e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
September 30,
2010
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file
number: 0-49992
TD Ameritrade Holding
Corporation
(Exact name of registrant as
specified in its charter)
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Delaware
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82-0543156
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification Number)
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4211 South 102nd Street,
Omaha, Nebraska 68127
(Address of principal
executive offices and zip code)
(402) 331-7856
(Registrants telephone
number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock $0.01 par value
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The NASDAQ Stock Market LLC
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Securities registered pursuant to Section 12(g) of the
Act:
Title of class
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) 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 whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files). Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, 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):
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Large accelerated
filer þ
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Accelerated
filer o
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Non-accelerated
filer o
(Do not check if a smaller reporting company)
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Smaller reporting
company o
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
The aggregate market value of the common stock held by
non-affiliates of the registrant was approximately
$4.2 billion computed by reference to the closing sale
price of the stock on the Nasdaq Global Select Market on
March 31, 2010, the last trading day of the
registrants most recently completed second fiscal quarter.
The number of shares of common stock outstanding as of
November 11, 2010 was 576,395,781 shares.
DOCUMENTS
INCORPORATED BY REFERENCE
Definitive Proxy Statement relating to the registrants
2011 Annual Meeting of Stockholders to be filed hereafter
(incorporated into Part III hereof).
TD
AMERITRADE HOLDING CORPORATION
INDEX
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Unless otherwise indicated, references to we,
us, our, Company, or
TD Ameritrade mean TD Ameritrade Holding
Corporation and its subsidiaries, and references to
fiscal mean the Companys fiscal year ended
September 30 (for fiscal years 2007 through 2010) or the
last Friday of September (for fiscal years prior to 2007).
References to the parent company mean TD Ameritrade
Holding Corporation.
PART I
Form of
Organization
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 parent company is a
Delaware corporation.
Operations
We are a leading provider of securities brokerage services and
technology-based financial services to retail investors, traders
and independent registered investment advisors
(RIAs). We provide our services predominantly
through the Internet, a national branch network and
relationships with RIAs. We believe that 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 to
market destinations; 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.
Strategy
We intend to capitalize on the growth and consolidation of the
retail brokerage industry in the United States and leverage our
low-cost infrastructure to grow our market share and
profitability. Our long-term growth strategy is to increase our
market share of total assets in client accounts by providing
superior offerings to long-term investors, RIAs and active
traders. We strive to enhance the client experience by providing
sophisticated asset management products and services, enhanced
technological capabilities that enable self-directed investors
to trade and invest in new asset classes and a superior,
proprietary, single-platform system to support RIAs. The key
elements of our strategy are as follows:
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Focus on brokerage services. We continue to
focus on attracting active traders, long-term investors and RIAs
to our brokerage services. This focused strategy is designed to
enable us to maintain our low operating cost structure while
offering our clients outstanding products and services. We
primarily execute client securities transactions on an agency,
rather than a principal, basis. We maintain only a small
inventory of fixed income securities to meet client requirements.
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Provide a comprehensive long-term investor
solution. We continue to expand our suite of
diversified investment products and services to best serve
investors needs. We help clients make investment decisions
by providing
simple-to-use
investment tools, guidance, education and objective third-party
research.
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Maintain industry leadership and market share with active
traders. We help active traders make
better-informed investment decisions by offering fast access to
markets, insight into market trends and innovative tools such as
strategy back-testing and comprehensive options research and
trading capabilities.
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Continue to be a leader in the RIA
industry. We provide RIAs with comprehensive
brokerage and custody services supported by our robust
integrated technology platform, customized personal service and
practice management solutions.
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Leverage our infrastructure to add incremental
revenue. Through our proprietary technology, we
are able to provide a very robust online experience for
long-term investors and active traders. Our low-cost, scalable
systems provide speed, reliability and quality trade execution
services for clients. The scalable capacity of our trading
system allows us to add a significant number of transactions
while incurring minimal additional fixed costs.
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Continue to be a low-cost provider of quality
services. We achieve low operating costs per
trade by creating economies of scale, utilizing our proprietary
transaction-processing systems, continuing to automate processes
and locating much of our operations in low-cost geographical
areas. This low fixed-cost infrastructure provides us with
significant financial flexibility.
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Continue to differentiate our offerings through innovative
technologies and service enhancements. We have
been an innovator in our industry over our
35-year
history. We continually strive to provide our clients with the
ability to customize their trading experience. We provide our
clients greater choice by tailoring our features and
functionality to meet their specific needs.
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Leverage the TD Ameritrade brand. We believe
that we have a superior brand identity and that our advertising
has established TD Ameritrade as a leading brand in the retail
brokerage market.
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Continue to aggressively pursue growth through
acquisitions. When evaluating potential
acquisitions, we look for transactions that will give us
operational leverage, technological leverage, increased market
share or other strategic opportunities.
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Most recently, on June 11, 2009, we acquired thinkorswim
Group Inc. (thinkorswim). The acquisition enhanced
our industry leadership position in client trades per day and
provides our clients with access to thinkorswims advanced
trading technology, tools and services, as well as a leading
investor education program. 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 that we believe has 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. It also
enabled us to provide our clients with Federal Deposit Insurance
Corporation (FDIC)-insured money market deposit
accounts as either designated sweep vehicles or as non-sweep
deposit accounts for their cash through an arrangement with TD
Bank USA, N.A and TD Bank, N.A.
Client
Offerings
We deliver products and services aimed at providing a
comprehensive, personalized experience for active traders,
long-term investors and independent RIAs. Our client offerings
are described below:
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TD
Ameritrade®
is our core offering for self-directed retail investors. We
offer sophisticated tools and services, including TD Ameritrade
Command Center 2.0,
SnapTicket,tm
Trade
Triggers,tm
QuoteScope,tm
Market Motion Detector, Pattern
Matcher,tm
StrategyDesktm
and
WealthRuler.tm
We offer futures and foreign exchange trading to TD Ameritrade
brokerage clients through our thinkorswim from
TD Ameritrade desktop application. We offer TD
Ameritrade
Apextm
for clients who place an average of five trades per month over a
three-month period or maintain a total account value of at least
$100,000. Apex clients receive free access to services that are
normally available on a paid subscription basis, as well as
access to exclusive services and content.
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TD Ameritrade Institutional is a leading provider of
comprehensive brokerage and custody services to more than 4,000
independent RIAs and their clients. Our advanced technology
platform, coupled with personal support from our dedicated
service teams, allows RIAs to run their practices more
effectively and efficiently while optimizing time with clients.
Additionally, TD Ameritrade Institutional provides a robust
offering of products, programs and services. These services are
all designed to help advisors build their businesses.
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thinkorswim by TD Ameritrade provides a suite of trading
platforms serving self-directed and institutional traders and
money managers. thinkorswim platforms have easy-to-use
interfaces, sophisticated analytical and research tools, and
fast and efficient order execution for complex trading
strategies. thinkorswim clients trade a broad range of products
including stock and stock options, index options, futures and
futures options, foreign exchange, mutual funds and fixed income.
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Investools offers a comprehensive suite of investor
education products and services for stock, option, foreign
exchange, futures, mutual fund and fixed-income investors.
Investools educational products and services are primarily
built around an investing method that is designed to teach both
experienced and beginning investors how to approach the
selection process for investment securities and actively manage
their investment portfolios. Course offerings are generally
combined with web-based tools, personalized instruction
techniques and ongoing service and support and are offered in a
variety of learning formats. Designed for the advanced student,
continuing education programs offer students comprehensive
access to a multitude of products and services priced either
individually or on a bundled basis. Typically included in the
continuing education bundles are additional curriculum, online
courses, live workshops and coaching services.
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Amerivesttm
is an online advisory service that develops portfolios of
exchange-traded funds (ETFs) to help long-term
investors pursue their financial goals. Our subsidiary,
Amerivest Investment Management, LLC, recommends an investment
portfolio based on our proprietary automated five-step process
centered on an investors goals and risk tolerance.
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TD Ameritrade Corporate Services provides self-directed
brokerage services to employees and executives of corporations,
either directly in partnership with the employer or through
joint marketing relationships with third-party administrators,
such as 401(k) providers and employee benefit consultants. Trust
and custody services are also offered to a wide range of plan
types through our TD Ameritrade Trust Company subsidiary.
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Products
and Services
We strive to provide the best value of retail brokerage services
to our clients. The products and services available to our
clients include:
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Common and preferred stock. Clients can
purchase common and preferred stocks and American Depository
Receipts traded on any United States exchange or quotation
system.
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Exchange-Traded Funds. ETFs are baskets of
securities (stocks or bonds) that typically track recognized
indices. They are similar to mutual funds, except that they
trade on an exchange like stocks. On October 7, 2010, we
introduced our new ETF Market Center, offering our clients over
100 commission-free ETFs, each of which has been carefully
selected by independent experts at Morningstar Associates.
Trades in these ETFs are commission-free, provided the funds are
held for 30 days or longer. We also introduced a redesigned
Web site that includes an ETF screener, along with independent
research and commentary to assist investors in their
decision-making.
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Options. We offer a full range of option
trades, including spreads, straddles and strangles. All option
trades, including complex trades, are accessible on our trading
platform.
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Futures. We offer futures trades in a wide
variety of commodities, stock indices and currencies.
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Foreign exchange. We offer access to trading
in over 100 different currency pairs.
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Mutual funds. Clients can compare and select
from a portfolio of over 13,000 mutual funds from leading fund
families, including a broad range of no-transaction-fee
(NTF) funds. Clients can also easily exchange funds
within the same mutual fund family.
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Fixed income. We offer our clients access to a
variety of Treasury, corporate, government agency and municipal
bonds, as well as mortgage-backed securities and certificates of
deposit.
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Margin lending. We extend credit to clients
that maintain margin accounts.
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Cash management services. Through third-party
banking relationships, we offer FDIC-insured deposit accounts
and money market mutual funds to our clients as cash sweep
alternatives. We also offer checking and ATM services through
these relationships.
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We earn commissions and transaction fees on client trades in
common and preferred stock, ETFs, options, futures, foreign
exchange, mutual funds and fixed income securities. Margin
lending and the related securities lending business generate net
interest revenue. Cash management services and fee-based mutual
funds generate insured deposit account fees and investment
product fee revenues. The following table presents the
percentage of net revenues contributed by each class of similar
services during the last three fiscal years:
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Percentage of Net Revenues
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Fiscal Year Ended September 30,
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Class of Service
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2010
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2009
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2008
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Commissions and transaction fees
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46.6
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%
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52.0
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%
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40.1
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%
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Net interest revenue
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16.5
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%
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14.4
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%
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21.7
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%
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Insured deposit account fees
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26.6
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%
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23.6
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%
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24.8
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%
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Investment product fees
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5.1
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%
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7.7
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%
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12.2
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%
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Other revenues
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5.2
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%
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2.3
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%
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1.2
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%
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Net revenues
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100.0
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%
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100.0
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%
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100.0
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%
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We provide our clients with an array of channels to access our
products and services. These include the Internet, our network
of retail branches, mobile trading applications, interactive
voice response and registered representatives via telephone.
Client
Service and Support
We strive to provide the best client service in the industry as
measured by: (1) speed of response time to telephone calls,
(2) turnaround time responding to client inquiries and
(3) client satisfaction with the account relationship.
We endeavor to optimize our highly-rated client service by:
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Ensuring prompt response to client service calls through
adequate staffing with properly trained and motivated personnel
in our client service departments, a majority of whom hold the
Series 7 license;
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Tailoring client service to the particular expectations of the
clients of each of our client segments; and
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Expanding our use of technology to provide automated responses
to the most typical inquiries generated in the course of
clients securities trading and related activities.
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We provide access to client service and support through the
following means:
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Web sites. Our Web sites provide basic
information on how to use our services, as well as an in-depth
education center that includes a guide to online investing and
an encyclopedia of finance. Ted, our Virtual
Investment Consultant, is a Web tool that allows retail clients
to interact with a virtual representative to ask questions
regarding our products, tools and services.
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Branches. We offer a nationwide network of
over 100 retail branches, located primarily in large
metropolitan areas.
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E-mail. Clients
are encouraged to use
e-mail to
contact our client service representatives. Our operating
standards require a response within 24 hours of receipt of
the e-mail;
however, we strive to respond within four hours after receiving
the original message.
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Telephone. For clients who choose to call or
whose inquiries necessitate calling one of our client service
representatives, we provide a toll-free number that connects to
advanced call handling systems. These systems provide automated
answering and directing of calls to the proper department. Our
systems also allow linkage between caller identification and the
client database to give the client service representative
immediate access to the clients account data when the call
is received. Client service representatives are available
24 hours a day, seven days a week (excluding market
holidays).
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Technology
and Information Systems
Our technological capabilities and systems are central to our
business and are critical to our goal of providing the best
execution at the best value to our clients. Our operations
require reliable, scalable systems that can handle complex
financial transactions for our clients with speed and accuracy.
We maintain sophisticated and proprietary technology that
automates traditionally labor-intensive securities transactions.
Our ability to effectively leverage and adopt new technology to
improve our services is a key component of our success.
We continue to make investments in technology and information
systems. We have spent a significant amount of resources to
increase capacity and improve speed and reliability. To provide
for system continuity during potential power outages, we have
equipped our data centers with uninterruptible power supply
units and
back-up
generators.
Our trading platforms currently have the capacity to process
approximately 1,500,000 trades per day and approximately 33,000
client login connections per second. The greatest number of
trades our clients have made in a single day is approximately
860,000.
Advertising
and Marketing
We intend to continue to grow and increase our market share by
advertising online, on television, in print and direct mail and
on our own Web sites. We invest heavily in advertising programs
designed to bring greater brand recognition to our services. We
intend to continue to aggressively advertise our services. From
time to time, we may choose to increase our advertising to
target specific groups of investors or to decrease advertising
in response to market conditions.
Advertising for retail clients is generally conducted through
Web sites, financial news networks and other television and
cable networks. We also place print advertisements in a broad
range of business publications and use direct mail advertising.
Advertising for institutional clients is significantly less than
for retail clients and is generally conducted through
highly-targeted media. We also utilize third-party partners to
market our investor education offerings at live events.
To monitor the success of our various marketing efforts, we use
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. Our methods and uses of client information
are disclosed in our privacy statement.
All of our brokerage-related communications with the public are
regulated by the Financial Industry Regulatory Authority
(FINRA).
Clearing
Operations
Our subsidiary, TD Ameritrade Clearing, Inc. (TDAC),
provides clearing and execution services to TD Ameritrade,
Inc., our introducing broker-dealer subsidiary. Clearing
services include the confirmation, receipt,
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settlement, delivery and record-keeping functions involved in
processing securities transactions. Our clearing broker-dealer
subsidiary provides the following back office functions:
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Maintaining client accounts;
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Extending credit in a margin account to the client;
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Engaging in securities lending and borrowing transactions;
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Settling securities transactions with clearinghouses such as The
Depository Trust & Clearing Corporation and The
Options Clearing Corporation;
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Settling commissions and transaction fees;
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Preparing client trade confirmations and statements;
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Performing designated cashiering functions, including the
delivery and receipt of funds and securities to or from the
client;
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Possession, control and safeguarding of funds and securities in
client accounts;
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Processing cash sweep transactions to and from insured deposit
accounts and money market mutual funds;
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Transmitting tax accounting information to the client and to the
applicable tax authority; and
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Forwarding prospectuses, proxy materials and other shareholder
information to clients.
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Competition
We believe that the principal determinants of success in the
retail brokerage market are brand recognition, size of client
base and client assets, ability to attract new clients 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 brokerage firm are reputation, client
service quality, price, convenient locations, product offerings,
quality of trade execution, platform capabilities, 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 highly
competitive. We have experienced significant 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, The Charles Schwab Corporation, Fidelity
Investments and Scottrade, Inc. We also encounter competition
from established full-commission brokerage firms such as Merrill
Lynch and Morgan Stanley Smith Barney, as well as financial
institutions, mutual fund sponsors and other organizations, some
of which provide online brokerage services.
Regulation
The securities industry is subject to extensive regulation under
federal and state law. Broker-dealers are required to register
with the U.S. Securities and Exchange Commission
(SEC) and to be members of FINRA. In addition, our
introducing broker-dealer subsidiary (TD Ameritrade, Inc.) is
registered with the Commodity Futures Trading Commission
(CFTC) and is a member of, and the corresponding
services functions are regulated by, the National Futures
Association (NFA). Our broker-dealer subsidiaries
are subject to the requirements of the Securities Exchange Act
of 1934 (the Exchange Act) relating to
broker-dealers, including, among other things, minimum net
capital requirements. For our clearing broker-dealer subsidiary
(TDAC), this minimum net capital level is determined by a
calculation described in
Rule 15c3-1
that is primarily based on aggregate debits, which
primarily are a function of client margin balances. TDAC is
required to maintain minimum net capital of 2% of aggregate
debits. Since our aggregate debits may fluctuate significantly,
our minimum net capital requirements may also fluctuate
significantly from period to period. TD Ameritrade, Inc. is
required to maintain minimum net capital of $1.0 million.
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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, TDAC 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, TDAC 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.
We are subject to a number of state and federal laws applicable
to companies conducting business on the Internet that address
client privacy, system security and safeguarding practices and
the use of client information. For additional, important
information relating to government regulation, please review the
information set forth under the heading Risk Factors
Relating to the Regulatory Environment in
Item 1A Risk Factors.
Risk
Management
Our business activities expose us to various risks, particularly
operational risk, interest rate risk, credit risk and liquidity
risk. Identifying and measuring our risks is critical to our
ability to manage risk within acceptable tolerance levels in
order to minimize the effect on our business, results of
operations and financial condition.
Our management team is responsible for managing risk, and it is
overseen by our board of directors, primarily through the
boards Risk Committee. We use risk management processes
and have policies and procedures for identifying, measuring and
managing risks. Our risk management, compliance, internal audit,
and legal departments assist management in identifying and
managing risks. Our management teams Corporate Risk
Committee is responsible for reviewing risk exposures and risk
mitigation.
Risk is inherent in our business, and therefore, despite our
efforts to manage risk, there can be no assurance that we will
not sustain unexpected losses. For a discussion of the factors
that could materially affect our business, financial condition
or future results of operations, see Item 1A
Risk Factors. For a discussion of the Companys market
risk, see Item 7A Quantitative and Qualitative
Disclosures About Market Risk.
Intellectual
Property Rights
Our success and ability to compete are significantly dependent
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 applications
for patents and trademark registrations with the United States
Patent and Trademark Office and entering into written licenses
and other technology agreements with third parties. Our patented
and patent pending technologies include stock indexing and
investor education technologies, as well as innovative trading
and analysis tools. Our trademarks include both our primary
brand, TD Ameritrade, as well as brands for other products and
services. A substantial portion of our intellectual property is
protected by trade secrets. The source and object code for our
proprietary software is also protected using applicable methods
of intellectual property protection and general protections
afforded to confidential information. In addition, it is our
policy to enter into confidentiality and intellectual property
ownership agreements with our employees and confidentiality and
noncompetition agreements with our independent contractors and
business partners and to control access to and distribution of
our intellectual property.
Employees
As of September 30, 2010, we had 5,240 full-time
equivalent employees. None of our employees is covered by a
collective bargaining agreement. We believe that our relations
with our employees are good.
9
Financial
Information about Segments and Geographic Areas
We primarily operate in the securities brokerage industry and
have no other reportable segments. Our revenues from external
clients for the fiscal years ended September 30, 2010, 2009
and 2008 were derived from our operations in the United States.
Internet
Address
Additional information concerning our business can be found on
our Web site at www.amtd.com. We make available free of
charge on our Web site our annual report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and amendments to those reports, as soon as reasonably
practicable after we electronically file such material with or
furnish it to the SEC.
Item 1A. Risk
Factors
In addition to the other information set forth in this report,
you should carefully consider the following factors which could
materially affect our business, financial condition or future
results of operations. Although the risks described below are
those that management believes are the most significant, these
are not the only risks facing our company. Additional risks and
uncertainties not currently known to us or that we currently do
not deem to be material also may materially affect our business,
financial condition or future results of operations.
Risk
Factors Relating to Our Business Operations
Economic
conditions and other securities industry risks could adversely
affect our business.
Substantially all of our revenues are derived from our
securities brokerage business. Like other securities brokerage
businesses, we are directly affected by economic and political
conditions, broad trends in business and finance and changes in
volume and price levels of securities transactions. Events in
global financial markets in recent years, including failures and
government bailouts of large financial services companies,
resulted in substantial market volatility and increased client
trading volume. However, any sustained downturn in general
economic conditions or U.S. equity markets could 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.
We
have exposure to interest rate risk.
As a fundamental part of our brokerage business, we invest in
interest-earning assets and are obligated on interest-bearing
liabilities. In addition, we earn fees on our FDIC-insured
deposit account arrangement with TD Bank USA, N.A. and TD Bank
N.A., which are subject to interest rate risk. During fiscal
2009, the Federal Open Market Committee reduced the federal
funds rate from 2.00% to between 0% and 0.25%. This lower
interest rate environment has compressed our net interest spread
and reduced our spread-based revenues. It has also resulted in
our voluntarily waiving fees on certain money market mutual
funds in order to prevent our clients yields on such funds
from becoming negative. 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
brokerage operations have exposure to liquidity
risk.
Maintaining adequate liquidity is crucial to our brokerage
operations, including key functions such as transaction
settlement and margin lending. 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
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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 if we are unable to obtain financing on
acceptable terms, or at all, 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.
We are
exposed to credit risk with clients and
counterparties.
We make margin loans to clients that are collateralized by
client securities and we borrow and lend securities in
connection with our broker-dealer business. A significant
portion of our net revenues is derived from interest on margin
loans. By permitting clients to purchase securities on margin,
we are subject to risks inherent in extending credit, especially
during periods of rapidly declining markets in which the value
of the collateral held by us could fall below the amount of a
clients indebtedness. In addition, in accordance with
regulatory guidelines, we collateralize borrowings of securities
by depositing cash or securities with lenders. Sharp changes in
market values of substantial amounts of securities and the
failure by parties to the borrowing transactions to honor their
commitments could have a material adverse effect on our revenues
and profitability.
Our
clearing operations expose us to liability for errors in
clearing functions.
Our broker-dealer subsidiary, TDAC, provides clearing and
execution services to our introducing broker-dealer subsidiary,
TD Ameritrade, Inc. 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 clearing 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. Clearing securities firms, such as TDAC, 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
regulatory fines and civil penalties as well as losses and
liability in related legal proceedings brought by clients and
others.
Systems
failures, delays and capacity constraints could harm our
business.
We receive and process trade orders through a variety of
electronic channels, including the Internet, mobile trading
applications 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 slow 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. The occurrence
of any of these events could have a material adverse effect on
our results of operations and financial condition.
Our
networks and client information could be vulnerable to security
risks.
The secure transmission of confidential information over public
networks is a critical element of our operations. Our networks
could be vulnerable to unauthorized access, computer viruses,
phishing schemes and other security problems. We, along with the
financial services industry in general, have experienced losses
related to
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clients login and password information being compromised,
generally caused by clients use of public computers or
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.
Substantial
competition could reduce our market share and harm our financial
performance.
The market for electronic brokerage services is continually
evolving and is intensely competitive. The retail brokerage
industry has experienced significant consolidation, which may
continue in the future, and which may increase competitive
pressures in the industry. Consolidation could enable other
firms to offer a broader range of products and services than we
do, or offer them at lower prices. 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, The
Charles Schwab Corporation, Fidelity Investments and Scottrade,
Inc. We also encounter competition from the broker-dealer
affiliates of established full-commission brokerage firms, such
as Merrill Lynch and Morgan Stanley Smith Barney, as well as
from financial institutions, mutual fund sponsors and other
organizations, some of which provide online brokerage services.
Some of our competitors have greater financial, technical,
marketing and other resources, offer a wider range of services
and financial products, and have greater name recognition and a
more extensive client base than we do. We believe that the
general financial success of companies within the retail
securities industry will continue to attract new competitors to
the industry, such as banks, software development companies,
insurance companies, providers of online financial information
and others. These companies may provide a more comprehensive
suite of services than we do. Increased competition, including
pricing pressure, could have a material adverse effect on our
results of operations and financial condition.
We
will need to introduce new products and services and enhance
existing products and services to remain
competitive.
Our future success depends in part on our ability to develop and
enhance our products and services. In addition, the adoption of
new Internet, networking or telecommunications technologies or
other technological changes could 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.
We
rely on third-party service providers to perform certain key
functions.
We rely on a number of third parties for various services. These
include the services of other broker-dealers, market makers and
exchanges to execute client orders. We contract with third
parties for thinkorswims clearing and related back-office
services. Third-party content providers provide us with
financial information, market news, charts, option and stock
quotes, research reports and other fundamental data that we
offer to clients.
We cannot assure that any third-party providers will be able to
continue to provide these services in an efficient,
cost-effective manner or that they will be able to adequately
expand their services to meet our needs. An interruption in or
the cessation of service by any third-party service provider as
a result of systems failures, capacity constraints, financial
constraints or problems, unanticipated trading market closures
or for any other reason, and our inability to make alternative
arrangements in a smooth and timely manner, if at all, could
have a material adverse effect on our business, results of
operations and financial condition.
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Risk
Factors Relating to the Regulatory Environment
Recent
legislation will result in changes to rules and regulations
applicable to our business, which may negatively impact our
business and financial results.
In July 2010, the Dodd-Frank Wall Street Reform and Consumer
Protection Act (the Dodd-Frank Act) was signed into
law. The Dodd-Frank Act requires many federal agencies to adopt
new rules and regulations that will apply to the financial
services industry and also calls for many studies regarding
various industry practices. In particular, the Dodd-Frank Act
gives the SEC discretion to adopt rules regarding standards of
conduct for broker-dealers providing investment advice to retail
customers. The various studies required by the legislation could
result in additional rulemaking or legislative action, which
could negatively impact our business and financial results.
While we have not yet been required to make material changes to
our business or operations as a result of the Dodd-Frank Act, it
is not certain what the scope of future rulemaking or
interpretive guidance from the SEC, FINRA, banking regulators
and other regulatory agencies may be, and what impact this will
have on our compliance costs, business, operations and
profitability.
Our profitability could also be affected by rules and
regulations that impact the business and financial communities
generally, including changes to the laws governing banking,
fiduciary duties, conflicts of interest, taxation, electronic
commerce, client privacy and security of client data.
Failure
to comply with net capital requirements could adversely affect
our business.
The SEC, FINRA, CFTC, NFA and various other regulatory agencies
have stringent rules with respect to the maintenance of specific
levels of net capital by securities broker-dealers. Net capital
is a measure, defined by the SEC, of a broker-dealers
readily available liquid assets, reduced by its total
liabilities other than approved subordinated debt. All of our
broker-dealer subsidiaries are required to comply with net
capital requirements. If we fail to maintain the required net
capital, the SEC could suspend or revoke our registration, or
FINRA could expel us from membership, which could ultimately
lead to our liquidation, or they could impose censures, fines or
other sanctions. If the net capital rules are changed or
expanded, or if there is an unusually large charge against net
capital, then our operations that require capital could be
limited. A large operating loss or charge against net capital
could have a material adverse effect on our ability to maintain
or expand our business.
Regulatory
uncertainties could harm our business.
The securities industry is subject to extensive regulation and
broker-dealers are subject to regulations covering all aspects
of the securities business. The SEC, FINRA, CFTC, NFA,
Department of Labor 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.
Our websites are accessible world-wide over the Internet, and we
currently have account holders located outside the United
States. These accounts comprise approximately 1.5% 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, among others, related to the brokerage
industry:
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sales practices and suitability of financial products and
services;
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auction rate securities;
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money market mutual funds;
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mutual fund trading;
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anti-money laundering policies and procedures;
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client cash sweep arrangements;
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regulatory reporting obligations;
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risk management;
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valuation of financial instruments;
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best execution practices;
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client privacy;
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system security and safeguarding practices;
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advertising claims; and
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brokerage services provided to investment advisors.
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These reviews could result in enforcement actions, significant
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 litigation and regulatory investigations and
proceedings and may not always be successful in defending
against such claims and proceedings.
The financial services industry faces substantial litigation and
regulatory risks. We are subject to arbitration claims and
lawsuits in the ordinary course of our business, as well as
class actions and other significant litigation. We also are the
subject of inquiries, investigations and proceedings by
regulatory and other governmental agencies. Actions brought
against us may result in settlements, awards, injunctions,
fines, penalties and other results adverse to us. Predicting the
outcome of such matters is inherently difficult, particularly
where claims are brought on behalf of various classes of
claimants or by a large number of claimants, when claimants seek
substantial or unspecified damages or when investigations or
legal proceedings are at an early stage. A substantial judgment,
settlement, fine or penalty could be material to our operating
results or cash flows for a particular period, depending on our
results for that period, or could cause us significant
reputational harm, which could harm our business prospects. In
market downturns, the volume of legal claims and amount of
damages sought in litigation and regulatory proceedings against
financial services companies have historically increased. The
volume of claims and amount of damages claimed in litigation and
the volume of regulatory matters have been increasing and remain
high. We are also increasingly subject to litigation claims from
third parties alleging infringement of their intellectual
property rights. Such litigation can require the expenditure of
significant resources, regardless of whether the claims have
merit. If we were found to have infringed a third-party patent
or other intellectual property right, then we could incur
substantial liability and in some circumstances could be
enjoined from using the relevant technology or providing related
products and services.
Risk
Factors Relating to Strategic Acquisitions and the Integration
of Acquired Operations
Acquisitions
involve risks that could adversely affect our
business.
We intend to pursue strategic acquisitions of businesses and
technologies. Acquisitions may entail numerous risks, including:
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difficulties in the integration of acquired operations, services
and products;
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failure to achieve expected synergies;
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diversion of managements attention from other business
concerns;
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assumption of unknown material liabilities of acquired companies;
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amortization of acquired intangible assets, which could reduce
future reported earnings;
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potential loss of clients or key employees of acquired
companies; and
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dilution to existing stockholders.
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As part of our growth strategy, we regularly consider, and from
time to time engage in, discussions and negotiations regarding
strategic transactions, such as acquisitions, mergers and
combinations within our industry. The purchase price for
possible acquisitions could be paid in cash, through the
issuance of common stock or other securities, borrowings or a
combination of these methods.
We cannot be certain that we will be able to continue to
identify, 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
The
market price of our common stock has experienced, and may
continue to experience, substantial volatility.
Our common stock, and the U.S. securities markets in
general, can 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 could decrease substantially. Among the factors
that may affect our stock price are the following:
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speculation in the investment community or the press about, or
actual changes in, our competitive position, organizational
structure, executive team, operations, financial condition,
financial reporting and results, effectiveness of cost reduction
initiatives, or strategic transactions;
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the announcement of new products, services, acquisitions, or
dispositions by us or our competitors; and
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increases or decreases in revenue or earnings, changes in
earnings estimates by the investment community, and variations
between estimated financial results and actual financial results.
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Changes in the stock market generally or as it concerns our
industry, as well as geopolitical, economic, and business
factors unrelated to us, may also affect our stock price.
Because the market price of our common stock can fluctuate
significantly, we could become the object of securities class
action litigation, which could result in substantial costs and a
diversion of managements attention and resources and could
have a material adverse effect on our business and the price of
our common stock.
We are
restricted by the terms of our revolving credit facility and
senior notes.
Our $300 million unsecured revolving credit facility
contains various negative covenants and restrictions that may
limit our ability to:
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incur additional indebtedness in excess of $100 million
that includes any covenants that are more restrictive (taken as
a whole) to us than those contained in the revolving credit
facility, unless the revolving credit facility is amended to
include the more restrictive covenants;
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incur additional indebtedness at our subsidiaries;
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create liens;
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sell all or substantially all of our assets;
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change the nature of our business;
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merge or consolidate with another entity; and
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conduct transactions with affiliates.
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Under our revolving credit facility, we are also required to
maintain compliance with a maximum consolidated leverage ratio
covenant (not to exceed 2.50:1.00) and a minimum consolidated
interest coverage ratio covenant (not less than 5.00:1:00), and
our broker-dealer subsidiaries are required to maintain
compliance with a minimum regulatory net capital covenant. As a
result of the covenants and restrictions contained in the
revolving credit facility and our senior unsecured notes, we are
limited in how we conduct our business. We cannot guarantee that
we will be able to remain in compliance with these covenants or
be able to obtain waivers for noncompliance in the future. A
failure to comply with these covenants could have a material
adverse effect on our financial condition by impairing our
ability to secure and maintain financing.
Our
corporate debt level may limit our ability to obtain additional
financing.
As of September 30, 2010, we had approximately
$1.3 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 our cash requirements. 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.
Our
business, financial position, and results of operations could be
harmed by adverse rating actions by credit rating
agencies.
If our counterparty credit rating or the credit ratings of our
outstanding indebtedness are downgraded, or if rating agencies
indicate that a downgrade may occur, our business, financial
position, and results of operations could be adversely affected
and perceptions of our financial strength could be damaged. A
downgrade would have the effect of increasing our incremental
borrowing costs and could decrease the availability of funds for
borrowing. In addition, a downgrade could adversely affect our
relationships with our clients.
TD and
the Ricketts holders exercise significant influence over TD
Ameritrade.
As of September 30, 2010, 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 46% and 15%, respectively, of our outstanding
common stock. As a result, TD and the Ricketts holders have the
ability to significantly influence the outcome of any matter
submitted for the vote of our stockholders. TD is permitted
under a stockholders agreement to exercise voting rights only
with respect to 45% of our outstanding shares of common stock
until termination of the stockholders agreement (which will
occur no later than January 24, 2016). There is no
restriction on the ability of TD to vote its shares following
the termination of the stockholders agreement. Under the
stockholders agreement, if our stock repurchases cause TDs
ownership percentage to increase, TD is only permitted to own up
to 48% of our outstanding common stock and has until
January 24, 2014 to reduce its ownership to 45%. The
Ricketts holders are permitted under the stockholders agreement
to own up to 29% of our outstanding common stock, with no
restriction on the number of shares they may own following the
termination of the stockholders agreement. 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 our other
stockholders.
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The stockholders agreement also provides that TD may designate
five of the twelve members of our board of directors and the
Ricketts holders may designate three of the twelve members of
our board of directors, subject to adjustment based on their
respective ownership positions in TD Ameritrade. As of
September 30, 2010, based on their ownership positions, TD
and the Ricketts holders may designate five and two of the
twelve members of our board of directors, respectively.
Accordingly, TD and the Ricketts holders are able to
significantly influence the outcome of all matters that come
before our board.
The ownership position and governance rights of TD and the
Ricketts holders could also discourage a third party from
proposing a change of control or other strategic transaction
concerning TD Ameritrade. As a result, our common stock could
trade at prices that do not reflect a takeover
premium to the same extent as do the stocks of similarly
situated companies that do not have a stockholder with an
ownership interest as large as TDs and the Ricketts
holders combined ownership interest.
We
have extensive relationships and business transactions with TD
and some of its affiliates, which if terminated or modified
could have a material adverse affect on our business, financial
condition and results of operations.
We have extensive relationships and business transactions with
TD and certain of its affiliates. The insured deposit account
agreement and mutual fund agreements between us and affiliates
of TD provide a significant portion of our revenue. During
fiscal 2010, net revenues related to these agreements accounted
for approximately 27% of our net revenues. The termination or
modification of these agreements without replacing them with
comparable terms, which may not be available, could have a
material adverse effect on our business, financial condition and
results of operations.
Conflicts
of interest may arise between TD Ameritrade and TD, which may be
resolved in a manner that adversely affects our business,
financial condition or results of operations.
Conflicts of interest may arise between us 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
our management and affairs. Some of the directors on our 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 us and for TD. Our amended and restated certificate of
incorporation contains provisions relating to the avoidance of
direct competition between us and TD. In addition, an
independent committee of our board of directors reviews and
approves transactions with TD and its affiliates. We have not
established any other formal procedures to resolve potential or
actual conflicts of interest between us and TD. There can be no
assurance that any of the foregoing potential conflicts would be
resolved in a manner that does not adversely affect our
business, financial condition or results of operations. In
addition, the provisions of the stockholders agreement related
to non-competition are subject to numerous exceptions and
qualifications and may not prevent us and TD from competing with
each other to some degree in the future.
The
terms of the stockholders agreement, our charter documents and
Delaware law could inhibit a takeover that stockholders may
consider favorable.
Provisions in the stockholders agreement among TD and the
Ricketts holders, our certificate of incorporation and bylaws
and Delaware law will make it difficult for any party to acquire
control of us in a transaction not approved by the requisite
number of directors. These provisions include:
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the presence of a classified board of directors;
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|
the ability of the board of directors to issue and determine the
terms of preferred stock;
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advance notice requirements for inclusion of stockholder
proposals at stockholder meetings; and
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the anti-takeover provisions of Delaware law.
|
17
These provisions could delay or prevent a change of control or
change in management that might provide stockholders with a
premium to the market price of their common stock.
Our
future ability to pay regular dividends to holders of our common
stock is subject to the discretion of our board of directors and
will be limited by our ability to generate sufficient earnings
and cash flows.
On October 26, 2010, we declared the first quarterly cash
dividend on our common stock. Any future payment of dividends
will depend on our ability to generate earnings and cash flows.
However, sufficient cash may not be available to pay such
dividends. Payment of future dividends, if any, will be at the
discretion of our board of directors and will depend upon a
number of factors that the board of directors deems relevant,
including future earnings, the success of our business
activities, capital requirements, the general financial
condition and future prospects of our business and general
business conditions. If we are unable to generate sufficient
earnings and cash flows from our business, we may not be able to
pay dividends on our common stock.
Our ability to pay cash dividends on our common stock is also
dependent on the ability of our subsidiaries to pay dividends to
the parent company. Some of our subsidiaries are subject to
requirements of the SEC, FINRA, the CFTC, the NFA 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.
|
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Item 1B.
|
Unresolved
Staff Comments
|
None.
Our corporate headquarters is located in Omaha, Nebraska and
occupies approximately 74,000 square feet of leased space.
The lease expires in April 2019. In the Omaha metropolitan area,
we also lease approximately 397,000 square feet of building
space for administrative and operational facilities. The leases
on these other Omaha-area locations expire on various dates from
2011 through 2020. We are currently constructing new facilities
in Omaha on land we purchased to create a corporate campus. The
transition to the new campus is scheduled to take place in
phases and to be completed in 2013.
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, Texas and Utah. 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.
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Item 3.
|
Legal
Proceedings
|
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 TD Ameritrade, 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 conducted four investigations from August 2007 to
June 2008 and reported that it found no evidence of identity
theft. On November 15, 2010, TD Ameritrade, Inc. and
plaintiffs Richard Holober and Brad Zigler entered into a
proposed class settlement agreement and the plaintiffs filed a
motion with the Court for preliminary approval. Under the
proposed settlement, the Company will pay no less than
$2.5 million in settlement benefits to eligible members of
the settlement class. Total compensation to be paid to all
claimants will not exceed $6.5 million, inclusive of any
award of attorneys fees and costs. In addition, the
proposed settlement agreement provides that the
18
Company will retain an independent information technology
security consultant to assess whether the Company has met
certain information technology security standards. The proposed
settlement is subject to final approval by the Court.
Reserve Fund Matters During September
2008, The Reserve, an independent mutual fund company, announced
that the net asset value of the Reserve Yield Plus Fund declined
below $1.00 per share. The Yield Plus Fund is not a money market
mutual fund, but its stated objective was to maintain a net
asset value of $1.00 per share. TD Ameritrade, Inc.s
clients hold shares in the Yield Plus Fund, which is being
liquidated by The Reserve.
On July 23, 2010, The Reserve announced that through that
date it had distributed approximately 94.8% of the Yield Plus
Fund assets as of September 15, 2008 and that the Yield
Plus Fund had approximately $39.7 million in total
remaining assets. The Reserve stated that the funds Board
of Trustees has set aside almost the entire amount of the
remaining assets to cover potential claims, fees and expenses.
The Company estimates that TD Ameritrade, Inc. clients
current positions held in the Reserve Yield Plus Fund amount to
approximately 79% of the fund, which, if valued based on a $1.00
per share net asset value, would total approximately
$47.3 million.
The SEC and other regulatory authorities are conducting
investigations regarding TD Ameritrade, Inc.s offering of
The Reserve Yield Plus Fund to clients. TD Ameritrade, Inc. has
received subpoenas and other requests for documents and
information from the regulatory authorities. TD Ameritrade, Inc.
is cooperating with the investigations and requests. The
Pennsylvania Securities Commission has filed an administrative
order against TD Ameritrade, Inc. involving the sale of
Yield Plus Fund securities to 21 Pennsylvania clients. An
administrative hearing will be held to determine whether there
have been violations of certain provisions of the Pennsylvania
Securities Act of 1972 and rules thereunder and to determine
what, if any, administrative sanctions should be imposed. TD
Ameritrade, Inc. is defending the action.
In November 2008, a purported class action lawsuit was filed
with respect to the Yield Plus Fund. The lawsuit is captioned
Ross v. Reserve Management Company, Inc. et al. and
is pending in the U.S. District Court for the Southern
District of New York. The Ross lawsuit is on behalf of persons
who purchased shares of Reserve Yield Plus Fund. On
November 20, 2009, the plaintiffs filed a first amended
complaint naming as defendants the funds advisor, certain
of its affiliates and the Company and certain of its directors,
officers and shareholders as alleged control persons. The
complaint alleges claims of violations of the federal securities
laws and other claims based on allegations that false and
misleading statements and omissions were made in the Reserve
Yield Plus Fund prospectuses and in other statements regarding
the fund. The complaint seeks an unspecified amount of
compensatory damages including interest, attorneys fees,
rescission, exemplary damages and equitable relief. On
January 19, 2010, the defendants submitted motions to
dismiss the complaint. The motions are pending.
The Company is unable to predict the outcome or the timing of
the ultimate resolution of these matters, or the potential loss,
if any, that may result from these matters.
Other Legal and Regulatory Matters The
Company is subject to other lawsuits, arbitrations, claims and
other legal proceedings in connection with its business. Some of
these legal actions include claims for substantial or
unspecified compensatory
and/or
punitive damages. A substantial adverse judgment or other
unfavorable resolution of these matters could have a material
adverse effect on the Companys financial condition,
results of operations and cash flows or could cause the Company
significant reputational harm. Management believes the Company
has adequate legal defenses with respect to these 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 or the timing of the ultimate
resolution of these matters, or the potential losses, if any,
that may result from 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, penalties or other sanctions. Management
believes the outcome of any resulting actions will not be
material to the Companys financial condition, results of
operations or cash flows. However, the Company is unable to
predict the outcome or the timing of the ultimate resolution of
these matters, or the potential fines, penalties or injunctive
or other equitable relief, if any, that may result from these
matters.
19
PART II
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Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Price
Range of Common Stock
Our common stock trades on the Nasdaq Global Select Market under
the symbol AMTD. The following table shows the high
and low sales prices for our common stock for the periods
indicated, as reported by the Nasdaq Global Select Market. The
prices reflect inter-dealer prices and do not include retail
markups, markdowns or commissions.
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Common Stock Price
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For the Fiscal Year Ended September 30,
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2010
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2009
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High
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Low
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|
|
High
|
|
|
Low
|
|
|
First Quarter
|
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$
|
21.30
|
|
|
$
|
17.91
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$
|
18.43
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|
$
|
9.34
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Second Quarter
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$
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20.06
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$
|
16.55
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$
|
14.88
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|
$
|
10.09
|
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Third Quarter
|
|
$
|
20.58
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|
|
$
|
15.18
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|
|
$
|
19.34
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|
|
$
|
13.23
|
|
Fourth Quarter
|
|
$
|
16.98
|
|
|
$
|
14.53
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|
$
|
20.23
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|
$
|
16.45
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|
The closing sale price of our common stock as reported on the
Nasdaq Global Select Market on November 8, 2010 was $17.56
per share. As of that date there were 904 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 106,000 beneficial holders of
our common stock.
Dividends
We did not declare or pay cash dividends on our common stock
during fiscal 2010 and 2009. On October 26, 2010, we
declared a $0.05 per share quarterly cash dividend, which is
payable on December 15, 2010 to all holders of record of
our common stock as of December 1, 2010. The payment of any
future dividends will be at the discretion of our board of
directors and will depend upon a number of factors that the
board of directors deems relevant, including future earnings,
the success of our business activities, capital requirements,
the general financial condition and future prospects of our
business and general business conditions.
Our ability to pay cash dividends on our common stock is also
dependent on the ability of our subsidiaries to pay dividends to
the parent company. Some of our subsidiaries are subject to
requirements of the SEC, FINRA, the CFTC, the NFA 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. See
Item 7, Managements Discussion and Analysis of
Results of Operations and Financial Condition
Liquidity and Capital Resources for further
information.
Securities
Authorized for Issuance Under Equity Compensation
Plans
Information about securities authorized for issuance under the
Companys equity compensation plans is contained in
Item 12 Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder Matters.
20
Performance
Graph
The following Company common stock performance information is
not deemed to be soliciting material or to be
filed with the SEC or subject to the SECs
proxy rules or to the liabilities of Section 18 of the
Exchange Act and 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
Companys most recent fiscal year from a $100 investment on
September 30, 2005 in the Companys common stock, a
broad-based stock index and the stocks comprising an industry
peer group.
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Period Ended
|
Index
|
|
9/30/05
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9/29/06
|
|
9/30/07
|
|
9/30/08
|
|
9/30/09
|
|
9/30/10
|
TD Ameritrade Holding Corporation
|
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100.00
|
|
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|
114.98
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|
|
|
111.14
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|
|
|
101.68
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|
|
|
119.74
|
|
|
|
98.51
|
|
|
|
|
|
|
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|
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|
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|
S&P 500
|
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|
100.00
|
|
|
|
110.79
|
|
|
|
129.01
|
|
|
|
100.66
|
|
|
|
93.70
|
|
|
|
103.22
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|
|
|
|
|
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|
|
|
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|
|
|
|
|
|
|
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Peer Group
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100.00
|
|
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|
127.80
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|
|
|
134.52
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|
|
|
140.67
|
|
|
|
104.31
|
|
|
|
77.60
|
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|
|
|
|
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The Peer Group is comprised of the following companies that have
significant retail brokerage operations:
E*TRADE Financial Corporation
The Charles Schwab Corporation
21
Purchases
of Equity Securities by the Issuer and Affiliated
Purchasers
ISSUER
PURCHASES OF EQUITY SECURITIES
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|
|
|
|
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|
Total Number of
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|
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Maximum Number
|
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|
|
|
|
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|
Shares Purchased as
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|
of Shares that May
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|
|
Total Number of
|
|
|
Average Price
|
|
|
Part of Publicly
|
|
|
Yet Be Purchased
|
|
Period
|
|
Shares Purchased
|
|
|
Paid per Share
|
|
|
Announced Program
|
|
|
Under the Program
|
|
|
July 1, 2010 July 31, 2010
|
|
|
1,143,238
|
|
|
$
|
15.17
|
|
|
|
1,000,100
|
|
|
|
|
|
August 1, 2010 August 31, 2010
|
|
|
292
|
|
|
$
|
15.78
|
|
|
|
|
|
|
|
12,000,000
|
|
September 1, 2010 September 30, 2010
|
|
|
4,209
|
|
|
$
|
15.95
|
|
|
|
|
|
|
|
12,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Three months ended September 30, 2010
|
|
|
1,147,739
|
|
|
$
|
15.17
|
|
|
|
1,000,100
|
|
|
|
12,000,000
|
|
|
|
|
|
|
|
|
|
|
|
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|
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On August 11, 2009, our board of directors authorized the
repurchase of up to 15 million shares of our common stock.
We disclosed this authorization on November 13, 2009 in our
annual report on
Form 10-K.
We initiated a stock repurchase program under this authorization
beginning May 10, 2010. During July 2010, we completed the
program by repurchasing the remaining one million shares at a
weighted average price of $15.15 per share. We repurchased a
total of 15 million shares under the program at a weighted
average purchase price of $17.25 per share.
On August 5, 2010, our board of directors authorized the
repurchase of up to an additional 30 million shares of our
common stock. We disclosed this authorization on August 9,
2010 in our quarterly report on
Form 10-Q.
On August 20, 2010, we entered into an agreement with an
investment bank counterparty to effect a structured repurchase
of up to 12 million shares of our common stock. The shares
are being repurchased as part of the 30 million share
repurchase authorization. Under the terms of the agreement, we
prepaid approximately $169 million to the counterparty. The
specific number of shares, if any, that we will purchase from
the counterparty will vary based on the average of the daily
volume-weighted average share price of the Companys common
stock over the measurement period for the transaction, less a
pre-determined discount. Settlement of the transaction will
occur after the end of the measurement period, which will end no
later than November 30, 2010 and is subject to early
termination by the counterparty. Upon settlement of the
transaction, any excess prepayment amount may be returned to us
in cash or, at our option, used to purchase additional shares of
our common stock.
During the quarter ended September 30, 2010,
147,639 shares were repurchased from employees for income
tax withholding in connection with restricted stock unit and
restricted stock award distributions.
|
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Item 6.
|
Selected
Financial Data
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
Sept. 30,
|
|
|
Sept. 30,
|
|
|
Sept. 30,
|
|
|
Sept. 30,
|
|
|
Sept. 29,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006*
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Consolidated Statements of Income Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
2,560,691
|
|
|
$
|
2,407,926
|
|
|
$
|
2,537,356
|
|
|
$
|
2,176,946
|
|
|
$
|
1,803,531
|
|
Operating income
|
|
|
965,373
|
|
|
|
1,101,478
|
|
|
|
1,341,021
|
|
|
|
1,146,995
|
|
|
|
869,871
|
|
Net income
|
|
|
592,188
|
|
|
|
643,705
|
|
|
|
803,917
|
|
|
|
645,900
|
|
|
|
526,759
|
|
Earnings per share basic
|
|
$
|
1.01
|
|
|
$
|
1.11
|
|
|
$
|
1.35
|
|
|
$
|
1.08
|
|
|
$
|
0.97
|
|
Earnings per share diluted
|
|
$
|
1.00
|
|
|
$
|
1.10
|
|
|
$
|
1.33
|
|
|
$
|
1.06
|
|
|
$
|
0.95
|
|
Weighted average shares outstanding basic
|
|
|
585,128
|
|
|
|
578,972
|
|
|
|
593,746
|
|
|
|
598,503
|
|
|
|
544,307
|
|
Weighted average shares outstanding diluted
|
|
|
591,922
|
|
|
|
587,252
|
|
|
|
603,133
|
|
|
|
608,263
|
|
|
|
555,465
|
|
Dividends declared per share
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
6.00
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
Sept. 30,
|
|
|
Sept. 30,
|
|
|
Sept. 30,
|
|
|
Sept. 30,
|
|
|
Sept. 29,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
741,492
|
|
|
$
|
791,211
|
|
|
$
|
674,135
|
|
|
$
|
413,787
|
|
|
$
|
363,650
|
|
Short-term investments
|
|
|
3,592
|
|
|
|
52,071
|
|
|
|
369,133
|
|
|
|
76,800
|
|
|
|
65,275
|
|
Total assets
|
|
|
14,726,918
|
|
|
|
18,371,810
|
|
|
|
15,951,522
|
|
|
|
18,092,327
|
|
|
|
16,558,469
|
|
Long-term obligations
|
|
|
1,323,068
|
|
|
|
1,443,465
|
|
|
|
1,444,544
|
|
|
|
1,481,948
|
|
|
|
1,710,712
|
|
Stockholders equity
|
|
|
3,771,879
|
|
|
|
3,551,283
|
|
|
|
2,925,038
|
|
|
|
2,154,921
|
|
|
|
1,730,234
|
|
|
|
|
* |
|
We declared and paid a special cash dividend of $6.00 per share
during fiscal 2006 in connection with our acquisition of TD
Waterhouse Group, Inc. on January 24, 2006. |
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
This discussion contains forward-looking statements within the
meaning of the U.S. Private Securities Litigation Reform
Act of 1995. Statements that are not historical facts, including
statements about our beliefs and expectations, are
forward-looking statements. Forward-looking statements include
statements preceded by, followed by or that include the words
may, could, would,
should, believe, expect,
anticipate, plan, estimate,
target, project, intend and
similar expressions. In particular, forward-looking statements
contained in this discussion include our expectations regarding:
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 operating expenses
and other expenses; our effective income tax rate; and our
capital and liquidity needs and our plans to finance such needs.
The Companys actual results could differ materially from
those anticipated in such forward-looking statements. Important
factors that may cause such differences include, but are not
limited to: general economic and political conditions;
fluctuations in interest rates; stock market fluctuations and
changes in client trading activity; credit risk with clients and
counterparties; increased competition; systems failures and
capacity constraints; network security risks; our ability to
service debt obligations; our ability to achieve the benefits of
the thinkorswim Group Inc. (thinkorswim)
acquisition; new laws and regulations affecting our business;
regulatory and legal matters and uncertainties and the other
risks and uncertainties set forth under Item 1A.
Risk Factors of this
Form 10-K.
The forward-looking statements contained in this report speak
only as of the date on which the statements were made. We
undertake no obligation to publicly update or revise these
statements, whether as a result of new information, future
events or otherwise.
Glossary
of Terms
In discussing and analyzing our business, we utilize several
metrics and other terms that are defined in the following
Glossary of Terms. Italics indicate other defined terms
that appear elsewhere in the Glossary. The term GAAP
refers to U.S. generally accepted accounting principles.
Activity rate total accounts Average
client trades per day during the period divided by the
average number of total accounts during the period.
Activity rate funded accounts Average
client trades per day during the period divided by the
average number of funded accounts during the period.
Asset-based revenues Revenues consisting of
(1) net interest revenue, (2) insured
deposit account 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 insured deposit account balances,
average fee-based investment
23
balances and average securities borrowing and
securities lending balances. Average rates consist of the
average interest rates and fees earned and paid on such balances.
Average client trades per account (annualized)
Total trades divided by the average number of total
accounts during the period, annualized based on the number
of trading days in the fiscal year.
Average client trades per day Total trades
divided by the number of trading days in the period.
This metric is also known as daily average revenue trades
(DARTs).
Average commissions and transaction fees per
trade Total commissions and transaction fee
revenues as reported on the Companys Consolidated
Statements of Income (excluding revenues from the active trader
business acquired from thinkorswim and clearing revenues from TD
Waterhouse UK) 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 insured 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.
Daily average revenue trades
(DARTs) Total trades divided
by the number of trading days in the period. This metric
is also known as average client trades per day.
EBITDA and EBITDA excluding investment
gains/losses EBITDA (earnings before interest,
taxes, depreciation and amortization) and EBITDA excluding
investment gains/losses are non-GAAP financial measures. We
consider EBITDA and EBITDA excluding investment gains/losses 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 covenant purposes
under our revolving credit facility. EBITDA eliminates the
non-cash effect of tangible asset depreciation and amortization
and intangible asset amortization. EBITDA excluding investment
24
gains/losses 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/losses 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.
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.
Insured deposit account fees Revenues
resulting from the Insured Deposit Account (IDA)
agreement with TD Bank USA, N.A. (TD Bank USA), TD
Bank, N.A. and The Toronto-Dominion Bank (TD). Under
the IDA agreement, TD Bank USA and TD Bank, N.A. (together, the
Depository Institutions) make available to clients
of the Company FDIC-insured money market deposit accounts as
either designated sweep vehicles or as non-sweep deposit
accounts. The Company provides marketing, recordkeeping and
support services for the Depository Institutions with respect to
the money market deposit accounts. In exchange for providing
these services, the Depository Institutions pay the Company a
fee based on the yield earned on the client IDA assets, less the
actual interest paid to clients, a flat fee to the Depository
Institutions of 25 basis points and the cost of FDIC
insurance premiums.
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 subsidiaries in excess of 120% of the minimum
dollar net capital requirement or in excess of
81/3%
of aggregate indebtedness and (d) 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 company cash and cash
equivalents, because capital requirements may limit the amount
of cash available for dividend from the broker-dealer and trust
company 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
25
trust company subsidiaries to the parent company. We consider
liquid assets an important measure of our liquidity and of our
ability to fund corporate investing and financing activities.
Liquid assets should be considered as a supplemental measure of
liquidity, rather than as a substitute for cash and cash
equivalents.
Liquidation value The net value of a
clients account holdings as of the close of a regular
trading session. Liquidation value includes client cash and the
value of long security positions, less margin balances and the
cost to buy back short security positions.
Margin accounts Brokerage accounts in which
clients may borrow from the Company to buy securities or for any
other purpose, subject to regulatory and Company-imposed
limitations.
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 insured deposit account
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.
Net new asset growth rate (annualized)
Annualized net new assets as a percentage of client
assets as of the beginning of the period.
Operating expenses excluding advertising
Operating expenses excluding advertising is a non-GAAP financial
measure. Operating expenses excluding advertising consists of
total operating expenses, adjusted to remove advertising
expense. We consider operating 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, can vary 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.
Operating expenses excluding advertising should be considered in
addition to, rather than as a substitute for, total operating
expenses.
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 Client and
brokerage-related asset balances, including client margin
balances, segregated cash, insured deposit account
balances, deposits paid on securities borrowing
(excluding conduit-based
26
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 Revenue-generating client
securities trades, which are executed by the Companys
broker-dealer subsidiaries on an agency basis, excluding trades
related to the active trader business acquired from thinkorswim
and trades processed for TD Waterhouse UK. Total trades are a
significant source of the Companys revenues. Such trades
include, but are not limited to, trades in equities, options,
futures, foreign exchange, 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).
Financial
Statement Overview
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 asset-based revenues and
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 insured deposit account
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.
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. 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 fluctuate significantly from period to
period.
Losses (gains) on money market funds and client guarantees
include: (a) corporate investment losses (gains) on money
market fund holdings, (b) losses (gains) associated with
our commitment to mitigate our clients losses, up to
27
$55 million, on their holdings in certain money market
funds in the event the clients received less than $1.00 per
share upon the orderly liquidation of the funds and
(c) losses (gains) associated with our guarantee related to
auction rate securities settlement agreements. See
Guarantees under Note 14 of the Notes to
Consolidated Financial Statements for information regarding the
client guarantees referred to under clauses (b) and
(c) above. 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.
Interest on borrowings consists of interest expense on our
long-term debt, capital leases and other borrowings. Loss on
debt refinancing consists of a charge to write off the
unamortized balance of debt issuance costs associated with the
credit facilities that were refinanced during fiscal 2010. Loss
(gain) on sale of investments represents losses and gains
realized on the sale of corporate (non broker-dealer)
investments.
Critical
Accounting Policies and Estimates
The preparation of our consolidated financial statements
requires us to make judgments and estimates that may have a
significant impact upon our financial results. Note 1,
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
managements judgments and estimates and could materially
affect our results of operations and financial position.
Valuation
of goodwill and acquired intangible assets
We test goodwill for impairment on at least an annual basis, or
whenever events and circumstances indicate that the carrying
value may not be recoverable. In performing the impairment
tests, we utilize quoted market prices of our common stock to
estimate the fair value of the Company as a whole. The estimated
fair value is then allocated to our reporting units, if
applicable, based on operating revenues, and is compared with
the carrying value of the reporting units. No impairment charges
have resulted from our annual impairment tests. We review our
acquired intangible assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of
such asset may not be recoverable. We evaluate recoverability by
comparing the undiscounted cash flows associated with the asset
to the assets carrying amount. We also evaluate the
remaining useful lives of intangible assets each reporting
period to determine if events or trends warrant a revision to
the remaining period of amortization. We have had no events or
trends that have warranted a revision to the originally
estimated useful lives.
Valuation
of stock-based compensation
Stock-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 stock-based awards
that will be forfeited. For performance-based awards, we must
also make assumptions regarding the likelihood of achieving
performance goals. If actual results differ significantly from
these estimates, stock-based compensation expense and our
results of operations could be materially affected.
Estimates
of effective income tax rates, deferred income taxes and related
valuation allowances
We estimate our income tax expense based on the various
jurisdictions where we conduct business. This requires us to
estimate our current income tax obligations and to assess
temporary differences between the financial statement carrying
amounts and tax bases of assets and liabilities. Temporary
differences result in deferred income tax assets and
liabilities. We must evaluate the likelihood that deferred
income tax assets will be realized. To the extent we determine
that realization is not more likely than not, we
establish a valuation allowance. Establishing or increasing a
valuation allowance results in a corresponding increase to
income tax expense in our Consolidated Statements of Income.
Conversely, to the extent circumstances indicate that a
valuation allowance can be reduced or is no longer necessary,
that portion of the valuation allowance is reversed, reducing
income tax expense.
We must make significant judgments to calculate our provision
for income taxes, our deferred income tax assets and liabilities
and any valuation allowance against our deferred income tax
assets. We must also exercise
28
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.
Valuation
of guarantees
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 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 14
Commitments and Contingencies and Insured Deposit Account
Agreement under Note 18 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 declines, we expect that it would have a
negative impact on our results of operations.
Changes in average balances, especially client margin, credit,
insured deposit account and mutual fund balances, may
significantly impact our results of operations. Changes in
interest rates also significantly 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.
Financial
Performance Metrics
Pre-tax income, net income, earnings per share and EBITDA are
key metrics we use in evaluating our financial performance.
EBITDA is a non-GAAP financial measure.
We consider EBITDA to be an important measure of our financial
performance and of our ability to generate cash flows to service
debt, fund capital expenditures and fund other corporate
investing and financing activities. EBITDA is used as the
denominator in the consolidated leverage ratio calculation for
covenant purposes under our revolving credit facility. EBITDA
eliminates the non-cash effect of tangible asset depreciation
and amortization and intangible asset amortization. EBITDA
should be considered in addition to, rather than as a substitute
for, pre-tax income, net income and cash flows from operating
activities.
The following table sets forth EBITDA in dollars and as a
percentage of net revenues for the periods indicated, and
provides reconciliations to net income, which is the most
directly comparable GAAP measure (dollars in thousands):
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Fiscal Year Ended September 30,
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2010
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2009
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2008
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|
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% of Net
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% of Net
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|
% of Net
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|
$
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|
|
Revenues
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|
|
$
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|
|
Revenues
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|
|
$
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|
|
Revenues
|
|
|
EBITDA
|
|
$
|
1,114,438
|
|
|
|
43.5
|
%
|
|
$
|
1,219,236
|
|
|
|
50.6
|
%
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|
$
|
1,438,123
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|
56.7
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%
|
Less:
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Depreciation and amortization
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|
(57,032
|
)
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|
(2.2
|
)%
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|
|
(45,891
|
)
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|
|
(1.9
|
)%
|
|
|
(36,899
|
)
|
|
|
(1.5
|
)%
|
Amortization of acquired intangible assets
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(100,463
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)
|
|
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(3.9
|
)%
|
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(73,870
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)
|
|
|
(3.1
|
)%
|
|
|
(59,275
|
)
|
|
|
(2.3
|
)%
|
Interest on borrowings
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|
|
(44,858
|
)
|
|
|
(1.8
|
)%
|
|
|
(40,070
|
)
|
|
|
(1.7
|
)%
|
|
|
(78,447
|
)
|
|
|
(3.1
|
)%
|
Provision for income taxes
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|
|
(319,897
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)
|
|
|
(12.5
|
)%
|
|
|
(415,700
|
)
|
|
|
(17.3
|
)%
|
|
|
(459,585
|
)
|
|
|
(18.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
Net income
|
|
$
|
592,188
|
|
|
|
23.1
|
%
|
|
$
|
643,705
|
|
|
|
26.7
|
%
|
|
$
|
803,917
|
|
|
|
31.7
|
%
|
|
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29
Our EBITDA decreased for fiscal 2010 compared to fiscal 2009,
primarily due to (1) lower net interest margin earned on
spread-based balances and investment product fees waived on
money market mutual funds due to the near-zero short-term
interest rate environment, (2) an 11% decrease in average
client trades per day on a pro forma combined basis including
results of thinkorswim (thinkorswim was acquired during the
third quarter of fiscal 2009), and (3) higher
incentive-based compensation related to our success in
attracting net new client assets. These factors were partially
offset by the favorable revenue impact of a 64% increase in
average spread-based balances for fiscal 2010 compared to fiscal
2009. Detailed analysis of net revenues and expenses is
presented later in this discussion.
Operating
Metrics
Our largest sources of revenues are asset-based revenues and
transaction-based revenues. For fiscal 2010, asset-based
revenues and transaction-based revenues accounted for 48% and
47% of our net revenues, respectively. Asset-based revenues
consist of (1) net interest revenue, (2) insured
deposit account 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 insured
deposit account 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 insured deposit account
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 insured deposit account
fees by average spread-based assets. Spread-based assets consist
of client and brokerage-related asset balances, including client
margin balances, segregated cash, insured deposit account
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10 vs. 09
|
|
|
09 vs. 08
|
|
|
|
Fiscal Year
|
|
|
Increase/
|
|
|
Increase/
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
Average interest-earning assets (excluding conduit business)
|
|
$
|
13,272
|
|
|
$
|
9,917
|
|
|
$
|
9,835
|
|
|
$
|
3,355
|
|
|
$
|
82
|
|
Average insured deposit account balances
|
|
|
39,187
|
|
|
|
22,003
|
|
|
|
15,640
|
|
|
|
17,184
|
|
|
|
6,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average spread-based balance
|
|
$
|
52,459
|
|
|
$
|
31,920
|
|
|
$
|
25,475
|
|
|
$
|
20,539
|
|
|
$
|
6,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest revenue (excluding conduit business)
|
|
$
|
420.9
|
|
|
$
|
342.7
|
|
|
$
|
538.1
|
|
|
$
|
78.2
|
|
|
$
|
(195.4
|
)
|
Insured deposit account fee revenue
|
|
|
682.2
|
|
|
|
568.1
|
|
|
|
628.7
|
|
|
|
114.1
|
|
|
|
(60.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Spread-based revenue
|
|
$
|
1,103.1
|
|
|
$
|
910.8
|
|
|
$
|
1,166.8
|
|
|
$
|
192.3
|
|
|
$
|
(256.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average yield interest-earning assets (excluding
conduit business)
|
|
|
3.13
|
%
|
|
|
3.41
|
%
|
|
|
5.38
|
%
|
|
|
(0.28
|
)%
|
|
|
(1.97
|
)%
|
Average yield insured deposit account fees
|
|
|
1.72
|
%
|
|
|
2.55
|
%
|
|
|
3.95
|
%
|
|
|
(0.83
|
)%
|
|
|
(1.40
|
)%
|
Net interest margin (NIM)
|
|
|
2.07
|
%
|
|
|
2.81
|
%
|
|
|
4.50
|
%
|
|
|
(0.74
|
)%
|
|
|
(1.69
|
)%
|
30
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Revenue (Expense)
|
|
|
10 vs. 09
|
|
|
09 vs. 08
|
|
|
|
Fiscal Year
|
|
|
Increase/
|
|
|
Increase/
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
Segregated cash
|
|
$
|
6.3
|
|
|
$
|
6.6
|
|
|
$
|
0.3
|
|
|
$
|
(0.3
|
)
|
|
$
|
6.3
|
|
Client margin balances
|
|
|
333.1
|
|
|
|
234.2
|
|
|
|
527.1
|
|
|
|
98.9
|
|
|
|
(292.9
|
)
|
Securities borrowing (excluding conduit business)
|
|
|
84.9
|
|
|
|
105.4
|
|
|
|
56.0
|
|
|
|
(20.5
|
)
|
|
|
49.4
|
|
Other cash and interest-earning investments, net
|
|
|
0.9
|
|
|
|
3.5
|
|
|
|
35.0
|
|
|
|
(2.6
|
)
|
|
|
(31.5
|
)
|
Client credit balances
|
|
|
(2.9
|
)
|
|
|
(4.1
|
)
|
|
|
(24.9
|
)
|
|
|
1.2
|
|
|
|
20.8
|
|
Securities lending (excluding conduit business)
|
|
|
(1.4
|
)
|
|
|
(2.9
|
)
|
|
|
(55.4
|
)
|
|
|
1.5
|
|
|
|
52.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest revenue (excluding conduit business)
|
|
|
420.9
|
|
|
|
342.7
|
|
|
|
538.1
|
|
|
|
78.2
|
|
|
|
(195.4
|
)
|
Securities borrowing conduit business
|
|
|
1.7
|
|
|
|
10.9
|
|
|
|
173.3
|
|
|
|
(9.2
|
)
|
|
|
(162.4
|
)
|
Securities lending conduit business
|
|
|
(0.9
|
)
|
|
|
(6.7
|
)
|
|
|
(161.8
|
)
|
|
|
5.8
|
|
|
|
155.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest revenue
|
|
$
|
421.7
|
|
|
$
|
346.9
|
|
|
$
|
549.6
|
|
|
$
|
74.8
|
|
|
$
|
(202.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Balance
|
|
|
10 vs. 09
|
|
|
09 vs. 08
|
|
|
|
Fiscal Year
|
|
|
%
|
|
|
%
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
Change
|
|
|
Segregated cash
|
|
$
|
4,675
|
|
|
$
|
3,916
|
|
|
$
|
12
|
|
|
|
19
|
%
|
|
|
N/A
|
|
Client margin balances
|
|
|
6,991
|
|
|
|
4,491
|
|
|
|
8,138
|
|
|
|
56
|
%
|
|
|
(45
|
)%
|
Securities borrowing (excluding conduit business)
|
|
|
536
|
|
|
|
450
|
|
|
|
416
|
|
|
|
19
|
%
|
|
|
8
|
%
|
Other cash and interest-earning investments
|
|
|
1,070
|
|
|
|
1,060
|
|
|
|
1,269
|
|
|
|
1
|
%
|
|
|
(16
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets (excluding conduit business)
|
|
|
13,272
|
|
|
|
9,917
|
|
|
|
9,835
|
|
|
|
34
|
%
|
|
|
1
|
%
|
Securities borrowing conduit business
|
|
|
481
|
|
|
|
1,242
|
|
|
|
5,446
|
|
|
|
(61
|
)%
|
|
|
(77
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets
|
|
$
|
13,753
|
|
|
$
|
11,159
|
|
|
$
|
15,281
|
|
|
|
23
|
%
|
|
|
(27
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Client credit balances
|
|
$
|
8,548
|
|
|
$
|
6,219
|
|
|
$
|
4,261
|
|
|
|
37
|
%
|
|
|
46
|
%
|
Securities lending (excluding conduit business)
|
|
|
1,643
|
|
|
|
1,231
|
|
|
|
3,200
|
|
|
|
33
|
%
|
|
|
(62
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities (excluding conduit business)
|
|
|
10,191
|
|
|
|
7,450
|
|
|
|
7,461
|
|
|
|
37
|
%
|
|
|
(0
|
)%
|
Securities lending conduit business
|
|
|
481
|
|
|
|
1,242
|
|
|
|
5,446
|
|
|
|
(61
|
)%
|
|
|
(77
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities
|
|
$
|
10,672
|
|
|
$
|
8,692
|
|
|
$
|
12,907
|
|
|
|
23
|
%
|
|
|
(33
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10 vs. 09
|
|
|
09 vs. 08
|
|
|
|
Average Yield (Cost)
|
|
|
Net Yield
|
|
|
Net Yield
|
|
|
|
Fiscal Year
|
|
|
Increase/
|
|
|
Increase/
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
Segregated cash
|
|
|
0.13
|
%
|
|
|
0.17
|
%
|
|
|
2.47
|
%
|
|
|
(0.04
|
)%
|
|
|
(2.30
|
)%
|
Client margin balances
|
|
|
4.70
|
%
|
|
|
5.14
|
%
|
|
|
6.37
|
%
|
|
|
(0.44
|
)%
|
|
|
(1.23
|
)%
|
Other cash and interest-earning investments, net
|
|
|
0.09
|
%
|
|
|
0.33
|
%
|
|
|
2.71
|
%
|
|
|
(0.24
|
)%
|
|
|
(2.38
|
)%
|
Client credit balances
|
|
|
(0.03
|
)%
|
|
|
(0.07
|
)%
|
|
|
(0.58
|
)%
|
|
|
0.04
|
%
|
|
|
0.51
|
%
|
Net interest revenue (excluding conduit business)
|
|
|
3.13
|
%
|
|
|
3.41
|
%
|
|
|
5.38
|
%
|
|
|
(0.28
|
)%
|
|
|
(1.97
|
)%
|
Securities borrowing conduit business
|
|
|
0.34
|
%
|
|
|
0.86
|
%
|
|
|
3.13
|
%
|
|
|
(0.52
|
)%
|
|
|
(2.27
|
)%
|
Securities lending conduit business
|
|
|
(0.19
|
)%
|
|
|
(0.53
|
)%
|
|
|
(2.92
|
)%
|
|
|
0.34
|
%
|
|
|
2.39
|
%
|
Net interest revenue
|
|
|
3.02
|
%
|
|
|
3.07
|
%
|
|
|
3.54
|
%
|
|
|
(0.05
|
)%
|
|
|
(0.47
|
)%
|
31
The following tables set forth key metrics that we use in
analyzing investment product fee revenues (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fee Revenue
|
|
|
10 vs. 09
|
|
|
09 vs. 08
|
|
|
|
Fiscal Year
|
|
|
Increase/
|
|
|
Increase/
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
Money market mutual fund
|
|
$
|
9.9
|
|
|
$
|
108.5
|
|
|
$
|
212.2
|
|
|
$
|
(98.6
|
)
|
|
$
|
(103.7
|
)
|
Other investment product fees
|
|
|
119.4
|
|
|
|
75.8
|
|
|
|
97.2
|
|
|
|
43.6
|
|
|
|
(21.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment product fees
|
|
$
|
129.3
|
|
|
$
|
184.3
|
|
|
$
|
309.4
|
|
|
$
|
(55.0
|
)
|
|
$
|
(125.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Balance
|
|
|
10 vs. 09
|
|
|
09 vs. 08
|
|
|
|
Fiscal Year
|
|
|
%
|
|
|
%
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
Change
|
|
|
Money market mutual fund
|
|
$
|
9,846
|
|
|
$
|
23,312
|
|
|
$
|
26,976
|
|
|
|
(58
|
)%
|
|
|
(14
|
)%
|
Other fee-based investment balances
|
|
|
51,734
|
|
|
|
36,113
|
|
|
|
43,806
|
|
|
|
43
|
%
|
|
|
(18
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fee-based investment balances
|
|
$
|
61,580
|
|
|
$
|
59,425
|
|
|
$
|
70,782
|
|
|
|
4
|
%
|
|
|
(16
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Yield
|
|
10 vs. 09
|
|
09 vs. 08
|
|
|
Fiscal Year
|
|
Increase/
|
|
Increase/
|
|
|
2010
|
|
2009
|
|
2008
|
|
(Decrease)
|
|
(Decrease)
|
|
Money market mutual fund
|
|
|
0.10
|
%
|
|
|
0.46
|
%
|
|
|
0.77
|
%
|
|
|
(0.36
|
)%
|
|
|
(0.31
|
)%
|
Other investment product fees
|
|
|
0.23
|
%
|
|
|
0.21
|
%
|
|
|
0.22
|
%
|
|
|
0.02
|
%
|
|
|
(0.01
|
)%
|
Total investment product fees
|
|
|
0.21
|
%
|
|
|
0.31
|
%
|
|
|
0.43
|
%
|
|
|
(0.10
|
)%
|
|
|
(0.12
|
)%
|
Transaction-Based
Revenue Metrics
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10 vs. 09
|
|
|
09 vs. 08
|
|
|
|
Fiscal Year
|
|
|
%
|
|
|
%
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
Change
|
|
|
Total trades (in millions)
|
|
|
93.33
|
|
|
|
93.27
|
|
|
|
75.72
|
|
|
|
0
|
%
|
|
|
23
|
%
|
Average commissions and transaction fees per
trade(1)
|
|
$
|
12.79
|
|
|
$
|
13.35
|
|
|
$
|
13.44
|
|
|
|
(4
|
)%
|
|
|
(1
|
)%
|
Average client trades per day
|
|
|
371,835
|
|
|
|
371,579
|
|
|
|
301,061
|
|
|
|
0
|
%
|
|
|
23
|
%
|
Average client trades per account (annualized)
|
|
|
12.0
|
|
|
|
12.9
|
|
|
|
11.4
|
|
|
|
(7
|
)%
|
|
|
13
|
%
|
Activity rate total accounts
|
|
|
4.8
|
%
|
|
|
5.1
|
%
|
|
|
4.5
|
%
|
|
|
(6
|
)%
|
|
|
13
|
%
|
Activity rate funded accounts
|
|
|
6.9
|
%
|
|
|
7.3
|
%
|
|
|
6.3
|
%
|
|
|
(5
|
)%
|
|
|
16
|
%
|
Trading days
|
|
|
251.0
|
|
|
|
251.0
|
|
|
|
251.5
|
|
|
|
0
|
%
|
|
|
(0
|
)%
|
|
|
|
(1) |
|
Average commissions and transaction fees per trade excludes
thinkorswim active trader and TD Waterhouse UK businesses. |
32
Client
Account and Client Asset Metrics
The following table sets forth certain metrics regarding client
accounts and client assets, which we use to analyze growth and
trends in our client base:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Total accounts (beginning of year)
|
|
|
7,563,000
|
|
|
|
6,895,000
|
|
|
|
6,380,000
|
|
New accounts opened
|
|
|
668,000
|
|
|
|
737,000
|
|
|
|
648,000
|
|
Accounts purchased
|
|
|
|
|
|
|
197,000
|
|
|
|
102,000
|
|
Accounts closed
|
|
|
(285,000
|
)
|
|
|
(266,000
|
)
|
|
|
(235,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accounts (end of year)
|
|
|
7,946,000
|
|
|
|
7,563,000
|
|
|
|
6,895,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage change during year
|
|
|
5
|
%
|
|
|
10
|
%
|
|
|
8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded accounts (beginning of year)
|
|
|
5,279,000
|
|
|
|
4,918,000
|
|
|
|
4,597,000
|
|
Funded accounts (end of year)
|
|
|
5,455,000
|
|
|
|
5,279,000
|
|
|
|
4,918,000
|
|
Percentage change during year
|
|
|
3
|
%
|
|
|
7
|
%
|
|
|
7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Client assets (beginning of year, in billions)
|
|
$
|
302.0
|
|
|
$
|
278.0
|
|
|
$
|
302.7
|
|
Client assets (end of year, in billions)
|
|
$
|
354.8
|
|
|
$
|
302.0
|
|
|
$
|
278.0
|
|
Percentage change during year
|
|
|
17
|
%
|
|
|
9
|
%
|
|
|
(8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net new assets (in billions)
|
|
$
|
33.9
|
|
|
$
|
26.6
|
|
|
$
|
22.8
|
|
Net new assets annualized growth rate
|
|
|
11
|
%
|
|
|
10
|
%
|
|
|
8
|
%
|
In connection with our purchase of thinkorswim on June 11,
2009, we acquired approximately 197,000 total accounts,
approximately 113,000 funded accounts and approximately
$4 billion in client assets. 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.
33
Consolidated
Statements of Income Data
The following table summarizes certain data from our
Consolidated Statements of Income for analysis purposes (dollars
in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
10 vs. 09
|
|
|
09 vs. 08
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
% Change
|
|
|
% Change
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction-based revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions and transaction fees
|
|
$
|
1,193.8
|
|
|
$
|
1,253.2
|
|
|
$
|
1,017.5
|
|
|
|
(5
|
)%
|
|
|
23
|
%
|
Asset-based revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest revenue
|
|
|
427.7
|
|
|
|
362.1
|
|
|
|
799.2
|
|
|
|
18
|
%
|
|
|
(55
|
)%
|
Brokerage interest expense
|
|
|
(6.1
|
)
|
|
|
(15.2
|
)
|
|
|
(249.6
|
)
|
|
|
(60
|
)%
|
|
|
(94
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest revenue
|
|
|
421.7
|
|
|
|
346.9
|
|
|
|
549.6
|
|
|
|
22
|
%
|
|
|
(37
|
)%
|
Insured deposit account fees
|
|
|
682.2
|
|
|
|
568.1
|
|
|
|
628.7
|
|
|
|
20
|
%
|
|
|
(10
|
)%
|
Investment product fees
|
|
|
129.3
|
|
|
|
184.3
|
|
|
|
309.4
|
|
|
|
(30
|
)%
|
|
|
(40
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total asset-based revenues
|
|
|
1,233.2
|
|
|
|
1,099.3
|
|
|
|
1,487.7
|
|
|
|
12
|
%
|
|
|
(26
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other revenues
|
|
|
133.8
|
|
|
|
55.4
|
|
|
|
32.2
|
|
|
|
141
|
%
|
|
|
72
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
2,560.7
|
|
|
|
2,407.9
|
|
|
|
2,537.4
|
|
|
|
6
|
%
|
|
|
(5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee compensation and benefits
|
|
|
622.4
|
|
|
|
511.2
|
|
|
|
503.3
|
|
|
|
22
|
%
|
|
|
2
|
%
|
Fair value adjustments of compensation-related
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
derivative instruments
|
|
|
|
|
|
|
|
|
|
|
0.8
|
|
|
|
N/A
|
|
|
|
(100
|
)%
|
Clearing and execution costs
|
|
|
90.4
|
|
|
|
70.9
|
|
|
|
44.6
|
|
|
|
27
|
%
|
|
|
59
|
%
|
Communications
|
|
|
106.9
|
|
|
|
83.1
|
|
|
|
69.6
|
|
|
|
29
|
%
|
|
|
19
|
%
|
Occupancy and equipment costs
|
|
|
142.9
|
|
|
|
124.3
|
|
|
|
101.8
|
|
|
|
15
|
%
|
|
|
22
|
%
|
Depreciation and amortization
|
|
|
57.0
|
|
|
|
45.9
|
|
|
|
36.9
|
|
|
|
24
|
%
|
|
|
24
|
%
|
Amortization of acquired intangible assets
|
|
|
100.5
|
|
|
|
73.9
|
|
|
|
59.3
|
|
|
|
36
|
%
|
|
|
25
|
%
|
Professional services
|
|
|
132.2
|
|
|
|
127.6
|
|
|
|
108.3
|
|
|
|
4
|
%
|
|
|
18
|
%
|
Advertising
|
|
|
250.0
|
|
|
|
197.1
|
|
|
|
173.3
|
|
|
|
27
|
%
|
|
|
14
|
%
|
Losses (gains) on money market funds and client guarantees
|
|
|
(12.7
|
)
|
|
|
13.8
|
|
|
|
35.6
|
|
|
|
N/A
|
|
|
|
(61
|
)%
|
Other
|
|
|
105.7
|
|
|
|
58.7
|
|
|
|
62.9
|
|
|
|
80
|
%
|
|
|
(7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
1,595.3
|
|
|
|
1,306.4
|
|
|
|
1,196.3
|
|
|
|
22
|
%
|
|
|
9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
965.4
|
|
|
|
1,101.5
|
|
|
|
1,341.0
|
|
|
|
(12
|
)%
|
|
|
(18
|
)%
|
Other expense (income):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on borrowings
|
|
|
44.9
|
|
|
|
40.1
|
|
|
|
78.4
|
|
|
|
12
|
%
|
|
|
(49
|
)%
|
Loss on debt refinancing
|
|
|
8.4
|
|
|
|
|
|
|
|
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Loss (gain) on sale of investments
|
|
|
0.0
|
|
|
|
2.0
|
|
|
|
(0.9
|
)
|
|
|
(98
|
)%
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense (income)
|
|
|
53.3
|
|
|
|
42.1
|
|
|
|
77.5
|
|
|
|
27
|
%
|
|
|
(46
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax income
|
|
|
912.1
|
|
|
|
1,059.4
|
|
|
|
1,263.5
|
|
|
|
(14
|
)%
|
|
|
(16
|
)%
|
Provision for income taxes
|
|
|
319.9
|
|
|
|
415.7
|
|
|
|
459.6
|
|
|
|
(23
|
)%
|
|
|
(10
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
592.2
|
|
|
$
|
643.7
|
|
|
$
|
803.9
|
|
|
|
(8
|
)%
|
|
|
(20
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
35.1
|
%
|
|
|
39.2
|
%
|
|
|
36.4
|
%
|
|
|
|
|
|
|
|
|
Average debt outstanding
|
|
$
|
1,303.0
|
|
|
$
|
1,444.3
|
|
|
$
|
1,469.2
|
|
|
|
(10
|
)%
|
|
|
(2
|
)%
|
Average interest rate incurred on borrowings
|
|
|
3.09
|
%
|
|
|
2.44
|
%
|
|
|
4.99
|
%
|
|
|
|
|
|
|
|
|
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.
34
Fiscal
Year Ended September 30, 2010 Compared to Fiscal Year Ended
September 30, 2009
Net
Revenues
Commissions and transaction fees decreased 5% to
$1.19 billion, primarily due to lower average commissions
and transaction fees per trade. Average commissions and
transaction fees per trade decreased to $12.79 per trade for
fiscal 2010 from $13.35 for fiscal 2009, primarily due to lower
payment for order flow revenue per trade and the full-year
effect of thinkorswim trading activity, which earns somewhat
lower average commissions and transaction fees per trade, during
fiscal 2010. These decreases were partially offset by a higher
percentage of option trades and a decrease in promotional trades
during fiscal 2010. Average client trades per day were virtually
unchanged at 371,835 for fiscal 2010 compared to 371,579 for
fiscal 2009. However, on a pro forma basis combined with
thinkorswim, average client trades per day decreased 11% from
418,639 for fiscal 2009. Average client trades per account
(annualized) were 12.0 for fiscal 2010 compared to 12.9 for
fiscal 2009. We expect average commissions and transaction fees
to range between $12.00 and $12.50 per trade during fiscal 2011,
depending on the mix of client trading activity, level of
payment for order flow revenue and other factors. We expect
revenues from commissions and transaction fees to range from
$1.02 billion to $1.29 billion for fiscal 2011,
depending on the volume of client trading activity, average
commissions and transaction fees per trade and other factors.
Asset-based revenues, which consists of net interest revenue,
insured deposit account fees and investment product fees,
increased 12% to $1.23 billion, as described below. We
expect asset-based revenues to increase to between
$1.32 billion and $1.47 billion for fiscal 2011,
depending largely on the interest rate environment and the rate
of growth in spread-based balances. This estimated range assumes
no change in the federal funds rate or LIBOR yield curve for
fiscal 2011. We expect increased average spread-based asset
balances for fiscal 2011 to be partially offset by a slight
decrease in the expected average yield earned on those assets
due to the expected continued low short-term interest rate
environment.
Net interest revenue increased 22% to $421.7 million, due
primarily to a 56% increase in average client margin balances,
partially offset by a decrease of 44 basis points in the
average yield earned on client margin balances and a
$22.4 million decrease in net interest revenue from our
securities borrowing/lending program for fiscal 2010 compared to
fiscal 2009.
Insured deposit account fees increased 20% to
$682.2 million, due primarily to a 78% increase in average
client insured deposit account balances during fiscal 2010
compared to fiscal 2009 and the effect of a $13.3 million
(6 basis points) FDIC special regulatory assessment during
fiscal 2009. The increased insured deposit account balances are
primarily due to our strategy of migrating client cash held in
client credit balances or swept to money market mutual funds to
the insured deposit account offering beginning in April 2009. In
January 2010, we moved an additional $4.2 billion of client
cash held in client credit balances into the insured deposit
account offering. We expect our migration strategy to position
the Company to earn higher net revenues, as we generally earn a
higher yield on insured deposit account balances than on money
market mutual fund or client credit balances. The effect of the
increased insured deposit account balances was significantly
offset by a decrease of 89 basis points (excluding the
effect of the FDIC special regulatory assessment mentioned
above) in the average yield earned on the insured deposit
account assets during fiscal 2010.
Investment product fees decreased 30% to $129.3 million,
primarily due to a 58% decrease in average money market mutual
fund balances and a decrease of 36 basis points in the
average yield earned on client money market mutual fund
balances, partially offset by a 43% increase in average other
fee-based investment balances in fiscal 2010 compared to fiscal
2009. The decrease in average money market mutual fund balances
resulted primarily from our client cash migration strategy
discussed above. The decrease in the average yield earned in
fiscal 2010 was primarily due to our decision to voluntarily
begin waiving fees on certain money market mutual funds during
the first quarter of fiscal 2009 in order to prevent our
clients yields on such funds from becoming negative. The
unfavorable impact of the fee waivers on the average yield
earned gradually increased during fiscal 2009.
Other revenues increased to $133.8 million, primarily due
to an increase in education revenues as a result of the
thinkorswim acquisition. We expect other revenues to decrease to
between $111.0 million and $121.0 million for fiscal
2011.
35
Operating
Expenses
Total operating expenses increased 22% to $1.60 billion
during fiscal 2010, as described below. We expect total
operating expenses to range from $1.56 billion to
$1.71 billion for fiscal 2011.
Employee compensation and benefits expense increased 22% to
$622.4 million, primarily due to an increase in average
headcount resulting from the thinkorswim acquisition and higher
incentive-based compensation related to actual Company and
individual performance, including our success in attracting net
new client assets, in fiscal 2010 compared to fiscal 2009. The
average number of full-time equivalent employees was 5,281 for
fiscal 2010 compared to 4,788 for fiscal 2009.
Clearing and execution costs increased 27% to
$90.4 million, due primarily to expenses associated with
the additional accounts and transaction processing volumes
resulting from the thinkorswim acquisition, partially offset by
lower client statement processing costs in fiscal 2010 compared
to fiscal 2009.
Communications expense increased 29% to $106.9 million, due
primarily to expenses associated with the additional accounts
and transaction processing volumes resulting from the
thinkorswim acquisition, increased telecommunications costs
resulting from our migration to a new secondary data center
during fiscal 2009 and increased costs for quotes and market
information.
Occupancy and equipment costs increased 15% to
$142.9 million due primarily to upgrades to our technology
infrastructure and facilities and due to the addition of
thinkorswim occupancy and equipment costs.
Depreciation and amortization increased 24% to
$57.0 million, due primarily to depreciation on recent
technology infrastructure upgrades and leasehold improvements
and due to depreciation of assets recorded in the thinkorswim
acquisition.
Amortization of acquired intangible assets increased 36% to
$100.5 million, due to amortization of intangible assets
recorded in the thinkorswim acquisition.
Professional services increased 4% to $132.2 million,
primarily due to higher usage of consulting and contract
services during fiscal 2010 in connection with new product
development, technology infrastructure upgrades and the
integration of thinkorswim. These increases were significantly
offset by the effect of a $13 million acquisition earn-out
payment and a $5 million write-off of software development
costs during fiscal 2009.
Advertising expense increased 27% to $250.0 million,
primarily due to increased spending for the TD Ameritrade
brand in response to competitive market share opportunities and
the full year effect of marketing support for the thinkorswim
business. 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.
Gains on money market funds and client guarantees during fiscal
2010 consists of $9.4 million of recoveries on our Reserve
Primary Fund holdings, $1.9 million of favorable fair
market value adjustments to our Reserve International Liquidity
Fund holdings and $1.4 million of gains related to the
final fulfillment of our auction rate securities and Primary
Fund client guarantees. Losses on money market funds and client
guarantees during fiscal 2009 consists of losses associated with
our client commitments related to auction rate securities
settlement agreements. Our client guarantees are discussed
further under Item 8 Financial Statements and
Supplementary Data Notes to Consolidated Financial
Statements: Guarantees under
Note 14 Commitments and Contingencies.
Other operating expenses increased 80% to $105.7 million,
primarily due to increased litigation, arbitration and
regulatory expenses and additional expenses related to the
thinkorswim business, including education travel and venue
costs, in fiscal 2010 compared to fiscal 2009.
Other
Expenses and Income Taxes
Other expenses increased by 27% to $53.3 million during
fiscal 2010, primarily due to the debt refinancing charge
described below. We expect other expenses to range from
$41.9 million to $46.8 million for fiscal 2011.
36
Interest on borrowings increased 12% to $44.9 million, due
primarily to higher average interest rates incurred on our debt,
partially offset by a 10% decrease in average debt outstanding
during fiscal 2010 compared to fiscal 2009. The average interest
rate incurred on our debt was 3.09% for fiscal 2010, compared to
2.44% for fiscal 2009, primarily due to the refinancing of our
long-term debt on November 25, 2009.
Loss on debt refinancing of $8.4 million consists of a
charge to write off the unamortized balance of debt issuance
costs associated with the Term A and Term B credit facilities
under our January 23, 2006 credit agreement. On
November 25, 2009, we refinanced our long-term debt by
issuing the Senior Notes and used the proceeds from the issuance
of the Senior Notes, together with cash on hand, to repay in
full the outstanding principal under our January 23, 2006
credit agreement.
Our effective income tax rate decreased to 35.1% for fiscal
2010, compared to 39.2% for fiscal 2009. The effective tax rate
for fiscal 2010 was unusually low due to $32.0 million of
favorable resolutions of certain federal and state income tax
matters during fiscal 2010. These items favorably impacted our
earnings for fiscal 2010 by approximately $0.05 per share. The
effective tax rate for fiscal 2009 was slightly higher than
normal due to unfavorable deferred income tax adjustments of
approximately $8.9 million resulting from state income tax
law changes and capital loss limitations on certain money market
mutual fund holdings. These items unfavorably impacted our
earnings for fiscal 2009 by approximately $0.02 per share. We
expect our effective income tax rate to range from 38% to 39%
for fiscal 2011. However, we expect to experience some
volatility in our quarterly and annual effective income tax rate
because current accounting rules for uncertain tax positions
require 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 the change occurs.
Fiscal
Year Ended September 30, 2009 Compared to Fiscal Year Ended
September 30, 2008
Net
Revenues
Commissions and transaction fees increased 23% to
$1.25 billion, primarily due to higher average client
trades per day, partially offset by slightly lower commissions
and transaction fees per trade. Average client trades per day
increased 23% to 371,579 for fiscal 2009 from 301,061 for fiscal
2008. Average client trades per account (annualized) increased
to 12.9 for fiscal 2009 compared to 11.4 for fiscal 2008.
Average commissions and transaction fees per trade decreased 1%
to $13.35 per trade for fiscal 2009 from $13.44 for fiscal 2008,
primarily due to the June 2009 acquisition of thinkorswim, which
earns somewhat lower average commissions and transaction fees
per trade, and an increase in promotional trades related to our
new account growth during fiscal 2009, partially offset by
higher payment for order flow revenue during fiscal 2009.
Net interest revenue decreased 37% to $346.9 million, due
primarily to a 45% decrease in average client margin balances, a
decrease of 123 basis points in the average yield earned on
client margin balances and a decrease of 238 basis points
in the average yield earned on other cash and interest-earning
investments in fiscal 2009 compared to fiscal 2008. These
decreases were partially offset by a $94.6 million increase
in net interest revenue from our securities borrowing/lending
program and a decrease of 51 basis points in the average
interest rate paid on client credit balances in fiscal 2009
compared to fiscal 2008.
Insured deposit account fees decreased 10% to
$568.1 million, due primarily to a 140 basis point
decrease in the average yield earned on the insured deposit
account assets during fiscal 2009, of which 6 basis points
($13.3 million) resulted from a FDIC special regulatory
assessment. This decrease was partially offset by a 41% increase
in average insured deposit account balances during fiscal 2009
compared to fiscal 2008.
Investment product fees decreased 40% to $184.3 million,
primarily due to a decrease of 31 basis points in the
average yield earned on client money market mutual fund
balances, a 14% decrease in average money market mutual fund
balances and an 18% decrease in average other fee-based
investment balances in fiscal 2009 compared to fiscal 2008. The
decrease in the average yield earned in fiscal 2009 was
primarily due to our decision to voluntarily begin waiving fees
on certain money market mutual funds during the first quarter of
fiscal 2009 in order to prevent our clients yields on such
funds from becoming negative.
In April 2009, we announced a strategy to migrate approximately
$10 to $14 billion of client cash held in client credit
balances or swept to money market mutual funds into the insured
deposit account offering. From March 31,
37
2009 to September 30, 2009, insured deposit account
balances increased by approximately $10.6 billion, while
money market mutual fund balances decreased by a similar amount,
due in part to the completion of part of the migration. The
portion of the migration completed in fiscal 2009 resulted in an
increase in insured deposit account fee revenues and a decrease
in investment product fee revenues, but did not have a material
impact on overall net revenues during fiscal 2009.
Other revenues increased 72% to $55.4 million, primarily
due to an increase in education revenues as a result of the
thinkorswim acquisition in June 2009.
Operating
Expenses
Employee compensation and benefits expense increased 2% to
$511.2 million, due primarily to an increase in average
headcount resulting from our fiscal 2008 growth initiatives and
the thinkorswim acquisition in June 2009, and an increase of
approximately $2.0 million in severance costs related to
staff reductions during fiscal 2009 compared to fiscal 2008.
These increases were partially offset by lower incentive-based
compensation related to actual Company and individual
performance compared to fiscal 2008. The average number of
full-time equivalent employees was 4,788 for fiscal 2009
compared to 4,381 for fiscal 2008.
Clearing and execution costs increased 59% to
$70.9 million, due primarily to higher client trading
volumes, increased clearing expenses associated with additional
accounts and transaction processing volumes resulting from the
acquisition of thinkorswim in fiscal 2009 and higher transaction
costs from clearing organizations in fiscal 2009 compared to
fiscal 2008.
Communications expense increased 19% to $83.1 million, due
primarily to increased costs for quotes and market information
related to higher client trading volume during fiscal 2009
compared to fiscal 2008 and communication costs associated with
the additional accounts and transaction processing volumes
resulting from the thinkorswim acquisition.
Occupancy and equipment costs increased 22% to
$124.3 million, due primarily to higher costs for
technology infrastructure and facilities resulting from our
fiscal 2008 growth initiatives.
Depreciation and amortization increased 24% to
$45.9 million, due primarily to increased depreciation on
technology infrastructure upgrades and leasehold improvements
resulting from our fiscal 2008 growth initiatives.
Amortization of acquired intangible assets increased 25% to
$73.9 million, primarily due to amortization of the
intangible assets recorded in the acquisitions of Fiserv
Trust Company in the second quarter of fiscal 2008 and
thinkorswim in the third quarter of fiscal 2009.
Professional services increased 18% to $127.6 million,
primarily due to a $13 million acquisition earn-out
payment, a $5 million write-off of software development
costs, higher usage of consulting and contract services in
connection with new product development and technology
infrastructure upgrades related to our growth initiatives and
the addition of thinkorswim professional services costs during
fiscal 2009. These increases were partially offset by fees
incurred during fiscal 2008 under the transition services
agreements related to the acquisition of Fiserv
Trust Company, which were not present during fiscal 2009.
Advertising expense increased 14% to $197.1 million,
primarily due to marketing support for the thinkorswim business,
and to a lesser extent increased spending for the TD Ameritrade
business during fiscal 2009 in response to competitive market
share opportunities.
Losses on money market funds and client guarantees during fiscal
2009 consists of losses associated with our client commitments
related to auction rate securities settlement agreements. Losses
on money market funds and client guarantees 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 resulted from our announced commitment of up to
$55 million to mitigate client losses in these funds in the
event clients received less than $1.00 per share upon the
orderly liquidation of the funds. These commitments are
discussed further under Item 8, Financial Statements and
Supplementary Data Notes to Consolidated Financial
Statements: Guarantees under
Note 14 Commitments and Contingencies.
38
Other operating expenses decreased 7% to $58.7 million,
primarily due to lower bad debt and other client-related trading
losses in fiscal 2009 compared to fiscal 2008. The decrease was
partially offset by additional business resulting from the
thinkorswim acquisition in fiscal 2009 and the effect of
favorable litigation settlements during fiscal 2008.
Other
Expenses and Income Taxes
Interest on borrowings decreased 49% to $40.1 million, due
primarily to lower average interest rates incurred on our debt
during fiscal 2009 compared to fiscal 2008. The average interest
rate incurred on our debt was 2.44% for fiscal 2009, compared to
4.99% for fiscal 2008.
Our effective income tax rate increased to 39.2% for fiscal 2009
compared to 36.4% for fiscal 2008, due primarily to unfavorable
deferred income tax adjustments of approximately
$8.9 million resulting from state income tax law changes
and capital loss limitations on certain money market mutual fund
holdings during fiscal 2009. These items unfavorably impacted
our earnings for fiscal 2009 by approximately $0.02 per share.
The effective income tax rate for fiscal 2008 was unusually low
due primarily to $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
share.
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 2010 were financed primarily from our
earnings and cash on hand. We plan to finance our operational
capital and liquidity needs in fiscal 2011 primarily from our
earnings, cash on hand and, if necessary, borrowings on our
parent company and broker-dealer credit facilities.
On July 20, 2009, our broker-dealer subsidiary TD
Ameritrade, Inc. entered into settlement agreements with the
Securities and Exchange Commission (SEC) and other
regulatory authorities, in which we agreed to extend an offer to
purchase eligible auction rate securities (ARS) from
certain current and former account holders. The offer commenced
on August 10, 2009. The final phase of the offer expired on
March 23, 2010 and TD Ameritrade, Inc. completed the
repurchases on March 30, 2010. Through March 30, 2010,
TD Ameritrade, Inc. purchased eligible ARS with an aggregate par
value of approximately $305 million. ARS are long-term
variable rate securities tied to short-term interest rates that
are reset through a Dutch auction process. In
February 2008, the Dutch auction process failed and holders were
no longer able to liquidate their holdings through the auction
process. Funds from ARS are not expected to be accessible until
one of the following occurs: a successful auction, the issuer
redeems the issue, a buyer is found outside of the auction
process or the underlying securities mature. Substantial delays
in the sale or redemption of our ARS holdings could adversely
affect our liquidity and require us to borrow on our lines of
credit or seek alternative financing. As of September 30,
2010, TD Ameritrade, Inc. held ARS with a fair value of
approximately $209 million.
Dividends from our subsidiaries are a source of liquidity for
the parent company. Some of our subsidiaries are subject to
requirements of the SEC, the Financial Industry Regulatory
Authority (FINRA), the Commodity Futures Trading
Commission (CFTC), the National Futures Association
(NFA) 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 SECs Uniform Net Capital Rule
(Rule 15c3-1
under the Securities Exchange Act of 1934), our broker-dealer
subsidiaries are required to maintain, at all times, at least
the minimum level of net capital required under
Rule 15c3-1.
For clearing broker-dealers, this minimum net capital level is
determined by a calculation described in
Rule 15c3-1
that is primarily based on each broker-dealers
aggregate debits, which primarily are a function of
client margin balances at our clearing broker-dealer subsidiary.
Since our aggregate debits may fluctuate significantly, our
minimum net capital requirements may also fluctuate
significantly from period to period. The
39
parent company may make cash capital contributions to our
broker-dealer subsidiaries, if necessary, to meet minimum net
capital requirements.
Liquid
Assets
We consider liquid assets an important measure of our liquidity
and of our ability to fund corporate investing and financing
activities. Liquid assets is 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 subsidiaries
in excess of 120% of the minimum dollar net capital requirement
or in excess of
81/3%
of aggregate indebtedness and (d) 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 company cash and cash
equivalents, because capital requirements may limit the amount
of cash available for dividend from the broker-dealer and trust
company 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 company
subsidiaries to the parent company. Liquid assets should be
considered as a supplemental measure of liquidity, rather than
as a substitute for cash and cash equivalents. The following
table sets forth a reconciliation of cash and cash equivalents,
which is the most directly comparable GAAP measure, to liquid
assets (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
Cash and cash equivalents
|
|
$
|
741,492
|
|
|
$
|
791,211
|
|
|
$
|
(49,719
|
)
|
Less: Broker-dealer cash and cash equivalents
|
|
|
(426,618
|
)
|
|
|
(473,996
|
)
|
|
|
47,378
|
|
Trust company cash and cash equivalents
|
|
|
(50,937
|
)
|
|
|
(25,143
|
)
|
|
|
(25,794
|
)
|
Investment advisory cash and cash equivalents
|
|
|
(28,944
|
)
|
|
|
(18,935
|
)
|
|
|
(10,009
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate cash and cash equivalents
|
|
|
234,993
|
|
|
|
273,137
|
|
|
|
(38,144
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plus: Corporate short-term investments
|
|
|
|
|
|
|
49,496
|
|
|
|
(49,496
|
)
|
Excess trust company Tier 1 capital
|
|
|
12,284
|
|
|
|
4,658
|
|
|
|
7,626
|
|
Excess broker-dealer regulatory net capital
|
|
|
828,979
|
|
|
|
814,836
|
|
|
|
14,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquid assets
|
|
$
|
1,076,256
|
|
|
$
|
1,142,127
|
|
|
$
|
(65,871
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The decrease in liquid assets is summarized as follows (dollars
in thousands):
|
|
|
|
|
Liquid assets as of September 30, 2009
|
|
$
|
1,142,127
|
|
|
|
|
|
|
Plus: Pre-tax income
|
|
|
912,085
|
|
Proceeds from exercise of stock options
|
|
|
12,536
|
|
Proceeds from the issuance of long-term debt
|
|
|
1,248,557
|
|
Other changes in working capital and regulatory net capital
|
|
|
173,706
|
|
|
|
|
|
|
Less: Income taxes paid
|
|
|
(352,504
|
)
|
Purchase of property and equipment
|
|
|
(91,198
|
)
|
Purchase of treasury stock
|
|
|
(265,599
|
)
|
Prepayment of structured stock repurchase
|
|
|
(169,200
|
)
|
Principal payments on long-term debt and capital lease
obligations
|
|
|
(1,424,407
|
)
|
Payment of debt issuance costs
|
|
|
(10,595
|
)
|
Additional net capital requirement due to increase in aggregate
debits
|
|
|
(99,252
|
)
|
|
|
|
|
|
Liquid assets as of September 30, 2010
|
|
$
|
1,076,256
|
|
|
|
|
|
|
40
Loan
Facilities
Senior Notes On November 25, 2009 we
sold, through a public offering, $1.25 billion aggregate
principal amount of unsecured senior notes, consisting of
$250 million aggregate principal amount of
2.950% Senior Notes due December 1, 2012 (the
2012 Notes), $500 million aggregate principal
amount of 4.150% Senior Notes due December 1, 2014
(the 2014 Notes) and $500 million aggregate
principal amount of 5.600% Senior Notes due
December 1, 2019 (the 2019 Notes and,
collectively with the 2012 Notes and the 2014 Notes, the
Senior Notes). The Senior Notes were issued at an
aggregate discount of $1.4 million, which is being
amortized to interest expense over the terms of the respective
Senior Notes. Interest on the Senior Notes is payable
semi-annually in arrears on June 1 and December 1 of each year.
On November 25, 2009, we used the net proceeds from the
issuance of the Senior Notes, together with approximately
$158 million of cash on hand, to repay in full the
outstanding principal under our January 23, 2006 credit
agreement. Upon repayment, the January 23, 2006 credit
agreement (including the Term A Facility, the Term B Facility
and the Revolving Facility as amended on November 5,
2009) was automatically amended and restated in its
entirety pursuant to the Amended and Restated Credit Agreement
(the Restated Credit Agreement), dated as of
November 25, 2009, as described below.
The Senior Notes are jointly and severally and fully and
unconditionally guaranteed by each of our current and future
subsidiaries that is or becomes a borrower or a guarantor under
the Restated Credit Agreement. Currently, the only subsidiary
guarantor of the obligations under the Senior Notes is TD
Ameritrade Online Holdings Corp. (TDAOH). The Senior
Notes and the guarantee by TDAOH are the general senior
unsecured obligations of the Company and TDAOH.
We may redeem each series of the Senior Notes, in whole at any
time or in part from time to time, at a redemption price equal
to the greater of (a) 100% of the principal amount of the
notes being redeemed, and (b) the sum of the present values
of the remaining scheduled payments of principal and interest on
the notes being redeemed, discounted to the date of redemption
on a semi-annual basis at the comparable U.S. Treasury
rate, plus: 25 basis points in the case of the 2012 Notes,
30 basis points in the case of the 2014 Notes and
35 basis points in the case of the 2019 Notes, plus, in
each case, accrued and unpaid interest to the date of redemption.
Interest Rate Swaps We are exposed to changes
in the fair value of our fixed-rate Senior Notes resulting from
interest rate fluctuations. To hedge this exposure, on
December 30, 2009, we entered into
fixed-for-variable
interest rate swaps on the 2012 Notes and 2014 Notes for
notional amounts of $250 million and $500 million,
respectively, with maturity dates matching the respective
maturity dates of the 2012 Notes and 2014 Notes. The interest
rate swaps effectively change the fixed-rate interest on the
2012 Notes and 2014 Notes to variable-rate interest. Under the
terms of the interest rate swap agreements, we receive
semi-annual fixed-rate interest payments based on the same rates
applicable to the 2012 Notes and 2014 Notes, and make quarterly
variable-rate interest payments based on three-month LIBOR plus
(a) 0.9693% for the swap on the 2012 Notes and
(b) 1.245% for the swap on the 2014 Notes.
The interest rate swaps are accounted for as fair value hedges
and qualify for the shortcut method of accounting. Changes in
the payment of interest resulting from the interest rate swaps
are recorded as an offset to interest on borrowings on the
Consolidated Statements of Income. Changes in fair value of the
interest rate swaps are completely offset by changes in fair
value of the related notes, resulting in no effect on net
income. For fiscal 2010, we recorded a $49.2 million gain
for the change in fair value of the interest rate swaps and an
offsetting $49.2 million fair value loss on the hedged
fixed-rate debt. The offsetting fair value gains and losses were
recorded in interest on borrowings on the Consolidated
Statements of Income.
The interest rate swaps are subject to counterparty credit risk.
Credit risk is managed by limiting activity to approved
counterparties that meet a minimum credit rating threshold and
by entering into credit support agreements. The bilateral credit
support agreement related to the interest rate swaps requires
daily collateral coverage, in the form of cash or
U.S. Treasury securities, for the aggregate fair value of
the interest rate swaps. As of September 30, 2010, the
interest rate swap counterparty had pledged $52.9 million
of collateral to us, in the form of U.S. Treasury
securities.
41
Restated Revolving Facility The Restated
Credit Agreement consists of an unsecured revolving credit
facility in the aggregate principal amount of $300 million
(the Restated Revolving Facility). The maturity date
of the Restated Revolving Facility is December 31, 2012.
The applicable interest rate under the Restated Revolving
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 highest of (x) the prime
rate, (y) the federal funds effective rate plus 0.50% or
(z) one-month LIBOR plus 1.00%, plus (ii) an interest
rate margin (Base Rate loans). The interest rate
margin ranges from 2.00% to 4.00% for LIBOR loans and from 1.00%
to 3.00% for Base Rate loans, determined by reference to our
public debt ratings. We are obligated to pay a commitment fee
ranging from 0.225% to 0.750% on any unused amount of the
Restated Revolving Facility, determined by reference to our
public debt ratings. As of September 30, 2010, the interest
rate margin would have been 2.50% for LIBOR loans and 1.50% for
Base Rate loans, and the commitment fee was 0.375% per annum,
each determined by reference to our Standard &
Poors public debt rating of BBB+. There were no borrowings
outstanding under the Restated Revolving Facility as of
September 30, 2010.
The obligations under the Restated Credit Agreement are
guaranteed by each significant subsidiary (as
defined in SEC
Rule 1-02(w)
of
Regulation S-X)
of the Company, other than broker-dealer subsidiaries, futures
commission merchant subsidiaries and controlled foreign
corporations. Currently, the only subsidiary guarantor of the
obligations under the Restated Credit Agreement is TDAOH.
The Restated Credit Agreement contains negative covenants that
limit or restrict the incurrence of liens, indebtedness of
subsidiaries, mergers, consolidations, transactions with
affiliates, change in nature of business and the sale of all or
substantially all of our assets and the assets of our
subsidiaries, 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 are restricted under the Restated Credit
Agreement from incurring additional indebtedness in an aggregate
principal amount in excess of $100 million that includes
any covenants that are more restrictive (taken as a whole) as to
the Company than those contained in the Restated Credit
Agreement, unless the Restated Credit Agreement is amended to
include such more restrictive covenants prior to the incurrence
of such additional indebtedness. We were in compliance with all
covenants under the Restated Credit Agreement as of
September 30, 2010.
Broker-Dealer Credit Facilities 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, 2010 and 2009. The
broker-dealer subsidiaries also had access to unsecured
uncommitted credit facilities of up to $150 million as of
September 30, 2010 and 2009. 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. There were no borrowings outstanding or letters of
credit issued under the secured or unsecured credit facilities
as of September 30, 2010 and 2009. As of September 30,
2010 and 2009, 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.
Stock
Repurchase Programs
On August 11, 2009, our board of directors authorized the
repurchase of up to 15 million shares of our common stock.
During fiscal 2010, we repurchased the 15 million shares
authorized at a weighted average purchase price of $17.25 per
share.
On August 5, 2010, our board of directors authorized the
repurchase of up to an additional 30 million shares of our
common stock. On August 20, 2010, we entered into an
agreement with an investment bank counterparty to effect a
structured repurchase of up to 12 million shares of our
common stock. Under the terms of the agreement, we prepaid
$169.2 million to the counterparty. The specific number of
shares, if any, that we will purchase from the counterparty will
vary based on the average of the daily volume-weighted average
share price of our common stock over the measurement period for
the transaction, less a pre-determined discount. Settlement of
the transaction will occur after the end of the measurement
period, which will end no later than November 30, 2010 and
is subject to
42
early termination by the counterparty. Upon settlement of the
transaction, any excess prepayment amount may be returned to us
in cash or, at our option, used to purchase additional shares of
our common stock.
Cash
Dividend
On October 26, 2010, our board of directors declared a
$0.05 per share quarterly cash dividend on our common stock. We
expect to pay approximately $29 million on
December 15, 2010 to fund this dividend.
Off-Balance
Sheet Arrangements
We enter into guarantees and other off-balance sheet
arrangements in the ordinary course of business, primarily to
meet the needs of our clients and 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 14 Commitments and Contingencies and
Insured Deposit Account Agreement under
Note 18 Related Party Transactions. The IDA
agreement accounts for a significant percentage of our net
revenues (27% of our net revenues for the fiscal year ended
September 30, 2010) 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, 2010 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period (Fiscal Years):
|
|
|
|
|
|
|
Less Than
|
|
|
|
|
|
|
|
|
More Than
|
|
|
|
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
Contractual Obligations
|
|
Total
|
|
|
2011
|
|
|
2012-13
|
|
|
2014-15
|
|
|
After 2015
|
|
|
Long-term debt obligations(1)
|
|
$
|
1,567,273
|
|
|
$
|
42,150
|
|
|
$
|
328,743
|
|
|
$
|
568,513
|
|
|
$
|
627,867
|
|
Capital lease obligations
|
|
|
23,654
|
|
|
|
10,677
|
|
|
|
10,785
|
|
|
|
2,192
|
|
|
|
|
|
Operating lease obligations
|
|
|
352,827
|
|
|
|
46,732
|
|
|
|
85,350
|
|
|
|
73,121
|
|
|
|
147,624
|
|
Purchase obligations
|
|
|
224,967
|
|
|
|
157,466
|
|
|
|
40,486
|
|
|
|
10,288
|
|
|
|
16,727
|
|
Deferred compensation(2)
|
|
|
18,138
|
|
|
|
18,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes payable(3)
|
|
|
147,368
|
|
|
|
147,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,334,227
|
|
|
$
|
422,531
|
|
|
$
|
465,364
|
|
|
$
|
654,114
|
|
|
$
|
792,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents scheduled principal payments, estimated interest
payments and commitment fees pursuant to the Senior Notes, the
interest rate swaps, the Restated Revolving Facility and other
long-term debt obligations. Actual amounts of interest may vary
depending on changes in variable interest rates associated with
the interest rate swaps. |
|
(2) |
|
Our obligation to Joseph H. Moglia, our Chairman and former CEO,
for deferred compensation will become payable not sooner than
the day after Mr. Moglias employment with the Company
terminates. The obligation is presented in the fiscal 2011
column as the entire amount of the compensation has already been
earned by Mr. Moglia. |
|
(3) |
|
A significant portion of our income taxes payable as of
September 30, 2010 consists of liabilities for uncertain
tax positions and related interest and penalties. The timing of
payments, if any, on liabilities for uncertain tax positions
cannot be predicted with reasonable accuracy. |
Recently
Adopted Accounting Pronouncements
ASC 805 On October 1, 2009, the Company
adopted Accounting Standards Codification (ASC) 805,
Business Combinations. ASC 805 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, ASC 805
43
applies prospectively to business combinations for which the
acquisition date is on or after October 1, 2009. The
adoption of ASC 805 did not have a material impact on the
Companys consolidated financial statements.
ASC
820-10 and
ASU
2010-06
On October 1, 2009, the Company adopted
ASC 820-10,
Fair Value Measurements and Disclosures, for nonfinancial
assets and liabilities that are not recognized or disclosed at
fair value in the financial statements on a recurring basis. In
January 2010, the Company adopted Accounting Standards Update
(ASU)
2010-06,
Improving Disclosures about Fair Value Measurements. ASU
2010-06
requires new disclosures and clarifies existing disclosure
requirements about fair value measurements as set forth in
ASC 820-10.
The adoption of
ASC 820-10
and ASU
2010-06 did
not have a material impact on the Companys consolidated
financial statements.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
Market risk generally represents the risk of loss that may
result from the potential change in the value of a financial
instrument as a result of fluctuations in interest rates and
market prices. We have established policies, procedures and
internal processes governing our management of market risks in
the normal course of our business operations.
Credit
Risk
Two primary sources of credit risk inherent in our business are
client margin lending and securities lending and borrowing. We
manage risk on client margin lending by requiring clients to
maintain margin collateral in compliance with regulatory and
internal guidelines. We monitor required margin levels daily
and, pursuant to 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.
The interest rate swaps on our Senior Notes and the prepayment
on our structured stock repurchase agreement are subject to
counterparty credit risk. Credit risk on derivative financial
instruments is managed by limiting activity to approved
counterparties that meet a minimum credit rating threshold and
by entering into credit support agreements. The bilateral credit
support agreements related to the interest rate swaps and the
structured stock repurchase agreement require daily collateral
coverage, in the form of cash or U.S. Treasury securities,
for the aggregate fair value of the interest rate swaps and the
actual amount of the structured stock repurchase prepayment,
respectively.
Interest
Rate Risk
As a fundamental part of our brokerage business, we invest in
interest-earning assets and are obligated on interest-bearing
liabilities. In addition, we earn fees on our insured deposit
account arrangement with TD Bank USA and TD Bank, N.A. and on
money market mutual funds, 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 insured deposit account
arrangement. The simulations involve
44
assumptions that are inherently uncertain and, as a result,
cannot precisely predict the impact that changes in interest
rates will have on pre-tax income. Actual results may differ
from simulated results due to differences in timing and
frequency of rate changes, changes in market conditions and
changes in management strategy that lead to changes in the mix
of interest-sensitive assets and liabilities.
The simulations assume that the asset and liability structure of
our Consolidated Balance Sheet and the insured deposit account
arrangement would not be changed as a result of a simulated
change in interest rates. The results of the simulations based
on our financial position as of September 30, 2010 indicate
that a gradual 1% (100 basis points) increase in interest
rates over a
12-month
period would result in approximately $102 million higher
pre-tax income, while a gradual 1% (100 basis points)
decrease in interest rates over a
12-month
period would result in approximately $29 million lower
pre-tax income. The results of the simulations reflect the fact
that short-term interest rates remain at historically low
levels, including the federal funds target rate, which is
currently a range of zero to 0.25%.
Market
Risk on Auction Rate Securities
As of September 30, 2010, we held ARS with a fair value of
$209 million. A hypothetical 10% decrease in the fair value
of our ARS would reduce our pre-tax income by approximately
$21 million.
Other
Market Risks
Our revenues and financial instruments are denominated in
U.S. dollars. We generally do not enter into derivative
transactions, except for hedging purposes.
45
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
TD Ameritrade Holding Corporation
We have audited the accompanying consolidated balance sheets of
TD Ameritrade Holding Corporation (the Company) as
of September 30, 2010 and 2009, and the related
consolidated statements of income, stockholders equity,
and cash flows for each of the three years in the period ended
September 30, 2010. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of TD Ameritrade Holding Corporation at
September 30, 2010 and 2009, and the consolidated results
of its operations and its cash flows for each of the three years
in the period ended September 30, 2010, 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), TD
Ameritrade Holding Corporations internal control over
financial reporting as of September 30, 2010, 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 19,
2010 expressed an unqualified opinion thereon.
Minneapolis, Minnesota
November 19, 2010
46
TD
AMERITRADE HOLDING CORPORATION
As
of September 30, 2010 and 2009
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
ASSETS
|
Cash and cash equivalents
|
|
$
|
741,492
|
|
|
$
|
791,211
|
|
Short-term investments
|
|
|
3,592
|
|
|
|
52,071
|
|
Cash and investments segregated in compliance with federal
regulations
|
|
|
994,026
|
|
|
|
5,813,862
|
|
Receivable from brokers, dealers and clearing organizations
|
|
|
1,207,723
|
|
|
|
1,777,741
|
|
Receivable from clients, net of allowance for doubtful accounts:
|
|
|
|
|
|
|
|
|
2010 $10.5 million; 2009
$12.9 million
|
|
|
7,391,432
|
|
|
|
5,712,261
|
|
Receivable from affiliates
|
|
|
92,946
|
|
|
|
92,974
|
|
Other receivables, net of allowance for doubtful accounts:
|
|
|
|
|
|
|
|
|
2010 $0.6 million; 2009
$0.6 million
|
|
|
68,928
|
|
|
|
73,921
|
|
Securities owned, at fair value
|
|
|
217,234
|
|
|
|
23,405
|
|
Property and equipment, net of accumulated depreciation and
amortization:
|
|
|
|
|
|
|
|
|
2010 $132.9 million; 2009
$91.3 million
|
|
|
272,211
|
|
|
|
238,256
|
|
Goodwill
|
|
|
2,467,013
|
|
|
|
2,472,098
|
|
Acquired intangible assets, net of accumulated amortization:
|
|
|
|
|
|
|
|
|
2010 $368.4 million; 2009
$267.9 million
|
|
|
1,124,259
|
|
|
|
1,224,722
|
|
Deferred income taxes
|
|
|
9,915
|
|
|
|
17,161
|
|
Other assets
|
|
|
136,147
|
|
|
|
82,127
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
14,726,918
|
|
|
$
|
18,371,810
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Liabilities:
|
|
|
|
|
|
|
|
|
Payable to brokers, dealers and clearing organizations
|
|
$
|
1,934,315
|
|
|
$
|
2,491,617
|
|
Payable to clients
|
|
|
6,810,391
|
|
|
|
9,914,823
|
|
Accounts payable and accrued liabilities
|
|
|
476,306
|
|
|
|
700,786
|
|
Payable to affiliates
|
|
|
3,244
|
|
|
|
3,724
|
|
Deferred revenue
|
|
|
63,512
|
|
|
|
72,134
|
|
Long-term debt
|
|
|
1,302,269
|
|
|
|
1,414,900
|
|
Capitalized lease obligations
|
|
|
20,799
|
|
|
|
28,565
|
|
Deferred income taxes
|
|
|
344,203
|
|
|
|
193,978
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
10,955,039
|
|
|
|
14,820,527
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value, 100 million shares
authorized; none issued
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value, one billion shares
authorized;
|
|
|
|
|
|
|
|
|
631,381,860 shares issued; 2010 576,134,924
outstanding;
|
|
|
|
|
|
|
|
|
2009 587,109,497 outstanding
|
|
|
6,314
|
|
|
|
6,314
|
|
Additional paid-in capital
|
|
|
1,390,283
|
|
|
|
1,574,638
|
|
Retained earnings
|
|
|
3,122,305
|
|
|
|
2,530,117
|
|
Treasury stock, common, at cost: 2010
55,246,936 shares;
|
|
|
|
|
|
|
|
|
2009 44,272,363 shares
|
|
|
(747,271
|
)
|
|
|
(559,883
|
)
|
Deferred compensation
|
|
|
196
|
|
|
|
171
|
|
Accumulated other comprehensive income (loss)
|
|
|
52
|
|
|
|
(74
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
3,771,879
|
|
|
|
3,551,283
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
14,726,918
|
|
|
$
|
18,371,810
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
47
TD
AMERITRADE HOLDING CORPORATION
For
the Years Ended September 30, 2010, 2009 and
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction-based revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions and transaction fees
|
|
$
|
1,193,761
|
|
|
$
|
1,253,154
|
|
|
$
|
1,017,456
|
|
Asset-based revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest revenue
|
|
|
427,723
|
|
|
|
362,076
|
|
|
|
799,189
|
|
Brokerage interest expense
|
|
|
(6,065
|
)
|
|
|
(15,165
|
)
|
|
|
(249,616
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest revenue
|
|
|
421,658
|
|
|
|
346,911
|
|
|
|
549,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insured deposit account fees
|
|
|
682,206
|
|
|
|
568,084
|
|
|
|
628,716
|
|
Investment product fees
|
|
|
129,308
|
|
|
|
184,341
|
|
|
|
309,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total asset-based revenues
|
|
|
1,233,172
|
|
|
|
1,099,336
|
|
|
|
1,487,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other revenues
|
|
|
133,758
|
|
|
|
55,436
|
|
|
|
32,191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
2,560,691
|
|
|
|
2,407,926
|
|
|
|
2,537,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee compensation and benefits
|
|
|
622,449
|
|
|
|
511,170
|
|
|
|
503,297
|
|
Fair value adjustments of compensation-related
|
|
|
|
|
|
|
|
|
|
|
|
|
derivative instruments
|
|
|
|
|
|
|
|
|
|
|
764
|
|
Clearing and execution costs
|
|
|
90,367
|
|
|
|
70,877
|
|
|
|
44,620
|
|
Communications
|
|
|
106,933
|
|
|
|
83,121
|
|
|
|
69,564
|
|
Occupancy and equipment costs
|
|
|
142,902
|
|
|
|
124,296
|
|
|
|
101,787
|
|
Depreciation and amortization
|
|
|
57,032
|
|
|
|
45,891
|
|
|
|
36,899
|
|
Amortization of acquired intangible assets
|
|
|
100,463
|
|
|
|
73,870
|
|
|
|
59,275
|
|
Professional services
|
|
|
132,218
|
|
|
|
127,572
|
|
|
|
108,271
|
|
Advertising
|
|
|
250,007
|
|
|
|
197,121
|
|
|
|
173,296
|
|
Losses (gains) on money market funds and client guarantees
|
|
|
(12,732
|
)
|
|
|
13,829
|
|
|
|
35,628
|
|
Other
|
|
|
105,679
|
|
|
|
58,701
|
|
|
|
62,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
1,595,318
|
|
|
|
1,306,448
|
|
|
|
1,196,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
965,373
|
|
|
|
1,101,478
|
|
|
|
1,341,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense (income):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on borrowings
|
|
|
44,858
|
|
|
|
40,070
|
|
|
|
78,447
|
|
Loss on debt refinancing
|
|
|
8,392
|
|
|
|
|
|
|
|
|
|
Loss (gain) on sale of investments
|
|
|
38
|
|
|
|
2,003
|
|
|
|
(928
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense (income)
|
|
|
53,288
|
|
|
|
42,073
|
|
|
|
77,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax income
|
|
|
912,085
|
|
|
|
1,059,405
|
|
|
|
1,263,502
|
|
Provision for income taxes
|
|
|
319,897
|
|
|
|
415,700
|
|
|
|
459,585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
592,188
|
|
|
$
|
643,705
|
|
|
$
|
803,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share basic
|
|
$
|
1.01
|
|
|
$
|
1.11
|
|
|
$
|
1.35
|
|
Earnings per share diluted
|
|
$
|
1.00
|
|
|
$
|
1.10
|
|
|
$
|
1.33
|
|
Weighted average shares outstanding basic
|
|
|
585,128
|
|
|
|
578,972
|
|
|
|
593,746
|
|
Weighted average shares outstanding diluted
|
|
|
591,922
|
|
|
|
587,252
|
|
|
|
603,133
|
|
See notes to consolidated financial statements.
48
TD
AMERITRADE HOLDING CORPORATION
For
the Years Ended September 30, 2010, 2009 and
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
Common
|
|
|
Total
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
Shares
|
|
|
Stockholders
|
|
|
Common
|
|
|
Paid-In
|
|
|
Retained
|
|
|
Treasury
|
|
|
Deferred
|
|
|
Comprehensive
|
|
|
|
Outstanding
|
|
|
Equity
|
|
|
Stock
|
|
|
Capital
|
|
|
Earnings
|
|
|
Stock
|
|
|
Compensation
|
|
|
Income (Loss)
|
|
|
|
(In thousands)
|
|
|
Balance, September 30, 2007
|
|
|
594,688
|
|
|
$
|
2,154,921
|
|
|
$
|
6,314
|
|
|
$
|
1,598,451
|
|
|
$
|
1,086,662
|
|
|
$
|
(537,547
|
)
|
|
$
|
431
|
|
|
$
|
610
|
|
Net income
|
|
|
|
|
|
|
803,917
|
|
|
|
|
|
|
|
|
|
|
|
803,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized investment loss, net of $0.6 million tax
|
|
|
|
|
|
|
(1,028
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,028
|
)
|
Reclassification adjustment for realized gain on investment
securities included in net income, net of $0.2 million tax
|
|
|
|
|
|
|
(340
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(340
|
)
|
Foreign currency translation
|
|
|
|
|
|
|
(112
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(112
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
802,437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of adopting Financial Accounting Standards
Board Interpretation No. 48 (ASC
740-10)
|
|
|
|
|
|
|
(4,167
|
)
|
|
|
|
|
|
|
|
|
|
|
(4,167
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchases of common stock
|
|
|
(4,123
|
)
|
|
|
(74,568
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(74,568
|
)
|
|
|
|
|
|
|
|
|
Issuances of common stock
|
|
|
3
|
|
|
|
52
|
|
|
|
|
|
|
|
13
|
|
|
|
|
|
|
|
39
|
|
|
|
|
|
|
|
|
|
Options exercised, including tax benefit
|
|
|
2,523
|
|
|
|
22,506
|
|
|
|
|
|
|
|
(8,594
|
)
|
|
|
|
|
|
|
31,100
|
|
|
|
|
|
|
|
|
|
Deferred compensation
|
|
|
40
|
|
|
|
187
|
|
|
|
|
|
|
|
167
|
|
|
|
|
|
|
|
312
|
|
|
|
(292
|
)
|
|
|
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
23,670
|
|
|
|
|
|
|
|
23,663
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2008
|
|
|
593,131
|
|
|
|
2,925,038
|
|
|
|
6,314
|
|
|
|
1,613,700
|
|
|
|
1,886,412
|
|
|
|
(580,664
|
)
|
|
|
146
|
|
|
|
(870
|
)
|
Net income
|
|
|
|
|
|
|
643,705
|
|
|
|
|
|
|
|
|
|
|
|
643,705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized investment loss, net of $0.2 million tax
|
|
|
|
|
|
|
(302
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(302
|
)
|
Reclassification adjustment for realized loss on investment
securities included in net income, net of $0.8 million tax
|
|
|
|
|
|
|
1,330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,330
|
|
Foreign currency translation
|
|
|
|
|
|
|
(232
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(232
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
644,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of thinkorswim Group Inc.
|
|
|
27,083
|
|
|
|
385,639
|
|
|
|
|
|
|
|
(24,209
|
)
|
|
|
|
|
|
|
409,848
|
|
|
|
|
|
|
|
|
|
Repurchases of common stock
|
|
|
(39,030
|
)
|
|
|
(466,144
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(466,144
|
)
|
|
|
|
|
|
|
|
|
Issuances of common stock
|
|
|
1,557
|
|
|
|
|
|
|
|
|
|
|
|
(18,412
|
)
|
|
|
|
|
|
|
18,412
|
|
|
|
|
|
|
|
|
|
Options exercised, including tax benefit
|
|
|
4,366
|
|
|
|
37,227
|
|
|
|
|
|
|
|
(21,411
|
)
|
|
|
|
|
|
|
58,638
|
|
|
|
|
|
|
|
|
|
Deferred compensation
|
|
|
2
|
|
|
|
2
|
|
|
|
|
|
|
|
(49
|
)
|
|
|
|
|
|
|
27
|
|
|
|
24
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
25,020
|
|
|
|
|
|
|
|
25,019
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2009
|
|
|
587,109
|
|
|
|
3,551,283
|
|
|
|
6,314
|
|
|
|
1,574,638
|
|
|
|
2,530,117
|
|
|
|
(559,883
|
)
|
|
|
171
|
|
|
|
(74
|
)
|
Net income
|
|
|
|
|
|
|
592,188
|
|
|
|
|
|
|
|
|
|
|
|
592,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized investment gain
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Foreign currency translation
|
|
|
|
|
|
|
125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
592,314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchases of common stock
|
|
|
(15,376
|
)
|
|
|
(265,599
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(265,599
|
)
|
|
|
|
|
|
|
|
|
Prepayment of structured stock repurchase
|
|
|
|
|
|
|
(169,200
|
)
|
|
|
|
|
|
|
(169,200
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuances of common stock
|
|
|
842
|
|
|
|
|
|
|
|
|
|
|
|
(14,677
|
)
|
|
|
|
|
|
|
14,677
|
|
|
|
|
|
|
|
|
|
Options exercised, including tax benefit
|
|
|
3,531
|
|
|
|
28,189
|
|
|
|
|
|
|
|
(34,846
|
)
|
|
|
|
|
|
|
63,035
|
|
|
|
|
|
|
|
|
|
Deferred compensation
|
|
|
29
|
|
|
|
544
|
|
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
499
|
|
|
|
25
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
34,348
|
|
|
|
|
|
|
|
34,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2010
|
|
|
576,135
|
|
|
$
|
3,771,879
|
|
|
$
|
6,314
|
|
|
$
|
1,390,283
|
|
|
$
|
3,122,305
|
|
|
$
|
(747,271
|
)
|
|
$
|
196
|
|
|
$
|
52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
49
TD
AMERITRADE HOLDING CORPORATION
For
the Years Ended September 30, 2010, 2009 and
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
592,188
|
|
|
$
|
643,705
|
|
|
$
|
803,917
|
|
Adjustments to reconcile net income to net cash provided by
operating
|
|
|
|
|
|
|
|
|
|
|
|
|
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
57,032
|
|
|
|
45,891
|
|
|
|
36,899
|
|
Amortization of acquired intangible assets
|
|
|
100,463
|
|
|
|
73,870
|
|
|
|
59,275
|
|
Deferred income taxes
|
|
|
154,380
|
|
|
|
(70,674
|
)
|
|
|
(96,238
|
)
|
Loss (gain) on sale of investments
|
|
|
38
|
|
|
|
2,003
|
|
|
|
(928
|
)
|
Loss on disposal of property
|
|
|
5,854
|
|
|
|
6,285
|
|
|
|
5,145
|
|
Losses (gains) on money market funds and client guarantees
|
|
|
(12,732
|
)
|
|
|
13,829
|
|
|
|
35,628
|
|
Loss on debt refinancing
|
|
|
8,392
|
|
|
|
|
|
|
|
|
|
Fair value adjustments of derivative instruments
|
|
|
|
|
|
|
|
|
|
|
764
|
|
Stock-based compensation
|
|
|
34,348
|
|
|
|
25,020
|
|
|
|
23,670
|
|
Excess tax benefits on stock-based compensation
|
|
|
(15,653
|
)
|
|
|
(8,743
|
)
|
|
|
(13,448
|
)
|
Other, net
|
|
|
214
|
|
|
|
874
|
|
|
|
(4
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and investments segregated in compliance with federal
regulations
|
|
|
4,819,836
|
|
|
|
(5,553,862
|
)
|
|
|
(260,000
|
)
|
Receivable from brokers, dealers and clearing organizations
|
|
|
570,018
|
|
|
|
2,415,389
|
|
|
|
2,574,088
|
|
Receivable from clients, net
|
|
|
(1,679,171
|
)
|
|
|
1,222,255
|
|
|
|
794,043
|
|
Receivable from/payable to affiliates, net
|
|
|
(963
|
)
|
|
|
98,065
|
|
|
|
(99,732
|
)
|
Other receivables, net
|
|
|
4,910
|
|
|
|
32,852
|
|
|
|
10,920
|
|
Securities owned
|
|
|
(183,762
|
)
|
|
|
36,717
|
|
|
|
(43,287
|
)
|
Other assets
|
|
|
(2,873
|
)
|
|
|
(4,077
|
)
|
|
|
(7,524
|
)
|
Payable to brokers, dealers and clearing organizations
|
|
|
(557,302
|
)
|
|
|
(3,278,059
|
)
|
|
|
(2,621,996
|
)
|
Payable to clients
|
|
|
(3,104,432
|
)
|
|
|
4,844,153
|
|
|
|
(242,905
|
)
|
Accounts payable and accrued liabilities
|
|
|
(197,487
|
)
|
|
|
45,425
|
|
|
|
46,284
|
|
Deferred revenue
|
|
|
(8,622
|
)
|
|
|
9,738
|
|
|
|
(9,155
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
584,676
|
|
|
|
600,656
|
|
|
|
995,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(91,198
|
)
|
|
|
(86,698
|
)
|
|
|
(98,836
|
)
|
Cash and cash equivalents acquired in business combinations
|
|
|
|
|
|
|
86,423
|
|
|
|
623,837
|
|
Cash paid in business combinations
|
|
|
|
|
|
|
(266,713
|
)
|
|
|
(274,470
|
)
|
Cash received in sale of businesses, net
|
|
|
|
|
|
|
599
|
|
|
|
|
|
Purchase of short-term investments
|
|
|
(5,790
|
)
|
|
|
(1,100
|
)
|
|
|
(329,759
|
)
|
Proceeds from sale and maturity of short-term investments
|
|
|
3,300
|
|
|
|
1,100
|
|
|
|
894,277
|
|
Reclassification of money market funds to short-term investments
|
|
|
|
|
|
|
|
|
|
|
(368,066
|
)
|
Proceeds from redemption of money market funds
|
|
|
52,208
|
|
|
|
317,015
|
|
|
|
|
|
Proceeds from sale of other investments
available-for-sale
|
|
|
16
|
|
|
|
11,688
|
|
|
|
5,226
|
|
Other
|
|
|
(2
|
)
|
|
|
(146
|
)
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(41,466
|
)
|
|
|
62,168
|
|
|
|
452,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of long-term debt
|
|
|
1,248,557
|
|
|
|
|
|
|
|
|
|
Payment of debt issuance costs
|
|
|
(10,595
|
)
|
|
|
|
|
|
|
|
|
Principal payments on long-term debt
|
|
|
(1,410,638
|
)
|
|
|
(111,500
|
)
|
|
|
(34,375
|
)
|
Decrease in trust account deposits
|
|
|
|
|
|
|
|
|
|
|
(1,097,808
|
)
|
Principal payments on capital lease obligations
|
|
|
(13,769
|
)
|
|
|
(5,002
|
)
|
|
|
(3,029
|
)
|
Proceeds from exercise of stock options
|
|
|
12,536
|
|
|
|
28,486
|
|
|
|
9,220
|
|
Purchase of treasury stock
|
|
|
(265,599
|
)
|
|
|
(466,144
|
)
|
|
|
(74,568
|
)
|
Prepayment of structured stock repurchase
|
|
|
(169,200
|
)
|
|
|
|
|
|
|
|
|
Excess tax benefits on stock-based compensation
|
|
|
15,653
|
|
|
|
8,743
|
|
|
|
13,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(593,055
|
)
|
|
|
(545,417
|
)
|
|
|
(1,187,112
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
126
|
|
|
|
(331
|
)
|
|
|
(175
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(49,719
|
)
|
|
|
117,076
|
|
|
|
260,348
|
|
Cash and cash equivalents at beginning of year
|
|
|
791,211
|
|
|
|
674,135
|
|
|
|
413,787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
741,492
|
|
|
$
|
791,211
|
|
|
$
|
674,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
39,028
|
|
|
$
|
60,680
|
|
|
$
|
346,657
|
|
Income taxes paid
|
|
$
|
352,504
|
|
|
$
|
359,666
|
|
|
$
|
463,379
|
|
Tax benefit on exercises and distributions of stock-based
compensation
|
|
$
|
19,956
|
|
|
$
|
9,711
|
|
|
$
|
13,517
|
|
Noncash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of capital lease obligations
|
|
$
|
6,003
|
|
|
$
|
32,780
|
|
|
$
|
|
|
Issuance of long-term debt in exchange for assets acquired
|
|
$
|
|
|
|
$
|
8,400
|
|
|
$
|
|
|
Issuance of common stock in business combinations
|
|
$
|
|
|
|
$
|
362,967
|
|
|
$
|
|
|
See notes to consolidated financial statements.
50
TD
AMERITRADE HOLDING CORPORATION
For the Years Ended September 30, 2010, 2009 and
2008
|
|
1.
|
Nature of
Operations and Summary of Significant Accounting
Policies
|
Basis of Presentation The consolidated
financial statements include the accounts of TD Ameritrade
Holding Corporation, a Delaware corporation, and its
wholly-owned subsidiaries (collectively, the
Company). Intercompany balances and transactions
have been eliminated.
Nature of Operations The Company provides
securities brokerage services, including trade execution,
clearing services and margin lending, through its broker-dealer
subsidiaries. The Company provides trustee, custodial and other
trust-related services to retirement plans and other custodial
accounts through its state-chartered trust company subsidiary.
The Companys education subsidiary provides a comprehensive
suite of investor education products and services. The Company
also provides cash sweep and deposit account products through
third-party relationships.
The Companys broker-dealer subsidiaries are subject to
regulation by the Securities and Exchange Commission
(SEC), the Financial Industry Regulatory Authority
(FINRA), the Commodity Futures Trading Commission
(CFTC), the National Futures Association
(NFA) and the various exchanges in which they
maintain membership. Dividends from the Companys
broker-dealer and trust company subsidiaries are a source of
liquidity for the holding company. Requirements of the SEC,
FINRA and CFTC relating to liquidity, net capital standards and
the use of client funds and securities may limit funds available
for the payment of dividends from the broker-dealer subsidiaries
to the holding company. State regulatory requirements may limit
funds available for the payment of dividends from the trust
company subsidiary to the holding company.
Use of Estimates The preparation of
consolidated financial statements in conformity with
U.S. generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Cash and Cash Equivalents The Company
considers temporary, highly-liquid investments with an original
maturity of three months or less to be cash equivalents, except
for amounts required to be segregated in compliance with federal
regulations. The carrying amounts of cash and cash equivalents
on the Consolidated Balance Sheets approximate fair value.
Cash and Investments Segregated in Compliance with Federal
Regulations Cash and investments segregated in
compliance with federal regulations consist primarily of
qualified deposits in special reserve bank accounts for the
exclusive benefit of clients under
Rule 15c3-3
of the Securities Exchange Act of 1934 (the Exchange
Act) and other regulations. Funds can be held in cash,
reverse repurchase agreements, fixed rate U.S. Treasury
securities and other qualified securities. Reverse repurchase
agreements (securities purchased under agreements to resell) are
treated as collateralized financing transactions and are carried
at amounts at which the securities will subsequently be resold,
plus accrued interest. The Companys reverse repurchase
agreements are collateralized by U.S. Treasury securities
and generally have a maturity of seven days.
Securities Borrowed and Securities Loaned
Securities borrowed and securities loaned transactions are
recorded at the amount of cash collateral advanced or received.
Securities borrowed transactions require the Company to provide
the counterparty with collateral in the form of cash. The
Company receives collateral in the form of cash for securities
loaned transactions. For these transactions, the fees earned or
incurred by the Company are recorded as interest revenue and
brokerage interest expense, respectively, on the Consolidated
Statements of Income. The related interest receivable from and
the brokerage interest payable to broker-dealers are included in
other receivables and in accounts payable and accrued
liabilities, respectively, on the Consolidated Balance Sheets.
Receivable from/Payable to Clients Receivable
from clients primarily consists of margin loans to brokerage
clients and is carried at the amount receivable, net of an
allowance for doubtful accounts. Payable to clients
51
TD
AMERITRADE HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
primarily consists of client cash held in brokerage accounts and
is carried at the amount of client cash on deposit. The Company
earns interest revenue and pays interest expense on its
receivable from client and payable to client balances,
respectively. The interest revenue and expense are included in
net interest revenue on the Consolidated Statements of Income.
Investments The Companys investments in
marketable securities are carried at fair value and are
designated as
available-for-sale,
except for securities owned by the Companys broker-dealer
subsidiaries, which are accounted for as trading investments.
Unrealized gains and losses on
available-for-sale
investments, net of deferred income taxes, are reflected as
accumulated other comprehensive income (loss). Realized gains
and losses on
available-for-sale
investments are determined on the specific identification method
and are reflected on the Consolidated Statements of Income.
Unrealized gains and losses on securities accounted for as
trading investments are reflected currently on the Consolidated
Statements of Income. Investments in equity securities are
accounted for under the equity method when the Company has the
ability to exercise significant influence over the
investees operating and financial policies. The cost
method is used for non-marketable investments that do not meet
equity method criteria. Declines in fair value of investments
that are considered other than temporary are accounted for as
realized losses.
Depreciation and Amortization Depreciation is
provided on a straight-line basis using estimated useful service
lives of three to seven years. Leasehold improvements are
amortized over the lesser of the economic useful life of the
improvement or the term of the lease.
Software Development From the date
technological feasibility has been established until beta
testing is complete, software development costs are capitalized
and included in property and equipment. Once the product is
fully functional, such costs are amortized in accordance with
the Companys normal accounting policies. Software
development costs that do not meet capitalization criteria are
expensed as incurred.
Goodwill The Company has recorded goodwill
for purchase business combinations to the extent the purchase
price of each completed acquisition exceeded the fair value of
the net identifiable assets of the acquired company. The Company
tests goodwill for impairment on at least an annual basis. In
performing the impairment tests, the Company utilizes quoted
market prices of the Companys common stock to estimate the
fair value of the Company as a whole. The estimated fair value
is then allocated to the Companys reporting units, if
applicable, based on operating revenues, and is compared with
the carrying value of the reporting units. No impairment charges
have resulted from the annual impairment tests.
Amortization of Acquired Intangible Assets
Acquired intangible assets are amortized on a straight-line
basis over their estimated useful lives, ranging from one to
23 years. The acquired intangible asset associated with a
trademark license agreement is not subject to amortization
because the term of the agreement is considered to be indefinite.
Long-Lived Assets and Acquired Intangible
Assets The Company reviews its long-lived assets
and acquired intangible assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of
such assets may not be recoverable. The Company evaluates
recoverability by comparing the undiscounted cash flows
associated with the asset to the assets carrying amount.
Long-lived assets classified as held for sale, if
any, are reported at the lesser of carrying amount or fair value
less cost to sell.
Income Taxes The Company files a consolidated
U.S. income tax return with its subsidiaries on a calendar
year basis, combined returns for state tax purposes where
required and certain of its subsidiaries file separate state
income tax returns where required. Deferred tax assets and
liabilities are determined based on the differences between the
financial statement carrying amounts and tax bases of assets and
liabilities using enacted tax rates expected to apply to taxable
income in the periods in which the deferred tax asset or
liability is expected to be settled or realized. Uncertain tax
positions are recognized if they are more likely than not to be
sustained upon examination, based on the technical merits of the
position. The amount of tax benefit recognized is the largest
amount of benefit that is greater than 50% likely of being
realized upon settlement. The Company recognizes interest and
penalties, if
52
TD
AMERITRADE HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
any, related to income tax matters as part of the provision for
income taxes on the Consolidated Statements of Income.
Capital Stock The authorized capital stock of
the Company consists of a single class of common stock and one
or more series of preferred stock as may be authorized for
issuance by the Companys board of directors. Voting,
dividend, conversion and liquidation rights of the preferred
stock would be established by the board of directors upon
issuance of such preferred stock.
Stock-Based Compensation The Company measures
and recognizes compensation expense based on estimated grant
date fair values for all stock-based payment
arrangements. Stock-based compensation expense is
based on awards expected to vest and therefore is reduced for
estimated forfeitures. Forfeitures are estimated at the time of
grant based on the Companys historical forfeiture
experience and revised in subsequent periods if actual
forfeitures differ from those estimates.
Deferred Compensation Company common stock
held in a rabbi trust pursuant to a Company deferred
compensation plan is recorded at the fair value of the stock at
the time it is transferred to the rabbi trust and is classified
as treasury stock. The corresponding deferred compensation
liability is recorded as a component of stockholders
equity.
Foreign Currency Translation Assets and
liabilities of the Companys foreign subsidiaries that are
denominated in a foreign currency are translated into
U.S. dollars using the exchange rate in effect at each
period end. Results of operations are translated at the average
exchange rate during the period. The effects of foreign currency
translation adjustments arising from differences in exchange
rates from period to period are included in accumulated other
comprehensive income (loss) on the Consolidated Balance Sheets.
Comprehensive Income (Loss) Comprehensive
income (loss) consists of net income; unrealized gains (losses)
on securities
available-for-sale,
net of related income taxes; and foreign currency translation
adjustments. These results are incorporated into the
Consolidated Statements of Stockholders Equity.
Securities Transactions Client securities
transactions are recorded on a settlement-date basis with such
transactions generally settling within three business days after
the trade date. Revenues and expenses related to securities
transactions, including revenues from execution agents (also
referred to as payment for order flow), are recorded on a
trade-date basis. Revenues related to securities transactions
are recorded net of promotional allowances. Securities owned by
clients, including those that collateralize margin or similar
transactions, are not reflected in the accompanying consolidated
financial statements.
Insured Deposit Account Fees Insured deposit
account fees are recognized in the period earned and consist of
revenues resulting from the Insured Deposit Account
(IDA) agreement with TD Bank USA, N.A. (TD
Bank USA), TD Bank, N.A. and The Toronto-Dominion Bank
(TD). Under the IDA agreement, TD Bank USA and TD
Bank, N.A. (together, the Depository Institutions)
make available to clients of the Company FDIC-insured money
market deposit accounts as either designated sweep vehicles or
as non-sweep deposit accounts. The Company provides marketing,
recordkeeping and support services for the Depository
Institutions with respect to the money market deposit accounts.
In exchange for providing these services, the Depository
Institutions pay the Company a fee based on the yield earned on
the client IDA assets, less the actual interest paid to clients,
a flat fee to the Depository Institutions of 25 basis
points and the cost of FDIC insurance premiums. The IDA
agreement is described further in Note 18.
Investment Product Fees Investment product
fee revenue is recognized in the period earned and consists of
revenues earned on client assets invested in money market mutual
funds, other mutual funds and certain
Company-sponsored
investment programs.
Education Revenue Recognition The Company
recognizes education revenue in accordance with Accounting
Standards Codification (ASC) 605, Revenue
Recognition. Revenue is not recognized until it is realized
or realizable and earned. The criteria to meet this guideline
are: (a) persuasive evidence of an arrangement
53
TD
AMERITRADE HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
exists; (b) delivery has occurred or services have been
rendered; (c) the price to the buyer is fixed or
determinable; and (d) collectibility is reasonably assured.
Education revenue is included in other revenues on the
Consolidated Statements of Income.
The Company sells investor education products separately and in
various bundles that contain multiple deliverables including
on-demand coaching services, website subscriptions, educational
workshops, online courses and other products and services. In
accordance with
ASC 605-25,
Multiple-Element Arrangements, sales arrangements with
multiple deliverables are divided into separate units of
accounting if the deliverables in the arrangement meet the
following criteria: (a) the product has value to the client
on a standalone basis; (b) there is objective and reliable
evidence of the fair value of undelivered items; and
(c) delivery or performance of any undelivered item is
probable and substantially in the Companys control. The
fair value of each separate element is generally determined by
prices charged when sold separately. In certain arrangements,
the Company offers these products bundled together at a
discount. The discount is allocated pro rata to each element
based on the relative fair value of each element when fair value
support exists for each element in the arrangement. Deferred
revenue arises because the payments are received before the
services have been rendered. Deferred revenue is generally
recognized into revenue for each element over the period that
the services are performed or the time that the contract period
expires.
The Company provides some limited rights of return in connection
with investor education products and services. The Company
estimates its returns based on historical experience and
maintains an allowance for estimated returns, which is included
in deferred revenue on the Consolidated Balance Sheets.
Advertising The Company expenses advertising
costs the first time the advertising takes place.
Derivatives and Hedging Activities The
Company occasionally utilizes derivative instruments to manage
risks, which may include market price, interest rate and foreign
currency risks. The Company does not use derivative instruments
for speculative or trading purposes. Derivatives are recorded on
the Consolidated Balance Sheets as assets or liabilities at fair
value. Derivative instruments properly designated to hedge
exposure to changes in the fair value of assets or liabilities
are accounted for as fair value hedges. Derivative instruments
properly designated to hedge exposure to the variability of
expected future cash flows or other forecasted transactions are
accounted for as cash flow hedges. The Company formally
documents the risk management objective and strategy for each
hedge transaction. Derivative instruments that do not qualify
for hedge accounting are carried at fair value on the
Consolidated Balance Sheets with unrealized gains and losses
recorded currently on the Consolidated Statements of Income.
Earnings Per Share Basic earnings per share
(EPS) is computed by dividing net income by the
weighted average common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were
exercised or converted into common stock, except when such
assumed exercise or conversion would have an antidilutive effect
on EPS.
Recently
Adopted Accounting Pronouncements
ASC 805 On October 1, 2009, the Company
adopted ASC 805, Business
Combinations. ASC 805 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, ASC 805 applies prospectively to
business combinations for which the acquisition date is on or
after October 1, 2009. The adoption of ASC 805 did not
have a material impact on the Companys consolidated
financial statements.
ASC
820-10 and
ASU
2010-06
On October 1, 2009, the Company adopted
ASC 820-10,
Fair Value Measurements and Disclosures, for nonfinancial
assets and liabilities that are not recognized or disclosed at
fair value in the financial statements on a recurring basis. In
January 2010, the Company adopted Accounting Standards
54
TD
AMERITRADE HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Update (ASU)
2010-06,
Improving Disclosures about Fair Value Measurements. ASU
2010-06
requires new disclosures and clarifies existing disclosure
requirements about fair value measurements as set forth in
ASC 820-10.
The adoption of
ASC 820-10
and ASU
2010-06 did
not have a material impact on the Companys consolidated
financial statements.
On June 11, 2009, the Company acquired thinkorswim Group
Inc. (thinkorswim) for 27.1 million shares of
Company common stock and $225.4 million in cash.
thinkorswim offers online brokerage, investor education and
related financial products and services for self-directed
investors and active traders. The Companys consolidated
financial statements include the results of operations for
thinkorswim beginning June 12, 2009.
On February 4, 2008, the Company acquired Fiserv
Trust Company, an investment support services business and
wholly-owned subsidiary of Fiserv, Inc. The Company paid
$274.5 million in cash during fiscal 2008 for this
acquisition. Pursuant to the stock purchase agreement, an
additional earn-out payment of up to $100 million in cash
was payable following the first anniversary of the acquisition
based on the achievement of revenue targets. In May 2009, based
on revenues through the February 4, 2009 anniversary date,
the Company paid approximately $41.3 million for the
earn-out obligation. The Companys consolidated financial
statements include the results of operations for Fiserv
Trust Company beginning February 5, 2008.
|
|
3.
|
Goodwill
and Acquired Intangible Assets
|
The Company has recorded goodwill for purchase business
combinations to the extent the purchase price of each completed
acquisition exceeded the fair value of the net identifiable
tangible and intangible assets of each acquired company. The
following table summarizes changes in the carrying amount of
goodwill (dollars in thousands):
|
|
|
|
|
Balance as of September 30, 2008
|
|
$
|
1,947,102
|
|
Goodwill recorded in acquisition of thinkorswim Group Inc.
|
|
|
485,999
|
|
Fiserv Trust Company earn-out payment
|
|
|
41,266
|
|
Purchase accounting adjustments, net of income taxes(1)
|
|
|
(1,300
|
)
|
Tax benefit on stock-based compensation awards(2)
|
|
|
(969
|
)
|
|
|
|
|
|
Balance as of September 30, 2009
|
|
|
2,472,098
|
|
Purchase accounting adjustments, net of income taxes(3)
|
|
|
(782
|
)
|
Tax benefit on stock-based compensation awards(2)
|
|
|
(4,303
|
)
|
|
|
|
|
|
Balance as of September 30, 2010
|
|
$
|
2,467,013
|
|
|
|
|
|
|
|
|
|
(1) |
|
Purchase accounting adjustments for fiscal 2009 primarily
consist of $0.8 million (net of income taxes) of
adjustments decreasing exit liabilities related to the TD
Waterhouse Group, Inc. (TD Waterhouse) acquisition
in fiscal 2006, $0.3 million (net of income taxes) of
adjustments to liabilities related to the Fiserv
Trust Company acquisition and $0.2 million of net
adjustments to accruals for uncertain tax positions relating to
the TD Waterhouse acquisition and the Datek Online Holdings
Corp. (Datek) merger in fiscal 2002. |
|
(2) |
|
Represents the tax benefit realized on replacement stock awards
that were issued in connection with the Datek merger and the
thinkorswim acquisition. The tax benefit realized on a stock
award is recorded as a reduction of goodwill to the extent the
Company recorded fair value of the replacement award in the
purchase accounting. To the extent any gain realized on a stock
award exceeds the fair value of the replacement award recorded
in the purchase accounting, the tax benefit on the excess is
recorded as additional paid-in capital. |
|
(3) |
|
Purchase accounting adjustments for fiscal 2010 primarily
consist of adjustments to assumed liabilities relating to the
acquisition of thinkorswim. |
55
TD
AMERITRADE HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Acquired intangible assets consist of the following (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Client relationships
|
|
$
|
1,230,469
|
|
|
$
|
(339,937
|
)
|
|
$
|
890,532
|
|
|
$
|
1,230,469
|
|
|
$
|
(261,183
|
)
|
|
$
|
969,286
|
|
Technology and content
|
|
|
100,904
|
|
|
|
(19,203
|
)
|
|
|
81,701
|
|
|
|
100,904
|
|
|
|
(4,509
|
)
|
|
|
96,395
|
|
Trade names
|
|
|
10,100
|
|
|
|
(6,844
|
)
|
|
|
3,256
|
|
|
|
10,100
|
|
|
|
(1,658
|
)
|
|
|
8,442
|
|
Non-competition agreement
|
|
|
5,486
|
|
|
|
(2,390
|
)
|
|
|
3,096
|
|
|
|
5,486
|
|
|
|
(561
|
)
|
|
|
4,925
|
|
Trademark license
|
|
|
145,674
|
|
|
|
|
|
|
|
145,674
|
|
|
|
145,674
|
|
|
|
|
|
|
|
145,674
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,492,633
|
|
|
$
|
(368,374
|
)
|
|
$
|
1,124,259
|
|
|
$
|
1,492,633
|
|
|
$
|
(267,911
|
)
|
|
$
|
1,224,722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense on acquired intangible assets was
$100.5 million, $73.9 million and $59.3 million
for fiscal years 2010, 2009 and 2008, respectively. Estimated
future amortization expense for acquired intangible assets
outstanding as of September 30, 2010 is as follows (dollars
in thousands):
|
|
|
|
|
|
|
Estimated
|
|
|
|
Amortization
|
|
Fiscal Year
|
|
Expense
|
|
|
2011
|
|
$
|
96,714
|
|
2012
|
|
|
92,897
|
|
2013
|
|
|
91,630
|
|
2014
|
|
|
91,171
|
|
2015
|
|
|
90,288
|
|
Thereafter (to 2025)
|
|
|
515,885
|
|
|
|
|
|
|
Total
|
|
$
|
978,585
|
|
|
|
|
|
|
|
|
4.
|
Cash and
Cash Equivalents
|
The Companys cash and cash equivalents is summarized in
the following table (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Corporate
|
|
$
|
234,993
|
|
|
$
|
273,137
|
|
Broker-dealer subsidiaries
|
|
|
426,618
|
|
|
|
473,996
|
|
Trust company subsidiary
|
|
|
50,937
|
|
|
|
25,143
|
|
Investment advisory subsidiaries
|
|
|
28,944
|
|
|
|
18,935
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
741,492
|
|
|
$
|
791,211
|
|
|
|
|
|
|
|
|
|
|
Capital requirements may limit the amount of cash available for
dividend from the broker-dealer and trust company subsidiaries
to the parent company. Cash and cash equivalents of the
investment advisory subsidiaries is generally not available for
corporate purposes.
56
TD
AMERITRADE HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
5.
|
Receivable
from and Payable to Brokers, Dealers and Clearing
Organizations
|
Amounts receivable from and payable to brokers, dealers and
clearing organizations consist of the following (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Receivable:
|
|
|
|
|
|
|
|
|
Deposits paid for securities borrowed
|
|
$
|
1,000,607
|
|
|
$
|
1,591,706
|
|
Broker-dealers
|
|
|
11,927
|
|
|
|
11,777
|
|
Clearing organizations
|
|
|
191,237
|
|
|
|
163,982
|
|
Securities failed to deliver
|
|
|
3,952
|
|
|
|
10,276
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,207,723
|
|
|
$
|
1,777,741
|
|
|
|
|
|
|
|
|
|
|
Payable:
|
|
|
|
|
|
|
|
|
Deposits received for securities loaned
|
|
$
|
1,868,724
|
|
|
$
|
2,455,833
|
|
Broker-dealers
|
|
|
1,519
|
|
|
|
8,974
|
|
Clearing organizations
|
|
|
26,319
|
|
|
|
5,875
|
|
Securities failed to receive
|
|
|
37,753
|
|
|
|
20,935
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,934,315
|
|
|
$
|
2,491,617
|
|
|
|
|
|
|
|
|
|
|
|
|
6.
|
Allowance
for Doubtful Accounts on Receivables
|
The following table summarizes activity in the Companys
allowance for doubtful accounts on client and other receivables
for the fiscal years indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Beginning balance
|
|
$
|
13,536
|
|
|
$
|
22,482
|
|
|
$
|
19,120
|
|
Provision for doubtful accounts
|
|
|
2,720
|
|
|
|
1,171
|
|
|
|
9,780
|
|
Acquired in business combinations
|
|
|
|
|
|
|
272
|
|
|
|
401
|
|
Write-off of doubtful accounts
|
|
|
(5,144
|
)
|
|
|
(10,389
|
)
|
|
|
(6,819
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
11,112
|
|
|
$
|
13,536
|
|
|
$
|
22,482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.
|
Property
and Equipment
|
Property and equipment consists of the following (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Leasehold improvements
|
|
$
|
102,852
|
|
|
$
|
84,230
|
|
Software
|
|
|
72,185
|
|
|
|
69,020
|
|
Computer equipment
|
|
|
174,492
|
|
|
|
128,284
|
|
Other property and equipment
|
|
|
55,615
|
|
|
|
48,065
|
|
|
|
|
|
|
|
|
|
|
|
|
|
405,144
|
|
|
|
329,599
|
|
Less: Accumulated depreciation and amortization
|
|
|
(132,933
|
)
|
|
|
(91,343
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
272,211
|
|
|
$
|
238,256
|
|
|
|
|
|
|
|
|
|
|
57
TD
AMERITRADE HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Long-term debt consists of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
$250 million 2.950% Senior Notes due 2012 (1)
|
|
$
|
259,114
|
|
|
$
|
|
|
$500 million 4.150% Senior Notes due 2014 (2)
|
|
|
539,525
|
|
|
|
|
|
$500 million 5.600% Senior Notes due 2019 (3)
|
|
|
499,368
|
|
|
|
|
|
Term A Facility
|
|
|
|
|
|
|
140,625
|
|
Term B Facility
|
|
|
|
|
|
|
1,265,875
|
|
Other
|
|
|
4,262
|
|
|
|
8,400
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
1,302,269
|
|
|
$
|
1,414,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Balance includes a $9.3 million unrealized loss related to
an interest rate swap, and is net of unamortized discount of
$0.2 million. |
|
(2) |
|
Balance includes a $39.9 million unrealized loss related to
an interest rate swap, and is net of unamortized discount of
$0.4 million. |
|
(3) |
|
Balance is net of unamortized discount of $0.6 million. |
Fiscal year maturities on long-term debt outstanding at
September 30, 2010 are as follows (dollars in thousands):
|
|
|
|
|
2011
|
|
$
|
4,262
|
|
2012
|
|
|
|
|
2013
|
|
|
250,000
|
|
2014
|
|
|
|
|
2015
|
|
|
500,000
|
|
Thereafter
|
|
|
500,000
|
|
|
|
|
|
|
Total
|
|
$
|
1,254,262
|
|
|
|
|
|
|
Senior Notes On November 25, 2009 the
Company sold, through a public offering, $1.25 billion
aggregate principal amount of unsecured senior notes, consisting
of $250 million aggregate principal amount of
2.950% Senior Notes due December 1, 2012 (the
2012 Notes), $500 million aggregate principal
amount of 4.150% Senior Notes due December 1, 2014
(the 2014 Notes) and $500 million aggregate
principal amount of 5.600% Senior Notes due
December 1, 2019 (the 2019 Notes and,
collectively with the 2012 Notes and the 2014 Notes, the
Senior Notes). The Senior Notes were issued at an
aggregate discount of $1.4 million, which is being
amortized to interest expense over the terms of the respective
Senior Notes. Interest on the Senior Notes is payable
semi-annually in arrears on June 1 and December 1 of each year.
On November 25, 2009, the Company used the net proceeds
from the issuance of the Senior Notes, together with
approximately $158 million of cash on hand, to repay in
full the outstanding principal under the Companys
January 23, 2006 credit agreement. Upon repayment, the
January 23, 2006 credit agreement (including the Term A
Facility, the Term B Facility and the Revolving Facility as
amended on November 5, 2009) was automatically amended
and restated in its entirety pursuant to the Amended and
Restated Credit Agreement (the Restated Credit
Agreement), dated as of November 25, 2009, as
described below.
The Senior Notes are jointly and severally and fully and
unconditionally guaranteed by each of the Companys current
and future subsidiaries that is or becomes a borrower or a
guarantor under the Restated Credit Agreement.
58
TD
AMERITRADE HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Currently, the only subsidiary guarantor of the obligations
under the Senior Notes is TD Ameritrade Online Holdings Corp.
(TDAOH). The Senior Notes and the guarantee by TDAOH
are the general senior unsecured obligations of the Company and
TDAOH.
The Company may redeem each series of the Senior Notes, in whole
at any time or in part from time to time, at a redemption price
equal to the greater of (a) 100% of the principal amount of
the notes being redeemed, and (b) the sum of the present
values of the remaining scheduled payments of principal and
interest on the notes being redeemed, discounted to the date of
redemption on a semi-annual basis at the comparable
U.S. Treasury rate, plus: 25 basis points in the case
of the 2012 Notes, 30 basis points in the case of the 2014
Notes and 35 basis points in the case of the 2019 Notes,
plus, in each case, accrued and unpaid interest to the date of
redemption.
Interest Rate Swaps The Company is exposed to
changes in the fair value of its fixed-rate Senior Notes
resulting from interest rate fluctuations. To hedge this
exposure, on December 30, 2009, the Company entered into
fixed-for-variable
interest rate swaps on the 2012 Notes and 2014 Notes for
notional amounts of $250 million and $500 million,
respectively, with maturity dates matching the respective
maturity dates of the 2012 Notes and 2014 Notes. The interest
rate swaps effectively change the fixed-rate interest on the
2012 Notes and 2014 Notes to variable-rate interest. Under the
terms of the interest rate swap agreements, the Company receives
semi-annual fixed-rate interest payments based on the same rates
applicable to the 2012 Notes and 2014 Notes, and makes quarterly
variable-rate interest payments based on three-month LIBOR plus
(a) 0.9693% for the swap on the 2012 Notes and
(b) 1.245% for the swap on the 2014 Notes.
The interest rate swaps are accounted for as fair value hedges
and qualify for the shortcut method of accounting. Changes in
the payment of interest resulting from the interest rate swaps
are recorded as an offset to interest on borrowings on the
Consolidated Statements of Income. Changes in fair value of the
interest rate swaps are completely offset by changes in fair
value of the related notes, resulting in no effect on net
income. For fiscal year 2010, the Company recorded a
$49.2 million gain for the change in fair value of the
interest rate swaps and an offsetting $49.2 million fair
value loss on the hedged fixed-rate debt. The offsetting fair
value gains and losses were recorded in interest on borrowings
on the Consolidated Statements of Income.
The following table summarizes the fair value of outstanding
derivatives designated as hedging instruments on the
Consolidated Balance Sheets (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Derivatives recorded under the caption Other assets:
|
|
|
|
|
|
|
|
|
Interest rate swap assets
|
|
$
|
49,235
|
|
|
$
|
|
|
The interest rate swaps are subject to counterparty credit risk.
Credit risk is managed by limiting activity to approved
counterparties that meet a minimum credit rating threshold and
by entering into credit support agreements. The bilateral credit
support agreement related to the interest rate swaps requires
daily collateral coverage, in the form of cash or
U.S. Treasury securities, for the aggregate fair value of
the interest rate swaps. As of September 30, 2010, the
interest rate swap counterparty had pledged $52.9 million
of collateral to the Company, in the form of U.S. Treasury
securities.
Restated Revolving Facility The Restated
Credit Agreement consists of an unsecured revolving credit
facility in the aggregate principal amount of $300 million
(the Restated Revolving Facility). The maturity date
of the Restated Revolving Facility is December 31, 2012.
The applicable interest rate under the Restated Revolving
Facility is calculated as a per annum rate equal to, at the
option of the Company, (a) LIBOR plus an interest rate
margin (LIBOR loans) or (b) (i) the highest of
(x) the prime rate, (y) the federal funds effective
rate plus 0.50% or (z) one-month LIBOR plus 1.00%, plus
(ii) an interest rate margin (Base Rate loans).
The interest rate margin ranges from 2.00% to 4.00% for LIBOR
loans and from 1.00% to 3.00% for Base Rate loans, determined by
reference to the Companys public debt ratings. The Company
is obligated to pay a commitment fee ranging from 0.225% to
0.750% on any unused amount of the Restated Revolving Facility,
determined by reference to the
59
TD
AMERITRADE HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Companys public debt ratings. As of September 30,
2010, the interest rate margin would have been 2.50% for LIBOR
loans and 1.50% for Base Rate loans, and the commitment fee was
0.375% per annum, each determined by reference to the
Companys Standard & Poors public debt
rating of BBB+. There were no borrowings outstanding under the
Restated Revolving Facility as of September 30, 2010.
The obligations under the Restated Credit Agreement are
guaranteed by each significant subsidiary (as
defined in SEC
Rule 1-02(w)
of
Regulation S-X)
of the Company, other than broker-dealer subsidiaries, futures
commission merchant subsidiaries and controlled foreign
corporations. Currently, the only subsidiary guarantor of the
obligations under the Restated Credit Agreement is TDAOH.
The Restated Credit Agreement contains negative covenants that
limit or restrict the incurrence of liens, indebtedness of
subsidiaries, mergers, consolidations, transactions with
affiliates, change in nature of business and the sale of all or
substantially all of the assets of the Company and its
subsidiaries, subject to certain exceptions. The Company is also
required to maintain compliance with a maximum consolidated
leverage ratio covenant and a minimum consolidated interest
coverage ratio covenant, and the Companys broker-dealer
subsidiaries are required to maintain compliance with a minimum
regulatory net capital covenant. The Company is restricted under
the Restated Credit Agreement from incurring additional
indebtedness in an aggregate principal amount in excess of
$100 million that includes any covenants that are more
restrictive (taken as a whole) as to the Company than those
contained in the Restated Credit Agreement, unless the Restated
Credit Agreement is amended to include such more restrictive
covenants prior to the incurrence of such additional
indebtedness. The Company was in compliance with all covenants
under the Restated Credit Agreement as of September 30,
2010.
Broker-Dealer Credit Facilities The Company,
through its wholly-owned broker-dealer subsidiaries, had access
to secured uncommitted credit facilities with financial
institutions of up to $630 million as of September 30,
2010 and 2009. The broker-dealer subsidiaries also had access to
unsecured uncommitted credit facilities of up to
$150 million as of September 30, 2010 and 2009. The
financial institutions may make loans under line of credit
arrangements or, in some cases, issue letters of credit under
these facilities. The secured credit facilities require the
Company to pledge qualified client securities to secure
outstanding obligations under these facilities. Borrowings under
the secured and unsecured credit facilities bear interest at a
variable rate based on the federal funds rate. There were no
borrowings outstanding or letters of credit issued under the
secured or unsecured credit facilities as of September 30,
2010 and 2009. As of September 30, 2010 and 2009,
approximately $780 million was available to the
Companys broker-dealer subsidiaries pursuant to
uncommitted credit facilities for either loans or, in some
cases, letters of credit.
Provision for income taxes is comprised of the following for the
fiscal years indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Current expense (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
168,972
|
|
|
$
|
438,911
|
|
|
$
|
505,270
|
|
State
|
|
|
(3,770
|
)
|
|
|
47,113
|
|
|
|
50,196
|
|
Foreign
|
|
|
315
|
|
|
|
350
|
|
|
|
357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
165,517
|
|
|
|
486,374
|
|
|
|
555,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred expense (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
145,349
|
|
|
|
(70,656
|
)
|
|
|
(76,843
|
)
|
State
|
|
|
9,031
|
|
|
|
(18
|
)
|
|
|
(19,395
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
154,380
|
|
|
|
(70,674
|
)
|
|
|
(96,238
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
319,897
|
|
|
$
|
415,700
|
|
|
$
|
459,585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
TD
AMERITRADE HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A reconciliation of the federal statutory tax rate to the
effective tax rate applicable to pre-tax income follows for the
fiscal years indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Federal statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State taxes, net of federal tax effect
|
|
|
2.4
|
|
|
|
2.4
|
|
|
|
2.6
|
|
Adjustments to estimated state income taxes
|
|
|
0.5
|
|
|
|
0.5
|
|
|
|
(0.9
|
)
|
Interest recorded on unrecognized tax benefits, net
|
|
|
(0.2
|
)
|
|
|
0.9
|
|
|
|
0.1
|
|
Reversal of accruals for unrecognized tax benefits
|
|
|
(2.5
|
)
|
|
|
|
|
|
|
(0.3
|
)
|
Capital loss limitation
|
|
|
|
|
|
|
0.3
|
|
|
|
|
|
Other
|
|
|
(0.1
|
)
|
|
|
0.1
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35.1
|
%
|
|
|
39.2
|
%
|
|
|
36.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys effective income tax rate for fiscal year
2010 was 35.1%, compared to 39.2% and 36.4% for fiscal years
2009 and 2008, respectively. The provision for income taxes for
fiscal year 2010 was unusually low due to $32.0 million of
favorable resolutions of certain federal and state income tax
matters. These items favorably impacted the Companys
earnings for fiscal year 2010 by approximately $0.05 per share.
The provision for income taxes for fiscal year 2009 was slightly
higher than normal due to unfavorable deferred income tax
adjustments of $8.9 million resulting from state income tax
law changes and capital loss limitations on certain money market
mutual fund holdings. These items unfavorably impacted the
Companys earnings for fiscal year 2009 by approximately
$0.02 per share. The provision for income taxes for fiscal year
2008 was unusually low due to $7.2 million (net of the
federal benefit) of favorable resolutions of state income tax
matters and $11.1 million (net of the federal benefit) of
adjustments to current and deferred income taxes resulting from
a revision to estimated state income tax expense. The revision
was based on the Companys actual state income tax returns
filed for calendar year 2006 and similar adjustments applied to
estimated state income tax rates for calendar year 2007 and
future years. These items favorably impacted the Companys
earnings for fiscal year 2008 by approximately $0.03 per share.
61
TD
AMERITRADE HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Deferred tax assets (liabilities) are comprised of the following
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Accrued liabilities
|
|
$
|
83,532
|
|
|
$
|
104,744
|
|
Deferred revenue
|
|
|
8,960
|
|
|
|
707
|
|
Intangible assets, state tax benefit
|
|
|
21,504
|
|
|
|
23,490
|
|
Stock-based compensation
|
|
|
21,516
|
|
|
|
15,575
|
|
Allowance for doubtful accounts
|
|
|
4,037
|
|
|
|
4,936
|
|
Unrealized tax gain on IDA agreement
|
|
|
15,272
|
|
|
|
164,165
|
|
Operating loss carryforwards
|
|
|
34,031
|
|
|
|
25,958
|
|
Other deferred tax assets
|
|
|
|
|
|
|
2,431
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
188,852
|
|
|
|
342,006
|
|
Less: Valuation allowance
|
|
|
(29,987
|
)
|
|
|
(21,587
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
158,865
|
|
|
|
320,419
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Property and intangible assets
|
|
|
(488,814
|
)
|
|
|
(493,445
|
)
|
Other deferred tax liabilities
|
|
|
(4,339
|
)
|
|
|
(3,791
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(493,153
|
)
|
|
|
(497,236
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities
|
|
$
|
(334,288
|
)
|
|
$
|
(176,817
|
)
|
|
|
|
|
|
|
|
|
|
Included in deferred tax assets above as of September 30,
2010 and 2009, is approximately $9.9 million and
$17.2 million, respectively, of deferred tax benefits
relating to intangible asset amortization deductions expected to
be claimed in various state taxing jurisdictions, which may not
be offset by deferred tax liabilities arising from different
taxing jurisdictions on the Consolidated Balance Sheets. These
amounts are presented separately as assets on the Consolidated
Balance Sheets.
The unrealized tax gain on IDA agreement in the table above is
attributable to the tax basis in the Companys marketing
fee associated with the IDA agreement described in Note 18.
The tax basis represents the tax gains recorded based on the
increase in the fair market values of the underlying securities
held by the Depository Institutions, which are supported by the
client insured deposit account balances. The unrealized tax
gains decreased significantly during fiscal 2010, due primarily
to resolution with the taxing authority of an uncertainty as to
the tax treatment of the IDA agreement.
As of September 30, 2010, the Company has recorded a tax
benefit for approximately $4.4 million of federal net
operating loss carryover that was acquired as part of the
thinkorswim acquisition. The net operating loss expires in 2019,
and is subject to substantial annual limitations on the
utilization of the net operating loss. The amount of tax benefit
recorded in the financial statements represents the amount that
is more likely than not to be realized within the carryforward
period. At September 30, 2010, subsidiaries of the Company
have approximately $617 million of separate state operating
loss carryforwards. These carryforwards expire between fiscal
2011 and 2029. Because the realization of the tax benefit from
state loss carryforwards is dependent on certain subsidiaries
generating sufficient state taxable income in future periods, as
well as annual limitations on future utilization, the Company
has provided a valuation allowance against the computed benefit
in order to reflect the tax benefit expected to be realized. The
increase in the valuation allowance of approximately
$8.4 million from September 30, 2009 to
September 30, 2010 related to additional net operating
losses generated at the separate subsidiaries, for which the
related tax benefits are not considered more likely than not to
be realized within the carryforward period.
62
TD
AMERITRADE HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A reconciliation of the activity related to unrecognized tax
benefits follows for the fiscal years indicated (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Beginning balance
|
|
$
|
310,255
|
|
|
$
|
227,025
|
|
|
$
|
135,096
|
|
Additions based on tax positions related to the current year
|
|
|
15,367
|
|
|
|
87,894
|
|
|
|
103,409
|
|
Additions for tax positions of prior years
|
|
|
2,911
|
|
|
|
338
|
|
|
|
555
|
|
Reductions for tax positions of prior years
|
|
|
(5,986
|
)
|
|
|
(4,494
|
)
|
|
|
(77
|
)
|
Reductions due to settlements with taxing authorities
|
|
|
(170,739
|
)
|
|
|
|
|
|
|
(11,082
|
)
|
Reductions due to lapsed statute of limitations
|
|
|
(3,272
|
)
|
|
|
(508
|
)
|
|
|
(876
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
148,536
|
|
|
$
|
310,255
|
|
|
$
|
227,025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The balance of unrecognized tax benefits as of
September 30, 2010 was $148.5 million
($96.9 million net of the federal benefit on state
matters), of which $90.8 million (net of the federal
benefit on state matters) represents the amount that, if
recognized, would favorably affect the effective income tax rate
in any future periods. The balance of unrecognized tax benefits
as of September 30, 2009 was $310.3 million
($253.6 million net of the federal benefit on state
matters), of which $100.4 million (net of the federal
benefit on state matters) represents the amount that, if
recognized, would favorably affect the effective income tax rate
in any future periods. The Companys income tax returns are
subject to review and examination by federal, state and local
taxing authorities. The federal returns for 2007 through 2009
remain open under the statute of limitations. The years open to
examination by state and local government authorities vary by
jurisdiction, but the statute of limitations is generally three
to four years from the date the tax return is filed. It is
reasonably possible that the gross unrecognized tax benefits as
of September 30, 2010 could decrease by up to
$29.7 million ($19.3 million net of the federal
benefit on state matters) within the next twelve months as a
result of settlements of certain examinations or expiration of
the statute of limitations with respect to other tax filings.
Interest and penalties recognized on the Consolidated Statements
of Income (net of the federal benefit) totaled
$0.4 million, $12.9 million and $1.3 million for
fiscal years 2010, 2009 and 2008, respectively. As of
September 30, 2010 and 2009, accrued interest and penalties
related to unrecognized tax benefits was $38.0 million and
$40.2 million, respectively.
The Companys broker-dealer subsidiaries are subject to the
SEC Uniform Net Capital Rule
(Rule 15c3-1
under the Exchange Act), which requires the maintenance of
minimum net capital, as defined. Net capital is calculated for
each broker-dealer subsidiary individually. Excess net capital
of one broker-dealer subsidiary may not be used to offset a net
capital deficiency of another broker-dealer subsidiary. Net
capital and the related net capital requirement may fluctuate on
a daily basis.
63
TD
AMERITRADE HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Net capital and net capital requirements for the Companys
broker-dealer subsidiaries are summarized in the following table
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
Minimum
|
|
|
|
|
|
|
|
< |