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We provide securities brokerage
and clearing execution services to our clients.
Our principal operating subsidiaries consist of
introducing broker-dealer operating units and our
wholly owned securities clearing broker-dealers,
Ameritrade, Inc. and iClearing LLC ("iClearing").
During fiscal 2002, substantially all of our net
revenues were derived from our brokerage activities
and clearing and execution services.
Our primary focus is serving retail clients by providing
services at prices that are generally lower than
most of our major competitors. Our brokerage clients
are able to trade securities with us through a variety
of channels, principally the Internet. We provide
our clients with investment news and information
as well as educational services. We also provide
clearing and execution services to our brokerage
operations as well as to unaffiliated broker-dealers.
Our largest sources of revenue are commissions earned
from our brokerage activities and associated securities
transaction clearing fees. Our other principal source
of revenue is net interest revenue. Net interest
revenue is the difference between interest revenues
and client interest expense. Interest revenues are
generated by charges to clients on margin balances
maintained in brokerage accounts and the investment
of cash from operations and cash segregated in compliance
with federal regulations in short-term marketable
securities. Client interest expense consists of
amounts paid or payable to clients based on credit
balances maintained in brokerage accounts. We also
receive payment for order flow, which results from
arrangements we have with many execution agents
to receive cash payments in exchange for routing
trade orders to these firms for execution and is
included in commissions and clearing fees on the
Statement of Operations.
Our largest operating expense generally is employee
compensation and benefits. Employee compensation
and benefits expense includes salaries, bonuses,
group insurance, contributions to benefit programs,
recruitment and other related employee costs. Communications
expense includes telecommunications, 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, as well
as amortization of intangible assets. Professional
services expense includes costs paid to outside
firms for assistance with legal, accounting, technology,
marketing and general management issues. Interest
on borrowings consists of interest expense on our
convertible subordinated notes and other borrowings.
Other operating expenses include commissions and
clearance expenses, trade execution fees, provision
for losses, client execution price adjustments,
travel expenses and other miscellaneous expenses.
In addition, our costs related to the processing
of client confirmations, statements and other communications
are included in this category. Advertising costs
are expensed as incurred and include production
and placement of advertisements in various media,
including online, television, print and direct mail.
Advertising expenses may increase or decrease significantly
from period to period.
We believe that the online securities brokerage
market is currently impacted by four significant
trends that may affect our financial condition and
results of operations. First, commissions charged
to clients of online brokerages have stabilized
and begun to increase slightly over the past two
years, after decreases over the past several years.
Second, technology has increased in importance,
as delivery channels such as the Internet have become
more prevalent. The vast majority of our trades
are now placed through electronic media, primarily
the Internet. This increased use of electronic media
has helped to decrease operating expenses per trade
over the past several years and we believe this
trend will continue. Third, the effects of price
competition and required investment in technology
have resulted in some consolidation in the industry.
Finally, we believe the intense advertising and
promotional efforts by our major competitors and
us are making it increasingly difficult for new
entrants to make a competitive impact without substantial
financial resources to invest in building a brand.
Our fiscal year ends on the last Friday in September.
References to fiscal year in this document or in
the information incorporated herein by reference
are to the approximate twelve-month period ended
on any such Friday. For example, "fiscal 2002"
refers to the fiscal year ended September 27, 2002. |
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