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Net
Revenues
Commissions and clearing fees decreased six percent
to $252.5 million in fiscal 2002 from $269.4 million
in fiscal 2001. This decrease was primarily attributable
to a decrease in the number of securities transactions
processed, as average trades per day decreased 18
percent to 83,890 in fiscal 2002 from 101,998 in
fiscal 2001. Clients averaged approximately 11 trades
per account during fiscal 2002, compared to approximately
17 trades per account during fiscal 2001. The decreased
volume per account was partially offset by a significant
increase in client accounts. We added 215,000 core
accounts during the fourth quarter of fiscal 2001
through our acquisition of National Discount Brokers
Corporation ("NDB") and 876,000 core accounts
during the fourth quarter of fiscal 2002 through
our merger with Datek. The substantial advertising
expenditures made by us during the past few years
also contributed to account growth. Client accounts
increased to approximately 2,842,000 at September
27, 2002 from approximately 1,794,000 at September
28, 2001. Commissions and clearing fees per trade
increased to $11.99 in fiscal 2002 from $10.69 in
fiscal 2001. This increase was due primarily to
the addition of the NDB accounts, which became part
of our Ameritrade Plus product offering, the implementation
of a commission structure for our Freetrade product
offering effective February 28, 2002 for trades
in excess of 25 per month and increased option trading
by our clients, which generates higher commissions
than equity trades. These increases were partially
offset by slightly lower payment for order flow
revenues.
On September 16, 2002, we announced a new suite
of products and services that went into effect,
along with a new pricing schedule, on October 19,
2002. Under the new pricing schedule, commissions
for online equity trades are $10.99 for both market
and limit orders, regardless of the number of shares
bought or sold with no additional order handling
fees. Under the previous pricing schedule, commissions
for online equity market orders were $8.00, while
online equity limit orders were $13.00. Flat commission
pricing has also been implemented for Interactive
Voice Response system trades, at $14.99 per trade
(previously $12 for market orders and $17 for limit
orders). Broker-assisted trades are now $24.99 for
market orders, with an additional $5.00 fee for
limit orders. We expect the net effect of the new
pricing schedule to result in an increase of approximately
10 percent in commissions and clearing fees per
trade during fiscal 2003. The incremental increase
in revenue per trade is expected to be offset somewhat
by slightly higher account attrition in the months
following the implementation of the new pricing
schedule.
In August 2002, NASD directed our broker-dealer
subsidiaries, iClearing and Ameritrade, Inc., to
cease permitting specified trading in cash accounts
that NASD believes violates Regulation T of the
Board of Governors of the Federal Reserve System.
We are currently in the process of evaluating, designing,
testing and implementing necessary changes to our
systems and procedures to address the NASD restriction.
We expect that this restriction on specified trades
will result in a decrease in trading activity in
some cash accounts, some clients closing their cash
accounts, some clients converting to margin accounts
and a potential increase in trading activity in
some margin accounts. We cannot predict with any
degree of certainty the impact of this restriction
on our revenues and profitability because we cannot
adequately forecast the degree to which clients
that have engaged in specified trades will adjust
their trading activity, close cash accounts or convert
to margin accounts, nor can we predict the impact
of future prevailing market conditions and other
factors over which we have no control. Although
its impact is dependent on many factors that we
cannot predict, we believe that this restriction
on specified trades could have a material adverse
effect on our revenues and profitability.
Net interest revenue (interest revenue less client
interest expense) decreased 29 percent to $104.1
million in fiscal 2002 from $147.6 million in fiscal
2001. This decrease was due primarily to a 29 percent
decrease in average client and correspondent receivables,
a decrease of approximately 230 basis points in
the average interest rate charged on such receivables,
a decrease of approximately 300 basis points in
the average interest rate earned on cash and investments,
including cash and investments segregated in compliance
with federal regulations, and an increase of 25
percent in average amounts payable to clients and
correspondents in fiscal 2002 from fiscal 2001.
These factors were partially offset by an 89 percent
increase in average cash and investments, including
cash and investments segregated in compliance with
federal regulations, and a decrease of approximately
130 basis points in the average interest rate paid
on client and correspondent payables in fiscal 2002
from fiscal 2001. We generally expect net interest
revenue to grow as our account base grows; however,
it will also be affected significantly by changes
in interest rates and fluctuations in the levels
of client margin borrowing and deposits.
Other revenues increased to $74.2 million in fiscal
2002 from $37.8 million in fiscal 2001, due primarily
to increased money market fee income, and the implementation
during the second half of fiscal 2001 of a transaction
fee for paper confirmations and a quarterly fee
on accounts that do not meet certain minimum levels
of trading activity or assets. In addition, fees
charged to third party broker-dealers for orders
placed through the TradeCast licensed order entry
software system also contributed to the increase.
We acquired TradeCast effective April 2, 2001. On
September 9, 2002, we announced our decision to
pursue a sale of TradeCast, due to redundancies
with Datek’s technology. Once the disposal
of TradeCast is completed, it is expected to result
in approximately $8 million in annualized operating
cash flow savings. |
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Expenses
Excluding Client Interest
Employee compensation and benefits expense decreased
eight percent to $133.9 million in fiscal 2002 from
$144.8 million in fiscal 2001, due primarily to
the effect of staff reductions during fiscal 2001.
Although full-time equivalent employees increased
to 2,150 at the end of September 2002 from 1,970
at the end of September 2001 primarily as a result
of the Datek merger, the average number of full-time
equivalent employees was 22 percent lower in fiscal
2002 than fiscal 2001. We expect the number of employees
to decrease during the first half of fiscal 2003
as the Datek merger integration progresses.
Communications expense decreased 10 percent to $36.1
million in fiscal 2002 compared to $39.9 million
in fiscal 2001, due primarily to decreased expense
for quotes, market information and postage due to
lower transaction processing volumes and the implementation
of electronic trade confirmations and client statements
during fiscal 2001, partially offset by additional
communications expenses for TradeCast.
Occupancy and equipment costs decreased nine percent
to $55.3 million in fiscal 2002 from $60.5 million
in fiscal 2001. This decrease was due primarily
to the effect of our facilities consolidation and
related restructuring charge in the fourth quarter
of fiscal 2001, partially offset by additional occupancy
and equipment costs related to TradeCast.
Depreciation and amortization decreased 22 percent
to $27.9 million in fiscal 2002 from $36.0 million
in fiscal 2001, due primarily to the discontinuation
of goodwill amortization upon our adoption of SFAS
No. 142, Goodwill and Other
Intangible Assets, on September 29, 2001,
and the effect of the facilities consolidation and
resulting restructuring charge in the fourth quarter
of fiscal 2001, partly offset by higher software
amortization expense.
Professional services expense decreased 34 percent
to $36.5 million in fiscal 2002 from $55.0 million
in fiscal 2001. This decrease was primarily due
to decreased usage of marketing and technology consulting
services during fiscal 2002 compared to fiscal 2001,
partially offset by legal and accounting expenses
incurred in connection with the Datek merger in
fiscal 2002.
Interest on borrowings decreased 54 percent to $5.1
million in fiscal 2002, from $11.1 million in fiscal
2001, due to the conversion of $152.4 million of
convertible subordinated notes in February 2001
and lower average interest rates and borrowings
on our revolving credit agreements. The debt conversion
resulted in savings of approximately $8.8 million
annually in cash interest payments on the convertible
subordinated notes.
Other operating expenses increased six percent to
$30.0 million in fiscal 2002 from $28.4 million
in fiscal 2001, primarily due to the accrual in
fiscal 2002 of $2.5 million related to a patent
infringement matter, partially offset by lower transaction
processing volumes and the implementation of electronic
statements and trade confirmations in fiscal 2001.
Advertising expenses decreased 55 percent to $61.0
million in fiscal 2002 from $134.8 million in fiscal
2001. The reduced level of advertising expenditures
was principally due to adverse stock market conditions
and lower media costs. We expect to spend approximately
$115 to $150 million for advertising for fiscal
2003, depending on market conditions.
Gain on sale of investment in fiscal 2001 consists
of a gain of approximately $9.7 million on the sale
of preferred stock of Epoch Partners, Inc. ("Epoch").
We sold our interest in Epoch for approximately
$16.4 million in cash.
Restructuring and asset impairment charges in fiscal
2002 consisted of a $63.4 million impairment charge
to reflect the amount by which the carrying value
of the TradeCast subsidiaries exceeded its estimated
fair value. The impairment loss consisted of $53.5
million of goodwill and $9.9 million of property
and equipment. Restructuring and asset impairment
charges of $38.3 million in fiscal 2001 consisted
primarily of severance pay and benefits for approximately
480 terminated employees and impairment charges
related to a comprehensive facilities consolidation
in connection with a reorganization of our corporate
and management structure. Offices in Fort Worth,
Texas; Omaha, Nebraska; Baltimore, Maryland; and
Purchase, New York were affected by the facilities
consolidation.
Debt conversion expense in fiscal 2001 consisted
of $58.7 million of cash paid to holders of the
convertible subordinated notes in connection with
the conversion of $152.4 million of the notes into
4.7 million shares of Class A Common Stock, and
$3.4 million of deferred note origination costs
written off related to the converted notes.
Income tax expense was $10.4 million in fiscal 2002
compared to income tax benefit of $55.2 million
in fiscal 2001. We recorded income tax expense in
fiscal 2002 despite having a pretax loss before
income taxes, due primarily to the nondeductible
goodwill component of the TradeCast impairment charge. |
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