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Basis
of Presentation – The consolidated financial
statements include the accounts of Ameritrade Holding
Corporation, a Delaware corporation (formerly Arrow
Stock Holding Corporation), and its wholly owned
subsidiaries (collectively, the "Company"). Intercompany
balances and transactions have been eliminated.
The Company reports on a fifty-two/fifty-three week
year. Each fiscal year ends on the last Friday of
the month of September. Fiscal years 2002 and 2001
were each fifty-two week years. Fiscal year 2000
was a fifty-three week year.
Nature of Operations
– The Company provides securities brokerage
services through its broker-dealer subsidiaries.
The Company also provides trading execution and
clearing services for its own broker-dealer operations
and for unaffiliated broker-dealers through its
subsidiaries, Ameritrade, Inc. and iClearing LLC
("iClearing"). The Company's broker-dealer subsidiaries
are subject to regulation by the Securities and
Exchange Commission ("SEC"), the National Association
of Securities Dealers, Inc. and the various exchanges
in which they maintain membership.
Capital Stock
– Prior to September 9, 2002, the authorized
capital stock of the Company consisted of Class
A Common Stock, Class B Common Stock and Preferred
Stock. Each share of Class A and Class B Common
Stock was entitled to one vote on all matters, except
that the Class B Common Stock was entitled to elect
a majority of the directors of the Company and the
Class A Common Stock was entitled to elect the remainder
of the directors. Each class of Common Stock was
equally entitled to dividends if, as and when declared
by the Board of Directors. Shares of Class A Common
Stock were not convertible, while each share of
Class B Common Stock was convertible into one share
of Class A Common Stock at the option of the Class
B holder or upon the occurrence of certain events.
Effective September 9, 2002, 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 Company's
Board of Directors.
Voting, dividend, conversion and liquidation rights
of the Preferred Stock would be established by the
Board of Directors upon issuance of such Preferred
Stock.
Use of Estimates
– The preparation of consolidated financial
statements in conformity with accounting principles
generally accepted in the United States of America
requires management to make estimates and assumptions
that affect the reported amount of assets and liabilities
and disclosure of contingent assets and liabilities
at the date of the consolidated financial statements
and the reported amounts of revenues and expenses
during the reporting period. Actual results could
differ from those estimates.
Securities Transactions
– Client securities transactions are recorded
on a settlement date basis with such transactions
generally settling three business days after the
trade date. Revenues and expenses related to securities
transactions, including revenues from execution
agents, are recorded on a trade date basis. Securities
owned by clients, including those that collateralize
margin or similar transactions, are not reflected
in the accompanying consolidated financial statements.
Depreciation and Amortization
– Depreciation is provided on a straight-line
basis using estimated useful service lives of three
to seven years. Leasehold improvements are amortized
over the lesser of the economic useful life of the
improvement or the term of the lease. Acquired intangible
assets are amortized on a straight-line basis over
their estimated useful lives, ranging from one to
23 years.
Long-Lived Assets
– The Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets,
effective September 29, 2001. The Company reviews
its long-lived assets for impairment whenever events
or changes in circumstances indicate that the carrying
amount of such asset may not be recoverable. The
Company evaluates recoverability by comparing the
undiscounted cash flows associated with the asset
to the asset's carrying amount. Long-lived assets
classified as "held for sale" (see Note 2) are reported
at the lesser of carrying amount or fair value less
cost to sell.
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.
Segregated Cash and
Investments – Cash and investments,
consisting primarily of U.S. Treasury Bills and
repurchase agreements, at the Company's clearing
subsidiaries of $5.7 billion and $2.0 billion as
of September 27, 2002 and September 28, 2001, respectively,
have been segregated in special reserve bank accounts
for the benefit of clients under Rule 15c3-3 of
the Securities Exchange Act of 1934 and other regulations.
Fair Value of Financial
Instruments – The Company considers
the amounts presented for financial instruments
on the consolidated balance sheets, except for the
convertible subordinated notes, to be reasonable
estimates of fair value based on maturity dates
and repricing characteristics. The estimated fair
value of the convertible subordinated notes was
approximately $37.8 and $31.1 million at September
27, 2002 and September 28, 2001, respectively. The
Company has determined the estimated fair value
of the notes using available market information.
Goodwill and Acquired
Intangible Assets – The Company has
recorded goodwill for purchase business combinations
to the extent the purchase price of each acquisition
exceeded the net identifiable assets of the acquired
company. The Company adopted SFAS No. 142, Goodwill
and Other Intangible Assets, on September
29, 2001. The Company completed its transitional
impairment test of goodwill under SFAS No. 142 during
the Company's second fiscal quarter of 2002. In
performing the transitional impairment test, the
Company utilized quoted market prices of the Company's
Class A Common Stock to estimate the fair value
of the Company as a whole. The estimated fair value
was then allocated to the Company's reporting units
based on operating revenues, and was compared with
the carrying value of the reporting units. No impairment
charges resulted from the transitional impairment
test.
Investments
– Investments are accounted for under the equity
method when the Company has the ability to exercise
significant influence over the investee's operating
and financial policies. The cost method is used
for investments that do not meet equity method criteria.
Declines in fair value of cost method investments
that are considered other than temporary are accounted
for as realized losses. The Company's investments
in marketable equity securities are carried at fair
value and are designated as available-for-sale.
Unrealized gains and losses, net of deferred income
taxes, are reflected as accumulated other comprehensive
income. Realized gains and losses are determined
on the specific identification method and are reflected
in the statements of operations.
Software Development
– Software development costs are capitalized
and included in property and equipment at the point
technological feasibility has been established until
beta testing is complete. Once the product is fully
functional, such costs are amortized in accordance
with the Company's normal accounting policies. Software
development costs incurred in the development and
enhancement of software used in connection with
services provided by the Company that do not meet
capitalization criteria are expensed as incurred.
Deferred Compensation
– Company Common Stock held in a rabbi trust
pursuant to a Company deferred compensation plan
is recorded at the fair value of the stock at the
time it is transferred to the rabbi trust and is
classified as treasury stock. The corresponding
deferred compensation liability is recorded as a
component of stockholders' equity at the current
fair value of the Common Stock.
Advertising
– The Company expenses advertising costs as
they are incurred.
Income Taxes
– The Company files a consolidated income tax
return with its subsidiaries on a calendar year
basis. Deferred tax liabilities and assets are determined
based on the differences between the financial statement
carrying amounts and tax bases of assets and liabilities
using enacted tax rates.
Earnings (Loss) Per
Share – Basic earnings (loss) per share
("EPS") is computed by dividing net income (loss)
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. Because the Company reported a net
loss in fiscal years 2002, 2001 and 2000, the calculation
of diluted loss per share for those years does not
include potential common shares resulting from stock
options, as they are antidilutive, resulting in
a reduction of loss per share. In addition, the
convertible subordinated notes are not included
in the diluted EPS calculations because the effect
would also be antidilutive.
Stock Based Compensation
– As permitted by SFAS No. 123, Accounting
for Stock Based Compensation, the Company
accounts for its stock-based compensation on the
intrinsic-value method in accordance with Accounting
Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, and related
interpretations. The Company provides pro forma
disclosures of net income (loss) and earnings (loss)
per share as required under SFAS No. 123.
Comprehensive Income (Loss)
– Comprehensive income (loss) for all periods
presented consists of net income (loss) and unrealized
gains (losses) on securities available-for-sale,
net of related income taxes. These results are incorporated
into the consolidated statements of stockholders'
equity.
Derivatives and Hedging Activities
– The Company adopted SFAS No. 133,
Accounting for Derivative
Instruments and Hedging Activities, as amended
by SFAS No. 137 and SFAS No. 138, on September 30,
2000. There was no impact to the consolidated financial
statements as a result of adopting this standard.
In fiscal 2001, the Company entered into an equity
index swap arrangement with a notional amount of
approximately $15.6 million for the purpose of hedging
its obligation under its deferred compensation plan
for its Chief Executive Officer. This arrangement
is accounted for as a cash flow hedge in accordance
with SFAS No. 133. Unrealized gains or losses on
the swap arrangement are treated as an adjustment
to employee compensation and benefits expense in
the statements of operations, offsetting changes
to the related deferred compensation liability,
which is included in accounts payable and accrued
liabilities in the balance sheets. As of September
27, 2002, approximately 4.1 million shares of the
Company's Knight Trading Group, Inc. ("Knight")
(see Note 5) common stock were pledged or subject
to pledge as collateral under the equity index swap
arrangement.
Related Party Loans
– Certain Company directors and employees maintain
margin accounts with the Company's clearing subsidiaries.
The Company had margin loans, secured primarily
by Company Common Stock, to Company directors and
employees totaling $31.5 million and $21.7 million
as of September 27, 2002 and September 28, 2001,
respectively. These loans are made in the ordinary
course of the Company's business on terms no more
favorable than those available on comparable transactions
with other parties.
Reclassifications
– Certain items in prior years' consolidated
financial statements have been reclassified to conform
to the current year presentation.
Recently Issued Accounting
Pronouncements:
SFAS No. 143
– In June 2001, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 143, Accounting
for Asset Retirement Obligations. SFAS No.
143 addresses financial accounting and reporting
for obligations associated with the retirement of
tangible long-lived assets and the associated asset
retirement costs and is effective for fiscal years
beginning after June 15, 2002. Management does not
expect the impact of SFAS No. 143 to be material
to the Company's consolidated financial statements.
SFAS No. 146
– In June 2002, the FASB issued SFAS No. 146,
Accounting for Costs Associated
with Exit or Disposal Activities. SFAS No.
146 is effective for exit or disposal activities
that are initiated after December 31, 2002 and requires
that a liability for a cost associated with an exit
or disposal activity be recognized when the liability
is incurred, rather than at the date of commitment
to an exit plan. |
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