Back to GetFilings.com

Table of Contents

Form 10-K

þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) UNDER THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED SEPTEMBER 27, 2002
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) UNDER THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM                         TO

Commission file number: 0-49992

Ameritrade Holding Corporation

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

      Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) under the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.     Yes     þ     No     o

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     o

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).     Yes     þ     No     o

      As of November 29, 2002, the aggregate market value of the Common Stock held by non-affiliates of the registrant was approximately $1.2 billion computed by reference to the closing sale price of the stock on the Nasdaq National Market on March 28, 2002, the last trading day of the registrant’s most recently completed second fiscal quarter.

      The number of shares of Common Stock outstanding as of November 29, 2002 was 429,754,769 shares.

DOCUMENTS INCORPORATED BY REFERENCE

      Definitive Proxy Statement relating to the Company’s 2003 Annual Meeting to be filed hereafter (incorporated into Part III hereof).

Table of Contents

AMERITRADE HOLDING CORPORATION

INDEX

1

Table of Contents

      Unless otherwise indicated, references to “we”, “us” or “Company” mean Ameritrade Holding Corporation and its subsidiaries, and references to “fiscal” mean the Company’s fiscal year ended the last Friday of September.

PART I

Item 1.     Business

      The Company was established in 1971. We are a leading provider of securities brokerage services, with online transactions representing the vast majority of our business.

Online Securities Brokerage Industry Overview

      The number of client accounts in the online securities brokerage industry has grown rapidly over the past five years. A number of factors have contributed to this growth, including:

	•	Increased consumer acceptance of and confidence in the Internet as a reliable, secure and cost-effective medium for financial transactions;
	•	The availability of financial information online, including research, real-time quotes, charts, news and company information;
	•	The appeal of online trading to investors based on lower commissions, greater range of investment alternatives and greater control over investment decisions; and
	•	The growth in equity ownership by individual investors.

Operations

      We are a provider of securities brokerage services and technology-based financial services to retail investors and business partners, predominantly through the Internet. Our services appeal to a broad market of independent, value conscious retail investors, traders, financial planners and institutions. We use our low-cost platform to offer brokerage services to retail investors and institutions at commissions that are generally lower than those charged by most of our major competitors.

      We have been an innovator in electronic brokerage services. 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; real-time portfolio management tools; extended trading hours; direct access; and commitment on the speed of execution. Since initiating online trading, we have dramatically 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 Ameritrade brand.

      During fiscal 2002, we merged with Datek Online Holdings Corp. (“Datek”). The merger combines the client service, technology, products, focus on execution quality and innovation of both companies to bring a superior offering to our clients and enhanced value to our stockholders. Shortly after the merger with Datek, we introduced a suite of new products, including Streamer®, Ameritrade Apex^TM, and the Ameritrade command center.

      We currently operate our brokerage business through several broker-dealer subsidiaries, including Ameritrade, Inc., iClearing LLC (“iClearing”), iCapital Markets LLC, Ameritrade Canada, Inc. and TradeCast Securities Ltd.

Business Strategy

      Our business strategy is to continue to capitalize on the projected growth of the online brokerage industry and leverage our low-cost infrastructure to grow market share and profitability. We strive to enhance the client experience while delivering greater value to stockholders. The key elements of our strategy are as follows:

	•	Focus on Brokerage Services. We plan to maintain our focus on attracting independent investors to our online brokerage services. We believe that this focus promotes efficiencies and capitalizes on

2

Table of Contents

		projected growth in the industry. This focused strategy is designed to allow us to maintain our low operating cost structure and still offer our clients outstanding products and services.
	•	Leverage Our Infrastructure to Add New Sources of Revenue. With the integration of Datek’s proprietary technology, we are able to provide a very competitive online experience for active traders. Our low-cost, scalable platform provides excellent speed, reliability and execution for clients. The available capacity in our trading system allows us to add a significant number of transactions without incurring additional fixed costs.
	•	Continue to be a Low-Cost Provider of Quality Services. Our operating expense per trade is among the lowest of any of our publicly traded major competitors. We intend to continue to lower our operating costs per trade by creating economies of scale, utilizing our single-platform proprietary system, continuing to automate processes and locating our operations in low-cost geographical areas. This low, fixed-cost infrastructure provides us with financial leverage.
	•	Continue to Strengthen Our Financial Position. Despite a sluggish economy, we reported record earnings from ongoing operations of $26.2 million during fiscal 2002, excluding a $63.4 million non-cash pre-tax charge related to the intended sale of our TradeCast operating subsidiaries. From the end of fiscal 2000 to the end of fiscal 2002, we have reduced our debt from $275 million to approximately $47.7 million. We intend to continue to strengthen our financial position by realizing synergies from our merger with Datek.
	•	Continue to Offer Innovative Technologies and Service Enhancements to Our Clients. We have been an innovator in our industry over our 27-year history. We continually strive to provide our clients with choice and the ability to customize their trading experience. The merger of Ameritrade and Datek brought together some of the most advanced technology in the online brokerage industry. By integrating the best technology of Ameritrade and Datek, we believe that we are able to offer independent investors a superior platform. In the past year, we have turned to clients to advise us on what they wanted in terms of products and services. We then delivered on their wishes with the launch of new products and pricing. Clients can “bundle” the products they want and pay only for what they need. We provide greater choice by tailoring our features and functionality to meet the specific needs of institutions and individual investors.
	•	Continue to Aggressively Pursue Growth Through Acquisitions. Following the Datek merger, we became the leader in online equity trades per day, with the fastest growing account base, lowest cost operations and highest operating margins among our publicly traded peers in the online brokerage industry. During fiscal 2001, we purchased National Discount Brokers Corporation (“NDB”) and TradeCast Inc. and its affiliates (“TradeCast”) and leveraged both to support our client segmentation strategy. When evaluating potential acquisitions, we look for combinations that will give us financial leverage, technology leverage or increased market share. We intend to continue to be an acquirer by proactively searching for other firms that fit one or more of these criteria.
	•	Leverage the Ameritrade Brand. In October 2002, the Company amplified its image as a champion of the individual investor with the launch of a new, aggressive advertising campaign. The new campaign “What’s Your Share?” reflects pride in stock ownership by average Americans. By combining the best products and services that both Ameritrade and Datek have to offer, we believe that we have a superior brand identity and offering. Our past advertising has established Ameritrade as a strong brand in the online brokerage market. We plan to leverage this strong brand awareness when advertising each of our client offerings.

      During 2001, the Company reorganized its corporate and management structure to meet the specific needs of its growing and diverse client base. The new management structure created two principal business units, a Private Client Division and an Institutional Client Division. Both divisions provide multiple service offerings, each tailored to specific clients and their respective investing and trading preferences.

3

Table of Contents

Private Client Division

      The Company’s Private Client Division provides tiered levels of products and services to meet the varying needs and investing patterns of different retail clients. We have developed strategies aimed at specific client segments, matching tools, information and choices to investor priorities. The private client offerings include:

	•	Ameritrade® has historically been our core offering for retail clients. With the Datek merger, we currently have two trading platforms for clients, both offering excellent tools, services and execution. During fiscal 2003, we plan to combine the two platforms into one. Because many of our clients are technologically savvy, we offer sophisticated tools and services, including Ameritrade Streamer, Ameritrade command center and Ameritrade Advanced AnalyzerTM.
	•	Ameritrade PlusTM is designed for self-directed clients seeking long-term portfolio management tools and a higher degree of personalized client service. Clients have access to a comprehensive suite of portfolio management tools for long-term investing strategies. Ameritrade Plus leverages the features and functionality obtained through the acquisition of NDB. Clients of Ameritrade Plus with an account value over $5,000 have access to a dedicated account executive.
	•	Freetrade.comTM serves self-directed traders who are willing to forgo traditional support and service in favor of a purely electronic brokerage experience.

Institutional Client Division

      Through the Institutional Client Division, we seek to grow our account base and expand revenues by targeting specific segments of the institutional client market with relevant products, tools and services, and by leveraging our core competencies of trade execution, technology and client service. Our institutional client offerings include:

	•	Ameritrade Advisor ServicesTM offers the Ameritrade ConnectionTM to independent financial advisors and independent broker-dealer affiliated registered investment advisors to help manage their businesses and their clients’ portfolios.
	•	Ameritrade Corporate ServicesTM provides self-directed brokerage services to employees and executives of corporations, either directly or through joint marketing relationships with third-party administrators, such as 401(k) providers and employee benefit consultants.
	•	Ameritrade ClearingTM provides innovative clearing services for broker-dealers across the price and service spectrum, including discount and full-service broker-dealers, banks, day trading firms and registered investment advisors.
	•	Ameritrade Financial ServicesTM provides a co-branded or private-label trading brokerage platform for distribution to our business partners’ customers, including banks, third-party providers and credit unions.

      The Private Client Division and Institutional Client Division are reportable business segments. See Note 14 to Consolidated Financial Statements for financial information regarding these segments.

Products and Services

      We strive to provide the best value of online brokerage services to our clients. Our products include:

	•	Common and Preferred Stock. Clients can purchase common and preferred stocks and American Depository Receipts traded on any United States exchange or quotation system.
	•	Option Trades. We offer a full range of option trades, including spreads, straddles and strangles. All option trades, including complex trades, are accessible on our Web site.
	•	Mutual Funds. Clients can compare and select from a portfolio of over 11,000 mutual funds. Clients can also easily exchange funds within the same mutual fund family.
	•	Treasury, Corporate and Municipal Bonds. We offer our clients access to a variety of treasury, corporate, government and municipal bonds as well as collateralized mortgage obligations.

4

Table of Contents

      We provide our clients with an array of channels to access our products and services. These include Internet, wireless telephone or Personal Digital Assistant, Interactive Voice Response and registered representatives.

Client Service

      We endeavor to optimize our highly rated client service by:

	•	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;
	•	Ensuring prompt response to client service calls through adequate staffing with properly trained and motivated personnel in our client service departments, many of whom have a Series 7 license; and
	•	Tailoring client service to the particular expectations of the clients of each of our client segments.

      We provide client service support through a variety of access points, including:

	•	Web Sites. Web sites provide basic information on how to use our services and an in-depth education center that includes a guide to online investing and an encyclopedia of finance.
	•	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 4 hours of the original message.
	•	Client Service Representatives. 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 client’s account data at the time the call is received. Client service representatives are available 24 hours a day, seven days a week.

      We strive to provide the best client service in the industry as measured by: (1) speed of response time on telephone calls; (2) turnaround time on responding to client inquiries; and (3) client satisfaction with the account relationship.

Technology and Information Systems

      Technology is the core of our business and is 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 to our success.

      We continue to make investments in technology and information systems. Since March 1999, we have spent a significant amount of our resources to increase capacity and improve speed and reliability. To provide for system continuity during potential power outages, we also have equipped our data centers with uninterruptible power supply units, as well as back-up generators.

      Our current capacity for trades is approximately 250,000 to 300,000 trades per day. Because of the scalability of our system, we believe that we would be able to increase capacity to approximately 500,000 trades per day at an estimated cost of $10 million.

Advertising and Marketing

      We intend to continue to grow and increase our market share by advertising through online avenues, television, print, direct mail and our own Web sites. In October 1997, we launched a national marketing campaign to promote the Ameritrade brand name. Since that date, we have invested approximately $525 million in advertising programs designed to bring greater brand recognition to our services. During this five-year period, we have added over 1.9 million accounts through internal growth. We intend to continue to aggressively advertise our services during fiscal 2003 and currently have budgeted $115 to $150 million for

5

Table of Contents

      Growth of the Private Client Division is primarily driven through advertising and/or acquisitions. Advertising for retail clients is generally conducted through Web sites, CNBC and other television and cable networks. We also place print advertisements in a broad range of business publications, including The Wall Street Journal, Barron’s and Investor’s Business Daily, and use direct mail advertising.

      Growth of the Institutional Client Division is primarily driven through our sales force and/or acquisitions. Advertising for institutional clients is significantly less than for private clients and is generally conducted through highly targeted media.

      To monitor the success of our various marketing efforts, we have installed a data gathering and tracking system. This system enables us to determine the type of advertising that best appeals to our target market so that we can invest future dollars in these programs and obtain a greater yield from our marketing dollars. 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 relationships with our clients and support marketing campaigns to attract new clients. All of our methods and uses of client information are disclosed in our privacy statement.

      All of our brokerage-related communications with the public are regulated by the National Association of Securities Dealers (“NASD”).

Ameritrade, Inc. and iClearing

      Ameritrade, Inc. and iClearing provide clearing and execution services to each of our affiliated broker-dealers, as well as a number of correspondent firms such as independent broker-dealers, depository institutions, registered investment advisors and financial planners. Clearing services include the confirmation, receipt, settlement, delivery and record-keeping functions involved in the processing of securities transactions. The clearing function involves a sharing of responsibilities between the clearing broker and the introducing broker. Our correspondents, as introducing brokers, are responsible for all client contact, including opening client accounts, responding to client inquiries and placing client orders with the clearing broker. As a clearing broker, we provide the following back office functions:

	•	Maintaining client accounts;
	•	Extending credit in a margin account to the client;
	•	Settling security transactions with clearing houses such as The Depository Trust & Clearing Corporation and The Options Clearing Corporation;
	•	Settling commissions and clearing fees;
	•	Preparing client trade confirmations and statements;
	•	Performing designated cashiering functions, including the delivery and receipt of funds and securities to or from the client;
	•	Possession, control and safeguarding funds and securities in client accounts;
	•	Transmitting tax accounting information to the client and to the applicable tax authority; and
	•	Forwarding prospectuses, proxies and other shareholder information to clients.

      We make margin loans to clients collateralized by client securities. Our margin lending is subject to the margin rules of the Board of Governors of the Federal Reserve System (“Federal Reserve”), the margin requirements of NASD and our own internal policies. By permitting clients to purchase on margin, we take the risk that a market decline could reduce the value of the collateral securing our loan to an amount that is less than the clients’ indebtedness to us. Under applicable securities laws and regulations, we are obligated to require the client to maintain net equity in the account equal to at least 25 percent of the value of the securities in the account. Our current internal requirement, however, is that the client’s net equity not be allowed to fall below 30 percent of the value of the securities in the account. If it does fall below 30 percent, we require the client to increase the account’s net equity to 35 percent of the value of the securities in the

6

Table of Contents

      We intend to consolidate our two clearing platforms into the Ameritrade, Inc. platform during fiscal 2003.

Competition

      We believe that the principal determinants of success in the online brokerage market are brand recognition, size of client base, client trading activity, efficiency of operations, technology infrastructure and access to financial resources. We also believe that the principal factors considered by clients in choosing a broker are price, client service, quality of trade execution, delivery platform capabilities, convenience and ease of use, breadth of services, innovation and overall value. Based on our experience, focus group research and the success we have enjoyed to date, we believe that we presently compete successfully in each of these categories.

      The market for brokerage services, particularly electronic brokerage services, is rapidly evolving and intensely competitive. We have seen a dramatic increase in 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 such brokerage firms as Charles Schwab & Co., Inc., TD Waterhouse Investor Services, Inc., E*TRADE Group, Inc., Harrisdirect and Scottrade, Inc. We also encounter competition from established full-commission brokerage firms as well as financial institutions, mutual fund sponsors and other organizations, some of which provide online brokerage services.

Investments

      Our investments consist primarily of approximately 7.9 million shares of Knight Trading Group, Inc. (“Knight”) common stock, which represents approximately seven percent of Knight’s outstanding stock. Knight is a publicly held company that is the largest wholesale market maker in U.S. equity securities. Knight became a public company in 1998 and trades on the Nasdaq National Market under the symbol “NITE.” We derive revenues from Knight in exchange for routing trade orders to it for execution. These amounts are included in commissions and clearing fees in our Statements of Operations.

      We also have investments in The Nasdaq Stock Market, Inc., Comprehensive Software Systems, Inc., a software development firm for the brokerage industry, and Adirondack Trading Partners LLC, a development stage company formed to trade listed equity and index options.

Regulation

      The securities industry is subject to extensive regulation under federal and state law. In general, broker-dealers are required to register with the Securities and Exchange Commission (“SEC”) and to be members of NASD. As such, we are subject to the requirements of the Securities Exchange Act of 1934 and the rules promulgated thereunder relating to broker-dealers and to the Rules of Fair Practice of NASD. These regulations establish, among other things, minimum net capital requirements for our operating subsidiaries. We are also subject to regulation under various state laws in all 50 states and the District of Columbia, including registration requirements.

      In their capacity as securities clearing firms, Ameritrade, Inc. and iClearing are members of the National Securities Clearing Corporation, 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, Ameritrade, Inc. and iClearing are 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 the Federal Reserve and NASD. 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.

7

Table of Contents

Intellectual Property Rights

      Our success and ability to compete are dependent to a significant degree on our intellectual property, which includes our proprietary technology, trade secrets and client base. We rely on numerous methods of intellectual property protection to protect our intellectual property, including copyright, trade secret, trademark, domain name, patent and contract law and have utilized the various methods available to us, including registrations with the Patent and Trademark office for various properties, as well as entry into written licenses and other technology agreements with third parties. The source and object code for our proprietary software is also protected using applicable methods of intellectual property protection. In addition, it is our policy to enter into confidentiality, intellectual property ownership and/or non-competition agreements with our associates, independent contractors and business partners, and to control access to and distribution of our intellectual property.

Associates

      As of September 27, 2002, we employed 2,150 full-time equivalent employees. The number of employees has increased from 1,970 full-time equivalent employees as of the end of fiscal 2001 primarily as a result of our merger with Datek. None of our employees is covered under a collective bargaining agreement. We believe that our relations with our employees are good.

Internet Address

      We maintain a Web site where additional information concerning our business can be found. The address of that Web site is 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 or furnish such materials to the SEC.

Item 2.     Properties

      Our corporate headquarters is located in Omaha, Nebraska, and occupies approximately 74,000 square feet of leased space. The lease expires in April 2019. Also in Omaha, we lease approximately 134,000 square feet for the operations center as well as several other locations totaling approximately 114,000 square feet. The leases on these Omaha locations expire on various dates from 2003 through 2008. We lease approximately 140,000 square feet for a second operations center in Ft. Worth, Texas. The Ft. Worth lease expires in January 2015. We also lease approximately:

	•	205,000 square feet in Jersey City, New Jersey with a lease that will be terminated by June 2003;
	•	62,000 square feet in Baltimore, Maryland with a lease that expires in June 2010;
	•	40,000 square feet in Seacaucus, New Jersey with leases that expire in 2010;
	•	27,000 square feet in New York, New York with leases that expire on various dates from 2003 through 2010;
	•	27,000 square feet in Houston, Texas with a lease that expires in August 2004;
	•	13,000 square feet in Vienna, Virginia with a lease that expires in January 2005;
	•	6,400 square feet in American Fork, Utah with a lease that expires in August 2003;
	•	3,000 square feet in Toronto, Ontario with a lease that expires in September 2003; and
	•	600 square feet in Chicago, Illinois with a lease that expires in August 2003.

      We also own an 89,000 square foot facility in Kansas City, Missouri that serves as a backup data center. We have executed a letter of intent to sell the Kansas City data center facility, but intend to lease back approximately 40% of the facility that we currently occupy for a minimum five-year period. This will allow our data center operations and backup capabilities to remain the same. We expect to complete the sale of the Kansas City facility in early calendar 2003. We believe that our facilities are suitable and adequate to meet our needs.

8

Table of Contents

Item 3.     Legal Proceedings

      In September 1998, a putative class action complaint was filed against the Company by Zannini, et al. in the District Court of Douglas County, Nebraska, claiming the Company was not able to handle the volume of subscribers to its Internet brokerage services. The complaint, as amended, seeks injunctive relief enjoining alleged deceptive, fraudulent and misleading practices, equitable relief compelling the Company to increase capacity, and unspecified compensatory damages. In May 2001, the Company filed a motion for summary judgment in the matter, which the plaintiffs opposed. The court granted summary judgment for the Company on January 2, 2002. The plaintiffs have appealed.

      The nature of the Company’s business subjects it to lawsuits, arbitrations, claims and other legal proceedings. We cannot predict with certainty the outcome of pending legal proceedings. A substantial adverse judgment or other resolution regarding these proceedings could have a material adverse effect on the Company’s financial condition, results of operations and cash flows. However, in the opinion of management, after consultation with legal counsel, the Company has adequate legal defenses with respect to the legal proceedings to which it is a defendant or respondent and the outcome of these proceedings is not likely to have a material adverse effect on the financial condition, results of operations or cash flows of the Company.

Item 4.     Submission of Matters to a Vote of Security Holders

      The Company held a special meeting of stockholders on September 5, 2002 to consider and vote upon a proposal to adopt a merger agreement with Datek Online Holdings Corp. The stockholders approved the proposal as follows:

PART II

Item 5.     Market for Registrant’s Common Equity and Related Stockholder Matters

Price Range of Common Stock

      Since September 9, 2002, the date the Datek merger was completed, we have had a single class of Common Stock, which trades on the Nasdaq National Market under the symbol “AMTD”. Prior to September 9, 2002, we had two classes of Common Stock: Class A Common Stock (the “Class A Stock”) and Class B Common Stock (the “Class B Stock”). The Class A Stock traded on the Nasdaq National Market under the symbol “AMTD”. The Class B Stock was not listed on any exchange and was not traded over the counter. In connection with our merger with Datek on September 9, 2002, each share of Class A Stock and Class B Stock was converted into a single class of Common Stock of a new holding company, which was formed for purposes of the Datek merger. The following table shows the high and low sales prices for the Common Stock (or for the Class A Stock prior to September 9, 2002) for the periods indicated, as reported by the Nasdaq National Market. The prices reflect inter-dealer prices and do not include retail markups, markdowns or commissions and may not represent actual transactions.

      The closing sale price of our Common Stock as reported on the Nasdaq National Market on December 6, 2002 was $4.95 per share. As of that date there were approximately 3,300 holders of record of our Common Stock based on information provided by our transfer agent. The number of stockholders does not reflect the

9

Table of Contents

Dividends

      We have not declared or paid cash dividends on our Common Stock. We currently intend to retain all of our earnings, if any, for use in our business and do not anticipate paying any cash dividends in the foreseeable future. Our revolving credit agreement prohibits the payment of cash dividends. The payment of any future dividends will be at the discretion of our Board of Directors, subject to the provisions of the revolving credit agreement, and will depend upon a number of factors, including future earnings, the success of our business activities, capital requirements, the general financial condition and future prospects of our business, general business conditions and such other factors as the Board of Directors may deem relevant.

10

Table of Contents

Item 6.     Selected Financial Data

	*	Fiscal 2000 was a 53-week year. All other periods presented are 52-week years.

(1)	Includes core brokerage account base only. Non-core accounts (primarily clearing accounts, stock option administration accounts and bank referral accounts) are not included.
(2)	Operating margin percentage is computed by dividing operating margin by net revenues.
(3)	Return on average equity is computed by dividing net income (loss) by stockholders’ equity averaged on a quarterly basis.

11

Table of Contents

Item 7.     Management’s Discussion and Analysis of Financial Condition and Results of Operations

      This report contains forward-looking statements within the meaning of the federal securities laws. We intend these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements in the federal securities laws. In particular, the following statements contained in this report are forward-looking statements: our expectations regarding the significant trends that will affect our financial condition and results of operations; our plans for the integration of Datek Online Holdings Corp. (“Datek”) and anticipated synergies resulting from the Datek merger; our expectations regarding the effect of our new pricing schedule on commissions and clearing fees per trade and client attrition; our expectations regarding the effect on our revenues and profitability of restrictions by the National Association of Securities Dealers (“NASD”) on specified trading in cash accounts; our expectations regarding growth of net interest revenue; our estimation of annualized operating cash flow savings resulting from the disposal of TradeCast Inc. and its affiliates (“TradeCast”); our expectation of reductions in the number of employees resulting from the Datek merger integration; our expected amount of advertising expenses; our anticipated capital and liquidity needs and our plans to finance such needs; our expectations regarding the modification and extension of our revolving credit agreement; our expectations regarding our stock repurchase program; and our expectations regarding the impact of recently issued accounting pronouncements. These statements only reflect our expectations and are not guarantees of performance. These statements involve risks, uncertainties and assumptions that could cause actual results or performance to differ materially from our expectations. Important factors that could cause our actual results or performance to differ materially from our expectations are set forth under the heading “Risk Factors”. 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.

      Our significant accounting policies are disclosed in the Notes to Consolidated Financial Statements for the fiscal year ended September 27, 2002. In the opinion of management, we do not have any critical accounting policies which routinely involve unusually difficult, subjective or complex judgments. However, we adopted Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets on September 29, 2001. SFAS No. 142 requires annual testing of goodwill and intangible assets for impairment. Our impairment testing of goodwill and intangible assets requires us to estimate the fair value of tangible and intangible assets within our reporting units. These estimates involve subjectivity due to lack of observable market data at the reporting unit level. We completed our transitional goodwill impairment test during the second fiscal quarter of 2002. No impairment charges resulted from the transitional impairment test.

      Unless otherwise indicated, references to “we”, “us” or “Company” in this report mean Ameritrade Holding Corporation and its subsidiaries.

12

Table of Contents

Overview

      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.

Business Combination

      On September 9, 2002, we completed our merger with Datek. Pursuant to the merger agreement, Ameritrade Online Holdings Corp. (“AOH”) (formerly Ameritrade Holding Corporation) and Datek each

13

Table of Contents

      We are currently in the process of integrating Datek’s business with ours. As part of the integration planning process, we have formed an integration planning organization comprised of representatives of both companies and a former Datek stockholder. Integration planning teams were assigned to determine the product and service features, functionality for clearing settlement services, call center organization and services, technology platforms and order routing for the combined company. Website enhancements to both our and Datek’s front-end websites, along with a new pricing schedule, were implemented on October 19, 2002. Several months after the completion of the merger, we intend to phase-in a combined website, which will be a single point of entry on to the trading platform for both Ameritrade and Datek clients. During fiscal 2003, we plan to consolidate the clearing functions performed by Ameritrade and Datek using the Ameritrade, Inc. clearing platform. Datek’s client call center function was moved to call centers in Omaha, Nebraska and Ft. Worth, Texas shortly after completion of the merger. The integration plans for the operations of Ameritrade and Datek are subject to change.

      We anticipate synergies from the merger resulting from cost savings programs, estimated to be approximately $100 million on an annualized, after-tax basis and which are expected to result from:

	•	Downsizing the workforce, resulting in estimated annualized after-tax savings of approximately $35 million,
	•	Eliminating duplicate occupancy, equipment and depreciation expenses, resulting in estimated annualized after-tax savings of approximately $25 million, and
	•	Eliminating duplicate advertising, communication, professional fees and other expenses, resulting in estimated annualized after-tax savings of approximately $40 million.

Results of Operations

      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.

14

Table of Contents

      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. See “Risk Factors — Implementation of NASD’s Position Concerning Permissible Activity in Cash Accounts Will Restrict Some Trading Activities of Some of Our Clients and Harm Our Business” below.

      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.

      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

15

Table of Contents

      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.

16

Table of Contents

      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.

      Commissions and clearing fees decreased 31 percent to $269.4 million in fiscal 2001 from $389.7 million in fiscal 2000. This decrease was primarily attributable to an 18 percent decrease in commissions and clearing fees per trade to $10.69 for fiscal 2001 from $13.11 for fiscal 2000, and an 11 percent decrease in the average number of trades processed per day to 101,998 in fiscal 2001 from 114,339 in fiscal 2000. The decrease in commissions per trade was due primarily to our clients increasingly using the Internet to place trades, as we charge lower commissions for Internet trades than for trades placed through other means, growth in our Freetrade.com^TM client base, a lower commission structure for option trades and lower payment for order flow revenue per trade. Payment for order flow revenue per trade decreased due primarily to regulatory changes, including stock market decimalization. The decrease in transaction processing volume was primarily a result of significantly lower client trading activity during fiscal 2001, compared to unusually high client trading activity throughout much of fiscal 2000. Clients averaged approximately 17 trades per account during fiscal 2001, compared to approximately 32 trades per account during fiscal 2000. In addition, there were fewer trading days during fiscal 2001 than fiscal 2000 due to fiscal 2000 being a 53-week fiscal year and four days of market closures in fiscal 2001 due to the September 11 terrorist attacks. The decreased volume per account was partially offset by a significant increase in client accounts resulting primarily from the substantial advertising expenditures made by us during the past few years, and 215,000 core accounts added through our acquisition of NDB. Client accounts increased to approximately 1,794,000 at September 28, 2001, from approximately 1,233,000 at September 29, 2000.

      Net interest revenue decreased 13 percent to $147.7 million in fiscal 2001 from $168.8 million in fiscal 2000. This decrease was due primarily to a decrease of 36 percent in average client and correspondent receivables and a decrease of approximately 30 basis points in the average interest rate charged on client and correspondent receivables, partially offset by a 109 percent increase in average cash and investments, including cash and investments segregated in compliance with federal regulations, in fiscal 2001 compared to fiscal 2000.

      Other revenues increased 73 percent to $37.8 million in fiscal 2001 from $21.9 million in fiscal 2000, due primarily to the implementation of a $15 per quarter fee during the third quarter of fiscal 2001 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.

      Employee compensation and benefits expense was virtually unchanged at $144.8 million in fiscal 2001 compared to $144.9 million in fiscal 2000. Full-time equivalent employees decreased 23 percent to 1,970 at the end of fiscal 2001 from 2,573 at the end of fiscal 2000. Reductions in expense resulting from staff reductions during fiscal 2001 were largely offset by costs associated with the hiring of our new Chief Executive Officer during the second quarter of fiscal 2001.

      Communications expense increased 10 percent to $39.9 million in fiscal 2001 compared to $36.4 million in fiscal 2000, primarily due to higher quote and market information costs and additional communication expenses for TradeCast.

      Occupancy and equipment costs increased 34 percent to $60.5 million in fiscal 2001 from $45.2 million in fiscal 2000. This increase was due primarily to the lease of equipment and additional office space. In fiscal 2000, we added approximately 150,000 square feet of additional space in Baltimore, Maryland; Ft. Worth, Texas; Omaha, Nebraska; Chicago, Illinois; and American Fork, Utah. We also leased additional equipment during fiscal 2000. Occupancy and equipment costs in Houston, Texas related to TradeCast also contributed to the increase.

17

Table of Contents

      Depreciation and amortization increased 67 percent to $36.0 million in fiscal 2001, from $21.6 million in fiscal 2000, due primarily to depreciation on additional equipment, furniture and leasehold improvements added during fiscal 2000 to accommodate growth and additional goodwill amortization resulting from the TradeCast acquisition.

      Professional services expense decreased 23 percent to $55.0 million in fiscal 2001 from $71.5 million in fiscal 2000. This decrease was primarily due to higher usage of marketing and technology consulting services during the first half of fiscal 2000, including consulting costs related to the development of OnMoney.com.

      Interest on borrowings decreased 33 percent to $11.1 million in fiscal 2001 from $16.4 million in fiscal 2000, due to lower average interest rates and the conversion of $152.4 million of convertible subordinated notes to Class A Common Stock in February 2001.

      Other operating expenses decreased 17 percent to $28.4 million in fiscal 2001 compared to $34.1 million in fiscal 2000, primarily due to the effect of lower transaction processing volumes.

      Advertising expenses decreased 40 percent to $134.8 million in fiscal 2001 from $225.8 million in fiscal 2000. The continuing high level of advertising expenditures was principally related to our efforts to build and maintain awareness of the Ameritrade brand and was primarily responsible for the significant increase in the number of client accounts during the period. However, due to adverse stock market conditions and a historically slow market for new accounts during the summer, we reduced our advertising expenditures during the second half of fiscal 2001.

      Gain on sale of investment consists of a gain of approximately $9.7 million on the sale of our preferred stock of Epoch during fiscal 2001. We sold our interest in Epoch for approximately $16.4 million in cash.

      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. We recorded asset impairment charges of $4.7 million during fiscal 2000 related to specific software applications that were discontinued.

      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 benefit was $55.2 million in fiscal 2001 compared to $6.6 million in fiscal 2000. The effective income tax rate in fiscal 2001 increased to 38 percent compared to 33 percent in fiscal 2000, due in part to the effect of state economic development tax credits in fiscal 2000.

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. Our liquidity needs during fiscal 2002 were financed primarily from our operating cash flows. We also issued Common Stock to purchase Datek, as described under “BUSINESS COMBINATION”. We plan to finance our capital and liquidity needs for fiscal 2003 primarily from our operating cash flows and borrowings on our revolving credit facility. In addition, we may issue other equity or debt securities. We may also consider selling, or entering into a forward contract to sell, some or all of our 7.9 million shares of Knight Trading Group, Inc. (“Knight”) common stock. As of September 27, 2002, approximately 4.1 million shares of our Knight common stock were pledged or subject to pledge as collateral under an equity index swap agreement, as described under “Other Contractual Obligations”.

      If additional funds are raised through the issuance of equity securities, the percentage ownership of the stockholders may be reduced, stockholders may experience additional dilution in net book value per share or such equity securities may have rights, preferences or privileges senior to those of the holders of our common stock. There can be no assurance that additional financing will be available when needed on terms favorable to us, if at all. If adequate funds are not available on acceptable terms, we may be unable to develop or enhance

18

Table of Contents

      Dividends from our subsidiaries are another source of liquidity for the holding company. Some of our subsidiaries are subject to requirements of the Securities and Exchange Commission (“SEC”) and the National Association of Securities Dealers relating to liquidity, capital standards and the use of client funds and securities, which limit funds available for the payment of dividends to the holding company.

      Under the SEC’s Uniform Net Capital Rule (Rule 15c3-1 under the Securities Exchange Act of 1934), our broker-dealer subsidiaries are required to maintain at all times at least the minimum level of net capital required under Rule 15c3-1. This minimum net capital level is determined based upon an involved calculation described in Rule 15c3-1, but takes into account, among other things, each broker-dealer’s “net debit items”, which primarily are a function of client margin receivables at our broker-dealer subsidiaries. Since our net debit items can fluctuate significantly, our minimum net capital requirements can also fluctuate significantly from period to period. Historically, we have utilized our revolving credit facility as a mechanism to provide additional capital as needed to meet net capital requirements, and the balance on our revolving credit facility often has fluctuated significantly from period to period due to changes in our net capital requirements.

      Cash provided by operating activities was $88.8 million in fiscal 2002, compared to cash used in operations of $47.3 million in fiscal 2001. The increase in cash flows from operations was primarily due to a substantial reduction in advertising expenditures compared to the previous year, and $37.2 million of debt conversion expense (net of income taxes) in fiscal 2001.

      Cash provided by investing activities was $110.1 million in fiscal 2002, compared to $1.2 million in fiscal 2001, due primarily to cash acquired in the Datek merger in fiscal 2002 and substantially lower capital expenditures during fiscal 2002 compared to the previous year, partly offset by $16.4 million of proceeds from the sale of Epoch in fiscal 2001.

      Cash used in financing activities was $24.6 million in fiscal 2002, compared to $52.2 million in fiscal 2001. The financing activities consisted mainly of net repayments on our revolving credit facility during both fiscal 2002 and fiscal 2001.

      On December 28, 2001, we entered into an amended and restated revolving credit agreement. The revolving credit agreement permits borrowings up to $20 million through December 27, 2002, and is secured primarily by our stock in our subsidiaries. Prior to July 11, 2002, it was also secured by 4.0 million shares of our Knight common stock, and we could borrow up to 70 percent of the fair market value of the pledged Knight stock, subject to certain limitations. On July 11, 2002, the lender under our revolving credit agreement agreed to amend the agreement to eliminate the Knight stock as collateral and to eliminate the requirement that the borrowing availability under the agreement be limited based on the market value of the Knight stock. The interest rate on borrowings, determined on a monthly basis, is equal to the greater of (i) the national prime rate or (ii) 90-day LIBOR plus 2.5 percent, subject to a minimum rate of 5.0 percent. At September 27, 2002, the interest rate on the revolving credit agreement would have been 5.0 percent. We also pay a maintenance fee of 0.375 percent of the unused borrowings through the maturity date. We had no outstanding indebtedness under the revolving credit agreement at September 27, 2002 and $22.5 million of outstanding indebtedness under the prior revolving credit agreement at September 28, 2001. We were in compliance with or have obtained waivers for all covenants under the revolving agreement for all periods presented in the consolidated financial statements.

      In December 2002, we agreed in principle to a modification and extension of the revolving credit agreement. The amended agreement will permit borrowings up to $50 million through December 26, 2003, bear interest initially at the lesser of (i) the prime rate or (ii) 30 day LIBOR plus 2.75 percent and will be secured primarily by our stock in our subsidiaries. We will also pay a maintenance fee of 0.375 percent of the unused borrowings through the maturity date. We expect to execute the amendment by December 27, 2002.

19

Table of Contents

      In August 1999, we issued $200 million of 5.75 percent convertible subordinated notes due August 1, 2004. The holders of the notes may convert the notes into shares of Common Stock at any time prior to the close of business on the maturity date of the notes, unless previously redeemed or repurchased, at a conversion rate of 30.7137 shares per $1,000 principal amount of notes (equivalent to an approximate conversion price of $32.56 per share), subject to adjustment in certain circumstances. Interest on the notes is payable on February 1 and August 1 of each year. The notes are subject to redemption after August 6, 2002, and we may, at our option, redeem the notes at a premium on or after such date, in whole or in part, upon notice to each holder not less than 30 days nor more than 60 days prior to the redemption date.

      In February 2001, $152.4 million of our convertible subordinated notes were converted for approximately 4.7 million shares of Class A Common Stock and $58.7 million of cash. As of September 27, 2002, we had approximately $47.6 million of the convertible subordinated notes outstanding. These notes are convertible into approximately 1.5 million shares of Common Stock.

      On September 9, 2002, our Board of Directors authorized a program to repurchase up to 40 million shares of our Common Stock from time to time over a two-year period beginning September 19, 2002. We have funded our initial purchases with cash on hand and expect to fund any future purchases primarily with operating profits. Through December 6, 2002, we have repurchased approximately 5.1 million shares at a weighted average purchase price of $3.84 per share.

      We are obligated to pay our Chief Executive Officer (“CEO”) $15.6 million in deferred compensation, adjusted for investment income or losses on the $15.6 million, pursuant to our employment agreement with the CEO. This payment will be made not sooner than the day after the CEO’s employment with the Company terminates. At September 27, 2002 and September 28, 2001, we had an equity index swap arrangement with a notional amount of $15.6 million for the purpose of hedging our obligation under this deferred compensation plan. Changes in the fair value of this instrument are offset by changes in our obligation to our CEO. As of September 27, 2002, approximately 4.1 million shares of our Knight common stock were pledged or subject to pledge as collateral under the equity index swap agreement.

      We also have contractual obligations under operating leases for facilities and equipment. The following table summarizes future payments under our contractual obligations. Amounts are in thousands.

(1)	Our obligation to our CEO for deferred compensation will become payable not sooner than the day after the CEO’s employment with the Company terminates. The obligation is presented in the fiscal 2003 column as that is the year in which the entire amount of the compensation will have been earned by the CEO.

New 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. We do not expect the impact of SFAS No. 143 to be material to our consolidated financial statements.

20

Table of Contents

      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.

Risk Factors

Stock Market Volatility and Other Securities Industry Risks Have Adversely Affected Our Business.

      Substantially all of our revenues are derived from securities brokerage and clearing and execution services. 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. We are particularly affected by volatility in technology and Internet-related stocks because significant numbers of our clients invest in these types of stocks. Since May 2000, the U.S. securities markets have been very volatile, which has reduced trading volume and net revenues. The terrorist attacks in the United States on September 11, 2001 also resulted in substantial market volatility and accompanying reductions in trading volume and net revenues. In addition, the general economic downturn has adversely affected trading volumes and net revenues. For fiscal 2002, our average client trades per day were 83,890 compared to 101,998 and 114,339 for fiscal 2001 and fiscal 2000, respectively. For fiscal 2002, our net revenues were $430.8 million compared to $454.7 million and $580.4 million for fiscal 2001 and fiscal 2000, respectively. These reductions in trading volumes and net revenues have adversely affected our profitability. Severe market fluctuations in the future or the continuation of current economic conditions could further reduce our trading volume and net revenues and adversely affect our profitability.

The Market Price of Our Common Stock Will Fluctuate and Could Fluctuate Significantly.

      Our Common Stock, and the U.S. securities markets in general, have experienced significant price fluctuations in recent years. The market prices of securities of Internet-related companies, in particular, have been especially volatile. The price of our Common Stock could decrease substantially. In addition, because the market price of our Common Stock tends to fluctuate significantly, we may become the object of securities class action litigation. Securities class action litigation may result in substantial costs and a diversion of management’s attention and resources.

Substantial Competition Could Reduce Our Market Share and Harm Our Financial Performance.

      The market for electronic brokerage services is young, rapidly evolving and intensely competitive. We expect the competitive environment to continue in the future. We face direct competition from numerous online brokerage firms, including Charles Schwab & Co., Inc., E*TRADE Group, Inc., TD Waterhouse Investor Services, Inc., Harrisdirect and Scottrade, Inc. We also encounter competition from the broker-dealer affiliates of established full-commission brokerage firms as well as from financial institutions, mutual fund sponsors and other organizations, some of which provide online brokerage services. Some of our competitors have greater financial, technical, marketing and other resources, offer a wider range of services and financial products, and have greater name recognition and a more extensive client base than we do. We believe that the general financial success of companies within the online 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. In addition, our clearing operations compete with numerous firms that provide clearing and execution services to the securities industry. We may not be able to compete effectively with current or future competitors.

Datek May be Subject to Claims That Could Affect Our Results of Operations.

      In January 2002, the SEC issued an order (the “SEC order”) against iCapital Markets LLC, a subsidiary of Datek (“iCapital”). The SEC order was based upon alleged improper activities by the day trading business that was conducted by iCapital’s predecessor, Datek Securities Corporation, until March 1998 when that business was sold to another broker-dealer. In the SEC order, the SEC charged iCapital with securities fraud and violations of the broker-dealer books and records and reporting provisions. The SEC

21

Table of Contents

      Through iCapital, we may be subject to additional claims relating to the allegations contained in the SEC order, including claims by governmental bodies, regulatory authorities or any other person for taxes, damages, indemnification, penalties and fines. Other than the SEC order, no claims have been asserted against Datek, iCapital or any of their respective predecessors, successors or affiliates that relate in any manner to the allegations, facts, events, transactions, acts, occurrences or any other matter in the SEC order. If any such claims were to be asserted and to the extent that a determination were to be made that we were obligated to satisfy these claims, our results of operations could be materially adversely affected.

We May Not be Able to Successfully Integrate Datek’s Operations.

      The integration of Datek will be complex and time-consuming, and will require management to dedicate substantial effort to it. These efforts could divert management’s focus and resources from other strategic opportunities and from operations during the integration process. Difficulties may occur during the integration process, including

	•	a loss of key officers, employees and clients,
	•	a loss of revenues and
	•	an increase in operating or other costs.

      Even if the integration of Datek is successful, it may not result in the realization of the full benefits of the synergies and growth opportunities that we currently expect or these benefits may not be achieved within the anticipated time frame. Any failure to timely realize these anticipated benefits could have a material adverse effect on our revenues, expenses and operating results.

The Estimates of Operational Cost Savings Resulting From the Datek Merger Are Inherently Uncertain and May Not be Accurate.

      We estimate that the merger with Datek will result in operational cost savings of approximately $100 million on an annualized, after-tax basis. These operational cost savings estimates are based on a number of assumptions, including that we will be able to implement cost saving programs such as personnel reductions, consolidation of operations, facilities and technologies, and elimination of duplicative administrative functions. In addition, the operational cost savings estimates assume that the integration of the operations of Datek will be successful. Failure to successfully implement cost saving programs or to successfully integrate the operations of Datek on a timely basis will result in lower than expected cost savings in connection with the merger and could have a material adverse effect on our operating results.

Systems Failures and Delays Could Harm Our Business.

      We receive and process trade orders through a variety of electronic channels, including the Internet, wireless web, personal digital assistants and our interactive voice response system. These methods of trading are heavily dependent on the integrity of the electronic systems supporting them. Our systems and operations are vulnerable to damage or interruption from human error, natural disasters, power loss, computer viruses, intentional acts of vandalism and similar events. Prior to the Datek merger, all of our core computer systems and applications were fully redundant and were replicated at a secondary site that is substantially complete. Datek’s core computer systems and applications, however, are not fully redundant and are not replicated at a secondary site. Extraordinary trading volumes could cause our computer systems to operate at an unacceptably low speed or even fail. While we have invested significant amounts in the last few years to upgrade the reliability and scalability of our systems, there can be no assurance that our systems will be sufficient to handle such extraordinary trading volumes. In the past, we experienced periods of extremely high trading volume that caused individual system components or processes to fail, resulting in the temporary unavailability of our Web site for online trading and delays in our telephone systems. On some other occasions, high trading volume

22

Table of Contents

	•	a loss of clients or a reduction in the growth of our client base,
	•	increased operating expenses,
	•	financial losses,
	•	additional litigation or other client claims, and
	•	regulatory sanctions or additional regulatory burdens.

Capacity Constraints of Our Systems Could Harm Our Business.

      If our business increases, we may need to expand and upgrade our transaction processing systems, network infrastructure and other aspects of our technology. Many of our systems are, and much of our infrastructure is, designed to accommodate additional growth without redesign or replacement; however, we may need to continue to make significant investments in additional hardware and software to accommodate growth. 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. Failure to make necessary expansions and upgrades to our systems and infrastructure could lead to failures and delays, which could cause a loss of clients or a reduction in the growth of the client base, increased operating expenses, financial losses, additional litigation or client claims, and regulatory sanctions or additional regulatory burdens.

Regulatory and Legal Uncertainties Could Harm Our Business.

      The securities industry in the United States is subject to extensive regulation under both federal and state laws. Broker-dealers are subject to regulations covering all aspects of the securities business. The SEC, NASD and other self-regulatory organizations and state securities commissions can censure, fine, issue cease-and-desist orders to, suspend or expel a broker-dealer or any of its officers or employees. Our ability to comply with applicable laws and rules is largely dependent on our internal system to ensure compliance, as well as our ability to attract and retain qualified compliance personnel. We could be subject to disciplinary or other actions in the future due to claimed noncompliance, which could have a material adverse effect on our operations and profitability.

      Recently, various regulatory and enforcement agencies have been reviewing systems capacity, client access, best execution practices, other service issues and advertising claims as they relate to the online brokerage industry. These reviews could result in enforcement actions or new 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 recently adopted regulations regarding client privacy and the use of client information by service providers. Additional laws and regulations relating to the Internet may be adopted in the future, including regulations regarding the pricing, taxation, content and quality of products and services delivered over the Internet. Complying with these laws and regulations is expensive and time consuming and could limit our ability to use the Internet as a distribution channel.

Implementation of NASD’S Position Concerning Permissible Activity in Cash Accounts Will Restrict Some Trading Activities of Some of Our Clients and Harm Our Business.

      Our broker-dealer subsidiaries, iClearing and Ameritrade, Inc., permit cash account clients to utilize the proceeds from the sale of fully-paid for securities to purchase other securities on the same day and in advance

23

Table of Contents

      In October 2001, NASD made an oral inquiry to iClearing regarding specified trades. In August 2002, NASD made a similar oral inquiry to Ameritrade, Inc. NASD’s inquiries focused on whether permitting specified trades in cash accounts was consistent with Staff Opinions 5-616.15 and 5-616.16 of the Board of Governors of the Federal Reserve System (the “January 2000 interpretations”), which are interpretations of Regulation T related to permissible activities in cash accounts. In response to NASD’s request, in July 2002 iClearing explained to NASD in writing, among other things, the reasons for its belief that permitting specified trades in cash accounts is common in the securities industry, posed no risk to investors and violated no applicable laws or rules, including the January 2000 interpretations. In August 2002, NASD concluded that permitting specified trades in cash accounts was prohibited by the January 2000 interpretations, and directed iClearing and Ameritrade, Inc. to cease permitting this activity.

      In August 2002, Ameritrade, Inc. informed NASD that it intended to comply with NASD’s direction, but requested further information to make the necessary changes to its systems and procedures. Since that time, we have been engaged in a dialogue with NASD to obtain the necessary information. Beginning in September 2002, we have sent notices to clients most likely to be affected explaining how the January 2000 interpretations may impact their trading.

      In December 2002, NASD informed Ameritrade, Inc. that the January 2000 interpretations should be applied for the entire three-day settlement cycle, rather than just to intra-day trading on the trade date. We are currently in the process of evaluating, designing, testing and implementing necessary changes to our systems and procedures to address this restriction. Due to the ongoing integration of iClearing and Ameritrade, Inc., and the differences in their respective systems and technologies, iClearing and Ameritrade, Inc. may complete the necessary changes to their respective systems and procedures at different times, while making efforts to minimize disruption to clients.

      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.

      We intend to conduct our business in conformity with all applicable laws, rules and regulations and expect to continue working cooperatively with NASD to address any future issues of interpretation or implementation that may arise. However, NASD may elect to bring disciplinary proceedings against iClearing and Ameritrade, Inc. If iClearing or Ameritrade, Inc. does not prevail in any such proceeding, NASD may seek censures, fines, suspensions or other sanctions. We may seek a ruling or interpretation by the Board of Governors of the Federal Reserve System or its staff to obtain relief from this restriction, though no assurance can be given that such relief would be granted.

The Success of Our Business Will Depend on Continued Development and Maintenance of the Internet Infrastructure.

      The Internet has experienced, and is expected to continue to experience, significant growth in the number of users and amount of traffic. Our success will depend upon the development and maintenance of the Internet’s infrastructure to cope with this increased traffic. The Internet has experienced a variety of outages and other delays as a result of damage to portions of its infrastructure and could face similar outages and

24

Table of Contents

Our Principal Stockholders Own a Significant Percentage of Our Common Stock, Which Limits the Ability of Other Stockholders to Influence Corporate Matters.

      J. Joe Ricketts, our Chairman and Founder, members of his family and trusts held for their benefit (collectively, the “Ricketts holders”) own approximately 25.7% of our Common Stock. Investment funds affiliated with Bain Capital, Silver Lake Partners and TA Associates (collectively, the “Datek holders”) collectively own approximately 29.6% of our Common Stock. The Ricketts holders and the Datek holders have entered into a stockholders agreement that obligates the parties to vote their shares in favor of a board of directors consisting of nine members, of which three are designated by the Ricketts holders, three are designated by the Datek holders and three are independent directors selected with the agreement of the parties. The agreement also obligates the parties to vote in favor of specified merger and sale of the company transactions that are approved by the requisite directors and to vote against specified merger and sale of the company transactions unless they are approved by the requisite directors. Accordingly, these stockholders have significant influence over the outcome of any corporate transaction or other matters submitted to our stockholders for approval, including the election of directors, mergers, consolidations and the sale of all or substantially all of our assets, and also could prevent or cause a change in control. The interests of these stockholders may differ from the interests of other stockholders. In addition, third parties may be discouraged from making a tender offer or bid to acquire the Company because of this concentration of ownership or the provisions of the stockholders agreement.

The Terms of the Stockholders Agreement, Our Charter Documents and Delaware Law May Inhibit a Takeover That Stockholders May Consider Favorable.

      Provisions in the stockholders agreement among the Ricketts holders and the Datek holders, our certificate of incorporation and bylaws and Delaware law will make it difficult for any party to acquire control of the Company in a transaction not approved by the requisite number of directors. These provisions include

	•	the presence of a classified board of directors,
	•	the ability of the board of directors to issue and determine the terms of preferred stock,
	•	advance notice requirements for inclusion of stockholder proposals at stockholder meetings, and
	•	the anti-takeover provisions of Delaware law.

      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.

We Will Need to Introduce New Products and Services to Remain Competitive.

      Our future success depends in part on our ability to develop and enhance our products and services. There are significant technical and financial risks in the development of new or enhanced products and services, including the risk that we will be unable to effectively use new technologies or adapt our services to emerging industry standards, or develop, introduce and market enhanced or new 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 modify or adapt our services or infrastructure.

Changes in Payments for Routing Our Clients’ Orders Could Adversely Affect Our Business.

      We have arrangements with several execution agents to receive cash payments in exchange for routing trade orders to these firms for execution. Competition between execution agents and the implementation of order handling rules and decimalization of stock prices has made it less profitable for execution agents to offer order flow payments to broker-dealers. On a per trade basis, our payment for order flow revenue has decreased significantly over the past several years. These payments may continue to decrease on a per trade basis, which could have a material adverse effect on our revenues and profitability.

25

Table of Contents

Our Networks May be Vulnerable to Security Risks.

      The secure transmission of confidential information over public networks is a critical element of our operations. We have not experienced significant network security problems in the past. However, our networks may in the future be vulnerable to unauthorized access, computer viruses and other security problems. 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 may 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.

Failure to Comply With Net Capital Requirements Could Adversely Affect Our Business.

      The SEC, NASD and various other regulatory agencies have stringent rules with respect to the maintenance of specific levels of net capital by securities broker-dealers. Net capital is a measure, defined by the SEC, of a broker-dealer’s readily available liquid assets, reduced by its total liabilities other than approved subordinated debt. All of our broker-dealer subsidiaries are required to comply with the net capital requirements. If we fail to maintain the required net capital, the SEC could suspend or revoke our registration, or NASD could expel us from membership, which could ultimately lead to our liquidation. If the net capital rules are changed or expanded, or if there is an unusually large charge against net capital, operations that require the intensive use of capital would be limited. A large operating loss or charge against net capital could adversely affect our ability to maintain or expand our business.

Our Clearing Operations Expose Us to Liability for Errors in Clearing Functions.

      Ameritrade, Inc. and iClearing provide clearing and execution services to each of our brokerage businesses, as well as to independent broker-dealers, depository institutions, registered investment advisors and financial planners. Clearing and execution services include the confirmation, receipt, settlement and delivery functions involved in securities transactions. Clearing brokers also assume direct responsibility for the possession and control of client securities and other assets and the clearance of client securities transactions. Self-clearing securities firms are subject to substantially more regulatory control and examination than brokers that rely on others to perform those 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 and introducing brokers, could lead to civil penalties imposed by applicable authorities as well as losses and liability in related lawsuits brought by clients and others.

We Are Exposed to Credit Risk.

      We make margin loans to clients collateralized by client securities and periodically borrow and lend securities to cover trades. A significant portion of our net revenues is derived from interest on margin loans. To the extent that these margin loans exceed client cash balances maintained with us, we must obtain financing from third parties. We may not be able to obtain this financing on favorable terms or in sufficient amounts. By permitting clients to purchase securities on margin, we are subject to risks inherent in extending credit, especially during periods of rapidly declining markets in which the value of the collateral held by us could fall below the amount of a client’s indebtedness. In addition, in accordance with regulatory guidelines, we collateralize borrowings of securities by depositing cash or securities with lenders. Sharp changes in market values of substantial amounts of securities and the failure by parties to the borrowing transactions to honor their commitments could have a material adverse effect on our revenues and profitability.

Acquisitions Involve Certain Risks That Could Adversely Affect Our Business.

      We intend to pursue strategic acquisitions of businesses and technologies. Acquisitions may entail numerous risks, including

	•	difficulties in the integration of acquired operations, services and products,
	•	diversion of management’s attention from other business concerns,
	•	assumption of unknown material liabilities of acquired companies,

26

Table of Contents

	•	amortization of acquired intangible assets, which could reduce future reported earnings, and
	•	potential loss of clients or key employees of acquired companies.

      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.

      Market risk generally represents the risk of loss that may result from the potential change in the value of a financial instrument as a result of fluctuations in interest rates and market prices. We have established policies, procedures and internal processes governing our management of market risks in the normal course of our business operations.

      We seek to control the risks associated with our client activities 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.

      As a fundamental part of our brokerage business, we hold short-term interest earning assets, mainly funds required to be segregated in compliance with federal regulations for clients. These funds totaled $5.7 billion at September 27, 2002 and $2.0 billion at September 28, 2001. We invest these funds primarily in short-term fixed-rate U.S. Treasury Bills and repurchase agreements. Our interest earning assets are financed primarily by short-term interest bearing liabilities, totaling $6.4 billion at September 27, 2002 and $2.8 billion at September 28, 2001, in the form of client cash balances. We earn a net interest spread on the difference between amounts earned on client margin loans and amounts paid on client credit balances. Since we establish the rate paid on client cash balances, a substantial portion of our interest rate risk is under our direct management.

      At September 27, 2002, we had $47.6 million of convertible subordinated notes outstanding, which bear interest at a fixed rate of 5.75 percent. At September 28, 2001, we had $70.1 million of interest bearing indebtedness outstanding, consisting of $47.6 million of convertible subordinated notes and $22.5 million under our revolving credit agreement, which bears interest at a floating rate.

      We hold a marketable equity security, which is recorded at fair value of $31.9 million ($19.4 million net of tax) at September 27, 2002 and has exposure to market price risk. The same security was recorded at fair value of $61.0 million ($36.9 million net of tax) at September 28, 2001. The potential loss in fair value resulting from a hypothetical 10 percent adverse change in prices quoted by the stock exchanges was approximately $3.2 million at September 27, 2002. Actual results may differ.

      Our revenues and financial instruments are denominated in U.S. dollars, and we generally do not invest in derivative financial instruments or derivative commodity instruments. At September 27, 2002 and September 28, 2001, we had an equity index swap arrangement with a notional amount of $15.6 million for the purpose of hedging our obligation under our deferred compensation plan for our CEO. Changes in the fair value of this instrument are offset by changes in our obligation to our CEO.

27

Table of Contents

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

28

Table of Contents

REPORT OF MANAGEMENT

To the Board of Directors and Stockholders of

      Management of Ameritrade Holding Corporation and its subsidiaries (the “Company”) is responsible for the preparation, consistency, integrity and fair presentation of the consolidated financial statements. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America applied on a consistent basis and, in management’s opinion, are fairly presented. The financial statements include amounts that are based on management’s informed judgments and best estimates.

      Management has established and maintains comprehensive systems of internal control that provide reasonable assurance as to the consistency, integrity, and reliability of the preparation and presentation of financial statements; the safeguarding of assets; the effectiveness and efficiency of operations; and compliance with applicable laws and regulations. The concept of reasonable assurance is based upon the recognition that the cost of the controls should not exceed the benefit derived. Management monitors the systems of internal control and maintains an independent internal auditing program that assesses the effectiveness of internal controls. Management assessed the Company’s internal control over financial reporting for financial presentations in conformity with accounting principles generally accepted in the United States of America. This assessment was based on criteria for effective internal control over financial reporting established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO Report). Based on this assessment, management believes that the Company maintained effective internal control over financial reporting for financial presentations in conformity with accounting principles generally accepted in the United States of America as of September 27, 2002.

      The Board of Directors exercises its oversight role with respect to the Company’s systems of internal control primarily through its Audit Committee, which is comprised solely of outside directors. The Audit Committee oversees the Company’s systems of internal control and financial reporting to assess whether their quality, integrity, and objectivity are sufficient to protect shareholders’ investments.

      The Company’s consolidated financial statements have been audited by Deloitte & Touche LLP (“Deloitte & Touche”), independent auditors. As part of its audit, Deloitte & Touche considers the Company’s internal controls to establish a basis for reliance thereon in determining the nature, timing, and extent of auditing procedures considered necessary to render its opinion as to the fair presentation, in all material respects, of the consolidated financial statements, which is based on independent audits made in accordance with auditing standards generally accepted in the United States of America. Management’s assertion that the Company maintained effective internal control over financial reporting for financial presentations in conformity with accounting principles generally accepted in the United States of America has

29

Table of Contents

	/s/ JOSEPH H. MOGLIA
	Joseph H. Moglia
	Chief Executive Officer
	/s/ JOHN R. MACDONALD
	John R. MacDonald
	Executive Vice President,
	Chief Financial Officer and Treasurer

October 24, 2002

30

Table of Contents

INDEPENDENT ACCOUNTANTS’ REPORT

To the Board of Directors

      We have examined management’s assertion, included in the accompanying Report of Management, that Ameritrade Holding Corporation and its subsidiaries (collectively, the “Company”) maintained effective internal control over financial reporting for financial presentations in conformity with accounting principles generally accepted in the United States of America, as of September 27, 2002 based on criteria for effective control over financial reporting established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO Report). The Company’s management is responsible for maintaining effective internal control over financial reporting. Our responsibility is to express an opinion on management’s assertion based on our examination.

      Our examination was conducted in accordance with attestation standards established by the American Institute of Certified Public Accountants and, accordingly, included obtaining an understanding of the internal control over financial reporting, testing, and evaluating the design and operating effectiveness of the internal control and performing such other procedures as we considered necessary in the circumstances. We believe that our examination provides a reasonable basis for our opinion.

      Because of inherent limitations in any internal control, misstatements due to error or fraud may occur and not be detected. Also, projections of any evaluation of the internal control over financial reporting to future periods are subject to the risk that the internal control may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

      In our opinion, management’s assertion that the Company maintained effective internal control over financial reporting for financial presentations in conformity with accounting principles generally accepted in the United States of America, as of September 27, 2002, is fairly stated, in all material respects, based on criteria established in the COSO Report.

	/s/ DELOITTE & TOUCHE LLP

Omaha, Nebraska

31

Table of Contents

INDEPENDENT AUDITORS’ REPORT

To the Board of Directors and Stockholders of

      We have audited the accompanying consolidated balance sheets of Ameritrade Holding Corporation and its subsidiaries (collectively, the “Company”) as of September 27, 2002 and September 28, 2001, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended September 27, 2002. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

      We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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, such consolidated financial statements present fairly, in all material respects, the financial position of Ameritrade Holding Corporation and its subsidiaries as of September 27, 2002 and September 28, 2001, and the results of their operations and their cash flows for each of the three years in the period ended September 27, 2002 in conformity with accounting principles generally accepted in the United States of America.

	/s/ DELOITTE & TOUCHE LLP

Omaha, Nebraska

32

Table of Contents

AMERITRADE HOLDING CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

See notes to consolidated financial statements.

33

Table of Contents

AMERITRADE HOLDING CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS