<PAGE>1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 1997
Commission File Number: 1-11921
E*TRADE Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware 94-2844166
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Four Embarcadero Place, 2400 Geng Rd. Palo Alto, CA 94303
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (415) 842-2500
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
As of May 13, 1997 the number of shares outstanding of the registrant's
common stock was 30,873,347
<PAGE>2
E*TRADE Group, Inc.
Form 10-Q Quarterly Report
For the Quarter Ended March 31, 1996
Table of Contents
Part I - Financial Information:
Page
Item 1. Financial Statements
Consolidated Statements of Operations 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Part II- Other Information:
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
UNLESS OTHERWISE INDICATED, REFERENCES TO "COMPANY" MEAN E*TRADE GROUP, INC.
AND ITS SUBSIDIARIES.
FORWARD-LOOKING STATEMENTS In addition to the historical information
contained throughout this quarterly report, there are forward-looking
statements that reflect management's expectations for the future. These
statements relate to a variety of matters including the Company's strategy,
sources of liquidity and capital expenditures. Many factors could cause actual
results to differ materially from these statements. These factors include, but
are not limited to: the timing of introductions of enhancements to online
financial services and products by the Company or its competitors; market
acceptance of online financial services and products; the pace of development
of the market for online commerce; changes in transaction volume on the
securities markets; trends in the securities markets; domestic and
international regulation of the brokerage industry; changes in pricing
policies by the Company or its competitors; changes in strategy; the success
of or costs associated with acquisitions, joint ventures or other strategic
relationships; changes in key personnel; seasonal trends; the extent of
international expansion; the mix of international and domestic sales; changes
in the level of operating expenses to support projected growth; and general
economic conditions. For a description of certain of these and other factors
that may cause actual results to so differ, reference is made hereby to the
Company's Annual Report on Form 10-K and other documents filed by the Company
from time to time with the Securities and Exchange Commission. The Company
disclaims any obligation to update its forward-looking statements.
Due to the foregoing factors, quarterly revenues and operating results are
difficult to forecast, and the Company believes that period-to-period
comparisons of its operating results will not necessarily be meaningful and
should not be relied upon as an indication of future performance. It is
likely that the Company's future quarterly operating results from time to
time will not meet the expectations of securities analysts or investors,
which may have an adverse effect on the market price of the Company's
Common Stock.
<PAGE>3
Part I. Financial Information
Item 1. Financial Statements
E*TRADE GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
------------------------ ------------------------
1997 1996 1997 1996
------------------------ ------------------------
<S> <C> <C> <C> <C>
Revenues:
Transaction revenues $24,419,000 $9,160,000 $44,791,000 $16,489,000
Interest - net of interest
expense (A) 5,017,000 579,000 8,871,000 1,173,000
International 2,000,000 - 2,000,000 -
Computer services and other 765,000 710,000 1,562,000 1,215,000
---------- ---------- ---------- ----------
Net revenues 32,201,000 10,449,000 57,224,000 18,877,000
---------- ---------- ---------- ----------
Cost of services:
Cost of services 14,049,000 6,043,000 27,327,000 10,567,000
Self-clearing start-up costs - 469,000 - 635,000
---------- ---------- ---------- ----------
Total cost of services 14,049,000 6,512,000 27,327,000 11,202,000
---------- ---------- ---------- ----------
Operating expenses:
Selling and marketing 7,805,000 2,391,000 10,933,000 3,518,000
Technology development 1,438,000 359,000 3,005,000 612,000
General and administrative 3,809,000 869,000 6,971,000 1,760,000
---------- ---------- ---------- ----------
Total operating expenses 13,052,000 3,619,000 20,909,000 5,890,000
---------- ---------- ---------- ----------
Total cost of services and
operating expenses 27,101,000 10,131,000 48,236,000 17,092,000
---------- ---------- ---------- ----------
Pre-tax income 5,100,000 318,000 8,988,000 1,785,000
Income tax expense 2,046,000 133,000 3,674,000 722,000
---------- ---------- ---------- ----------
Net income $ 3,054,000 $ 185,000 $ 5,314,000 $ 1,063,000
========== ========== ========== ==========
Net income per share $0.09 $0.01 $0.16 $0.04
========== ========== ========== ==========
Weighted average number of
common and common equivalent
shares outstanding 33,970,000 27,338,000 34,187,000 27,325,000
</TABLE
(A) Interest is presented net of interest expense. Interest expense for the
three months ended March 31, 1997 and 1996 was $2,516,000 and $6,000,
respectively. Interest expense for the six months ended March 31, 1997 and
1996 was $4,813,000 and $9,000, respectively.
See notes to consolidated financial statements.
<PAGE>4
E*TRADE GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
</TABLE>
<TABLE>
<CAPTION>
March 31, September 30,
1997 1996
------------ ------------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and equivalents $ 24,141,000 $ 14,641,000
Cash and investments required to be
segregated under Federal or
other regulations 21,500,000 35,500,000
Investment securities 26,839,000 35,003,000
Brokerage receivables - net 353,829,000 193,228,000
Other assets 2,423,000 2,203,000
----------- -----------
Total current assets 428,732,000 280,575,000
Property and equipment - net 13,455,000 9,228,000
Equity investment 3,320,000 2,860,000
Other assets 6,818,000 2,218,000
----------- -----------
Total assets $452,325,000 $294,881,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Brokerage payables $362,067,000 $219,483,000
Income taxes payable 1,222,000 -
Accounts payable,
accrued liabilities and other 13,642,000 6,072,000
----------- -----------
Total current liabilities 376,931,000 225,555,000
Long-term portion of capital leases 12,000 22,000
----------- -----------
Total liabilities 376,943,000 225,577,000
----------- -----------
Shareholders' Equity:
Common stock, $.01 par: shares authorized,
50,000,000; shares issued and outstanding:
March 1997, 30,439,787;
September 1996, 29,539,147 304,000 295,000
Additional paid-in capital 69,493,000 68,738,000
Retained earnings 5,585,000 271,000
----------- -----------
Total shareholders' equity 75,382,000 69,304,000
----------- -----------
Total liabilities and
shareholders' equity $452,325,000 $294,881,000
=========== ===========
See notes to consolidated financial statements.
</TABLE>
<PAGE>5
E*TRADE GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
March 31,
-------------------------
1996 1995
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,314,000 $ 1,063,000
Noncash items included in net income:
Deferred income taxes 571,000 -
Depreciation and amortization 1,309,000 219,000
Issuance of common stock for services - 14,000
Equity income from investment (496,000) (341,000)
Net effect of changes in:
Cash and investments required to be segregated
under Federal or other regulations 14,000,000 -
Brokerage receivables (160,353,000) (476,000)
Other assets (2,244,000) (318,000)
Brokerage payables 142,584,000 -
Income taxes payable 1,222,000 (303,000)
Accounts payable, accrued liabilities and other 7,570,000 740,000
------------ -----------
Net cash provided by operating activities 9,477,000 598,000
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (5,536,000) (1,854,000)
Purchase of investment securities (189,943,000) -
Sale/maturity of investment securities 198,097,000 -
Relocation loan (3,147,000) -
Reinvestment of equity investment earnings (408,000) -
Distributions received from equity investment 206,000 178,000
------------ -----------
Net cash used in investing activities (731,000) (1,676,000)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Costs from initial public offering (102,000) -
Proceeds from exercise of stock options 557,000 88,000
Proceeds from exercise of stock warrants - 113,000
Proceeds from purchase of common stock by
Employee Stock Purchase Plan participants 309,000 -
Repayment of long-term note payable - (42,000)
Repayment of capital leases (10,000) (11,000)
------------ -----------
Net cash provided by financing activities 754,000 148,000
------------ -----------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS 9,500,000 (930,000)
CASH AND EQUIVALENTS--Beginning of period 14,641,000 9,624,000
------------ -----------
CASH AND EQUIVALENTS--End of period $ 24,141,000 $ 8,694,000
============ ============
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest $ 4,617,000 $ 9,000
============ ===========
Cash paid for income taxes $ 1,205,000 $ 1,025,000
============ ===========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Tax benefit on exercise
of non-qualified stock warrants $ - $ 177,000
Capital expenditures financed with note payable $ - $ 2,500,000
</TABLE>
See notes to consolidated financial statements.
<PAGE>6
E*TRADE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1. - General
The accompanying unaudited consolidated financial statements include E*TRADE
Group, Inc. and its subsidiaries (collectively the "Company"). E*TRADE Group,
Inc. is a holding company engaged, through its subsidiaries, in securities
brokerage and related investment services. E*TRADE Group Inc.'s principal
operating subsidiary, E*TRADE Securities, Inc. ("E*TRADE Securities") is a
securities broker-dealer.
These financial statements have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC") and, in the
opinion of management, reflect all adjustments necessary to present fairly
the financial position, results of operations and cash flows for the periods
presented in conformity with generally accepted accounting principles. All
adjustments were of a normal recurring nature. All material intercompany
balances and transactions have been eliminated. These financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's 1996 Annual Report to Shareholders
and Form 10-K for the fiscal year ended September 30, 1996.
Certain items in prior periods' financial statements have been reclassified
to conform to the fiscal 1997 presentation.
Note 2. - Recently Issued Accounting Standards
The Company is required to adopt Statement of Financial Accounting Standards
("SFAS") No. 123, Accounting for Stock-Based Compensation, in fiscal 1997.
SFAS No. 123 establishes accounting and disclosure requirements using a
fair-value based method of accounting for stock based employee compensation
plans. Under SFAS No. 123, the Company may either adopt the new fair-value
based accounting method or continue the intrinsic value based method and
provide pro forma disclosures of net income and earnings per share as if the
accounting provisions of SFAS No. 123 had been adopted. The Company plans to
adopt only the disclosure requirements of SFAS No. 123; therefore, such
adoption will have no effect on the Company's consolidated net income or cash
flows.
On June 28, 1996, the Financial Accounting Standards Board issued SFAS No.
125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, effective for transfers of financial assets
made after December 31, 1996 except for certain financial assets for which the
effective date has been delayed until 1998 by SFAS No. 127, Deferral of the
Effective Date of Certain Provisions of SFAS No. 125. This new statement
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. The Company does not
expect SFAS No. 125 to have a material effect on its consolidated financial
statements.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, Earnings per Share. The Company is required to adopt SFAS 128 in the
first quarter of fiscal 1998 and will restate at that time earnings per share
("EPS") data for prior periods to conform with SFAS 128. Earlier application
is not permitted. SFAS 128 replaces current EPS reporting requirements and
requires a dual presentation of basic and diluted EPS. Basic EPS excludes
dilution and is computed by dividing net income by the weighted average number
of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock. If SFAS 128 had
been in effect during the current and prior periods, basic EPS would have been
$.10 and $.01 for the quarters ended March 31, 1997 and 1996, respectively, and
$.18 and $.07 for the year to date periods, respectively. Diluted EPS under
SFAS 128 would not have been significantly different than fully diluted EPS
currently reported for the periods.
<PAGE>7
Note 3. - Relocation Loan Receivable
During the fourth calendar quarter of 1996, the Company made a relocation
loan to Mr. Christos Cotsakos, its Chief Executive Officer and a Director,
in the aggregate principal amount of $3,147,000. The proceeds of this loan
were used to fund the purchase by Mr. Cotsakos of a personal residence in
the Silicon Valley area. In providing this relocation loan, the
Compensation Committee of the Board of Directors considered, among the other
things, the rapid escalation of residential housing costs in the Silicon
Valley area as well as the costs incurred by Mr. Cotsakos in relocating from
Brussels, Belgium to California. The relocation loan accrues interest at the
rate of 7% per annum which, together with the principal amount, is due and
payable in November 1999. The loan is required to be collateralized by a
combination of assets, including the residence purchased. The due date of
the relocation loan is subject to acceleration upon the occurrence of certain
events including the voluntary cessation of employment with the Company by Mr.
Cotsakos.
Note 4. - Regulatory Requirements
E*TRADE Securities is subject to the Uniform Net Capital Rule (the "Rule")
under the Securities Exchange Act of 1934 administered by the Securities and
Exchange Commission and the National Association of Securities Dealers, Inc.,
which requires the maintenance of minimum net capital. E*TRADE Securities has
elected to use the alternative method permitted by the Rule, which requires
that the Company maintain minimum net capital equal to the greater of
$250,000 or 2 percent of aggregate debit balances arising from customer
transactions, as defined. At March 31, 1997, E*TRADE Securities had net
capital of $24,821,000 (7.5% of aggregate debit balances), which was
$18,177,000 in excess of its required net capital of $6,644,000. Under the
alternative method, a broker-dealer may not repay subordinated borrowings,
pay cash dividends or make any unsecured advances or loans to its parent or
employees if such payment would result in net capital of less than 5% of
aggregate debit balances or less than 120% of its minimum dollar amount
requirement.
Note 5. - Contingencies
During the period ended March 31, 1997, the Company became aware of several
instances of its non-compliance with applicable broker-dealer regulations. For
example, the Company failed to comply with applicable advertising restrictions
in one international jurisdiction, and due to a clerical oversight failed to
renew its registration as a broker-dealer in two states. All of these matters
but one have been resolved without material effect on the Company's results of
operations. One of the state jurisdictions, as a condition of renewing the
Company's license as a broker-dealer in that jurisdiction, is requiring the
Company to offer customers resident in that state the ability to rescind (for
up to 30 days) certain transactions affected by the Company during the period
January 1, 1997 through April 15, 1997, the date the Company's license was
renewed. At the present time, the Company is unable to predict the extent to
which affected transactions will be rescinded. Accordingly, the ultimate
outcome of this matter cannot be presently determined, however it could have a
material adverse effect on the Company's results of operations. While the
Company was in non-compliance due to a clerical oversight to renew its annual
registration, it believes that no customer in the effected jurisdiction
incurred any damage as a result of this oversight.
<PAGE>8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
THREE MONTHS ENDED MARCH 31, 1997 VS. 1996
Transaction Revenue
Transaction revenue increased 167% to $24,419,000 for the second quarter of
fiscal 1997 up from $9,160,000 for the same period in fiscal 1996. Of these
amounts, commission revenue for the second fiscal quarter of 1997 increased
152% to $17,294,000 up from $6,875,000 for the same period a year ago. Average
commissions per trade declined from $21.00 in the second quarter of fiscal
1996 to $19.86 in the second quarter of fiscal 1997 due to a slight change in
product mix and the planned lowering of commissions on listed market orders
from $19.95 to $14.95 in February 1996. Payments for order flow increased 212%
to $7,125,000 in the second quarter of fiscal 1997, up from $2,285,000 for
the same period in the prior year. The average transaction revenue per
securities transaction was $28.04 in the second quarter of fiscal 1997 and
$27.98 in the same period a year ago. The increase in transaction revenue
resulted primarily from an increase in the number of transactions processed by
the Company. Transactions for the second quarter of fiscal 1997 totaled 871,000
for an average of 14,283 trades per day. This is an increase of 175% over the
average daily transaction volume of 5,197 for the same period last year.
Interest Net of Interest Expense
Net interest revenue for the second quarter of fiscal 1997 increased 766% to
$5,017,000 up from $579,000 for the same period in 1996. This increase is
primarily a result of customer average margin debit balances increasing 187%
to $287 million in the second quarter of fiscal 1997, customer average
interest earning credit balances increasing 806% to $227 million in the second
quarter of fiscal 1997 and average money market fund balances increasing 136%
to $587 million in the second quarter of fiscal 1997 compared to average
balances in the second quarter of fiscal 1996.
International
International revenue was $2,000,000 in the second quarter of fiscal 1997 due
to the recognition of up-front licensing fees attributable to the Company's
agreement with VERSUS Brokerage Services, Inc., a Canadian corporation. This
licensing arrangement allows VERSUS to offer Canadian based on-line investing
services under the E*TRADE name and is supported by a license to certain
aspects of the Company's technology. Under the agreement the Company will
receive ongoing royalties from VERSUS based upon the transaction revenues
earned by VERSUS. The Company may, from time to time, seek to enter into
similar licensing arrangements with third parties as part of its international
expansion strategy. No assurances can be given that any such future
arrangements will be consummated or that the terms thereof will be the same as
those as VERSUS or that the recognition of a substantial portion of up-front
licensing fees will occur during the period in which an arrangement is
consummated.
<PAGE>9
Computer Services and Other
Computer services and other revenue increased 8% to $765,000 in the second
quarter of fiscal 1997 up from $710,000 for the comparable period in 1996.
These revenues increased as a result of an increase in profits from the
investment in Roundtable Partners LLC, partially offset by a decrease in
customer connect time charges.
Cost of Services
Total cost of services increased 116% to $14,049,000 for the second quarter
of fiscal 1997 up from $6,512,000 for the comparable period in 1996. The
increase results from the higher volume of customer transactions processed by
the Company, a related increase in customer service inquiries, and operations
and maintenance costs associated with the secondary data center in Rancho
Cordova, California.
Operating Expenses
Selling and marketing expenses increased 226% to $7,805,000 for the second
quarter of fiscal 1997 up from $2,391,000 for the comparable period in 1996.
The increase reflects the Company's national television advertising campaign
launched during the second quarter of fiscal 1997. In addition it reflects
increases in expenditures for other advertising placements, creative
development and collateral materials resulting from advertising campaigns
directed at building a dominant brand, growing customer base and market
share, and maintaining customer retention rates.
Technology development costs increased 301% to $1,438,000 for the second
quarter of fiscal 1997 up from $359,000 for the comparable period in 1996.
The 1997 level of expenses was incurred to enhance the Company's existing
product offerings, including the Company's Web site which became operational
in February of 1996.
General and administrative costs increased 338% to $3,809,000 for the second
quarter of fiscal 1997 up from $869,000 in the comparable 1996 quarter. The
increase is the result of increased costs associated with personnel
additions, relocation to larger facilities, and an increased use of
consultants by the Company in the second quarter of 1997 compared to the same
period in the prior year.
Income Tax Expense
Income tax expense represents the provision for federal and state income
taxes at an effective rate of 40.1% for the second quarter of 1997 and 41.8%
for the comparable period in 1996.
<PAGE>10
SIX MONTHS ENDED MARCH 31, 1997 VS. 1996
Transaction Revenue
Transaction revenue increased 172% to $44,791,000 for the six months ended
March 31, 1997 up from $16,489,000 for the same period in fiscal 1996. Of
these amounts, commission revenue increased 149% to $31,131,000 up from
$12,496,000 for the same period in fiscal 1996. Average commissions per trade
declined from $21.97 for the six months ended March 31, 1996 to $19.96 for
the same period in fiscal 1997 due to the planned lowering of commissions on
listed market orders from $19.95 to $14.95 in February 1996. Payments for
order flow increased 242% to $13,660,000 for the six months ended March 31,
1997 up from $3,993,000 for the same period in the prior year. The growth in
payments for order flow was higher than the growth in average daily trades
because the conversion to self clearing completed in July of 1996 has
provided significant opportunities to manage order flow revenues. The average
transaction revenue per securities transaction was $28.72 for the six months
ended March 31, 1997 and $29.00 in the same period a year ago. The increase in
transaction revenue resulted primarily from an increase in the number of
transactions processed by the Company. Transactions for the six months ended
March 31, 1997 totaled 1,559,000 for an average of 12,476 trades per day. This
is an increase of 176% over the average daily transaction volume of 4,513 for
the same period last year.
Interest Net of Interest Expense
Net interest revenue for the six months ended March 31, 1997 increased 656%
to $8,871,000 up from $1,173,000 for the same period in 1996. This increase
is primarily a result of customer average margin debit balances increasing
167% to $247 million, customer average interest earning credit balances
increasing 804% to $205 million and average money market fund balances
increasing 127% to $526 million compared to average balances during the six
months ended March 31, 1996.
International
International revenue was $2,000,000 in the second quarter of fiscal 1997 due
to the recognition of up-front licensing fees attributable to the Company's
agreement with VERSUS Brokerage Services, Inc., a Canadian corporation. This
licensing arrangement allows VERSUS to offer Canadian based on-line investing
services under the E*TRADE name and is supported by a license to certain
aspects of the Company's technology. Under the agreement the Company will
receive ongoing royalties from VERSUS based upon the transaction revenues
earned by VERSUS. The Company may, from time to time, seek to enter into
similar licensing arrangements with third parties as part of its international
expansion strategy. No assurances can be given that any such future
arrangements will be consummated or that the terms thereof will be the same as
those as VERSUS or that the recognition of a substantial portion of up-front
licensing fees will occur during the period in which an arrangement is
consummated.
Computer Services and Other
<PAGE>11
Computer services and other revenue increased 29% to $1,562,000 for the six
months ended March 31, 1997 up from $1,215,000 for the comparable period in
1996. These revenues increased as a result of an increase in the profits from
the investment in Roundtable Partners LLC, partially offset by a decrease in
customer connect time charges.
Cost of Services
Total cost of services increased 144% to $27,327,000 for the six months ended
March 31, 1997 from $11,202,000 for the comparable period in 1996. The
increase results from the higher volume of customer transactions processed by
the Company, a related increase in customer service inquiries, and operations
and maintenance costs associated with the secondary data center in Rancho
Cordova, California.
Operating Expenses
Selling and marketing expenses increased 211% to $10,933,000 for the six
months ended March 31, 1997 up from $3,518,000 for the comparable period in
1996. The increase reflects the Company's national television advertising
campaign launched during the second quarter of fiscal 1997. In addition the
increase reflects expenditures for advertising placements, creative development
and collateral materials resulting from a variety of advertising campaigns
directed at building a dominant brand, growing customer base and market share,
and maintaining customer retention rates.
Technology development costs increased 391% to $3,005,000 for the six months
ended March 31, 1997 up from $612,000 for the comparable period in 1996. The
1997 level of expenses was incurred to enhance the Company's existing product
offerings, including the Company's Web site which became operational in
February of 1996.
General and administrative costs increased 296% to $6,971,000 for the six
months ended March 31, 1997 up from $1,760,000 for the comparable period in
1996. The increase is the result of increased costs associated with personnel
additions, relocation to larger facilities, and an increased use of
consultants by the Company in comparison to the same period in the prior year.
Income Tax Expense
Income tax expense represents the provision for federal and state income
taxes at an effective rate of 40.9% for the six months ended March 31, 1997
and 40.4% for the comparable period in 1996.
<PAGE>12
Variability of Results; Recent Developments
The Company expects to experience significant fluctuations in future
quarterly operating results that may be caused by many factors, including
the following: the timing of introductions of enhancements to online
financial services and products by the Company or its competitors; market
acceptance of online financial services and products; the pace of development
of the market for online commerce; changes in transaction volume on the
securities markets; trends in the securities markets; domestic and
international regulation of the brokerage industry; changes in pricing
policies by the Company or its competitors; changes in strategy; the success
of or costs associated with acquisitions, joint ventures or other strategic
relationships; changes in key personnel; seasonal trends; the extent of
international expansion; the mix of international and domestic sales; changes
in the level of operating expenses to support projected growth; and general
economic conditions. Due to the foregoing factors, quarterly revenues and
operating results are difficult to forecast, and the Company believes that
period-to-period comparisons of its operating results will not necessarily be
meaningful and should not be relied upon as an indication of future
performance. It is likely that the Company's future quarterly operating
results from time to time will not meet the expectations of securities
analysts or investors, which may have an adverse effect on the market price of
the Company's Common Stock.
The Company recently became aware of several instances of its non-compliance
with applicable regulatory requirements. See "Legal Proceedings" in Part II
Item 1 and "Note 5" to the Consolidated Financial Statements in Part I Item 1
for a discussion of these matters.
Liquidity and Capital Resources
The Company currently anticipates that its available cash resources and
credit facilities will be sufficient to meet its presently anticipated
working capital and capital expenditure requirements for at least the next 12
months. However, the Company may need to raise additional funds in order to
support more rapid expansion, develop new or enhanced services and products,
respond to competitive pressures, acquire complementary businesses or
technologies or respond to unanticipated requirements. If additional funds
are raised through the issuance of equity securities, the percentage
ownership of the shareholders of the Company will be reduced, shareholders
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 the Company's Common Stock. There can be no assurance that
additional financing will be available when needed on terms favorable to the
Company, if at all. If adequate funds are not available on acceptable terms,
the Company may be unable to develop or enhance its services and products,
take advantage of future opportunities or respond to competitive pressures or
unanticipated requirements, any of which could have a material adverse effect
on the Company's business, financial condition and operating results.
Cash provided by operating activities was $9,477,000 for the six months ended
March 31, 1997 primarily as a result of net income, an increase in income
taxes payable and other accrued liabilities, offset by the recording of new
brokerage receivable and payable balances and related statutorily required
<PAGE>13
segregated balances.
Cash used in investing activities was $731,000 for the six months ended
March 31, 1997 primarily as a result of cash used for investments in property
and equipment and the relocation loan (see Note 3 to Consolidated Financial
Statements), partially offset by the net sales and maturities of short term
interest bearing investment securities.
The Company expects that it will incur approximately $15 million of capital
expenditures during the fiscal year ending September 30, 1997.
Part II. Other Information
Item 1. Legal proceedings - The Company is not currently a party to any
litigation that it believes could have a material adverse effect on the
Company's business, financial condition or operating results. However, from
time to time the Company has been threatened with, or named as a defendant
in, lawsuits, administrative claims and disciplinary actions by regulatory
bodies. Compliance and trading problems that are reported to the NASD or the
SEC by dissatisfied customers are investigated by the NASD or the SEC, and, if
pursued by such customers, may rise to the level of arbitration or
disciplinary action. One or more of such lawsuits, claims or disciplinary
actions decided adversely to the Company could have a material adverse effect
on the Company's business, financial condition and results of operations. The
Company is also subject to periodic audits and inspections.
The securities industry is subject to extensive regulation under federal,
state and applicable international laws. As a result, the Company is required
to comply with many complex laws and rules and its ability to so comply is
dependent in large part upon the establishment and maintenance of a qualified
compliance system. During the period ended March 31, 1997, the Company became
aware of several instances of its non-compliance with applicable regulations.
See note 5 to the Consolidated Financial Statements in Part I, Item 1 for a
discussion of these matters.
Item 2. Changes in Securities - None
Item 3. Defaults Upon Senior Securities - Not applicable
<PAGE>14
Item 4. Submission of Matters to a Vote of Security Holders -
The annual meeting of shareholders was held on February 19, 1997. Lewis E.
Randall and Lester C. Thurow were elected as directors, as tabulated below.
Against or
For Withheld
---------- ----------
Election of Directors
Lewis E. Randall 23,334,244 4,375
Lester C. Thurow 20,633,403 2,705,216
In addition, William A. Porter, Christos M. Cotsakos, Richard S. Braddock,
William E. Ford, George Hayter, and Keith Petty will continue as directors.
Deloitte & Touche LLP was elected as Independent Public Accountants for the
fiscal year ended September 30, 1997, as tabulated below.
Against or
For Withheld Abstentions
---------- --------- -----------
Votes 23,330,987 1,682 5,950
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
11.1 Statement regarding computation of per share earnings.
27.1 Financial Data Schedule, EDGAR Filing only.
(b) Form 8-K:
Exhibit 10.22, Form 8-K, regarding the Licenses and Services
Agreement, dated January 21, 1997 among VERSUS Technologies, Inc.
("VTI") and VERSUS Brokerage Services Inc., and E*TRADE Group,
Inc. (incorporated by reference).
Exhibit 20.3, Form 8-K, regarding the announcement of the
Strategic Partnership Agreement between Microsoft and E*TRADE
Group, Inc., dated February 8, 1997 (incorporated by reference).
<PAGE>15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
E*TRADE Group, Inc.
(Registrant)
Dated: May 15, 1997
/s/ Christos M. Cotsakos
------------------------
Christos M. Cotsakos,
President, Chief Executive
Officer and Director (principal
executive officer)
/s/ Stephen C. Richards
-----------------------
Stephen C. Richards
Senior Vice President, Finance and
Administration, Chief Financial Officer
and Treasurer(principal financial and
accounting officer)
<PAGE>1
Exhibit 11.1
Earnings per share is based on the fully diluted weighted average number of
common and common equivalent shares outstanding during the period. Pursuant
to rules of the Securities and Exchange Commission, all common and common
equivalent shares issued and options, warrants and other rights to acquire
shares of common stock at a price less than the initial public offering price
granted by the Company during the 12 months preceding the offering date
(using the treasury stock method until shares are issued) have been included
in the computation of common and common equivalent shares outstanding for all
periods prior to the initial public offering.
E*TRADE GROUP, INC.
STATEMENT RE: COMPUTATION OF PER-SHARE EARNINGS
<TABLE>
<CAPTION>
(in thousands, except per share amounts)
Three Months Ended Six Months Ended
March 31, March 31,
1997 1996 1997 1996
--------------- --------------
<S> <C> <C>
Weighted average shares
outstanding 29,992 15,447 29,989 15,262
Series A convertible
preferred stock -- 6,000 -- 6,000
Series B convertible
preferred stock -- 949 -- 983
Stock options 3,978 4,942 4,198 5,080
------- ------- ------- -------
Shares used to compute per
share data 33,970 27,338 34,187 27,325
======= ======= ======= =======
Net income 3,054 185 $ 5,314 $ 1,063
======= ======= ======= =======
Net income per share $ .09 $ .01 $ 0.16 $ 0.04
======= ======= ======= =======
</TABLE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> BD
<LEGEND>
Exhibit 27.1 - FINANCIAL DATA SCHEDULE
This schedule contains summary financial information extracted from the
Consolidated Statements of Operations and Consolidated Balance Sheets of the
Company's Quarterly Report on Form 10-Q for the period ended March 31, 1997,
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> MAR-31-1997
<CASH> 24141
<RECEIVABLES> 353829
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 30159
<PP&E> 13455
<TOTAL-ASSETS> 452325
<SHORT-TERM> 14864
<PAYABLES> 362067
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 0
<LONG-TERM> 12
<COMMON> 304
0
0
<OTHER-SE> 75078
<TOTAL-LIABILITY-AND-EQUITY> 75382
<TRADING-REVENUE> 0
<INTEREST-DIVIDENDS> 5017
<COMMISSIONS> 24419
<INVESTMENT-BANKING-REVENUES> 0
<FEE-REVENUE> 0
<INTEREST-EXPENSE> 2516
<COMPENSATION> 0
<INCOME-PRETAX> 5100
<INCOME-PRE-EXTRAORDINARY> 5100
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3054
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.09
</TABLE>
