<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 December 31, 1996
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 February 7, 1997 the number of shares outstanding of the registrant's
common stock was 29,605,207.
<PAGE> 2
E*TRADE Group, Inc.
Form 10-Q Quarterly Report
For the Quarter Ended December 31, 1996
Table of Contents
Part I - Financial Information:
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 7
Part II- Other Information:
Item 1. Legal Proceedings 10
Item 2. Changes in Securities 10
Item 3. Defaults Upon Senior Securities 10
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 11
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 interim report, there are forward-looking statements that
reflect management's expectations for the future. These statements relate to
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; 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. The Company disclaims any obligation to update
its forward-looking statements.
<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
December 31,
------------------------
1996 1995
----------- -----------
<S> <C> <C>
Revenues:
Transaction revenues $20,372,000 $ 7,329,000
Interest, net of interest
expense of $2,297,000 and
$3,000 in fiscal 1997 and
1996, respectively 3,854,000 593,000
Computer services and other 797,000 506,000
----------- -----------
Net revenues 25,023,000 8,428,000
----------- -----------
Cost of services:
Cost of services 13,278,000 4,523,000
Self-clearing start-up costs - 166,000
----------- -----------
Total cost of services 13,278,000 4,689,000
----------- -----------
Operating expenses:
Selling and marketing 3,128,000 1,127,000
Technology development 1,567,000 253,000
General and administrative 3,162,000 892,000
----------- -----------
Total operating expenses 7,857,000 2,272,000
----------- -----------
Total cost of services and
operating expenses 21,135,000 6,961,000
----------- -----------
Pre-tax income 3,888,000 1,467,000
Income tax expense 1,628,000 589,000
----------- -----------
Net income $ 2,260,000 $ 878,000
=========== ===========
Net income per share $ 0.07 $ 0.03
=========== ===========
Weighted average number of common and
common equivalent shares outstanding 33,374,000 26,811,000
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE> 4
E*TRADE GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, September 30,
1996 1996
------------ ------------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and equivalents $ 13,414,000 $ 14,641,000
Cash and investments required to be segregated
under Federal or other regulations 47,000,000 35,500,000
Investment securities 31,458,000 35,003,000
Brokerage receivables - net 251,599,000 193,228,000
Other assets 1,089,000 2,203,000
------------ ------------
Total current assets 344,560,000 280,575,000
Property and equipment - net 9,632,000 9,228,000
Equity investment 2,984,000 2,860,000
Other assets 5,965,000 2,218,000
------------ ------------
Total assets $363,141,000 $294,881,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Brokerage payables $282,598,000 $219,483,000
Income taxes payable 383,000 -
Accounts payable, accrued liabilities and other 8,685,000 6,072,000
------------ ------------
Total current liabilities 291,666,000 225,555,000
Long-term portion of capital leases 12,000 22,000
------------ ------------
Total liabilities 291,678,000 225,577,000
------------ ------------
Shareholders' equity:
Common stock, $.01 par: shares authorized, 50,000,000;
shares issued and outstanding:
December 1996, 29,545,147;
September 1996, 29,539,147 295,000 295,000
Additional paid-in capital 68,637,000 68,738,000
Retained earnings 2,531,000 271,000
------------ ------------
Total shareholders' equity 71,463,000 69,304,000
------------ ------------
Total liabilities and shareholders' equity $363,141,000 $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>
Three Months Ended
December 31,
---------------------------
1996 1995
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,260,000 $ 878,000
Non-cash items included in net income:
Deferred income taxes 571,000 -
Depreciation and amortization 533,000 36,000
Equity income from investment (231,000) (64,000)
Net effect of changes in:
Cash and investments required to be
segregated under Federal or other regulations (11,500,000) -
Brokerage receivables (58,371,000) 141,000
Other assets (57,000) (1,363,000)
Brokerage payables 63,115,000 -
Accounts payable, accrued liabilities and other 2,996,000 470,000
------------- -------------
Net cash provided by (used in)
operating activities (684,000) 98,000
------------- -------------
Cash flows from investing activities:
Purchase of property and equipment (937,000) (1,159,000)
Purchase of investment securities (198,711,000) -
Sale/maturity of investment securities 202,256,000 -
Relocation loan (3,147,000) -
Distributions received from equity investment 107,000 -
------------- -------------
Net cash used in investing activities (432,000) (1,159,000)
------------- -------------
Cash flows from financing activities:
Costs from initial public offering (102,000) -
Proceeds from exercise of stock options 1,000 61,000
Repayment of capital leases (10,000) (4,000)
------------- -------------
Net cash provided by (used in)
financing activities (111,000) 57,000
------------- -------------
Decrease in cash and equivalents (1,227,000) (1,004,000)
Cash and equivalents - Beginning of period 14,641,000 9,624,000
------------- -------------
Cash and equivalents - End of period $ 13,414,000 $ 8,620,000
============= =============
Supplemental disclosures:
Cash paid for interest $ 2,397,000 $ 2,000
Cash paid for income taxes $ - $ 580,000
</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. 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
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.
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
<PAGE> 7
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 December 31, 1996, E*TRADE Securities had net capital of
$18,308,000 (8% of aggregate debit balances), which was $13,494,000 in excess
of its required net capital of $4,814,000. 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.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
TRANSACTION REVENUE
Transaction revenue increased 178% to $20,372,000 for the first quarter of
fiscal 1997 up from $7,329,000 for the same period in fiscal 1996. Of these
amounts, commission revenue for the first fiscal quarter of 1997 increased
146% to $13,837,000 up from $5,621,000 for the same period a year ago.
Commissions per trade declined from $23.30 in the first quarter of fiscal 1996
to $20.10 in the first quarter of fiscal 1997 due to the planned reduction in
listed market order commissions in February 1996. Payments for order flow
increased 283% to $6,535,000 in the first quarter of fiscal 1997, up from
$1,708,000 for the same period in the prior year. The average revenue per
security transaction was $29.59 in the first quarter of fiscal 1997 and $30.38
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 first quarter of fiscal 1997 totaled 688,000 or
an average of 10,750 trades per day. This is an increase of 181% over the
average daily transaction volume of 3,830 for the same period last year.
INTEREST NET OF INTEREST EXPENSE
Net interest revenue for the first quarter of fiscal 1997 increased 550% to
$3,854,000 up from $593,000 for the same period in 1996. This increase is a
<PAGE> 8
result of customer average margin debit balances increasing 144% to $206
million, customer average credit balances increasing 1,005% to $226 million
and average money market fund balances increasing 116% to $466 million
compared to average balances in the first quarter of fiscal 1996.
COMPUTER SERVICES AND OTHER
Computer services and other revenue increased 58% to $797,000 in the first
quarter of fiscal 1997 up from $506,000 for the comparable period in 1996. The
increase consists primarily of the Company's return on its investment in
Roundtable Partners LLC and to a lesser extent, an increase in connect time
and other fees.
COST OF SERVICES
Total cost of services increased 183% to $13,278,000 for the first quarter of
fiscal 1997 from $4,689,000 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 178% to $3,128,000 for the first
quarter of fiscal 1997 up from $1,127,000 for the comparable period in 1996.
The increase reflects the Company's increases in expenditures for advertising
placements, creative development and collateral materials resulting from an
advertising campaign directed at building a dominant brand, growing customer
base and market share, and maintaining high customer retention rates.
Technology development costs increased 519% to $1,567,000 for the first
quarter of fiscal 1997 up from $253,000 for the comparable period in 1996. The
1997 level of expenses was incurred to enhance the Company's existing product
offerings.
General and administrative costs increased 254% to $3,162,000 for the first
quarter of fiscal 1997 up from $892,000 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.
INCOME TAX EXPENSE
Income tax expense represents the provision for federal and state income taxes
at an effective rate of 41.9% for the first quarter of 1997 and 40.1% for the
comparable period in 1996.
VARIABILITY OF RESULTS
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
<PAGE> 9
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; 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.
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 used in operating activities was $684,000 in the first quarter of fiscal
1997 primarily as a result of the recording of new brokerage receivable and
payable balances and related statutorily required segregated balances since
the end of fiscal 1996 offset by net income and a high level of accrued
liabilities.
Cash used in investing activities was $432,000 for the first quarter of fiscal
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 have $20.0 million of capital expenditures
during the fiscal year ending September 30, 1997.
<PAGE> 10
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 and administrative claims. 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 regulatory audits and
inspections.
Item 2. Changes in Securities - None
Item 3. Defaults Upon Senior Securities - Not applicable
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.1 Form of Loan Agreement Between Christos M. Cotsakos and
E*TRADE Group, Inc.
11.1 Statement regarding computation of per share earnings.
27.1 Financial Data Schedule, EDGAR Filing only.
(b) Form 8-K:
No reports on Form 8-K were filed during the three months
ended December 31, 1996.
<PAGE> 11
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: February __, 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
FORM OF LOAN DOCUMENTS
PROMISSORY NOTE
$_______________ Dated: _______________, 19_____
FOR VALUE RECEIVED, the undersigned, Christos M. Cotsakos (the
"Borrower"), HEREBY UNCONDITIONALLY PROMISES TO PAY to the order of E*Trade
Group, Inc. (the "Lender"), the principal sum of ____________________ DOLLARS
($_________), on ____________________.
The Borrower further promises to pay interest on the outstanding
principal amount of this Promissory Note from the date hereof until maturity,
in arrears, on _______________, 19_____, at a rate per annum equal at all
times to 7%. In the event that any amount of principal or interest, or any
other amount payable hereunder, is not paid in full when due (whether at
stated maturity, by acceleration or otherwise), the Borrower agrees to pay
interest on such unpaid principal or other amount, from the date such amount
becomes due until the date such amount is paid in full, payable on demand, at
a rate per annum equal at all times to 9%. All computations of interest
shall be made on the basis of a year of 360 days for the actual number of
days (including the first day but excluding the last day) occurring in the
period for which such interest is payable.
All payments hereunder shall be made in lawful money of the United
States of America, to the Lender, at such place or to such account as the
Lender from time to time shall designate in a written notice to the Borrower.
Whenever any payment hereunder shall be stated to be due, or
whenever any interest payment date or any other date specified hereunder
would otherwise occur, on a day other than a Business Day (as defined below),
then such payment shall be made, and such interest payment date or other date
shall occur, on the next succeeding Business Day, and such extension of time
shall in such case be included in the computation of payment of interest
hereunder. As used herein, "Business Day" means a day (i) other than
Saturday or Sunday, and (ii) on which commercial banks are open for business
in San Francisco, California.
Anything herein to the contrary notwithstanding, if during any
period for which interest is computed hereunder, the amount of interest
computed on the basis provided for in this Promissory Note, together with all
fees, charges and other payments which are treated as interest under
applicable law, as provided for herein or in any other document executed in
connection herewith, would exceed the amount of such interest computed on the
basis of the Highest Lawful Rate, the Borrower shall not be obligated to pay,
and the Lender shall not be entitled to charge, collect, receive, reserve or
take, interest in excess of the Highest Lawful Rate, and during any such
period the interest payable hereunder shall be computed on the basis of the
Highest Lawful Rate. As used herein, "Highest Lawful Rate" means the maximum
non-usurious rate of interest, as in effect from time to time, which may be
charged, contracted for, reserved, received or collected by the Lender in
connection with this Promissory Note under applicable law.
The Borrower may prepay the outstanding amount hereof in whole or
in part at any time, without premium or penalty. Together with any such
prepayment the Borrower shall pay accrued interest on the amount prepaid.
Any partial prepayment shall be applied to the
<PAGE>2
installments of principal hereof in reverse order of maturity.
So long as any amount payable by the Borrower hereunder shall
remain unpaid, the Borrower will furnish to the Lender from time to time such
information respecting the Borrower's financial condition and the Collateral
(as defined below) as the Lender may from time to time reasonably request.
The Borrower represents and warrants to the Lender that this
Promissory Note does not contravene any contractual or judicial restriction
binding on or affecting the Borrower and that this Promissory Note is the
legal, valid and binding obligation of the Borrower enforceable against him
in accordance with its terms.
The Borrower agrees to notify the Lender of the incurrence of any
other indebtedness secured by the Collateral prior to the incurrence thereof
and to certify in writing to the Lender, at the end of each annual period
occurring after the date hereof, that it has maintained, in full force and
effect, without material modification, all insurance policies required to be
delivered to the Lender under the Deed of Trust (as defined below).
The occurrence of any of the following shall constitute an "Event
of Default" under this Promissory Note:
i) the failure to make any payment of principal, interest or
any other amount payable hereunder when due under this Promissory Note or the
breach of any other condition or obligation under this Promissory Note;
ii) the breach of any representation or covenant under the
Pledge Agreement (as defined below) or Deed of Trust;
iii) the filing of a petition by or against the Borrower under
any provision of the Bankruptcy Reform Act, Title 11 of the United States
Code, as amended or recodified from time to time, or under any similar law
relating to bankruptcy, insolvency or other relief for debtors; or
appointment of a receiver, trustee, custodian or liquidator of or for all or
any part of the assets or property of the Borrower; or the insolvency of the
Borrower; or the making of a general assignment for the benefit of creditors
by the Borrower;
iv) the Borrower's death or incapacity;
v) any of the documents relating to the Collateral after
delivery thereof shall for any reason be revoked or invalidated, or other-
wise cease to be in full force and effect, or the Borrower or any other
person shall contest in any manner the validity or enforceability thereof, or
the Borrower or any other person shall deny that it has any further liability
or obligation thereunder; or any of the documents relating to the Collateral
for any reason, except to the extent permitted by the terms thereof, shall
cease to create a valid and perfected first priority lien in any of the
Collateral purported to be covered thereby;
vi) the failure of the Borrower to maintain at any time
Collateral with a fair market value (as determined by the Lender) of at least
140% of the outstanding principal amount of the loan and then unpaid interest
hereunder, provided, that the value of the Collateral utilized to satisfy
such Collateral maintenance requirement shall be reduced by the amount of all
indebtedness owed by Borrower that is secured by such Collateral; or
<PAGE>3
vii) the incurence by the Borrower of any other indebtedness
secured by the Collateral which has not been consented to by the Lender.
Upon the occurrence of any Event of Default, the Lender, at its
option, may i) by notice to the Borrower, declare the unpaid principal amount
of this Promissory Note, all interest accrued and unpaid hereon and all other
amounts payable hereunder to be immediately due and payable, whereupon the
unpaid principal amount of this Promissory Note, all such interest and all
such other amounts shall become immediately due and payable, without
presentment, demand, protest or further notice of any kind, provided that if
an event described in paragraph (iii) above shall occur, the result which
would otherwise occur only upon giving of notice by the Lender to the
Borrower as specified above shall occur automatically, without the giving of
any such notice; and (ii) whether or not the actions referred to in clause
(i) have been taken, exercise any or all of the Lender's rights and remedies
under the Pledge Agreement and Deed of Trust and proceed to enforce all other
rights and remedies available to the Lender under applicable law.
The Borrower agrees to pay on demand all the losses, costs, and
expenses (including, without limitation, attorneys' fees and disbursements)
which the Lender incurs in connection with enforcement or attempted
enforcement of this Promissory Note, or the protection or preservation of the
Lender's rights under this Promissory Note, whether by judicial proceedings
or otherwise. Such costs and expenses include, without limitation, those
incurred in connection with any workout or refinancing, or any bankruptcy,
insolvency, liquidation or similar proceedings.
The Borrower hereby waives diligence, demand, presentment, protest
or further notice of any kind. The Borrower agrees to make all payments
under this Promissory Note without setoff or deduction and regardless of any
counterclaim or defense.
No single or partial exercise of any power under this Promissory
Note shall preclude any other or further exercise of such power or exercise
of any other power. No delay or omission on the part of the Lender in
exercising any right under this Promissory Note shall operate as a waiver of
such right or any other right hereunder.
<PAGE>4
This Promissory Note shall be binding on the Borrower and his
successors, assigns, personal representatives, heirs, and legatees, and shall
be binding upon and inure to the benefit of the Lender, any future holder of
this Promissory Note and their respective successors and assigns. The
Borrower may not assign or transfer this Promissory Note or any of his
obligations hereunder without the Lender's prior written consent.
This Promissory Note is secured by certain collateral (the
"Collateral") more specifically described in the Pledge Agreement of even
date herewith between the Borrower and the Lender (the "Pledge Agreement")
and the Deed of Trust with Assignment of Rents of even date herewith by the
Borrower in favor of the Lender (the "Deed of Trust").
THIS PROMISSORY NOTE SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH CALIFORNIA LAW.
___________________________________
Christos M. Cotsakos
Address:
___________________________________
___________________________________
___________________________________
Acknowledged and Agreed:
___________________________________
Hannah B. Cotsakos
<PAGE>5
PLEDGE AGREEMENT
In order to secure payment of that certain _______________, 19_____,
promissory note (the "Note") payable by the undersigned to the order of
E*Trade Group, Inc. ("the Company"), the undersigned hereby grants the
Company a security interest in, and assigns, transfers to and pledges with
the Company, the following securities and other property:
(i) options to purchase __________ shares of the common stock ("Common
Stock") of the Company (the "Common Stock Options") owned and held by the
undersigned as described further on Schedule A;
(ii) any and all new, additional or different securities or other property
subsequently distributed with respect to the Common Stock Options and Common
Stock identified in subparagraph (i) that are to be delivered to and
deposited with the Company pursuant to the requirements of paragraph 3 of
this agreement;
(iii) any and all other property and money that is delivered to or comes
into the possession of the Company pursuant to the terms and provisions of
this agreement; and
(iv) the proceeds of any sale, exchange or disposition of the property and
securities described in subparagraphs (i), (ii) or (iii) above.
All securities, property and money so assigned, transferred to
and pledged with the Company shall be herein referred to as the "Collateral"
and shall be accompanied, if such Collateral is Common Stock or similar
securities, by one or more stock power assignments properly endorsed by the
undersigned. The Company shall hold the Collateral in accordance with the
following terms and provisions:
1. No Liens. The undersigned hereby warrants that the
undersigned is the owner of the Collateral and has the right to pledge the
Collateral and that the Collateral is free from all liens, adverse claims and
other security interests (other than those created hereby).
2. Rights and Powers. The Company may, without obligation to
do so, exercise at any time and from time to time one or more of the
following rights and powers with respect to any or all of the Collateral:
(a) accept in its discretion other property of the undersigned
in exchange for all or part of the Collateral and release Collateral to the
undersigned to the extent necessary to effect such exchange, and in such
event the money, property or securities received in the exchange shall be
held by the Company as substitute security for the Note and all other
indebtedness secured hereunder;
(b) perform such acts as are necessary to preserve and protect
the Collateral and the rights, powers and remedies granted with respect to
such Collateral by this agreement; and
(c) transfer record ownership of the Collateral to the Company
or its nominee
<PAGE>6
and receive, endorse and give receipt for, or collect by legal proceedings or
otherwise, dividends or other distributions made or paid with respect to the
Collateral, provided and only if there exists at the time an outstanding
event of default under paragraph 7 of this agreement.
Any action by the Company pursuant to the provisions of this
paragraph 2 may be taken without notice to the undersigned. Expenses
reasonably incurred in connection with such action shall be payable by the
undersigned and form part of the indebtedness secured hereunder as provided
in paragraph 9.
So long as there exists no event of default under paragraph 7 of
this agreement, the undersigned may exercise all rights to determine when to
purchase the Common Stock of the Company subject to the Common Stock Options
and all stockholder voting rights, and be entitled to receive any and all
cash dividends paid on the Collateral. Accordingly, until such time as an
event of default occurs under this agreement, all proxy statements and other
stockholder materials pertaining to the Collateral shall be delivered to the
undersigned at the address indicated below.
Any cash sums that the Company may receive in the exercise of its
rights and powers under paragraph 2(c) above shall be applied to the payment
of the Note and any other indebtedness secured hereunder, in such order of
application as the Company deems appropriate. Any remaining cash shall be
paid over to the undersigned.
3. Duty to Deliver. Any new, additional or different
securities that may now or hereafter become distributable with respect to the
Collateral by reason of (i) any stock dividend, stock split or
reclassification of the capital stock of the Company or (ii) any merger,
consolidation or other reorganization affecting the capital structure of the
Company shall, upon receipt by the undersigned, be promptly delivered to and
deposited with the Company as part of the Collateral hereunder. Such
securities shall be accompanied by one or more properly-endorsed stock power
assignments as required by the Company.
4. Care of Collateral. The Company shall exercise reasonable
care in the custody and preservation of the Collateral, but shall have no
obligation to initiate any action with respect to, or otherwise inform the
undersigned of, any conversion, call, exchange right, preemptive right,
subscription right, purchase offer or other right or privilege relating to or
affecting the Collateral. The Company shall have no duty to preserve the
rights of the undersigned against adverse claims or to protect the Collateral
against the possibility of a decline in market value. The Company shall not
be obligated to take any action with respect to the Collateral requested by
the undersigned unless the request is made in writing and the Company
determines that the requested action will not unreasonably jeopardize the
value of the Collateral as security for the Note and other indebtedness
secured hereunder.
The Company may at any time prior to the repayment in full of all
indebtedness outstanding under the Note, the Deed of Trust (as defined in the
Note), and hereunder, in its sole discretion, release and deliver all or part
of the Collateral to the undersigned, and the receipt thereof by the
undersigned shall constitute a complete and full acquittance for the
Collateral so released and delivered. The Company shall accordingly be
discharged from any further liability or responsibility for the Collateral,
and the released Collateral shall no longer be subject to the provisions of
this agreement.
5. Payment of Taxes and Other Charges. The undersigned shall
pay, prior to the delinquency date, all taxes, liens, assessments and other
charges against the Collateral, and in
<PAGE>7
the event of the undersigned's failure to do so, the Company may at its
election pay any or all of such taxes and charges without contesting the
validity or legality thereof. The payments so made shall become part of the
indebtedness secured hereunder and until paid shall bear interest at the per
annum rate equal to the rate then applicable under the Note.
6. Transfer of Collateral. In connection with the transfer or
assignment of the Note (whether by negotiation, discount or otherwise), the
Company may transfer all or any part of the Collateral, and the transferee
shall thereupon succeed to all the rights, powers and remedies granted the
Company hereunder with respect to the Collateral so transferred. Upon such
transfer, the Company shall be fully discharged from all liability and
responsibility for the transferred Collateral.
7. Events of Default. The occurrence of one or more of the
following events shall constitute an event of default under this agreement:
(a) the failure of the undersigned to pay when due under the
Note, any installment of principal or accrued interest;
(b) the failure of the undersigned to perform any obligation
imposed upon the undersigned by reason of this agreement, the Note or the
Deed of Trust; or
(c) the breach of any warranty of the undersigned contained in
this agreement, the Note or the Deed of Trust.
Upon the occurrence of any such event of default, the Company
may, at its election, declare the Note and all other indebtedness secured
hereunder to become immediately due and payable and may exercise any or all
of the rights and remedies granted to a secured party under the provisions of
the California Uniform Commercial Code (as now or hereafter in effect),
including (without limitation) the power to dispose of the Collateral by
public or private sale or to accept the Collateral in full payment of the
Note and all other indebtedness secured hereunder.
Any proceeds realized from the disposition of the Collateral
pursuant to the foregoing power of sale shall be applied first to the payment
of expenses incurred by the Company in connection with such disposition, then
to the payment of the Note and finally to any other indebtedness secured
hereunder. Any surplus proceeds shall be paid over to the undersigned.
8. Other Remedies. The rights, powers and remedies granted
to the Company pursuant to the provisions of this agreement shall be in
addition to all rights, powers and remedies granted to the Company under any
statute or rule of law. Any forbearance, failure or delay by the Company in
exercising any right, power or remedy under this agreement shall not be
deemed to be a waiver of such right, power or remedy. Any single or partial
exercise of any right, power or remedy under this agreement shall not
preclude the further exercise thereof, and every right, power and remedy of
the Company under this agreement shall continue in full force and effect
unless such right, power or remedy is specifically waived by an instrument
executed by the Company.
9. Costs and Expenses. All costs and expenses (including
reasonable attorneys fees) incurred by the Company in the exercise or
enforcement of any right, power or
<PAGE>8
remedy granted it under this agreement shall become part of the indebtedness
secured hereunder and shall constitute a personal liability of the
undersigned payable immediately upon demand and bearing interest until paid
at the per annum rate equal to the rate then applicable under the Note.
10. Applicable Law. This agreement shall be governed by and
construed in accordance with the laws of the State of California and shall be
binding upon the executors, administrators, heirs and assigns of the
undersigned.
11. Severability. If any provision of this agreement is held
to be invalid under applicable law, then such provision shall be ineffective
only to the extent of such invalidity, and neither the remainder of such
provision nor any other provisions of this agreement shall be affected
thereby.
IN WITNESS WHEREOF, this agreement has been executed by the
undersigned on this _____ day of _______________, 19_____.
By: ____________________
Christos M. Cotsakos
Address:
Agreed to and Accepted by:
E*TRADE GROUP, INC.
By: ____________________
Dated: _______________, 19_____
Agreed to and Accepted by:
Hannah B. Cotsakos as a
co-pledgor and to the fullest
extent of her marital interest
By: ____________________
Hannah B. Cotsakos
<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>
THREE MONTHS ENDED DECEMBER 31
--------------------------
1996 1995
-------- --------
(in thousands, except per share amounts)
<S> <C> <C>
Weighted average shares
outstanding................... 29,542 15,078
Series A convertible
preferred stock............. -- 6,000
Series B convertible
preferred stock............. -- 949
Stock options ................ 3,832 4,784
-------- --------
Shares used to compute per
share data.................... 33,374 26,811
======== ========
Net income (loss).............. $ 2,260 $ 878
======== ========
Net income (loss) per share.... $ 0.07 $ 0.03
======== ========
</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 December 31,
1996, 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> DEC-31-1996
<CASH> 13414
<RECEIVABLES> 251599
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 34442
<PP&E> 9632
<TOTAL-ASSETS> 363141
<SHORT-TERM> 9068
<PAYABLES> 282598
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 0
<LONG-TERM> 12
<COMMON> 301
0
0
<OTHER-SE> 71162
<TOTAL-LIABILITY-AND-EQUITY> 363141
<TRADING-REVENUE> 0
<INTEREST-DIVIDENDS> 3854
<COMMISSIONS> 20372
<INVESTMENT-BANKING-REVENUES> 0
<FEE-REVENUE> 0
<INTEREST-EXPENSE> 2297
<COMPENSATION> 0
<INCOME-PRETAX> 3888
<INCOME-PRE-EXTRAORDINARY> 2260
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2260
<EPS-PRIMARY> 0.07
<EPS-DILUTED> 0.07
</TABLE>
