<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 June 30, 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 Road 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 July 17, 1997 the number of shares outstanding of the registrant's
common stock was 31,003,147.
<PAGE>2
E*TRADE Group, Inc.
Form 10-Q Quarterly Report
For the Quarter Ended June 30, 1997
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 14
Item 2. Changes in Securities 14
Item 3. Defaults Upon Senior Securities 14
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
<TABLE>
<CAPTION>
E*TRADE GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------ ------------------------
1997 1996 1997 1996
------------------------ ------------------------
<S> <C> <C> <C> <C>
Revenues:
Transaction revenues $27,538,000 $13,719,000 $72,329,000 $30,208,000
Interest - net of interest
expense (A) 6,775,000 1,040,000 15,646,000 2,213,000
International 2,000,000 - 4,000,000 -
Computer services and other 723,000 787,000 2,285,000 2,002,000
---------- ---------- ---------- ----------
Net revenues 37,036,000 15,546,000 94,260,000 34,423,000
---------- ---------- ---------- ----------
Cost of services:
Cost of services 18,037,000 13,463,000 45,364,000 24,030,000
Registration charge 4,334,000 - 4,334,000 -
Self-clearing start-up costs - 1,209,000 - 1,844,000
---------- ---------- ---------- ----------
Total cost of services 22,371,000 14,672,000 49,698,000 25,874,000
---------- ---------- ---------- ----------
Operating expenses:
Selling and marketing 5,299,000 2,231,000 16,232,000 5,749,000
Technology development 1,430,000 711,000 4,435,000 1,323,000
General and administrative 2,814,000 1,941,000 9,785,000 3,701,000
---------- ---------- ---------- ----------
Total operating expenses 9,543,000 4,883,000 30,452,000 10,773,000
---------- ---------- ---------- ----------
Total cost of services and
operating expenses 31,914,000 19,555,000 80,150,000 36,647,000
---------- ---------- ---------- ----------
Pre-tax income (loss) 5,122,000 (4,009,000) 14,110,000 (2,224,000)
Income tax expense (benefit) 2,054,000 (1,612,000) 5,728,000 (890,000)
---------- ---------- ---------- ----------
Net income (loss) $ 3,068,000 $(2,397,000) $ 8,382,000 $(1,334,000)
========== ========== ========== ==========
Net income (loss) per share $0.09 ($0.08) $0.24 ($0.05)
========== ========== ========== ==========
Weighted average number of
common and common equivalent
shares outstanding 34,493,000 29,457,000 34,719,000 28,477,000
(A) Interest is presented net of interest expense. Interest expense for the
three months ended June 30, 1997 and 1996 was $3,290,000 and $51,000,
respectively. Interest expense for the nine months ended June 30, 1997 and
1996 was $8,103,000 and $60,000, respectively.
See notes to consolidated financial statements.
</TABLE>
<PAGE>4
E*TRADE GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, September 30,
1997 1996
------------ ------------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and equivalents $ 18,116,000 $ 14,641,000
Cash and investments required to be
segregated under Federal or
other regulations 183,500,000 35,500,000
Investment securities 25,214,000 35,003,000
Brokerage receivables - net 459,653,000 193,228,000
Other assets 4,593,000 2,203,000
----------- -----------
Total current assets 691,076,000 280,575,000
Property and equipment - net 16,270,000 9,228,000
Equity investment 3,105,000 2,860,000
Relocation loan receivable 3,147,000 -
Other assets 6,247,000 2,218,000
----------- -----------
Total assets $719,845,000 $294,881,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Brokerage payables $572,490,000 $219,483,000
Bank loan payable 51,900,000 -
Accounts payable,
accrued liabilities and other 12,392,000 6,072,000
----------- -----------
Total current liabilities 636,782,000 225,555,000
Long-term portion of capital leases 6,000 22,000
----------- -----------
Total liabilities 636,788,000 225,577,000
----------- -----------
Stockholders' Equity:
Common stock, $.01 par: shares authorized,
50,000,000; shares issued and outstanding:
June 1997, 30,958,147;
September 1996, 29,539,147 309,000 295,000
Additional paid-in capital 74,095,000 68,738,000
Retained earnings 8,653,000 271,000
----------- -----------
Total stockholders' equity 83,057,000 69,304,000
----------- -----------
Total liabilities and
stockholders' equity $719,845,000 $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>
Nine Months Ended
June 30,
-------------------------
1997 1996
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 8,382,000 $(1,334,000)
Noncash items included in net income (loss):
Deferred income taxes 790,000 (848,000)
Depreciation and amortization 2,179,000 478,000
Equity income from investment (654,000) (542,000)
Other - 20,000
Net effect of changes in brokerage related
assets and liabilities:
Brokerage receivables (266,098,000) (1,156,000)
Cash and investments required to be segregated
under Federal or other regulations (148,000,000) -
Brokerage payables 353,007,000 -
Other changes, net:
Other assets (683,000) (2,722,000)
Accounts payable, accrued liabilities and other 6,320,000 1,973,000
------------ -----------
Net cash provided by operating activities (44,757,000) (4,131,000)
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (9,221,000) (2,502,000)
Internally developed software (2,302,000) -
Purchase of investment securities (445,765,000) -
Sale/maturity of investment securities 455,544,000 -
Relocation loan (3,147,000) -
Reinvestment of equity investment earnings (566,000) -
Distributions received from equity investment 658,000 408,000
------------ -----------
Net cash used in investing activities (4,799,000) (2,094,000)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Costs from initial public offering (102,000) -
Proceeds from issuance of preferred stock - 11,787,000
Proceeds from exercise of stock options 940,000 294,000
Proceeds from exercise of stock warrants - 113,000
Proceeds from Employee Stock Purchase Plan 309,000 -
Increase in bank loan payable 51,900,000 -
Repayment of long-term note payable - (167,000)
Repayment of capital leases (16,000) (17,000)
------------ -----------
Net cash provided by financing activities 53,031,000 12,010,000
------------ -----------
INCREASE IN CASH AND EQUIVALENTS 3,475,000 5,785,000
CASH AND EQUIVALENTS--Beginning of period 14,641,000 9,624,000
------------ -----------
CASH AND EQUIVALENTS--End of period $ 18,116,000 $15,409,000
============ ===========
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest $ 7,153,000 $ 60,000
============ ===========
Cash paid for income taxes $ 1,205,000 $ 1,025,000
============ ===========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Capital expenditures financed with note payable $ - $ 2,500,000
Tax benefit on exercise of
stock options and warrants $ 4,224,000 $ 352,000
</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 Stockholders
and Form 10-K for the fiscal year ended September 30, 1996.
As permitted by Statement of Financial Accounting Standards ("SFAS") No. 123,
the Company accounts for its stock-based compensation on the intrinsic-value
method in accordance with Accounting Principles Board Opinion No. 25.
Certain items in these financial statements have been reclassified to conform
to the current period presentation.
Note 2. - Recently Issued Accounting Standards
In June 1996, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, whose effective date was delayed by SFAS No.
127. This new standard provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of liabilities
beginning in fiscal 1998. The Company does not expect this standard to have a
material effect on its consolidated financial statements.
<PAGE>7
In February 1997, the FASB issued SFAS No. 128, Earnings per Share. The Company
is required to adopt SFAS No. 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 No. 128. Earlier application is not permitted. SFAS No. 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 No. 128 had been in effect during the
periods presented, basic EPS would have been $.10 and $(.15) for the
quarters ended June 30, 1997 and 1996, respectively, and $.28 and $(.09) for
the nine months ended June 30, 1997 and 1996, respectively. Diluted EPS under
SFAS No. 128 would not have been significantly different from fully diluted EPS
currently reported for the periods.
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. 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 June 30, 1997, E*TRADE Securities had net
capital of $22,906,000 (5.4% of aggregate debit balances), which was
$14,494,000 in excess of its required net capital of $8,412,000. 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.
<PAGE>8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months Ended June 30, 1997 and 1996
Revenues
Transaction revenues increased 101% to $27,538,000 for the third quarter of
fiscal 1997 up from $13,719,000 for the same period in fiscal 1996. Of these
amounts, commission revenues for the third quarter of fiscal 1997 increased
104% to $20,833,000 up from $10,202,000 for the same period a year ago.
Average commissions per transaction declined from $20.31 in the third quarter
of fiscal 1996 to $19.98 in the third quarter of fiscal 1997 due to a slight
change in product mix. Payments for order flow increased 91% to $6,705,000 in
the third quarter of fiscal 1997 up from $3,517,000 for the same period in
the prior year. The average transaction revenues per securities transaction was
$26.40 in the third quarter of fiscal 1997 and $27.31 in the same period a
year earlier. The increase in transaction revenues resulted primarily from an
increase in the number of transactions processed by the Company. Transactions
for the third quarter of fiscal 1997 totaled 1,043,000 for an average of
16,296 per day. This is an increase of 104% over the average daily
transaction volume of 7,975 for the same period in fiscal 1996.
Net interest revenues for the third quarter of fiscal 1997 increased 551% to
$6,775,000 up from $1,040,000 for the same period in fiscal 1996. This increase
was primarily a result of customer average margin debit balances increasing
169% to $364 million, customer average interest-earning credit balances
increasing 291% to $228 million and average money market fund balances
increasing 141% to $764 million during the period compared to the average
balances during the third quarter of fiscal 1996. Additionally, the growth in
interest revenues is due to the conversion to self-clearing completed in July
1996, which has provided significant opportunities to manage funds in
customer accounts and statutorily required segregated balances.
International revenues were $2,000,000 in the third quarter of fiscal 1997 due
to the recognition of licensing fees attributable to the Company's agreement
with Nova Pacific Capital Ltd. ("Nova Pacific"). There were no international
revenues for the three months ended June 30, 1996. Under this agreement the
Company will receive ongoing royalties from Nova Pacific based upon their
transaction revenues. The Company may, from time to time, seek to enter into
similar licensing agreements with others as part of its international expansion
strategy. There can be no assurance that any such future agreements will be
consummated or that the terms thereof will be comparable to that of Nova
Pacific or that the recognition of any licensing fees will occur during the
period in which an arrangement is consummated.
Computer services and other revenues decreased 8% to $723,000 in the third
quarter of fiscal 1997 from $787,000 for the comparable period in fiscal 1996.
These revenues decreased as a result of a decrease in revenue from customer
connect time charges, partially offset by an increase in profits from the
investment in Roundtable Partners LLC.
<PAGE>9
Cost of Services
Total cost of services increased 52% to $22,371,000 for the third quarter
of fiscal 1997 from $14,672,000 for the comparable period in fiscal 1996.
Included in cost of services in the third quarter of fiscal 1997 is a charge of
$4,334,000 which resulted from a clerical oversight connected with registration
procedures in the state of Ohio. Included in cost of services in the three
months ended June 30, 1996 are self-clearing start-up costs of $1,209,000. Cost
of services, exclusive of the registration charge and self clearing start-up
costs, increased 34% and reflects the overall increase in customer transactions
processed by the Company, a related increase in customer service inquiries, and
operations and maintenance costs associated with the second data center in
Rancho Cordova, California.
Operating Expenses
Selling and marketing expenses increased 138% to $5,299,000 for the third
quarter of fiscal 1997, up from $2,231,000 for the comparable period in fiscal
1996. The increase reflects expenditures for advertising placements, creative
development and collateral materials resulting from a variety of advertising
campaigns directed at building brand name recognition, growing customer base
and market share, and maintaining customer retention rates.
Technology development costs increased 101% to $1,430,000 for the third
quarter of fiscal 1997 up from $711,000 for the comparable period in fiscal
1996. The fiscal 1997 level of expense was incurred to enhance the Company's
existing product offerings.
General and administrative costs increased 45% to $2,814,000 for the third
quarter of fiscal 1997 up from $1,941,000 for the comparable fiscal 1996
quarter. The increase was the result of increased costs associated with
personnel additions and relocation to larger facilities in fiscal 1997.
Income Tax Expense (Benefit)
Income tax expense (benefit) represents the provision for federal and state
income taxes at an effective rate of 40.1% for the third quarter of 1997 and
40.2% for the comparable period in 1996.
<PAGE>10
Nine Months Ended June 30, 1997 and 1996
Revenues
Transaction revenues increased 139% to $72,329,000 for the nine months ended
June 30, 1997, up from $30,208,000 for the same period in fiscal 1996. Of
these amounts, commission revenues increased 129% to $51,964,000 up from
$22,698,000 for the same period in fiscal 1996. Average commissions per
transaction declined from $21.19 for the nine months ended June 30, 1996 to
$19.97 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 171% to $20,365,000 for the nine months ended
June 30, 1997 up from $7,510,000 for the same period in the prior year. The
growth in payments for order flow was higher than the growth in average daily
transactions because the conversion to self-clearing completed in July 1996
has provided significant opportunities to improve order flow revenues. The
average transaction revenues per securities transaction was $27.79 for the nine
months ended June 30, 1997 and $28.20 in the same period a year earlier. The
increase in transaction revenues resulted primarily from an increase in the
number of transactions processed by the Company. Transactions for the nine
months ended June 30, 1997 totaled 2,602,000 for an average of 13,769 per day
This is an increase of 143% over the average daily transaction volume of 5,667
for the same period in fiscal 1996.
Net interest revenues for the nine months ended June 30, 1997 increased 607%
to $15,646,000 up from $2,213,000 for the same period in fiscal 1996. This
increase was primarily a result of customer average margin debit balances
increasing 168% to $286.0 million, customer average interest-earning credit
balances increasing 516% to $213.0 million and average money market fund
balances increasing 133% to $606.0 million during the period compared to the
average balances during the nine months ended June 30, 1996. Additionally, the
growth in interest revenues is due to the conversion to self-clearing completed
in July 1996, which has provided significant opportunities to manage funds in
customer accounts and statutorily required segregated balances.
International revenues were $4,000,000 for the nine months ended June 30, 1997
due to the recognition of licensing fees attributable to the Company's
agreements with VERSUS Technologies, Inc. ("VERSUS"), in the second quarter of
fiscal 1997 and Nova Pacific, in the third quarter of fiscal 1997, each for
$2,000,000. There were no international revenues for the nine months ended June
30, 1996. Under these agreements, the Company will receive ongoing royalties
from VERSUS and Nova Pacific based upon their transaction revenues. The Company
may, from time to time, seek to enter into similar licensing agreements with
others as part of its international expansion strategy. There can be no
assurance that any such future agreements will be consummated or that the terms
thereof will be comparable to those of the aforementioned agreements or that
the recognition of any licensing fees will occur during the period in which an
arrangement is consummated.
<PAGE>11
Computer services and other revenues increased 14% to $2,285,000 for the nine
months ended June 30, 1997 from $2,002,000 for the comparable period in
fiscal 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 92% to $49,698,000 for the nine months ended
June 30, 1997 from $25,874,000 for the comparable period in fiscal 1996.
Included in cost of services in the nine months ended June 30, 1997 is a charge
of $4,334,000 which resulted from a clerical oversight connected with
registration procedures in the state of Ohio. Included in cost of services in
the nine months ended June 30, 1996 are self-clearing start-up costs of
$1,844,000. Cost of services, exclusive of the registration charge and self-
clearing start-up costs, increased 89% and reflects the overall increase in
customer transactions processed by the Company, a related increase in customer
service inquiries, and operations and maintenance costs associated with the
second data center in Rancho Cordova, California.
Operating Expenses
Selling and marketing expenses increased 182% to $16,232,000 for the nine
months ended June 30, 1997, up from $5,749,000 for the comparable period in
fiscal 1996. The increase reflects expenditures for advertising placements,
creative development and collateral materials resulting from a variety of
advertising campaigns directed at building brand name recognition, growing
customer base and market share, and maintaining customer retention rates. In
addition, the increase reflects the Company's national television advertising
campaign launched during the second quarter of fiscal 1997.
Technology development costs increased 235% to $4,435,000 for the nine months
ended June 30, 1997 up from $1,323,000 for the comparable period in fiscal
1996. The fiscal 1997 level of expense was incurred to enhance the Company's
existing product offerings, including the launch of the Company's Web site in
February 1996.
General and administrative costs increased 164% to $9,785,000 for the nine
months ended June 30, 1997 up from $3,701,000 for the comparable period in
fiscal 1996. The increase was 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
<PAGE>12
Income Tax Expense (Benefit)
Income tax expense (benefit) represents the provision for federal and state
income taxes at an effective rate of 40.6% for the nine months ended June 30,
1997 and 40.0% for the comparable period in fiscal 1996.
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 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. The Company is aware of several instances of its non-
compliance with applicable regulations. In particular, 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, Nebraska and Ohio. One of the state
jurisdictions, Ohio, as a condition of renewing the Company's license as a
broker-dealer in that jurisdiction, required the Company to offer customers
resident in that state the ability to rescind (for up to 30 days) certain
securities transactions effected through the Company during the period January
1, 1997 through April 15, 1997, the date the Company's license was renewed.
For the nine months ended June 30, 1997, the Company recorded a $4.3 million
pre-tax charge against earnings in connection with this matter.
Liquidity and Capital Resources
In August 1996, the Company completed an initial public offering of its Common
Stock resulting in net proceeds to the Company of approximately $46.4 million.
The Company has also financed its activities through cash provided by
operations, the private placement of Preferred Stock and, to a lesser extent,
equipment financing. In September 1995, the Company privately placed $12.3
million of convertible Preferred Stock, of which $3.8 million was used to
repurchase and retire outstanding Common Stock. In April and June 1996, the
Company sold convertible Preferred Stock for an aggregate of $11.8 million. All
of the Company's Preferred Stock converted to Common Stock upon the completion
of the Company's initial public offering.
<PAGE>13
In July 1996, the Company obtained $100 million in authorized financing, to be
collateralized by customer securities. There was $51.9 million outstanding
under these lines at June 30, 1997. In addition, the Company has entered into
numerous agreements with other broker-dealers to provide financing for the
Company's stock loan activities.
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 stockholders of the Company will 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 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 $44,757,000 for the nine months ended
June 30, 1997 compared with $4,131,000 in the comparable period for 1996.
The increase in cash used in the 1997 period was primarily a result of
increases in brokerage-related assets in excess of related liabilities of
$61,091,000 arising from the self-clearing operations begun subsequent to June
30, 1996, offset in part by net income during the period.
Cash used in investing activities was $4,799,000 and $2,094,000 for the nine
months ended June 30, 1997 and 1996, respectively, primarily as a result of
cash used for purchases of property and equipment and, in 1997, a relocation
loan to the Company's Chief Executive Officer (see Note 3 of Notes to
Consolidated Financial Statements), partially offset by the net sales and
maturities of investment securities.
Cash provided by financing activities was $53,031,000 for the nine months ended
June 30, 1997 primarily as a result of an increase in bank loans payable and
proceeds from the exercise of stock options, compared with $12,010,000 for the
comparable period in 1996, arising principally from the sale of preferred
stock.
The Company expects that it will incur approximately $25.0 million of capital
expenditures for the twelve months ended June 30, 1998.
<PAGE>14
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 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. The Company is aware of several instances of its non-
compliance with applicable regulations. In particular, 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, Nebraska and Ohio. One of the state
jurisdictions, Ohio, as a condition of renewing the Company's license as a
broker-dealer in that jurisdiction, required the Company to offer customers
resident in that state the ability to rescind (for up to 30 days) certain
securities transactions effected through the Company during the period January
1, 1997 through April 15, 1997, the date the Company's license was renewed.
For the nine months ended June 30, 1997, the Company recorded a $4.3 million
pre-tax charge against earnings in connection with this matter.
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:
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 June 30, 1997.
<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: July 23, 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 Nine Months Ended
June 30, June 30,
1997 1996 1997 1996
--------------- --------------
<S> <C> <C>
Weighted average shares
outstanding 30,699 16,066 30,249 15,530
Series A convertible
preferred stock -- 6,000 -- 6,000
Series B convertible
preferred stock -- 949 -- 949
Stock options 3,794 6,442 4,470 5,998
------- ------- ------- -------
Shares used to compute per
share data 34,493 29,457 34,719 28,477
======= ======= ======= =======
Net income (loss) $ 3,068 $(2,397) $ 8,382 $(1,334)
======= ======= ======= =======
Net income (loss) per share $ 0.09 $ (0.08) $ 0.24 $ (0.05)
======= ======= ======= =======
</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 June 30, 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> JUN-30-1997
<CASH> 18116
<RECEIVABLES> 457555
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 28319
<PP&E> 16270
<TOTAL-ASSETS> 719845
<SHORT-TERM> 12457
<PAYABLES> 624325
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 0
<LONG-TERM> 6
<COMMON> 309
0
0
<OTHER-SE> 82748
<TOTAL-LIABILITY-AND-EQUITY> 83057
<TRADING-REVENUE> 0
<INTEREST-DIVIDENDS> 10065
<COMMISSIONS> 27538
<INVESTMENT-BANKING-REVENUES> 0
<FEE-REVENUE> 0
<INTEREST-EXPENSE> 3290
<COMPENSATION> 0
<INCOME-PRETAX> 5122
<INCOME-PRE-EXTRAORDINARY> 5122
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3068
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.09
</TABLE>
