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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, 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 (I.R.S. Employer Identification
of incorporation or organization) Number)
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: (650) 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 9, 1998, the number of shares outstanding of the registrant's
common stock was 38,949,521.
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E*TRADE GROUP, INC.
FORM 10-Q QUARTERLY REPORT
FOR THE QUARTER ENDED DECEMBER 31, 1997
TABLE OF CONTENTS
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PAGE
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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.................................................... 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk........ 10
PART II -- OTHER INFORMATION:
Item 1. Legal Proceedings................................................. 11
Item 2. Changes in Securities and Use of Proceeds......................... 11
Item 3. Defaults Upon Senior Securities................................... 12
Item 4. Submission of Matters to a Vote of Security Holders............... 12
Item 5. Other Information................................................. 12
Item 6. Exhibits and Reports on Form 8-K.................................. 12
Signatures................................................................ 13
</TABLE>
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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.
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
E*TRADE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(UNAUDITED)
<TABLE>
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THREE MONTHS ENDED
DECEMBER 31,
-------------------
1997 1996
--------- ---------
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Revenues:
Transaction revenues..................................... $ 37,684 $ 20,372
Interest, net of interest expense (A).................... 12,036 3,854
International............................................ 27 --
Computer services and other.............................. 1,383 797
--------- ---------
Net revenues........................................... 51,130 25,023
--------- ---------
Cost of services........................................... 22,747 12,425
--------- ---------
Operating expenses:
Selling and marketing.................................... 8,100 3,216
Technology development................................... 4,995 2,320
Acquired in-process research and development............. 2,756 --
General and administrative............................... 4,765 3,174
--------- ---------
Total operating expenses............................... 20,616 8,710
--------- ---------
Total cost of services and operating expenses.......... 43,363 21,135
--------- ---------
Pre-tax income............................................. 7,767 3,888
Income tax expense......................................... 2,853 1,628
--------- ---------
Net income................................................. $ 4,914 $ 2,260
========= =========
Basic net income per share................................. $ 0.13 $ 0.08
========= =========
Diluted net income per share............................... $ 0.12 $ 0.07
========= =========
Shares used in computation of basic net income per share... 38,719 29,500
Shares used in computation of diluted net income per share. 41,766 33,374
</TABLE>
- --------
(A) Interest is presented net of interest expense. Interest expense for the
three months ended December 31, 1997 and 1996 was $8,712 and $2,297,
respectively.
See notes to consolidated financial statements.
3
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E*TRADE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
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DECEMBER 31, SEPTEMBER 30,
------------ -------------
1997 1997
------------ -------------
(Unaudited)
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ASSETS
Current assets:
Cash and equivalents............................... $ 7,861 $ 21,814
Cash and investments required to be segregated
under Federal or other regulations................ 58,000 15,001
Investment securities.............................. 193,446 191,398
Brokerage receivables--net......................... 877,664 724,365
Other assets....................................... 5,325 4,744
---------- --------
Total current assets.............................. 1,142,296 957,322
Property and equipment--net......................... 20,723 18,802
Other assets........................................ 14,858 13,779
---------- --------
Total assets.................................... $1,177,877 $989,903
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Brokerage payables................................. $ 860,377 $681,106
Bank loan payable.................................. 5,750 9,400
Accounts payable, accrued liabilities and other.... 24,945 18,122
---------- --------
Total liabilities............................... 891,072 708,628
---------- --------
Contingencies (Note 6)
Stockholders' equity:
Common stock, $.01 par: shares authorized,
150,000,000;
shares issued and outstanding:
December 1997, 38,810,308; September 1997,
38,657,328........................................ 388 387
Additional paid-in capital......................... 267,269 266,712
Retained earnings.................................. 19,090 14,176
Unrealized gain on available-for-sale securities,
net of tax........................................ 58 --
---------- --------
Total stockholders' equity........................ 286,805 281,275
---------- --------
Total liabilities and stockholders' equity...... $1,177,877 $989,903
========== ========
</TABLE>
See notes to consolidated financial statements.
4
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E*TRADE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(UNAUDITED)
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THREE MONTHS ENDED
DECEMBER 31,
--------------------
1997 1996
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................... $ 4,914 $ 2,260
Non-cash items included in net income:
Deferred income taxes.................................. (1,105) 571
Depreciation and amortization.......................... 1,570 533
Income from equity investment.......................... (1,086) (231)
Net effect of changes in broker-related assets and
liabilities:
Cash and investments required to be segregated under
Federal or other regulations.......................... (42,999) (11,500)
Brokerage receivables.................................. (153,299) (58,371)
Brokerage payables..................................... 179,271 63,115
Bank loan payable...................................... (3,650) --
Other changes, net:
Other assets........................................... 1,046 (57)
Accounts payable, accrued liabilities and other........ 7,754 2,996
--------- ---------
Net cash used in operating activities.................... (7,584) (684)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment....................... (3,128) (937)
Internally developed software............................ (421) --
Purchase of investment securities........................ (460,610) (198,711)
Sale/maturity of investment securities................... 458,120 202,256
Related party transactions............................... (144) (3,147)
Acquisition of net assets of OptionsLink (net of $2,756
in-process R&D)......................................... (744) --
Distributions received from equity investments........... -- 107
--------- ---------
Net cash used in investing activities.................... (6,927) (432)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Costs from initial public offering....................... -- (102)
Proceeds from exercise of stock options.................. 558 1
Repayment of capital leases.............................. -- (10)
--------- ---------
Net cash provided by (used in) financing activities...... 558 (111)
--------- ---------
DECREASE IN CASH AND EQUIVALENTS......................... (13,953) (1,227)
CASH AND EQUIVALENTS--Beginning of period................ 21,814 14,641
--------- ---------
CASH AND EQUIVALENTS--End of period...................... $ 7,861 $ 13,414
========= =========
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest................................... $ 7,448 $ 2,397
========= =========
Cash paid for income taxes............................... $ -- $ --
========= =========
Non-cash activities:
Unrealized gain on available-for-sale securities, net
of tax................................................ $ 58 $ --
</TABLE>
See notes to consolidated financial statements.
5
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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 1997 Annual Report to Stockholders on
Form 10-K for the fiscal year ended September 30, 1997.
Certain items in these financial statements have been reclassified to
conform to the current period presentation.
NOTE 2.--BROKERAGE RECEIVABLES AND PAYABLES--NET
Brokerage receivables and payables--net consists of the following (in
thousands):
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DECEMBER 31, SEPTEMBER 30,
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1997 1997
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Receivable from customers and non-customers (less
allowance for doubtful accounts of $234 at December
31, 1997 and $435 at September 30, 1997)........... $797,478 $655,981
Receivable from brokers, dealers and clearing
organizations:
Net settlement and deposits with clearing
organizations.................................... 35,390 37,198
Deposits paid for securities borrowed............. 38,711 25,584
Securities failed to deliver...................... 2,289 1,011
Other............................................. 3,796 4,591
-------- --------
Total brokerage receivables--net................ $877,664 $724,365
======== ========
Payable to customers and non-customers.............. $226,245 $279,348
Payable to brokers, dealers and clearing
organizations:
Deposits received for securities loaned........... 629,539 398,007
Securities failed to receive...................... 1,740 1,304
Other............................................. 2,853 2,447
-------- --------
Total brokerage payables........................ $860,377 $681,106
======== ========
</TABLE>
Receivable from and payable to brokers, dealers and clearing organizations
result from the Company's brokerage activities. Receivable from customers and
non-customers represents credit extended to finance their purchases of
securities on margin. Credit extended with respect to margin accounts was $821
million at December 31, 1997 and $678 million at September 30, 1997.
Securities owned by customers and non-customers are held as collateral for
amounts due on margin balances (the value of which is not reflected on the
accompanying consolidated balance sheets). Payable to customers and non-
customers represents free credit balances and other funds pending completion
of securities transactions. The Company pays interest on certain customer and
non-customer credit balances.
6
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NOTE 3.--ACQUISITION
In December 1997, the Company completed its acquisition of the OptionsLink
Division of Hambrecht & Quist for cash of approximately $3,500,000. The
purchase price exceeded the fair value of net assets acquired by approximately
$3 million, of which $2,756,000 was allocated to in-process research and
development and written-off in the period.
NOTE 4.--NET INCOME PER SHARE
The Company has adopted SFAS No. 128, Earnings per Share. SFAS No. 128
requires a dual presentation of basic and diluted EPS. Basic EPS excludes
dilution and is computed by dividing net income by the weighted average common
shares outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock. Prior periods have been restated to
conform with SFAS No. 128.
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THREE MONTHS ENDED
DECEMBER 31,
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1997 1996
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Shares used in computation (in thousands):
Weighted average common shares outstanding used in
computation of basic net income per share............... 38,719 29,500
Dilutive effect of stock options......................... 3,047 3,874
--------- ---------
Shares used in computation of diluted net income per
share................................................... 41,766 33,374
========= =========
</TABLE>
Options to purchase 571,669 and 86,000 shares of common stock at prices
ranging from $28.25 to $46.06 and $11.25 to $13.19 were outstanding as of
December 31, 1997 and 1996, respectively, but not included in the computation
of diluted net income per share. These options were excluded because the
options' exercise price was greater than the average market price of the
common stock for the three months ended December 31, 1997 and 1996, and
therefore would be anti-dilutive for purposes of this calculation.
NOTE 5.--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.
("NASD"), 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, 1997, E*TRADE Securities
had net capital of $54,314,000 (6.7% of aggregate debit balances), which was
$37,992,000 in excess of its required net capital of $16,322,000. 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 6.--CONTINGENCIES
The Company is a defendant in civil actions arising from the normal course
of business. In the opinion of management, these actions are expected to be
resolved with no material effect on the Company's consolidated financial
position or results of operations.
On November 21, 1997, a complaint was filed in the Superior Court of
California, County of Santa Clara, by Larry R. Cooper, purportedly on behalf
of himself and a class of other similarly situated individuals, and also as a
"private attorney general," seeking injunctive and other relief due to the
Company's alleged false and deceptive advertising and other communications
regarding the Company's commission rates and the
7
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Company's ability to execute transactions in a timely manner. The complaint
seeks injunctive relief enjoining alleged deceptive and unfair practices
alleged in the complaint and unspecified compensatory and punitive damages, as
well as attorney fees. This proceeding is at a very early stage and the Company
is unable to speculate as to its ultimate outcome, however, management does not
expect the outcome to have a material effect on its consolidated financial
position or results of operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Revenues
Transaction revenues increased 85% to $37,684,000 for the first quarter of
fiscal 1998, up from $20,372,000 for the same period in fiscal 1997.
Transaction revenues consist of commission revenues and payments for order
flow. Commission revenues for the first quarter of fiscal 1998 increased 123%
to $30,893,000, up from $13,837,000 for the same period a year ago.
Transactions for the first quarter of fiscal 1998 totaled 1,575,000 or an
average of 24,606 transactions per day. This is an increase of 129% over the
average daily transaction volume of 10,755 for the same period last year.
Average commissions per transaction declined from $20.10 in the first quarter
of fiscal 1997 to $19.62 in the first quarter of fiscal 1998 due to a change in
product mix. Payments for order flow increased 4% to $6,791,000 in the first
quarter of fiscal 1998, up from $6,535,000 for the same period in the prior
year. This increase is less than the increase in the total volume of
transactions due to the implementation of the new SEC order handling rules in
January 1997.
Net interest revenues for the first quarter of fiscal 1998 increased 212% to
$12,036,000 for the first quarter of fiscal 1998, up from $3,854,000 for the
same period in fiscal 1997. This increase is a result of customer average
margin debit balances increasing 294% to $815 million, customer average credit
balances increasing 24% to $229 million and average money market fund balances
increasing 142% to $1.13 billion compared to average balances in the first
quarter of fiscal 1997.
International revenues of $27,000 for the first quarter of fiscal 1998
represent royalty fees from Versus Technologies, Inc. in Canada, which operates
under the E*TRADE name.
Computer services and other revenues increased 74% to $1,383,000 for the
first quarter of fiscal 1998, up from $797,000 for the comparable period in
fiscal 1997. This increase is a result of increases in customer connect time
charges, equity income from the investment in Roundtable Partners LLC, and
broker-related fees for services.
Cost of Services
Total cost of services increased 83% to $22,747,000 for the first quarter of
fiscal 1998, up from $12,425,000 for the comparable period in fiscal 1997. The
increase results primarily from the higher volume of customer transactions
processed by the Company.
Operating Expenses
Selling and marketing expenses increased 152% to $8,100,000 for the first
quarter of fiscal 1998, up from $3,216,000 for the comparable period in fiscal
1997. This increase reflects the Company's increases in expenditures for
advertising placements, creative development and collateral materials resulting
from a variety of advertising campaigns directed at building a brand name
recognition, growing customer base and market share, and maintaining customer
retention rates.
Technology development costs increased 115% to $4,995,000 for the first
quarter of fiscal 1998, up from $2,320,000 for the comparable period in fiscal
1997. The increased level of expenses was incurred to enhance the Company's
existing product offerings, including maintenance of the Company's Web site,
and reflects the Company's continuing commitment to invest in new products and
technologies.
8
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The Company recorded a onetime charge of $2,756,000 for acquired in-process
research and development, or $0.04 per share after tax, in connection with the
Company's acquisition of OptionsLink, a division of Hambrecht & Quist.
General and administrative costs increased 50% to $4,765,000 for the first
quarter of fiscal 1998, up from $3,174,000 for the comparable period in fiscal
1997. This increase is the result of increased costs associated with personnel
additions and the development of administrative functions resulting from the
overall growth in the Company.
Income Tax Expense
Income tax expense represents the provision for federal and state income
taxes at an effective rate of 36.7% for the first quarter of fiscal 1998 and
41.9% for the comparable period in fiscal 1997.
Variability of Results
The Company expects to experience significant fluctuations in future
quarterly operating results that may be caused by many factors. 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; domestic and international regulation of the
brokerage industry; 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 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
take advantage of unanticipated opportunities. The Company's future liquidity
and capital requirements will depend upon numerous factors, including costs
and timing of expansion of research and development efforts and the success of
such efforts, the success of the Company's existing and new service offerings
and competing technological and market developments. The Company's forecast of
the period of time through which its financial resources will be adequate to
support its operations is a forward-looking statement that involves risks and
uncertainties, and actual results could vary. The factors described earlier in
this paragraph will impact the Company's future capital requirements and the
adequacy of its available funds. 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,
9
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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 $7,584,000 for the first quarter of
fiscal 1998 compared with $684,000 for the comparable period in fiscal 1997.
The increase in cash used in the first quarter of fiscal 1998 was primarily a
result of increases in brokerage-related assets in excess of related
liabilities of $20,677,000, offset by net income during the period, non-cash
items included in net income and increases in accounts payable, accrued and
other liabilities.
Cash used in investing activities was $6,927,000 for the first quarter of
fiscal 1998 compared with $432,000 for the comparable period in fiscal 1997.
The increase in cash used in the first quarter of fiscal 1998 was primarily a
result of the acquisition of OptionsLink, a division of Hambrecht & Quist, and
an increase in cash used for investments in property and equipment, and
internally developed software. Additionally, the Company was a net purchaser
of investment securities in the first quarter of fiscal 1998 by $2,490,000,
compared with the first quarter of fiscal 1997 when the Company's sales and
maturities of investment securities exceeded its purchases by $3,545,000.
Cash provided by financing activities was $558,000 for the first quarter of
fiscal 1998 as a result of proceeds from the exercise of stock options,
compared with cash used in financing activities of $111,000 for the first
quarter of fiscal 1997, primarily as a result of costs from the initial public
offering.
The Company expects that it will incur approximately $35 million of capital
expenditures during the fiscal year ending September 30, 1998.
Year 2000 Compliance
The Company utilizes and is dependent upon data processing systems and
software to conduct its business. The data processing systems and software
include those developed and maintained by the Company's third-party data
processing vendors and software which is run on in-house computer networks.
During the first quarter of fiscal 1998, the Company initiated a review and
assessment of all hardware and software to confirm that it will function
properly in the year 2000. With respect to internal systems, the results of
that evaluation to date have not revealed any year 2000 issues that, in the
Company's opinion, create a material risk of disruption of operations. With
respect to outside vendors, those vendors which have been contacted have
indicated that their hardware or software is or will be Year 2000 compliant in
time frames that meet regulatory requirements. Evaluation of these issues is
continuing and there can be no assurance that additional issues, not presently
known to the Company, will not be discovered which could present a material
risk of disruption to the Company's operations. In addition, the method of
trading employed by the Company is heavily dependent on the integrity of
electronic systems outside of the Company's control, such as online and
Internet service providers, and third-party software such as Internet
browsers. A failure of any such system in the trading process, even for a
short time, could cause interruption to the Company's business.
Securities Industry
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK -- Not
applicable.
10
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS--
On November 21, 1997, a complaint was filed in the Superior Court of
California, County of Santa Clara, by Larry R. Cooper, purportedly on behalf
of himself and a class of other similarly situated individuals, and also as a
"private attorney general". The complaint alleges, among other things, that
the Company's advertising, other communications and business practices
regarding the Company's commission rates and its ability to timely execute
transactions through its online brokerage services were false and deceptive.
The complaint seeks injunctive relief enjoining the purported deceptive and
unfair practices alleged in the complaint and also seeks unspecified
compensatory and punitive damages, as well as attorney fees.
This proceeding is at a very early stage and the Company is unable to
speculate as to its ultimate outcome. However, the Company believes it has
meritorious defenses to the claims and intends to conduct vigorous defenses.
An unfavorable outcome in any matters which are not covered by insurance could
have a material adverse effect on the Company's business, financial condition
and results of operations. In addition, even if the ultimate outcomes are
resolved in favor of the Company, the defense of such litigation could entail
considerable cost and the diversion of efforts of management, either of which
could have a material adverse effect in the Company's results of operation.
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 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.
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, in fiscal 1997, the
Company failed to comply with applicable advertising restrictions in one
international jurisdiction, and due to a clerical oversight failed to timely
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 fiscal 1997, the Company recorded a one-time $4.3 million pre-tax
charge against earnings in connection with this matter.
The Company maintains insurance in such amounts and with such coverages,
deductibles and policy limits as management believes are reasonable and
prudent. The principal risks that the Company insures against are
comprehensive general liability, commercial property, hardware/software
damage, directors and officers, and errors and omissions liability. The
Company believes that such insurance coverages are adequate for the purpose of
its business.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS--
Use of Proceeds
On August 16, 1996, a Registration Statement on Form S-1 (No. 333-05525) was
declared effective by the Securities and Exchange Commission, pursuant to
which 5,026,550 shares of the Company's Common Stock were offered and sold for
the account of the Company at a price of $10.50 per share, generating gross
offering proceeds of $52,779,000 for the account of the Company. A further
675,450 shares of the Company's
11
<PAGE>
Common Stock were offered and sold for the account of selling stockholders at
a price of $10.50 per share, generating gross offering proceeds of $7,092,000
for the account of selling stockholders. Each share of Series A, Series B and
Series C Preferred Stock was automatically converted into 60 shares of Common
Stock upon the closing of the initial public offering. The managing
underwriters were BancAmerica Robertson Stephens, Hambrecht & Quist LLC, and
Deutsche Morgan Grenfell/C.J. Lawrence, Inc.
In connection with the offering, the Company incurred $3,695,000 in
underwriting discounts and commissions, and $2,682,000 in other related
expenses. The net proceeds of the offering, after deducting the foregoing
expenses, were $46,402,000.
On August 20, 1997, a Registration Statement on Form S-1 (No. 333-31841) was
declared effective by the Securities and Exchange Commission, pursuant to
which 7,305,000 shares of the Company's Common Stock were offered and sold for
the account of the Company at a price of $27.50 per share, generating gross
offering proceeds of $200,888,000 for the account of the Company. A further
2,010,000 shares of the Company's Common Stock were offered and sold for the
account of selling stockholders at a price of $27.50 per share, generating
gross offering proceeds of $55,275,000 for the account of selling
stockholders. The managing underwriters were BancAmerica Robertson Stephens,
Hambrecht & Quist LLC, Deutsche Morgan Grenfell/C.J. Lawrence, Inc.,
NationsBanc Montgomery Securities, and E*TRADE Securities, Inc.
In connection with the offering, the Company incurred $10,044,000 in
underwriting discounts and commissions, and $2,019,000 in other related
expenses. The net proceeds of the offering, after deducting the foregoing
expenses, were $188,825,000.
The Company has used a portion of the net proceeds of the two offerings as
follows: (i) $12,126,000 for the purchase and installation of software,
machinery and equipment, (ii) $3,599,000 for the construction of plant,
building and facilities, (iii) $2,250,000 for the repayment of indebtedness,
(iv) $3,147,000 for a relocation loan to an officer, (v) $2,293,000 for the
purchase of equity investments, (vi) $2,000,000 for investment in KAP Group,
LLC, (vii) $3,500,000 for the acquisition of OptionsLink, (viii) $3,861,000
for investment in new projects, technology and products to expand and
complement the business, and (ix) $202,451,000 for investment in short-term,
investment grade, interest bearing securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES -- Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS --
A special meeting of stockholders was held on December 30, 1997. The
proposal to amend the Company's Certificate of Incorporation to increase the
Company's authorized common stock from 50 million shares to 150 million shares
was approved, as tabulated below.
<TABLE>
<CAPTION>
AGAINST OR
FOR WITHHELD ABSTENTIONS
---------- ---------- -----------
<S> <C> <C> <C>
Votes......................................... 29,930,159 8,762,002 79,827
</TABLE>
ITEM 5. OTHER INFORMATION -- None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit:
27.1 Financial Data Schedule.
(b) Form 8-K:
No reports on Form 8-K were filed during the three months ended
December 31, 1997.
12
<PAGE>
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 17, 1998
/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)
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<LEGEND>
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, 1997,
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 7,861
<RECEIVABLES> 838,953
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 38,711
<INSTRUMENTS-OWNED> 197,508
<PP&E> 20,723
<TOTAL-ASSETS> 1,177,877
<SHORT-TERM> 30,695
<PAYABLES> 230,838
<REPOS-SOLD> 0
<SECURITIES-LOANED> 629,539
<INSTRUMENTS-SOLD> 0
<LONG-TERM> 0
0
0
<COMMON> 388
<OTHER-SE> 286,417
<TOTAL-LIABILITY-AND-EQUITY> 1,177,877
<TRADING-REVENUE> 0
<INTEREST-DIVIDENDS> 12,036
<COMMISSIONS> 37,684
<INVESTMENT-BANKING-REVENUES> 0
<FEE-REVENUE> 0
<INTEREST-EXPENSE> 8,712
<COMPENSATION> 0
<INCOME-PRETAX> 7,767
<INCOME-PRE-EXTRAORDINARY> 4,914
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,914
<EPS-PRIMARY> 0.13
<EPS-DILUTED> 0.12
</TABLE>
