<PAGE>
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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 March 31, 2000
Commission file number 1-11921
----------------
E*TRADE Group, Inc.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 94-2844166
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
</TABLE>
4500 Bohannon Drive, Menlo Park, CA 94025
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (650) 331-6000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
As of May 10, 2000, the number of shares outstanding of the registrant's
common stock was 291,712,105.
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<PAGE>
E*TRADE Group, Inc.
Form 10-Q Quarterly Report
For the Quarter Ended March 31, 2000
Table of Contents
<TABLE>
<CAPTION>
Page
Part I--Financial Information ----
<C> <S> <C>
Item 1. Financial Statements
Consolidated Statements of Operations.......................... 3
Consolidated Balance Sheets.................................... 4
Condensed Consolidated Statements of Cash Flows................ 5
Notes to Consolidated Financial Statements..................... 6
Management's Discussion and Analysis of Financial Condition and
Item 2. Results of Operations.......................................... 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 39
<CAPTION>
Part II--Other Information
<C> <S> <C>
Item 1. Legal and Administrative Proceedings........................... 40
Item 2. Changes in Securities and Use of Proceeds...................... 42
Item 3. Defaults Upon Senior Securities................................ 42
Item 4. Submission of Matters to a Vote of Security Holders............ 42
Item 5. Other Information.............................................. 42
Item 6. Exhibits and Reports on Form 8-K............................... 42
Signatures.............................................................. 43
</TABLE>
UNLESS OTHERWISE INDICATED, REFERENCES TO "COMPANY" MEAN E*TRADE GROUP,
INC. AND ITS SUBSIDIARIES.
E*TRADE(R) and the E*TRADE logo are registered trademarks of E*TRADE
Securities, Inc. All other products, trademarks or service marks mentioned in
this document or any document incorporated by reference herein are trademarks
or service marks of E*TRADE Group, Inc., its subsidiaries, or other companies
with which they are associated or with which they have a business
relationship.
FORWARD-LOOKING STATEMENTS
Certain statements in this report, including statements regarding the
Company's strategy, financial performance and revenue sources, are forward-
looking statements based on current expectations and entail various risks and
uncertainties. The Company's actual results may differ materially from those
anticipated in these forward-looking statements as a result of certain
factors, including, but not limited to, those set forth under "Risk Factors"
and elsewhere in this report. Readers are urged to carefully review and
consider the various disclosures made by the Company in this report and in the
Company's other reports filed with the SEC, including the Company's Annual
Report on Form 10-K/A as filed with the SEC, that attempt to advise interested
parties of certain risks and factors that may affect the Company's business.
Readers are cautioned not to place undue reliance on these forward-looking
statements to reflect events or circumstances occurring after the date hereof.
The following should be read in conjunction with the Company's financial
statements and notes thereto.
2
<PAGE>
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>
<CAPTION>
Three Months Ended Six Months
March 31, Ended March 31,
------------------- -------------------
2000 1999 2000 1999
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Revenue:
Transaction revenues............... $ 254,596 $ 90,524 $ 406,908 $150,844
Interest income.................... 242,675 80,527 399,872 141,567
Global and institutional........... 41,384 29,308 75,083 57,414
Other.............................. 16,640 10,389 35,923 18,639
--------- -------- --------- --------
Gross revenues................... 555,295 210,748 917,786 368,464
Interest expense................... (146,609) (48,483) (240,921) (86,502)
Provision for loan losses.......... (1,256) (490) (1,793) (770)
--------- -------- --------- --------
Net revenues..................... 407,430 161,775 675,072 281,192
--------- -------- --------- --------
Cost of services.................... 130,474 66,493 241,981 116,730
--------- -------- --------- --------
Operating expenses:
Selling and marketing.............. 177,484 78,174 307,164 135,883
Technology development............. 42,127 15,256 78,507 29,822
General and administrative......... 50,225 24,714 92,303 45,080
Amortization of goodwill and other
intangibles....................... 5,159 609 7,184 1,369
Merger-related expenses............ 24,599 -- 30,386 --
--------- -------- --------- --------
Total operating expenses......... 299,594 118,753 515,544 212,154
--------- -------- --------- --------
Total cost of services and
operating expenses.............. 430,068 185,246 757,525 328,884
--------- -------- --------- --------
Operating loss...................... (22,638) (23,471) (82,453) (47,692)
--------- -------- --------- --------
Non-operating income (expense):
Gain on sale of investments........ 10,915 33,367 42,231 33,367
Unrealized gain (loss) on venture
fund.............................. (14,628) -- 10,825 --
Corporate interest-net and other... (5,353) 4,754 (7,300) 10,133
--------- -------- --------- --------
Total non-operating income
(expense)....................... (9,066) 38,121 45,756 43,500
--------- -------- --------- --------
Pre-tax income (loss)............... (31,704) 14,650 (36,697) (4,192)
Income tax expense (benefit)........ (8,923) 5,052 (9,620) (3,429)
Minority interest in subsidiary..... 408 561 903 1,132
--------- -------- --------- --------
Income (loss) before cumulative
effect of accounting change........ (23,189) 9,037 (27,980) (1,895)
Cumulative effect of accounting
change, net of tax................. -- (469) -- (469)
--------- -------- --------- --------
Net income (loss)................... (23,189) 8,568 (27,980) (2,364)
Preferred stock dividends........... -- 60 -- 120
--------- -------- --------- --------
Income (loss) applicable to common
stock.............................. $ (23,189) $ 8,508 $ (27,980) $ (2,484)
========= ======== ========= ========
Income (loss) per share before
cumulative effect of accounting
change:
Basic.............................. $ (0.08) $ 0.03 $ (0.11) $ (0.01)
========= ======== ========= ========
Diluted............................ $ (0.08) $ 0.03 $ (0.11) $ (0.01)
========= ======== ========= ========
Income (loss) per share:
Basic.............................. $ (0.08) $ 0.03 $ (0.11) $ (0.01)
========= ======== ========= ========
Diluted............................ $ (0.08) $ 0.03 $ (0.11) $ (0.01)
========= ======== ========= ========
Shares used in computation of income
(loss) per share before cumulative
effect of accounting change and
income (loss) per share:
Basic.............................. 285,004 261,104 266,001 259,493
Diluted............................ 285,004 282,580 266,001 259,493
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
E*TRADE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
March 31, September 30,
2000 1999
----------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
------
Cash and equivalents................................ $ 371,136 $ 124,801
Cash and investments required to be segregated under
Federal or other regulations....................... 267,155 104,500
Brokerage receivables--net.......................... 7,016,255 2,912,581
Mortgage-backed securities.......................... 2,693,519 1,426,053
Loans receivable--net............................... 3,049,840 2,154,509
Investments......................................... 1,353,148 830,329
Property and equipment--net......................... 225,094 178,854
Goodwill and other intangibles...................... 382,299 17,211
Other assets........................................ 351,440 159,386
----------- ----------
Total assets.................................... $15,709,886 $7,908,224
=========== ==========
LIABILITIES AND SHAREOWNERS' EQUITY
-----------------------------------
Liabilities:
Brokerage payables................................ $ 6,744,299 $2,824,212
Banking deposits.................................. 3,292,931 2,162,682
Borrowings by bank subsidiary..................... 2,573,599 1,267,474
Accounts payable, accrued and other liabilities... 556,358 203,971
Convertible subordinated notes.................... 650,000 --
----------- ----------
Total liabilities............................... 13,817,187 6,458,339
----------- ----------
Company-obligated mandatorily redeemable preferred
capital securities of subsidiary trusts holding
solely junior subordinated debentures of the
Company and other mandatorily redeemable preferred
securities......................................... 30,615 30,584
----------- ----------
Commitments and contigencies
Shareowners' equity:
Common stock, $.01 par: shares authorized,
600,000,000; shares issued and outstanding: March
31, 2000, 289,705,776; September 30, 1999,
275,145,791...................................... 2,897 2,751
Additional paid-in capital........................ 1,629,729 1,269,167
Unearned ESOP shares.............................. (1,834) (2,122)
Accumulated deficit............................... (36,344) (8,364)
Accumulated other comprehensive income............ 267,636 157,869
----------- ----------
Total shareowners' equity....................... 1,862,084 1,419,301
----------- ----------
Total liabilities and shareowners' equity....... $15,709,886 $7,908,224
=========== ==========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
E*TRADE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
March 31,
----------------------
2000 1999
---------- ----------
<S> <C> <C>
Net cash provided by (used in) operating activities.... $ (217,088) $ 84,385
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of available-for-sale securities............ (4,332,847) (3,821,195)
Proceeds from sales, maturities of and principal
payments on available-for-sale securities........... 2,746,493 3,567,902
Net increase in loans held for investment............ (903,102) (401,939)
Restricted deposits.................................. (64,645) --
Cash used in business acquisitions................... (26,707) --
Purchases of property and equipment, net of capital
lease............................................... (79,979) (31,617)
Other................................................ 935 196
---------- ----------
Net cash used in investing activities............ (2,659,852) (686,653)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in banking deposits..................... 1,130,249 289,313
Advances from the Federal Home Loan Bank of Atlanta.. 2,119,000 1,220,510
Payments on advances from the Federal Home Loan Bank
of Atlanta.......................................... (1,398,000) (1,018,010)
Net increase in securities sold under agreements to
repurchase.......................................... 582,615 123,171
Net proceeds from convertible subordinated notes..... 631,312 --
Proceeds from issuance of common stock............... 32,516 17,387
Payments on bank loans and lines of credit........... (150,589) --
Proceeds from bank loans and lines of credit, net of
transaction costs................................... 177,535 --
Other................................................ (1,363) (1,648)
---------- ----------
Net cash provided by financing activities........ 3,123,275 630,723
---------- ----------
INCREASE IN CASH AND EQUIVALENTS....................... 246,335 28,455
CASH AND EQUIVALENTS--Beginning of period.............. 124,801 71,317
---------- ----------
CASH AND EQUIVALENTS--End of period.................... $ 371,136 $ 99,772
========== ==========
SUPPLEMENTAL DISCLOSURES:
Non-cash investing and financing activities:
Unrealized gain on available-for-sale securities...... $ 185,315 $ 362,133
========== ==========
Tax benefit on exercise of stock options.............. $ -- $ 30,190
========== ==========
Assets acquired under capital lease obligations....... $ 31,698 $ --
========== ==========
Purchase acquisitions, net of cash acquired:
Common stock issued and stock options assumed........ $ 323,967 $ --
Cash paid, less acquired............................. 26,707 --
Liabilities assumed.................................. 6,000 --
Carrying value of joint-venture investment........... 5,343 --
---------- ----------
Fair value of assets recorded (including goodwill of
$357,397)........................................... $ 362,017 $ --
========== ==========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
E*TRADE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements
include E*TRADE Group, Inc., a financial services holding company, and its
subsidiaries (collectively, the "Company"), including E*TRADE Securities, Inc.
("E*TRADE Securities"), a securities broker-dealer, Telebanc Financial
Corporation ("Telebanc"), a provider of banking and related financial
services, and TIR (Holdings) Limited ("TIR"), a provider of global securities
brokerage and other related services to institutional clients. The primary
business of Telebanc consists of the activities conducted by Telebank (as of
May 8, 2000, renamed E*TRADE bank) and Telebanc Capital Markets, Inc. ("TCM").
Telebank is a federally chartered savings bank that provides deposit accounts
insured by the Federal Deposit Insurance Corporation ("FDIC") to customers
nationwide. TCM is a funds manager and registered broker-dealer.
These interim consolidated 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 normal recurring adjustments
necessary to present fairly the financial position, results of operations and
cash flows for the periods presented in conformity with accounting principles
generally accepted in the United States of America. All significant
intercompany accounts and transactions have been eliminated. These interim
consolidated financial statements should be read in conjunction with the
audited annual consolidated financial statements and notes thereto included in
the Company's Annual Report on Form 10-K/A for the fiscal year ended September
30, 1999.
The consolidated financial statements of the Company have been prepared to
give retroactive effect to the acquisition of Telebanc on January 12, 2000,
which was accounted for as a pooling of interests (see Note 23 to the
Company's Annual Report on Form 10-K/A for the fiscal year ended September 30,
1999).
NOTE 2. BROKERAGE RECEIVABLES--NET AND PAYABLES
Brokerage receivables--net and payables consist of the following (in
thousands):
<TABLE>
<CAPTION>
March 31, September 30,
2000 1999
---------- -------------
<S> <C> <C>
Receivable from customers and non-customers (less
allowance for doubtful accounts of $4,531 at March
31, 2000 and $975 at September 30, 1999)............ $6,239,143 $2,559,283
Receivable from brokers, dealers and clearing
organizations:
Net settlement and deposits with clearing
organizations..................................... 84,616 20,066
Deposits paid for securities borrowed.............. 659,377 306,326
Securities failed to deliver....................... 16,549 7,508
Other.............................................. 16,570 19,398
---------- ----------
Total brokerage receivables--net................. $7,016,255 $2,912,581
========== ==========
Payable to customers and non-customers............... $1,652,180 $ 946,760
Payable to brokers, dealers and clearing
organizations:
Deposits received for securities loaned............ 5,042,596 1,806,590
Securities failed to receive....................... 19,048 7,235
Other.............................................. 30,475 63,627
---------- ----------
Total brokerage payables......................... $6,744,299 $2,824,212
========== ==========
</TABLE>
6
<PAGE>
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. At March 31, 2000 and September 30, 1999, credit
extended to customers and non-customers with respect to margin accounts was
$6,171 million and $2,452 million, respectively. 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 customer and non-customer funds pending completion of securities
transactions. The Company pays interest on certain customer and non-customer
credit balances.
NOTE 3. INVESTMENTS
Investments are comprised of trading and available-for-sale debt and equity
securities, as defined under the provisions of SFAS No. 115, Accounting for
Certain Investments in Debt and Equity Securities. Also included in
investments are investments in entities in which the Company owns between 20%
and 50% or has the ability to exercise significant influence, accounted for
under the equity method.
The carrying amounts of investments are shown below (in thousands):
<TABLE>
<CAPTION>
March 31, September 30,
2000 1999
---------- -------------
<S> <C> <C>
Trading securities.................................. $ 17,770 $ 38,269
Available-for-sale investment securities............ 1,189,221 685,555
Equity method investments:
Venture capital funds............................. 69,908 36,270
Other equity method investments................... 51,618 57,402
Other investments................................... 24,631 12,833
---------- --------
Total investments................................... $1,353,148 $830,329
========== ========
</TABLE>
Publicly-traded Equity Securities
Included in available-for-sale securities are investments in several
companies that are publicly-traded and carried at fair value. These companies
include Knight/Trimark Inc., CriticalPath, Digital Island, Message Media, E-
LOAN and Versus. During the six months ended March 31, 2000, the Company sold
shares of Knight/Trimark generating proceeds of $41.1 million, resulting in a
pre-tax gain of $41.0 million. Unrealized gains related to these investments
were $498.4 million and $282.3 million at March 31, 2000 and September 30,
1999, respectively. There were no unrealized losses related to these
investments at March 31, 2000 and September 30, 1999.
Venture Capital Funds
The Company made a $25 million contribution to the E*TRADE eCommerce Fund,
L.P. (the "Fund") on October 1, 1999. The Fund has committed capital of
approximately $100 million, $75 million of which was raised from third party
investors. The Fund invests in early to mid-stage Internet companies focused
on e-commerce, infrastructure tools, communication and services. The Company
received a general and limited partnership interest of approximately 28% in
the Fund. Through the Fund, the Company is able to leverage its own investment
capital, expand the scope of its strategic investments (beyond financial
services) and keep it in a position to capitalize on leading-edge
technologies. The Fund is managed by its General Partner, E*TRADE Ventures I,
LLC (the "General Partner"). Christos M. Cotsakos, the Chairman of the Board
of Directors and Chief Executive Officer of the Company, and Thomas
Bevilacqua, the Company's Chief Strategic Investment Officer, are the managing
members of the General Partner. The Company is a non-managing member of the
General Partner. The General Partner receives an annual management fee of
approximately 1.75% of the total committed capital. The management fee is paid
in its entirety to the Company and is used to offset the
7
<PAGE>
costs and expenses of its corporate development group. In addition, to the
extent that the Fund generates profits, 20% are allocated to the General
Partner as a carried interest. As members of the General Partner, the Company
is entitled to receive 50% of such amount provided that up to one-fifth of the
Company's interest can be allocated by the managing members to Company
personnel. The Company also has limited partnership interests in two other
unrelated venture capital funds.
NOTE 4. SUBORDINATED NOTES AND OTHER BORROWINGS
On February 7, 2000, the Company completed a Rule 144A offering of $500
million convertible subordinated notes due February 2007. The notes are
convertible, at the option of the holder, into a total of 21,186,441 shares of
the Company's common stock at a conversion price of $23.60 per share. The notes
bear interest at 6%, payable semiannually, and are non-callable for three years
and may then be called by the Company at a premium, which declines over time.
The holders have the right to require redemption at a premium in the event of a
change in control or other defined redemption event. On March 17, 2000, the
initial purchasers exercised an option to purchase an additional $150 million
of notes, which are convertible into 6,355,932 shares of common stock. The
Company used $145 million of the net proceeds to repay the outstanding balance
on a line of credit in February 2000. Debt issuance costs of $19.1 million are
included in other assets and are being amortized to corporate interest expense
over the term of the notes. Had these securities been issued at the beginning
of the fiscal year, and the proceeds used to reduce the borrowings under the
line of credit, loss per share would have increased to $0.12 and $0.18 for the
three and six months ended March 31, 2000, respectively, compared to $0.08 and
$0.11, for the three and six months ended March 31, 1999, respectively, due to
the additional interest expense and amortization of issuance costs associated
with the notes.
In December 1999, the Company obtained a $150 million line of credit
agreement with a syndicate of banks. The line of credit, which had an
expiration date of March 31, 2000, was dissolved by the Company in February
2000 following the Company's issuance of convertible subordinated notes and
repayment of the $145 million outstanding balance.
In November 1999, the Company obtained a $50 million line of credit under an
agreement with a bank that expires in November 2000. The line of credit is
collateralized by investment securities that are owned by the Company.
Borrowings under the line of credit bear interest at 0.35% above LIBOR. The
agreement requires the Company to meet certain financial covenants. As of March
31, 2000, the Company was in compliance with all such covenants. As of March
31, 2000, the Company had $32 million outstanding under this line of credit.
8
<PAGE>
NOTE 5. COMPREHENSIVE INCOME
On October 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income, which requires that an enterprise report, by major
components and as a single total, the change in net assets during the period
from non-owner sources. The reconciliation of net income (loss) to
comprehensive income (loss) is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
------------------- ------------------
2000 1999 2000 1999
--------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss)..................... $ (23,189) $ 8,568 $(27,980) $ (2,364)
Changes in other comprehensive income:
Unrealized gain (loss) on available-
for-sale securities, net of tax.... (80,842) 196,934 111,953 214,937
Cumulative translation adjustments.. (1,973) (788) (2,186) (396)
--------- -------- -------- --------
Total comprehensive income
(loss)........................... $(106,004) $204,714 $ 81,787 $212,177
========= ======== ======== ========
</TABLE>
NOTE 6. INCOME (LOSS) PER SHARE
The following table sets forth the computation of the numerator and
denominator used in the computation of basic and diluted income (loss) per
share (in thousands):
<TABLE>
<CAPTION>
Six Months Ended
Three Months Ended March 31, March 31,
------------------------------------------ -------------------------
2000 1999 2000 1999
------------ ----------------------------- ------------ ------------
Basic and Basic and Basic and
diluted loss Basic income Diluted income diluted loss diluted loss
per share per share per share per share per share
------------ ------------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Numerator:
Income (loss) before
cumulative effect of
accounting change...... $(23,189) $ 9,037 $ 9,037 $(27,980) $ (1,895)
Cumulative effect of
accounting change, net
of tax................. -- (469) (469) -- (469)
-------- -------- -------- -------- --------
Net income (loss)....... (23,189) 8,568 8,568 (27,980) (2,364)
Less preferred
dividends.............. -- 60 60 -- 120
-------- -------- -------- -------- --------
Income (loss) applicable
to common stock........ $(23,189) $ 8,508 $ 8,508 $(27,980) $ (2,484)
======== ======== ======== ======== ========
Denominator:
Weighted average shares
outstanding............ 285,004 261,104 261,104 266,001 259,493
Dilutive effect of
options issued to
associates............. -- -- 19,947 -- --
Dilutive effect of
warrants outstanding... -- -- 1,529 -- --
-------- -------- -------- -------- --------
285,004 261,104 282,580 266,001 259,493
======== ======== ======== ======== ========
</TABLE>
Because the Company reported a net loss in the three and six months ended
March 31, 2000 and in the six months ended March 31, 1999, the calculation of
diluted earnings per share does not include common stock equivalents as they
are anti-dilutive and would result in a reduction of loss per share. If the
Company had reported net income in the three and six months ended March 31,
2000 and in the six months ended March 31, 1999, there would have been
17,847,000, 18,838,000, and 19,091,000 additional shares for options
outstanding, respectively, 889,000, 897,000, and 1,518,000 additional shares
for warrants outstanding, respectively, and 13,317,000, 6,622,000, and no
additional shares for shares issuable under convertible subordinated notes
(see Note 4), respectively, in the calculation of diluted earnings per share.
9
<PAGE>
The following options to purchase shares of common stock would not be
included in the computation of diluted income (loss) per share because the
options' exercise price was greater than the average market price of the
Company's common stock for the periods stated, and therefore, the effect would
be antidilutive (in thousands, except exercise price data):
<TABLE>
<CAPTION>
Three Months Six Months
Ended March Ended March
31, 31,
------------- -------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Options excluded from computation of diluted
income (loss) per share.......................... 5,086 154 2,810 490
Exercise price ranges:
High............................................. $58.75 $39.74 $58.75 $39.74
Low.............................................. $25.34 $23.81 $27.13 $15.57
</TABLE>
NOTE 7. COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED CAPITAL SECURITIES
In June 1997, Telebanc formed Telebanc Capital Trust I ("TCT I"), which in
turn sold, at par, 10,000 shares of trust preferred securities, Series A,
liquidation amount of $1,000, for a total of $10.0 million. TCT I is a
business trust formed for the purpose of issuing capital securities and
investing the proceeds in junior subordinated debentures issued by Telebanc.
These junior subordinated debentures, which are the sole assets of TCT I, have
a principal amount of $10.0 million and bear interest at an annual rate of
11.0%. The junior subordinated debentures mature in 2027.
In July 1998, Telebanc formed Telebanc Capital Trust II ("TCT II"), a
business trust formed solely for the purpose of issuing capital securities.
TCT II sold, at par, 1,100,000 shares of Beneficial Unsecured Securities,
Series A, with a liquidation amount of $25 per share, for a total of $27.5
million and invested the net proceeds in Telebanc's 9.0% Junior Subordinated
Deferrable Interest Debentures, Series A. These Junior Subordinated Deferrable
Interest Debentures, Series A, which are the sole assets of TCT II, have a
principal amount of $27.5 million and mature in 2028.
All of the capital securities of TCT I and TCT II (together the "Trusts")
are owned by Telebanc. The guarantees for the Trusts, together with
obligations under the trust agreements as assumed in the Company's acquisition
of Telebanc, and the indenture and junior subordinated debentures, constitute
a full, irrevocable and unconditional guarantee by the Company of the capital
securities issued by TCT I and TCT II.
NOTE 8. 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 ("SEC") 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 two percent of aggregate debit balances arising
from customer transactions, as defined. E*TRADE Securities had amounts in
relation to the Rule as follows (in thousands, except percentage data):
<TABLE>
<CAPTION>
March September 30,
31, 2000 1999
-------- -------------
<S> <C> <C>
Net capital.......................................... $479,326 $162,729
Percentage of aggregate debit balances............... 7.5% 6.2%
Required net capital................................. $128,404 $ 52,206
Excess net capital................................... $350,922 $110,523
</TABLE>
10
<PAGE>
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.
TIR's brokerage subsidiary companies are also subject to net capital
requirements. These companies are located in the United States, Australia,
Hong Kong, Ireland, the Philippines and the United Kingdom. The companies
outside the United States have various and differing capital requirements, all
of which were met at March 31, 2000 and September 30, 1999. The net capital
requirements of TIR's brokerage subsidiary companies located in the United
States are summarized as follows:
TIR Securities, Inc.--TIR Securities, Inc. is subject to the Rule and is
required to maintain net capital equal to the greater of $250,000 or 6.67%
of aggregate indebtedness as defined. The Rule also requires that the ratio
of aggregate indebtedness to net capital shall not exceed 15 to 1. TIR
Securities, Inc. is also subject to the Commodity Futures Trading
Commission ("CFTC") Regulation 1.17, which requires the maintenance of net
capital of 4% of the funds required to be segregated in accordance with
Section 4d(2) of the Commodities Exchange Act or $30,000, whichever is
greater. TIR Securities, Inc. is required to maintain net capital in
accordance with the Rule or CFTC Regulation 1.17, whichever is greater.
TIR Investor Select, Inc.--TIR Investor Select, Inc. is subject to the Rule
and is required to maintain net capital equal to the greater of $5,000 or
6.67% of aggregate indebtedness, as defined. The Rule also requires that
the ratio of aggregate indebtedness to net capital shall not exceed 15 to
1.
Marquette Securities, Inc.--Marquette Securities, Inc. is subject to the
Rule and is required to maintain net capital equal to the greater of
$250,000 or 6.67% of aggregate indebtedness, as defined. The Rule also
requires that the ratio of aggregate indebtedness to net capital shall not
exceed 15 to 1.
Telebanc Capital Markets, Inc.--Telebanc's registered broker-dealer
subsidiary, TCM, is also subject to the Rule and is required to maintain
net capital equal to the greater of $100,000 or 6.67% of aggregate
indebtedness, as defined. The Rule also requires that the ratio of
aggregate indebtedness to net capital shall not exceed 15 to 1.
The table below summarizes the minimum and excess capital requirements for
the above companies (in thousands):
<TABLE>
<CAPTION>
March 31, 2000 September 30, 1999
------------------------ ------------------------
Required Excess Required Excess
net Net net net Net net
capital capital capital capital capital capital
-------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
TIR Securities, Inc. .... $250 $ 2,522 $ 2,272 $ 82 $ 2,289 $ 2,207
TIR Investor Select,
Inc. ................... $ 5 $ 367 $ 362 $ 5 $ 254 $ 249
Marquette Securities,
Inc. ................... $250 $ 475 $ 225 $250 $ 445 $ 195
Telebanc Capital Markets,
Inc. ................... $213 $18,710 $18,497 $190 $17,310 $17,120
</TABLE>
Telebank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory--and possibly additional discretionary--actions
by regulators that, if undertaken, could have a direct material effect on
Telebank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, Telebank must meet specific
capital guidelines that involve quantitative measures of Telebank's assets,
liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. Telebank's capital amounts and classification
are also subject to qualitative judgments by the regulators about components,
risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require Telebank to maintain minimum amounts and ratios of total and Tier I
capital to risk-weighted assets and of Tier I capital to average assets.
Management believes, as of March 31, 2000, that Telebank meets all capital
adequacy requirements to which it is subject. As of March 31, 2000 and
September 30, 1999, the Office of Thrift Supervision ("OTS")
11
<PAGE>
categorized Telebank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, Telebank must
maintain minimum total risk-based, Tier I risk-based, and Tier I leverage
ratios as set forth in the following table. There are no conditions or events
since that notification that management believes have changed the institution's
category.
Telebank's required and actual capital amounts and ratios are presented in
the table below (dollars in thousands):
<TABLE>
<CAPTION>
Required To Be
Well
Capitalized
Required For Under Prompt
Capital Corrective
Adequacy Action
Actual Purposes Provisions
-------------- --------------- ---------------
Amount Ratio Amount Ratio Amount Ratio
-------- ----- --------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C>
As of March 31, 2000:
Core Capital (to adjusted
tangible assets)........... $471,179 7.32% >$257,762 > 4.0% $322,202 > 5.0%
Tangible Capital (to
tangible assets)........... $471,179 7.32% >$ 96,502 > 1.5% N/A N/A
Tier I Capital (to risk
weighted assets)........... $471,179 18.36% N/A N/A $153,825 > 6.0%
Total Capital (to risk
weighted assets)........... $479,516 18.04% >$434,565 > 8.0% $256,376 >10.0%
As of September 30, 1999:
Core Capital (to adjusted
tangible assets)........... $440,469 11.20% >$157,320 > 4.0% >$196,651 > 5.0%
Tangible Capital (to
tangible assets)........... $440,469 11.20% >$ 58,995 > 1.5% N/A N/A
Tier I Capital (to risk
weighted assets)........... $440,469 25.97% N/A N/A >$101,768 > 6.0%
Total Capital (to risk
weighted assets)........... $447,170 26.36% >$135,691 > 8.0% >$169,614 >10.0%
</TABLE>
Telebank is subject to certain restrictions on the amount of dividends it
may declare without prior regulatory approval. At March 31, 2000, approximately
$118.0 million of Telebank's retained earnings was available for dividend
declaration without regulatory approval.
NOTE 9. COMMITMENTS, CONTINGENCIES AND OTHER REGULATORY MATTERS
As of March 31, 2000, the Company had commitments to purchase $313.1 million
in fixed rate and $440.2 million in variable rate loans, and certificates of
deposit scheduled to mature in less than one year approximating $1,317 million.
In the normal course of business, the Company makes various commitments to
extend credit and incur contingent liabilities that are not reflected in the
balance sheets.
The Company is a defendant in civil actions arising in the normal course of
business, including several putative class action filings. The matters alleged
by the plaintiffs include:
. False and deceptive advertising and other communications regarding the
Company's commission rates and ability to timely execute and confirm
online transactions;
. Damages arising from alleged problems in accessing brokerage accounts
and placing orders;
. Damages arising from system interruptions, including those occurring on
February 3, 4 and 5, 1999; and
. Unfair business practices regarding the extent to which initial public
offering shares are made available to the Company's customers.
These proceedings are at early stages, and the Company is unable to predict
their ultimate outcome; however, the Company believes that all of these claims
are without merit and intends to defend against them vigorously. An unfavorable
outcome in any of these matters, if they 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 on the Company's results of operation.
12
<PAGE>
From time to time, the Company has been threatened with, or named as a
defendant in, lawsuits, arbitrations 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 against 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 and banking industries are 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 noncompliance with applicable regulations.
NOTE 10. ACQUISITIONS
On March 13, 2000, the Company entered into a definitive agreement to
acquire Card Capture Services, Inc. ("CCS"), the largest independent network of
centrally-managed automated teller machines in the United States. On May 8,
2000, the Company completed the acquisition of CCS. With the acquisition of
CCS, the Company will be able to provide customers with a nationwide, branded
electronic physical presence to conduct financial transactions. The acquisition
will be accounted for as a purchase. Under the terms of the agreement, the
Company will issue 3,211,124 shares of the Company's common stock, with a value
of approximately $82.4 million.
On January 12, 2000, the Company completed the acquisition of Telebanc.
Telebanc is the holding company for Telebank, an Internet-based bank (renamed
E*TRADE bank as of May 8, 2000). Under the terms of the agreement, Telebanc
shareowners received 1.05 shares of E*TRADE common stock for each share of
Telebanc common stock representing a total of 35.6 million shares of the
Company's common stock. The Company also assumed all outstanding Telebanc
options, which were converted to options to purchase approximately 5,494,000
shares of the Company's common stock. The acquisition was accounted for as a
pooling of interests and, accordingly, all prior financial data of the Company
has been restated to include the historical operations of Telebanc. There were
no significant intercompany transactions requiring elimination for any prior
periods presented. The Company has incurred $24.2 million and $26.9 million
merger-related costs in the three and six months ended March 31, 2000,
respectively, related to the acquisition of Telebanc. The information below
reflects the operations of E*TRADE and Telebanc on a standalone and
consolidated basis (in thousands):
<TABLE>
<CAPTION>
Net
Income (Loss)
Before Cumulative
Net Effect of Net
Revenues Accounting Change Income (Loss)
-------- ----------------- ------------
<S> <C> <C> <C>
Three months ended March
31, 2000:
E*TRADE Group........... $378,698 $(11,855) $(11,855)
Telebanc................ 28,732 (11,334) (11,334)
-------- -------- --------
Combined................ $407,430 $(23,189) $(23,189)
======== ======== ========
Three months ended March
31, 1999:
E*TRADE Group........... $149,402 $ 7,320 $ 7,320
Telebanc................ 12,373 1,717 1,248
-------- -------- --------
Combined................ $161,775 $ 9,037 $ 8,568
======== ======== ========
Six months ended March 31,
2000:
E*TRADE Group........... $622,917 $(17,069) $(17,069)
Telebanc................ 52,155 (10,911) (10,911)
-------- -------- --------
Combined................ $675,072 $(27,980) $(27,980)
======== ======== ========
Six months ended March 31,
1999:
E*TRADE Group........... $259,913 $ (4,267) $ (4,267)
Telebanc................ 21,279 2,372 1,903
-------- -------- --------
Combined................ $281,192 $ (1,895) $ (2,364)
======== ======== ========
</TABLE>
13
<PAGE>
During the quarter ended December 31, 1999, the Company acquired 100%
ownership of three of its foreign affiliates, E*TRADE Nordic AB, a Swedish
company, E*TRADE @ Net Bourse S.A., a French company, and the remaining
portion of its E*TRADE UK joint venture, for an aggregate purchase price of
$362 million. The purchase price was comprised of 11.7 million shares of the
Company's common stock, cash of $26.7 million and the assumption of options of
the affiliates. The purchase price exceeded the fair value of the assets
acquired by $357 million, which was recorded as goodwill to be amortized over
20 years. Merger-related costs related to foreign acquisitions were not
significant.
The pro forma information below assumes that the acquisitions occurred at
the beginning of fiscal 1999 and includes the effect of amortization of
goodwill from that date (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Six Months Ended
March 31,
------------------
2000 1999
-------- --------
<S> <C> <C>
Net revenues.......................................... $691,152 $297,387
Net loss.............................................. $(36,831) $(13,462)
Basic and diluted loss per share...................... $ (0.14) $ (0.05)
</TABLE>
The pro forma information is for informational purposes only and is not
necessarily indicative of the results of future operations nor results that
would have been achieved had the acquisitions taken place at the beginning of
fiscal 1999.
NOTE 11. SEGMENT INFORMATION
The Company provides securities brokerage and related investment and
financial services. Following the acquisitions of TIR in fiscal 1999 and
Telebanc in fiscal 2000 (see Note 10), the Company classified the operations
of E*TRADE's historical business, TIR and Telebanc as separate reportable
segments due to the relatively short operating history of the combined
operations of E*TRADE's historical business with TIR and Telebanc and due to
Telebanc's online banking services which represent a new line of business.
With the acquisition of three foreign affiliates in the quarter ended December
31, 1999, their results have been combined with TIR to constitute the
International segment. This is the manner in which management currently
evaluates the Company's operating performance. Financial information for the
Company's reportable segments is presented in the table below, and the totals
are equal to the Company's consolidated amounts as reported in the
consolidated financial statements.
<TABLE>
<CAPTION>
E*TRADE
Group International Telebanc Total
-------- ------------- -------- --------
(in thousands)
<S> <C> <C> <C> <C>
Three months ended March 31, 2000:
Interest income--net of interest
expense.......................... $ 66,386 $ 377 $29,303 $ 96,066
Non-interest revenue--net of
provision for loan losses........ 269,550 42,385 (571) 311,364
-------- ------- ------- --------
Net revenues...................... $335,936 $42,762 $28,732 $407,430
======== ======= ======= ========
Operating income (loss)........... $(16,123) $ 1,959 $(8,474) $(22,638)
Pre-tax income (loss)............. $(24,554) $ 1,359 $(8,509) $(31,704)
Three months ended March 31, 1999:
Interest income--net of interest
expense.......................... $ 22,550 $ 164 $ 9,330 $ 32,044
Non-interest revenue--net of
provision for loan losses........ 98,408 28,280 3,043 129,731
-------- ------- ------- --------
Net revenues...................... $120,958 $28,444 $12,373 $161,775
======== ======= ======= ========
Operating income (loss)........... $(28,970) $ 2,126 $ 3,373 $(23,471)
Pre-tax income.................... $ 9,056 $ 2,033 $ 3,561 $ 14,650
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
E*TRADE
Group International Telebanc Total
---------- ------------- ---------- -----------
(in thousands)
<S> <C> <C> <C> <C>
Six months ended March 31,
2000:
Interest income--net of
interest expense......... $ 107,784 $ 531 $ 50,636 $ 158,951
Non-interest revenue--net
of provision for
loan losses.............. 438,808 75,794 1,519 516,121
---------- -------- ---------- -----------
Net revenues.............. $ 546,592 $ 76,325 $ 52,155 $ 675,072
========== ======== ========== ===========
Operating income (loss)... $ (80,364) $ 4,183 $ (6,272) $ (82,453)
Pre-tax income (loss)..... $ (33,985) $ 3,548 $ (6,260) $ (36,697)
Six months ended March 31,
1999:
Interest income--net of
interest expense......... $ 38,717 $ 397 $ 15,951 $ 55,065
Non-interest revenue--net
of provision for
loan losses.............. 165,073 55,726 5,328 226,127
---------- -------- ---------- -----------
Net revenues.............. $ 203,790 $ 56,123 $ 21,279 $ 281,192
========== ======== ========== ===========
Operating income (loss)... $ (57,394) $ 4,376 $ 5,326 $ (47,692)
Pre-tax income (loss)..... $ (14,062) $ 4,349 $ 5,521 $ (4,192)
<CAPTION>
E*TRADE
Group International Telebanc Total
---------- ------------- ---------- -----------
(in thousands)
<S> <C> <C> <C> <C>
As of March 31, 2000:
Segment assets............ $9,157,096 $128,039 $6,424,751 $15,709,886
As of September 30, 1999:
Segment assets............ $3,771,370 $155,610 $3,981,244 $ 7,908,224
</TABLE>
No one single customer accounted for greater than 10% of total revenues in
the three or six months ended March 31, 2000 or 1999.
15
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward-Looking Statements
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the consolidated
financial statements and notes thereto included elsewhere in this Form 10-Q.
This discussion contains forward-looking statements, including statements
regarding the Company's strategy, financial performance and revenue sources,
which involve risks and uncertainties. The Company's actual results may differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including, but not limited to, those set forth in
the section entitled "Risk Factors" and elsewhere in this Form 10-Q.
Results of Operations
Revenue Detail (in millions, except percentage data)
The following table sets forth the components of revenue and the percentage
change for the three and six months ended March 31, 2000 and 1999:
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
March 31, March 31,
------------- -------------
Percentage Percent
2000 1999 Change 2000 1999 Change
------ ------ ---------- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
Transaction revenues:
Commissions.................... $225.8 $ 80.6 180% $362.5 $133.0 173%
Order flow..................... 28.8 9.9 191% 44.4 17.8 149%
------ ------ ------ ------
Total transaction revenues... 254.6 90.5 181% 406.9 150.8 170%
------ ------ ------ ------
Interest income:
Brokerage-related activities... 132.3 38.8 241% 207.5 64.7 221%
Banking-related activities..... 110.4 41.7 165% 192.4 76.9 150%
------ ------ ------ ------
Total interest income........ 242.7 80.5 201% 399.9 141.6 182%
------ ------ ------ ------
Global and institutional......... 41.4 29.3 41% 75.1 57.4 31%
Other............................ 16.6 10.4 60% 35.9 18.7 92%
------ ------ ------ ------
Gross revenues............... 555.3 210.7 164% 917.8 368.5 149%
------ ------ ------ ------
Interest expense:
Brokerage-related activities... 65.6 16.1 307% 99.2 25.6 288%
Banking-related activities..... 81.0 32.3 151% 141.7 60.9 133%
------ ------ ------ ------
Total interest expense....... 146.6 48.4 203% 240.9 86.5 178%
Provision for loan losses........ 1.3 0.5 160% 1.8 0.8 125%
------ ------ ------ ------
Net revenues................. $407.4 $161.8 152% $675.1 $281.2 140%
====== ====== ====== ======
</TABLE>
Revenues
The Company's net revenues increased to $407.4 million in the second
quarter of fiscal 2000, up 152% from $161.8 million in the equivalent period
of fiscal 1999. The Company's revenues increased to $675.1 million for the six
months ended March 31, 2000, up 140% from $281.2 million in the equivalent
period of fiscal 1999. Revenues increased mainly due to higher customer
trading volume, an increase in net new active accounts, and an increase in
customer assets.
Transaction Revenues
Transaction revenues increased to $254.6 million in the second quarter of
fiscal 2000, up 181% from $90.5 million in the equivalent period in fiscal
1999. Transaction revenues increased to $406.9 million for the
16
<PAGE>
six months ended March 31, 2000, up 170% from $150.8 million for the
equivalent period in fiscal 1999. Transaction revenues consist of commission
revenues and payments for order flow. Growth in transaction revenues reflect
the overall high level of trading volume in U.S. financial markets, as well as
the increase in new customer accounts.
Commission revenues for the second quarter of fiscal 2000 increased to
$225.8 million, up 180% from $80.6 million for the same period a year ago.
Commission revenues for the six months ended March 31, 2000 increased to
$362.5 million, up 173% from $133.0 million for the same period a year ago.
Brokerage transactions for the second quarter of fiscal 2000 totaled 14.2
million, or an average of 226,100 transactions per day. This is an increase of
220% over the average daily brokerage transaction volume of 70,200 in the
prior year. Brokerage transactions for the six months ended March 31, 2000
totaled 22.7 million, or an average of 178,800 transactions per day. This is
an increase of 161% over the average daily brokerage transaction volume of
113,200 in the prior period. Commissions per trade decreased from $18.83 and
$18.90 in the three and six months ended March 31, 1999, respectively, to
$15.85 and $15.96 for the three and six months ended March 31, 2000,
respectively. The decline in commissions per trade was a result of promotional
activities, changes in the mix of revenue generating transactions and the
August 1999 implementation of the new Power E*TRADE program, a component of
which provides reduced commissions for active traders.
Payments for order flow increased to $28.8 million for the second quarter
of fiscal 2000, up 191% from $9.9 million for the same period a year ago.
Order flow revenue increased to $44.4 million for the six months ended March
31, 2000, up 149% from $17.8 million for the same period in the prior year. As
a percentage of transaction revenue, payments for order flow were 11% for the
three months ended March 31, 2000 and 1999. As a percentage of transaction
revenues, payments for order flow decreased to 11% in the six months ended
March 31, 2000 from 12% in the comparable period in fiscal 1999. Payments for
order flow did not increase at the same rate as transactions due to changes in
the order flow mix, a decrease in the average shares per equity transaction,
and the continued impact of the SEC's order handling rules.
Interest Income and Expense
Interest income from brokerage-related activities is comprised of interest
earned by the Company on credit extended to its customers to finance their
purchases of securities on margin and fees on its customer assets invested in
money market accounts. Interest expense from brokerage-related activities is
comprised of interest paid to customers on certain credit balances, interest
paid to banks and interest paid to other broker-dealers through the Company's
stock loan program. Interest income from banking-related activities reflects
interest earned on assets, consisting primarily of loans receivable and
mortgage-backed securities. Interest expense from banking-related activities
is comprised of interest-bearing liabilities which include customer deposits,
advances from the Federal Home Loan Bank of Atlanta and other borrowings.
Brokerage interest income increased to $132.3 million in the second quarter
of fiscal 2000, up 241% from $38.8 million for the same period a year ago.
Brokerage interest income increased to $207.5 million for the six months ended
March 31, 2000, up 221% from $64.7 million for the same period in fiscal 1999.
These increases primarily reflect the overall increase in average customer
margin balances, which increased 195% to $4,877 million in the second quarter
of fiscal 2000, from $1,655 million in the same period a year ago, and average
customer money market fund balances, which increased 131% to $6,698 million in
the second quarter of fiscal 2000, from $2,904 million in the same period a
year ago. Brokerage interest expense increased to $65.6 million in the second
quarter of fiscal 2000, up 307% from $16.1 million in the comparable prior
year period. Brokerage interest expense increased to $99.2 million for the six
months ended March 31, 2000, up 288% from $25.6 million in the comparable
prior year period. This increase is due to an overall increase in average
customer credit balances, which increased 259% to $1,530 million in the second
quarter of fiscal 2000, from $425.7 million in the same period a year ago, and
average stock loan balances, which increased 376% to $4,385 million in the
second quarter of fiscal 2000, from $921.4 million in the same period a year
ago.
Banking interest income increased to $110.4 million in the second quarter
of fiscal 2000, up 165% from $41.7 million for the same period a year ago.
Banking interest income increased to $192.4 million in the
17
<PAGE>
six months ended March 31, 2000, up 150% from $76.9 million for the same
period a year ago. These increases reflect an increase in the average
interest-earning asset balances coupled with an increase in the average
interest yield. Average interest-earning assets increased 137% to $5,694
million during the second quarter of fiscal 2000, from $2,406 million in the
same period a year ago. The average yield increased to 7.76% in the second
quarter of fiscal 2000 from 6.93% in the same period a year ago. Average
interest-earning assets increased 134% to $5,109 million during the six months
ended March 31, 2000, from $2,186 million in the same period a year ago. The
average yield increased to 7.53% in the six months ended March 31, 2000 from
7.02% in the same period a year ago. Interest expense from banking activities
increased to $81.0 million in the first quarter of fiscal 2000, up 151% from
$32.3 million for the same period a year ago. Interest expense from banking
activities increased to $141.7 million in the six months ended March 31, 2000,
up 133% from $60.9 million for the same period a year ago. These increases
reflect an increase in the average interest-bearing liabilities coupled with
an increase in the average cost of the borrowings. Average interest-bearing
liabilities increased 129% to $5,316 million during the second quarter of
fiscal 2000, from $2,321 million in the same period a year ago. The average
cost increased to 6.13% in the second quarter of fiscal 2000 from 5.66% in the
same period a year ago. Average interest-bearing liabilities increased 125% to
$4,717 million during the six months ended March 31, 2000, from $2,101 million
in the same period a year ago. The average cost increased to 6.01% in the six
months ended March 31, 2000 from 5.76% in the same period a year ago.
18
<PAGE>
The following tables present average balance data and income and expense
data for the Company's banking operations and the related interest yields and
rates for the three and six months ended March 31, 2000 and 1999. The tables
also present information for the periods indicated with respect to net
interest margin, an indicator of an institution's profitability, which is
calculated by dividing net interest income by interest-earning banking assets.
Another indicator of profitability is net interest spread, which is the
difference between the weighted average yield earned on interest-earning
assets and weighted average rate paid on interest-bearing liabilities.
Interest includes the incremental tax benefit of tax exempt income.
<TABLE>
<CAPTION>
Three Months Ended March 31,
2000 Three Months Ended March 31, 1999
------------------------------ --------------------------------------
Interest Average Interest Average
Average Income/ Annualized Average Income/ Annualized
Balance Expense Yield/Cost Balance Expense Yield/Cost
---------- -------- ---------- ------------- ---------- ------------
(In thousands)
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning banking
assets:
Loans receivable,
net.................. $2,777,617 $ 56,119 8.08% $ 1,005,016 $ 19,111 7.61%
Interest-bearing
deposits............. 104,930 1,450 5.56 21,824 223 4.14
Mortgage-backed and
related available-
for-sale securities.. 2,539,374 48,005 7.56 1,122,206 18,305 6.52
Available-for-sale
investment
securities........... 194,270 3,356 7.13 220,985 3,391 6.34
Investment in FHLB
stock................ 53,427 1,029 7.75 24,622 455 7.50
Trading securities.... 24,100 382 6.34 11,118 207 7.45
---------- -------- ------ ------------- ---------- ---------
Total interest-
earning banking
assets.............. 5,693,718 $110,341 7.76% 2,405,771 $ 41,692 6.93%
Non-interest-earning
banking assets......... 233,858 88,343
---------- -------------
Total banking
assets.............. $5,927,576 $ 2,494,114
========== =============
Interest-bearing banking
liabilities:
Retail deposits....... $2,910,177 $ 43,176 5.94% $ 1,223,657 $ 17,158 5.69%
Brokered callable
certificates of
deposit.............. 91,836 1,483 6.48 67,078 1,098 6.64
FHLB advances......... 1,056,637 16,317 6.11 437,033 5,745 5.26
Other borrowings...... 1,257,613 20,061 6.31 563,052 7,477 5.31
Subordinated debt,
net.................. -- -- -- 29,877 884 11.83
---------- -------- ------------- ----------
Total interest-
bearing banking
liabilities......... 5,316,263 $ 81,037 6.13% 2,320,697 $ 32,362 5.66%
Non-interest-bearing
banking liabilities.... 112,924 59,029
---------- -------------
Total banking
liabilities......... 5,429,187 2,379,726
Total banking
shareowners'
equity.............. 498,389 114,388
---------- -------------
Total banking
liabilities and
shareowners' equity.... $5,927,576 $ 2,494,114
========== =============
Excess of interest-
earning banking assets
over interest-bearing
banking liabilities/net
interest income........ $ 377,455 $ 29,304 $ 85,074 $ 9,330
========== ======== ============= ==========
Net interest spread..... 1.63% 1.27%
====== =========
Net interest margin (net
yield on interest-
earning banking
assets)................ 2.07% 1.55%
====== =========
Ratio of interest-
earning banking assets
to interest-bearing
banking liabilities.... 107.10% 103.67%
====== =========
Return on average total
banking assets......... 0.26%* 0.20%
====== =========
Return on average net
banking assets......... 3.15%* 4.30%
====== =========
Equity to total banking
assets................. 8.41% 4.59%
====== =========
</TABLE>
- --------
* Ratios calculated by excluding ESOP and merger related costs of $13.8
million.
19
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended March 31, Six Months Ended March 31,
2000 1999
------------------------------ ------------------------------
Interest Average Interest Average
Average Income/ Annualized Average Income/ Annualized
Balance Expense Yield/Cost Balance Expense Yield/Cost
---------- -------- ---------- ---------- -------- ----------
(In thousands)
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning banking
assets:
Loans receivable,
net.................. $2,558,598 $ 99,818 7.80% $ 929,752 $35,826 7.71%
Interest-bearing
deposits............. 74,494 2,031 5.45 17,538 418 4.77
Mortgage-backed and
related available-
for-sale securities.. 2,214,835 81,374 7.35 989,124 32,531 6.58
Available-for-sale
investment
securities........... 191,131 6,518 6.82 221,402 6,878 6.21
Investment in FHLB
stock................ 45,689 1,769 7.74 20,701 773 7.47
Trading securities.... 23,994 849 7.08 7,269 274 7.54
---------- -------- ------ ---------- ------- ------
Total interest-
earning banking
assets.............. 5,108,741 $192,359 7.53% 2,185,786 $76,700 7.02%
Non-interest-earning
banking assets......... 200,585 89,889
---------- ----------
Total banking
assets.............. $5,309,326 $2,275,675
========== ==========
Interest-bearing banking
liabilities:
Retail deposits....... $2,607,313 $ 76,554 5.87% $1,143,885 $32,991 5.75%
Brokered callable
certificates of
deposit.............. 85,505 2,788 6.52 67,058 2,220 6.62
FHLB advances......... 898,858 27,220 6.06 377,536 10,191 5.40
Other borrowings...... 1,125,463 35,161 6.25 482,851 13,307 5.51
Subordinated debt,
net.................. -- -- -- 29,846 1,769 11.85
---------- -------- ---------- -------
Total interest-
bearing banking
liabilities......... 4,717,139 $141,723 6.01% 2,101,176 $60,478 5.76%
Non-interest-bearing
banking liabilities.... 89,802 58,354
---------- ----------
Total banking
liabilities......... 4,806,941 2,159,530
Total banking
shareowners'
equity.............. 502,385 116,144
---------- ----------
Total banking
liabilities and
shareowners' equity.... $5,309,326 $2,275,674
========== ==========
Excess of interest-
earning banking assets
over interest-bearing
banking liabilities/net
interest income........ $ 391,602 $ 50,636 $ 84,610 $16,222
========== ======== ========== =======
Net interest spread..... 1.52% 1.28%
====== ======
Net interest margin (net
yield on interest-
earning banking
assets)................ 1.98% 1.48%
====== ======
Ratio of interest-
earning banking assets
to interest-bearing
banking liabilities.... 108.30% 104.03%
====== ======
Return on average total
banking assets......... 0.13%* 0.25%
====== ======
Return on average net
banking assets......... 1.72%* 4.21%
====== ======
Equity to total banking
assets................. 9.46%* 5.10%
====== ======
</TABLE>
- --------
* Ratios calculated by excluding ESOP and merger related costs of $17.6
million.
20
<PAGE>
Global and Institutional
Global and institutional revenues increased to $41.4 million for the second
quarter of fiscal 2000, up 41% from $29.3 million for the same period a year
ago. For the six months ended March 31, 2000, global and institutional
revenues increased to $75.1 million from $57.4 million, up 31% from the same
period in fiscal 1999. Global and institutional revenues are comprised of
revenues from TIR's operations, as well as licensing fees, royalties and
brokerage-related transaction revenue from E*TRADE International's affiliates.
TIR's net revenues increased to $38.9 million in the second quarter of fiscal
2000, up 37% from $28.4 million for the same period a year ago. These
increases are primarily attributable to strong market conditions in Asia and
Europe. TIR revenues are largely comprised of commissions from institutional
trade executions; for the second quarter of fiscal 2000, approximately 56% of
TIR's transactions were from outside the U.S., and approximately 87% were
cross-border transactions.
Other Revenues
Other revenues increased to $16.6 million in the second quarter of fiscal
2000, up 60% from $10.4 million for the comparable period in fiscal 1999.
Other revenues increased to $35.9 million for the six months ended March 31,
2000, up 92% from $18.7 million for the comparable period in fiscal 1999.
Other revenues increased primarily due to growth in mutual funds revenue,
revenues from fees charged for advertising on the Company's Web site,
investment banking revenue, E*TRADE Business Solutions revenue, and brokerage
and banking-related fees for services.
Provision for Loan Losses
The provision for loan losses increased to $1.3 million in the second
quarter of fiscal 2000, up 160% from $0.5 million for the comparable period in
fiscal 1999. For the six months ended March 31, 2000, the provision for loan
losses increased to $1.8 million from $0.8 million, up 125% from the same
period in fiscal 1999. The provision for loan losses recorded reflects
increases to the Company's allowance for loan losses based upon management's
review and assessment of the risk in the Company's loan portfolio, as well as
the level of charge-offs to the Company's allowance for loan losses. The
increase in the provision for loan losses in the second quarter of fiscal 2000
primarily reflects the growth in the Company's loan portfolio. As of March 31,
2000, the total loan loss allowance was $8.8 million, or 0.29% of total loans
outstanding. The total loan loss allowance as of September 30, 1999 was $7.1
million, or 0.33% of total loans outstanding. As of March 31, 2000, the
general loan loss allowance was $8.3 million, or 43.9% of total non-performing
assets of $19.0 million. As of September 30, 1999, the general loan loss
allowance was $6.7 million, or 78.8% of total non-performing assets of $8.5
million.
Cost of Services
Total cost of services increased to $130.5 million for the second quarter
of fiscal 2000, up 96% from $66.5 million in the comparable period in fiscal
1999. Total cost of services increased to $242.0 million for the six months
ended March 31, 2000, up 107% from $116.7 million in the comparable period in
fiscal 1999. Cost of services includes expenses related to the Company's
clearing operations, customer service activities, Web site content costs,
system maintenance, communication expenses and depreciation. These increases
reflect 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 Company's technology centers in Rancho
Cordova, California and Alpharetta, Georgia. Cost of services as a percentage
of net revenues was 32% in the second quarter of fiscal 2000 and 41% in the
comparable period in fiscal 1999. Cost of services as a percentage of net
revenues was 36% for the six months ended March 31, 2000, compared to 42% in
the comparable period in fiscal 1999. The improvement in cost of services as a
percentage of net revenue is reflective of increased trading volumes and the
diversification of revenue streams.
Operating Expenses
Selling and marketing expenses increased to $177.5 million in the second
quarter of fiscal 2000, up 127% from $78.2 million in the comparable period in
fiscal 1999. Selling and marketing expenses increased to $307.2 million for
the six months ended March 31, 2000, up 126% from $135.9 million in the
comparable period
21
<PAGE>
in fiscal 1999. The increases reflect expenditures for advertising placements,
creative development and collateral materials resulting from a variety of
advertising campaigns directed at building brand name recognition, growing the
customer base and market share, and maintaining customer retention rates.
Selling and marketing expenditures in the three and six months ended March 31,
2000 reflect expenditures which resulted from the Company's Sponsorship of
Super Bowl XXXIV. International marketing expenditures are expected to
increase as the Company expands its advertising efforts abroad; however,
overall marketing expenditure levels are not expected to continue to grow at
the same rate throughout fiscal 2000.
Technology development expenses increased to $42.1 million in the second
quarter of fiscal 2000, up 175% from $15.3 million in the comparable period in
fiscal 1999. Technology development expenses increased to $78.5 million for
the six months ended March 31, 2000, up 163% from $29.8 million in the
comparable period in fiscal 1999. The increased level of expense 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
General and administrative expenses increased to $50.2 million in the
second quarter of fiscal 2000, up 103% from $24.7 million in the comparable
period in fiscal 1999. General and administrative expenses increased to $92.3
million for the six months ended March 31, 2000, up 105% from $45.1 million in
the comparable period in fiscal 1999. These increases were the result of
personnel additions and the development of administrative functions resulting
from the overall growth in the Company.
Amortization of goodwill and other intangibles was $5.2 million in the
second quarter of fiscal 2000 up 754% from $0.6 million in the comparable
period in fiscal 1999. Amortization of goodwill and other intangibles
increased to $7.2 million for the six months ended March 31, 2000, up 414%
from $1.4 million in the comparable period in fiscal 1999. These increases
primarily consist of amortization of goodwill related to the acquisition of
three of the Company's foreign affiliates. Goodwill is amortized over 15 to 20
years.
Merger-related expenses of $24.6 million were recognized in the second
quarter of fiscal 2000, compared to $5.8 million of merger-related expenses
recognized in the first quarter of fiscal 2000. Merger-related expenses
primarily relate to transaction costs associated with the Telebanc
acquisition. Additional costs associated with the Company's mergers and
acquisitions are expected to be incurred throughout fiscal 2000. No merger-
related expenses were incurred during the three or six months ended March 31,
1999.
Non-operating Income (Expense)
Corporate interest expense-net was $3.9 million for the quarter ended
March 31, 2000, compared with $5.9 million in corporate interest income-net in
the comparable period in fiscal 1999. Corporate interest expense-net was $2.1
million for the six month period ended March 31, 2000, compared with $11.3
million in corporate interest income-net in the comparable period in fiscal
1999. Corporate interest expense-net increased primarily as a result of a
decrease in average corporate investment balances coupled with interest
arising from the issuance of $650 million in convertible notes during the
three months ended March 31, 2000.
In the second quarter of fiscal 2000, the Company continued to liquidate
portions of its investment portfolio and recognized realized gains of $10.9
million, compared with $33.4 million in recognized realized gains in the first
quarter of fiscal 2000. The gain on sale of investments for the six month
period ended March 31, 2000 was $42.2 million, compared with $33.4 million in
recognized realized gains for the equivalent period in fiscal 1999.
The Company recorded an unrealized loss of $14.6 million during the second
quarter of fiscal 2000 on its participation in the E*TRADE eCommerce Fund
L.P., representing market declines on public investments held by the fund. The
Company recorded an unrealized gain of $10.8 million in the six months ended
March 31, 2000. This fund was formed in the first quarter of fiscal 2000.
Equity in losses of investments included in other non-operating income
(expense) was $0.7 million in the second quarter of fiscal 2000, which
resulted from the Company's minority ownership in its investments which are
accounted for under the equity method, compared to $1.1 million in the
comparable period in fiscal 1999. Equity in losses of investments was $4.6
million for the six month period ended March 31, 2000, compared to
22
<PAGE>
$1.1 million in the equivalent period in fiscal 1999. These investments
include E*TRADE Japan, E*OFFERING and Archipelago. The Company expects that
these companies will continue to invest in the development of their products
and services, and will incur operating losses throughout fiscal 2000, which
will result in future charges being recorded by the Company to reflect its
proportionate share of those losses.
Income Tax Expense (Benefit)
Income tax expense (benefit) represents the benefit for federal and state
income taxes at an effective tax rate of 28.1% for the second quarter of
fiscal 2000, and the expense for federal and state income taxes at an
effective tax rate of 34.5% for the comparable period in fiscal 1999. Income
tax benefit represents the benefit for federal and state income taxes at an
effective tax rate of 26.2% for the six months ended March 31, 2000, and 81.8%
for the comparable period in fiscal 1999. The rate for the the three and six
months ended March 31, 2000 reflects the impact of non-deductible merger-
related expenses and amortization of goodwill arising from the foreign
acquisitions.
Minority Interest in Subsidiary
Minority interest in subsidiary was $0.4 million and $0.6 million in the
second quarters of fiscal 2000 and 1999, respectively, and $0.9 million and
$1.1 million in the six months ended March 31, 2000 and 1999, respectively,
resulting from Telebanc's interest payments to subsidiary trusts which have
issued Company-obligated mandatorily redeemable capital securities and which
hold junior subordinated debentures of the Company.
Cumulative Effect of Change in Accounting Principle
Cumulative effect of change in accounting principle was $0.5 million in the
three and six months ended March 31, 1999, resulting from the implementation
by Telebanc of Statement of Position 98-5, Reporting on the Cost of Start-Up
Activities, which requires that the cost of start-up activities be expensed as
incurred rather than capitalized, with initial application reported as the
cumulative effect of a change in accounting principle.
Liquidity and Capital Resources
The Company has financing facilities totaling $425 million to meet the
needs of E*TRADE Securities that would be collateralized by customer
securities. There were no borrowings outstanding under these lines on March
31, 2000. The Company also had a short term loan for up to $150 million,
collateralized by publicly-traded investment securities owned by the Company.
In December 1999, the Company obtained a $150 million line of credit agreement
with a syndicate of banks. The line of credit, which had an expiration date of
March 31, 2000, was dissolved by the Company in February 2000 following the
Company's issuance of convertible subordinated notes and repayment of the $145
million outstanding balance. The Company also has a short term line of credit
for up to $50 million, collateralized by marketable securities owned by the
Company, of which $32 million was outstanding as of March 31, 2000. In
addition, the Company has entered into numerous agreements with other broker-
dealers to provide financing under the Company's stock loan program.
On February 7, 2000, the Company completed a Rule 144A offering of $500
million convertible subordinated notes due February 2007. The notes are
convertible, at the option of the holder, into a total of 21,186,441 shares of
the Company's common stock at a conversion price of $23.60 per share. The
notes bear interest at 6%, payable semiannually, and are non-callable for
three years and may then be called by the Company at a premium, which declines
over time. The holders have the right to require redemption at a premium in
the event of a change in control or other defined redemption event. On March
17, 2000, the initial purchasers exercised an option to purchase an additional
$150 million of notes, which are convertible into 6,355,932 shares of common
stock. The Company used $145 million of the $631.3 million in net proceeds to
pay the outstanding balance on a line of credit in February 2000. The Company
expects to use the remaining net proceeds for general corporate purposes,
including the future growth of the business. Debt issuance costs of $19.1
million are included in other assets and are being amortized to interest
expense over the term of the notes. Had these securities been issued at the
beginning of the fiscal year, and the proceeds used to repay the outstanding
balance on the $150 million line of credit agreement, loss per share would
have increased to $0.12 and $0.18 for the three and six months ended
23
<PAGE>
March 31, 2000, respectively, compared to $0.08 and $0.11 for the three and
six months ended March 31, 1999, respectively, due to the additional net
interest expense and issuance costs associated with the securities.
The Company currently anticipates that its available cash resources and
credit facilities, along with the convertible subordinated debt offering
described above, 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 shareowners of
the Company will be reduced, shareowners 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, 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 $217.1 million for the six months
ended March 31, 2000 compared to cash provided by operating activities of
$84.4 million in the equivalent period in fiscal 1999. Cash used in operating
activities primarily reflects the increase in brokerage-related assets in
excess of liabilities of $220.6 million, an increase in segregated cash
balances of $120.0 million and an increase in other assets and intangibles of
$129.1 million offset by an increase in accounts payable, accrued and other
liabilities of $271.3 million. Cash provided by operating activities in the
prior year period primarily reflects proceeds from the sales and maturities of
loans, net of purchases, of $45.4 million, proceeds from the sales and
maturities of trading assets, net of purchases, of $36.8 million, and an
increase in interest credited to customer deposits of $48.2 million, offset by
an increase in brokerage-related assets in excess of liabilities of $22.9
million.
Cash used in investing activities was $2,660 million for the six months
ended March 31, 2000 and $686.7 million in the equivalent period in fiscal
1999. For the six months ended March 31, 2000, cash used in investing
activities was the result of the excess of purchases of investments over the
net sale/maturity of investments of $1,586 million, purchases of $80.0 million
of property and equipment, an increase in loans held for investment of $903.1
million, increase in restricted deposits of $64.6 million, and $26.7 million
paid for the acquisition of three foreign affiliates. This compares to cash
used in investing activities in the equivalent period of fiscal 1999 where the
Company had an excess of purchases of investments over the net sale/maturity
of investments of $253.3 million, purchases of $31.6 million of property and
equipment, and an increase in loans held for investment of $401.9 million.
Cash provided by financing activities was $3,123 million for the six months
ended March 31, 2000, compared with $630.7 million in the equivalent period in
fiscal 1999. Cash provided by financing activities for the six months ended
March 31, 2000 primarily resulted from $3,832 million in increased banking
deposits, advances from the Federal Home Loan Bank of Atlanta, increases in
securities sold under agreements to repurchase, and the issuance of $631.3
million in convertible subordinated debt, net of issuance costs offset by
$1,398 million in payments on outstanding loans. Cash provided by financing
activities in the comparable period of fiscal 1999 primarily resulted from
$1,633 million in increased banking deposits, advances from the Federal Home
Loan Bank of Atlanta and increases in securities sold under agreements to
repurchase, offset by $1,018 million in payments on outstanding loans.
24
<PAGE>
RISK FACTORS
You should carefully consider the risks described below before making an
investment decision in our company. The risks and uncertainties described
below are not the only ones facing our company and there may be additional
risks that we do not presently know of or that we currently deem immaterial.
All of these risks may impair our business operations. This document also
contains forward-looking statements that involve risks and uncertainties and
actual results may differ materially as a result of certain factors, including
those set forth below and elsewhere in this filing. If any of the following
risks actually occur, our business, financial condition or results of
operations could be materially adversely affected. In such case, the trading
price of our common stock could decline, and you may lose all or part of your
investment.
In accordance with "plain English" guidelines provided by the Securities
and Exchange Commission, the risk factors have been written in the first
person.
We could suffer substantial losses and be subject to customer litigation if
our systems fail or our transaction processing is slow
We receive and process transactions mostly through the Internet, online
service providers and touch-tone telephone. Thus, we depend heavily on the
integrity of the electronic systems supporting these types of transactions,
including our internal software programs and computer systems. Our systems or
any other systems in the transaction process could slow down significantly or
fail for a variety of reasons including:
. undetected errors in our internal software programs or computer systems;
. our inability to effectively resolve any errors in our internal software
programs or computer systems once they are detected; or
. heavy stress placed on our system during certain peak trading times.
If our systems or any other systems in the transaction process slow down
significantly or fail even for a short time, our customers could suffer delays
in transaction processing, which could cause substantial losses and possibly
subject us to claims for such losses or to litigation claiming fraud or
negligence. We have experienced such systems failures and degradation in the
past, including certain days in February 1999. We could experience future
system failures and degradations, especially in foreign markets where we must
implement new transaction processing infrastructures. To promote customer
satisfaction and protect our brand name, we have, on certain occasions,
compensated customers for verifiable losses from such failures. To date,
during our systems failures, we were able to take orders by telephone,
however, with respect to our brokerage transactions, only associates with
securities brokers' licenses can accept telephone orders. An adequate number
of such associates may not be available to take customer calls in the event of
a future systems failure. We may not be able to increase our customer service
personnel and capabilities in a timely and cost-effective manner. We could
experience a number of adverse consequences as a result of these systems
failures including the loss of existing customers and the inability to attract
or retain new customers. There can be no assurance that our network structure
will operate appropriately in any of the following events:
. subsystem, component or software failure;
. a power or telecommunications failure;
. human error;
. an earthquake, fire or other natural disaster; or
. an act of God or war.
There can be no assurance that, in any such event, we will be able to
prevent an extended systems failure. Any such systems failure that interrupts
our operations could have a material adverse effect on our business, financial
condition and operating results. We have received in the past, including as a
result of our systems
25
<PAGE>
failures in February 1999, adverse publicity in the financial press and in
online discussion forums primarily relating to systems failures.
Our security could be breached, which could damage our reputation and deter
customers from using our services
We must protect our computer systems and network from physical break-ins,
security breaches and other disruptive problems caused by the Internet or
other users. Computer break-ins could jeopardize the security of information
stored in and transmitted through our computer systems and network, which
could adversely affect our ability to retain or attract customers, damage our
reputation and subject us to litigation. We have in the past, and could in the
future, be subject to denial of service, vandalism and other attacks on our
systems by Internet hackers. Although we intend to continue to implement
security technology and establish operational procedures to prevent break-ins,
damage and failures, these security measures may fail. Our insurance coverage
in certain circumstances may be insufficient to cover issues that may result
from such events.
Our business could suffer if we cannot protect the confidentiality of customer
information transmitted over public networks
A significant barrier to online commerce is the secure transmission of
confidential information over public networks. We rely on encryption and
authentication technology, including cryptography technology licensed from RSA
Data Security, Inc., to provide secure transmission of confidential
information. There can be no assurance that advances in computer and
cryptography capabilities or other developments will not result in a
compromise of the RSA or other algorithms we use to protect customer
transaction data. If any such compromise of our security were to occur, it
could have a material adverse effect on our business, financial condition and
operating results.
Our quarterly results fluctuate and do not reliably indicate future operating
results
We do not believe that our historical operating results should be relied
upon as an indication of our future operating results. We expect to experience
large fluctuations in future quarterly operating results that may be caused by
many factors, including the following:
. fluctuations in the fair market value of our equity investments in other
companies, including through existing or future private investment funds
managed by us;
. fluctuations in interest rates, which will impact our investment and
loan portfolios;
. increased levels of advertising, sales and marketing expenditures for
customer acquisition, which may be affected by competitive conditions in
the marketplace;
. the timing of introductions or enhancements to online investing services
and products by us or our competitors;
. market acceptance of online financial services and products;
. the pace of development of the market for online commerce;
. changes in trading volume in securities markets;
. trends in securities and banking markets;
. domestic and international regulation of the brokerage, banking and
internet industries;
. implementation of new accounting pronouncements, such as Statement of
Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities;
. changes in domestic or international tax rates;
26
<PAGE>
. changes in pricing policies by us or our 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 revenues;
. fluctuation in foreign exchange rates;
. changes in the level of operating expenses to support projected growth;
and
. general economic conditions.
We have also experienced fluctuations in the average number of customer
transactions per day. Thus, the rate of growth in customer transactions at any
given time is not necessarily indicative of future transaction activity.
Our business will suffer if we cannot effectively compete
The market for financial services over the Internet is new, rapidly
evolving and intensely competitive. We expect competition to continue and
intensify in the future. We face direct competition from financial
institutions, brokerage firms, banks, mutual fund companies, Internet portals
and other organizations. These competitors include, among others:
. American Express
. America Online, Inc.;
. Ameritrade, Inc.;
. Bank of America;
. Charles Schwab & Co., Inc.;
. Citigroup, Inc.;
. CyBerCorp.com;
. Datek Online Holdings Corporation;
. DLJdirect;
. Fidelity Brokerage Services, Inc.;
. Intuit Inc.;
. Merrill Lynch, Pierce, Fenner & Smith Incorporated;
. Microsoft Money;
. National Discount Brokers;
. Net.B@nk, Inc.;
. PaineWebber Incorporated;
. Quick & Reilly, Inc.;
. Salomon Smith Barney, Inc.;
. SURETRADE, Inc.;
27
<PAGE>
. TD Waterhouse Securities, Inc.;
. Wells Fargo & Company;
. WingspanBank.com; and
. Yahoo! Inc.
Many of our competitors have longer operating histories and significantly
greater financial, technical, marketing and other resources than we do. In
addition, many of our competitors offer a wider range of services and
financial products than we do, and thus may be able to respond more quickly to
new or changing opportunities, technologies and customer requirements. Many of
our competitors also have greater name recognition and larger customer bases
that could be leveraged, thereby gaining market share from us. Such
competitors may conduct more extensive promotional activities and offer better
terms and lower prices to customers than we do, possibly even sparking a price
war in the online financial services industry. Moreover, certain competitors
have established cooperative relationships among themselves or with third
parties to enhance their services and products. For example, Charles Schwab's
One-Source mutual fund service and similar services may discourage potential
customers from using our brokerage services. Accordingly, it is possible that
new competitors or alliances among existing competitors may significantly
reduce our market share.
General financial success within the financial services industry over the
past several years has strengthened existing competitors. We believe that such
success will continue to attract new competitors, such as software development
companies, insurance companies and others, as such companies expand their
product lines. Commercial banks and other financial institutions have become
more competitive with our brokerage operations by offering their customers
certain corporate and individual financial services traditionally provided by
securities firms. The current trend toward consolidation in the commercial
banking industry could further increase competition in all aspects of our
business. Commercial banks generally are expanding their securities and
financial services activities. While we cannot predict the type and extent of
competitive services that commercial banks and other financial institutions
ultimately may offer, we may be adversely affected by such competition. To the
extent our competitors are able to attract and retain customers, our business
or ability to grow could be adversely affected. In many instances, we are
competing with such organizations for the same customers. In addition,
competition among financial services firms exists for experienced technical
and other personnel.
There can be no assurance that we will be able to compete effectively with
current or future competitors or that such competition will not have a
material adverse effect on our business, financial condition and operating
results.
Our success depends on our ability to effectively adapt to changing business
conditions
We have grown rapidly and our business and operations have changed
substantially since we began offering electronic investing services in 1992,
and Internet investing services in February 1996, and we expect this trend to
continue. Such rapid change and expansion places significant demands on our
administrative, operational, financial, and technical management and other
resources.
We expect operating expenses and staffing levels to increase substantially
in the future. In particular, we have hired and intend to hire a significant
number of additional skilled personnel, including persons with experience in
the computer, brokerage and banking industries, and, specifically, persons
with Series 7 or other broker-dealer licenses. Competition for such personnel
is intense, and there can be no assurance that we will be able to find or keep
additional suitable senior managers or technical persons or licensed
representatives in the future. In particular, we depend heavily on our chief
executive officer, president and chief operating officer and other members of
senior management, the loss of any of whom could seriously harm our business.
We also expect to expend resources for future expansion of our accounting and
internal information management systems and for a number of other new systems
and procedures. In addition, we expect that future expansion will continue to
challenge our ability to successfully hire and retain associates. If our
revenues do not keep up with operating
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expenses, our information management systems do not expand to meet increasing
demands, we fail to attract, assimilate and retain qualified personnel, or we
fail to manage our expansion effectively, there could be a material adverse
effect on our business, financial condition and operating results.
The rapid growth in the use of our services has strained our ability to
adequately expand technologically. As we acquire new equipment and
applications quickly, we have less time to test and validate hardware and
software, which could lead to performance problems. We also rely on a number
of third parties to process our transactions, including online and Internet
service providers, back office processing organizations, service providers and
market-makers, all of which will need to expand the scope of the operations
they perform for us. Any backlog caused by a third party's inability to expand
sufficiently to meet our needs could have a material adverse effect on our
business, financial condition and operating results. As transaction volume
increases, we may have difficulty hiring and training qualified personnel at
the necessary pace, and the shortage of licensed personnel could cause a
backlog in the processing of brokerage orders that need review, which could
lead to not only unsatisfied customers, but also to liability for brokerage
orders that were not executed on a timely basis.
Through our Digital Financial Media initiative, we plan to deliver
interactive multimedia content and commerce through a variety of broadband
communications channels and electronic platforms. We believe that achieving
success in this strategy is essential to our ability to compete in the rapidly
evolving electronic marketplaces in which we operate. We have limited
experience in these media and our failure to execute this strategy
successfully may limit our future growth.
Our ability to attract customers and our profitability may suffer if changes
in government regulation favor our competition or restrict our business
practices
The securities and banking industries in the United States are each subject
to extensive regulation under both federal and state laws. Broker-dealers are
subject to regulations covering all aspects of the securities business,
including:
. sales methods;
. trade practices among broker-dealers;
. use and safekeeping of customers' funds and securities;
. capital structure;
. record keeping;
. advertising;
. conduct of directors, officers and employees; and
. supervision.
Because we are a self-clearing broker-dealer, we have to comply with many
complex laws and rules. These include rules relating to possession and control
of customer funds and securities, margin lending and execution and settlement
of transactions. Our ability to so comply depends largely on the establishment
and maintenance of a qualified compliance system.
Similarly, E*TRADE and Telebanc, as savings and loan holding companies, and
Telebank, as a federally chartered savings bank and subsidiary of Telebanc,
are subject to extensive regulation, supervision and examination by the Office
of Thrift Supervision ("OTS") and, in the case of Telebank, the Federal
Deposit Insurance Corporation. Such regulation covers all aspects of the
banking business, including lending practices, safeguarding deposits, capital
structure, record keeping, and conduct and qualifications of personnel.
In November 1999, the Gramm-Leach-Bliley Act was enacted into law. This act
reduces the legal barriers between banking, securities and insurance
companies, and will make it easier for bank holding companies to compete
directly with our securities business, as well as for our competitors in the
securities business to diversify
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<PAGE>
their revenues and attract additional customers through entry into the banking
and insurance businesses. The Gramm-Leach-Bliley Act may have a material
impact on the competitive landscape that we face.
Additionally our mode of operation and profitability may be directly
affected by:
. additional legislation;
. changes in rules promulgated by the SEC, the National Association of
Securities Dealers, Inc., ("NASD"), the Board of Governors of the
Federal Reserve System, the OTS, the various stock exchanges and other
self-regulatory organizations; or
. changes in the interpretation or enforcement of existing laws and rules.
The SEC, the NASD or other self-regulatory organizations and state
securities commissions can censure, fine, issue cease-and-desist orders or
suspend or expel a broker-dealer or any of its officers or employees. The OTS
may take similar action with respect to our banking activities. Our ability to
comply with all applicable laws and rules is largely dependent on our
establishment and maintenance of a system to ensure such compliance, as well
as our ability to attract and retain qualified compliance personnel. Our
growth has placed considerable strain on our ability to ensure such
compliance. We could be subject to disciplinary or other actions due to
claimed noncompliance in the future, which could have a material adverse
effect on our business, financial condition and operating results.
We have initiated an aggressive marketing campaign designed to bring brand
name recognition to E*TRADE and E*TRADE Bank. All marketing activities by
E*TRADE Securities are regulated by the NASD, and all marketing materials must
be reviewed by an E*TRADE Securities Series 24 licensed principal prior to
release. The NASD has in the past asked us to revise certain marketing
materials. The NASD can impose certain penalties for violations of its
advertising regulations, including:
. censures or fines;
. suspension of all advertising;
. the issuance of cease-and-desist orders; or
. the suspension or expulsion of a broker-dealer or any of its officers or
employees.
We do not currently solicit orders from our customers or make investment
recommendations. However, if we were to engage in such activities, we would
become subject to additional rules and regulations governing, among other
things, sales practices and the suitability of recommendations to customers.
We intend to continue expanding our business to other countries and to
broaden our customers' abilities to trade securities of non-U.S. companies and
execute other transactions through the Internet and other gateways. In order
to expand our services globally, we must comply with the regulatory controls
of each specific country in which we conduct business. Our international
expansion could be limited by the compliance requirements of other national
regulatory jurisdictions. We intend to rely primarily on local third parties
and our subsidiaries for regulatory compliance in international jurisdictions.
See "Risk Factors--We face numerous risks associated with doing business in
international markets."
There can be no assurance that other federal, state or foreign agencies
will not attempt to regulate our online and other activities. We anticipate
that we may be required to comply with record keeping, data processing and
other regulatory requirements as a result of proposed federal legislation or
otherwise. We may also be subject to additional regulation as the market for
online commerce evolves. Because of the growth in the electronic commerce
market, Congress has held hearings on whether to regulate providers of
services and transactions in the electronic commerce market. As a result,
federal or state authorities could enact laws, rules or regulations affecting
our business or operations. We may also be subject to federal, state or
foreign money transmitter laws and state and foreign sales or use tax laws. If
such laws are enacted or deemed applicable to us, our business or operations
would be rendered more costly or burdensome, less efficient or even
impossible. Any of the foregoing could have a material adverse effect on our
business, financial condition and operating results.
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<PAGE>
Due to the increasing popularity of the Internet, laws and regulations may
be passed dealing with issues such as user privacy, pricing, content and
quality of products and services.
As required by the Gramm-Leach-Bliley Act, the SEC and OTS have recently
proposed regulations on financial privacy, to take effect in November 2000,
that will require E*TRADE Securities and Telebank to notify consumers about
the circumstances in which they may share consumers' personal information with
unaffiliated third parties and to give consumers the right to opt out of such
information sharing. Although E*TRADE Securities and Telebank already provide
such opt-out rights in our privacy policies, the regulations could require us
to modify the text and the form of presentation of our privacy policies and to
incur additional expense to ensure ongoing compliance with the regulations.
In addition, the New York Attorney General carried out an investigation of
the online brokerage industry and issued a report, citing consumer complaints
about delays and technical difficulties conducting online stock trading. SEC
Commissioner Laura Unger also issued a report on issues raised by online
brokerage, including suitability and marketing issues. Increased attention
focused upon these issues could adversely affect the growth of the online
financial services industry, which could, in turn, decrease the demand for our
services or could otherwise have a material adverse effect on our business,
financial condition and operating results.
We may be fined or forced out of business if we do not maintain the net
capital levels required by regulators
The SEC, NASD, OTS and various other regulatory agencies have stringent
rules with respect to the maintenance of specific levels of net capital by
securities broker-dealers and regulatory capital by banks. Net capital is the
net worth of a broker or dealer (assets minus liabilities), less deductions
for certain types of assets. If a firm fails to maintain the required net
capital it may be subject to suspension or revocation of registration by the
SEC and suspension or expulsion by the NASD, and could ultimately lead to the
firm's liquidation. In the past, our broker-dealer subsidiaries have depended
largely on capital contributions by us in order to comply with net capital
requirements. If such net capital rules are changed or expanded, or if there
is an unusually large charge against net capital, operations that require the
intensive use of capital would be limited. Such operations may include trading
activities and the financing of customer account balances. Also, our ability
to withdraw capital from brokerage subsidiaries could be restricted, which in
turn could limit our ability to pay dividends, repay debt and redeem or
purchase shares of our outstanding stock. A large operating loss or charge
against net capital could adversely affect our ability to expand or even
maintain our present levels of business, which could have a material adverse
effect on our business, financial condition and operating results.
The table below summarizes the minimum net capital requirements for our
domestic broker-dealer subsidiaries as of March 31, 2000 (in thousands):
<TABLE>
<CAPTION>
Required
net Net Excess
capital capital net capital
-------- -------- -----------
<S> <C> <C> <C>
E*TRADE Securities, Inc. ...................... $128,404 $479,326 $350,922
TIR Securities, Inc. .......................... 250 2,522 2,272
TIR Investor Select, Inc. ..................... 5 367 362
Marquette Securities, Inc. .................... 250 475 225
Telebanc Capital Markets, Inc. ................ 213 18,710 18,497
</TABLE>
Similarly, banks, such as Telebank, are subject to various regulatory
capital requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory--and possibly
additional discretionary--actions by regulators that, if undertaken, could
have a direct material effect on a bank's operations and financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, a bank must meet specific capital guidelines that involve
quantitative measures of a bank's assets, liabilities, and certain off-
balance-sheet items as calculated under regulatory accounting practices. A
bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
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<PAGE>
Quantitative measures established by regulation to ensure capital adequacy
require a bank to maintain minimum amounts and ratios of total and Tier 1
capital to risk-weighted assets and of Tier 1 capital to average assets. To be
categorized as well capitalized a bank must maintain minimum total risk-based,
Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the following
table.
The table below summarizes the capital adequacy requirements for Telebank
as of March 31, 2000 (dollars in thousands):
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
Prompt Corrective
Actual Action Provisions
--------------- ------------------
Amount Ratio Amount Ratio
-------- ------ ---------- -------
<S> <C> <C> <C> <C>
Core Capital (to adjusted tangible
assets)............................... $471,179 7.32% > $322,202 > 5.0%
Tier I Capital (to risk weighted
assets)............................... $471,179 18.36% > $153,825 > 6.0%
Total Capital (to risk weighted
assets)............................... $479,516 18.04% > $256,376 > 10.0%
</TABLE>
As a significant portion of our revenues come from online investing services,
any downturn in the securities industry could significantly harm our business
A significant portion of our revenues in recent years has been from online
investing services, and we expect this business to continue to account for a
significant portion of our revenues in the foreseeable future. We, like other
financial services firms, are directly affected by economic and political
conditions, broad trends in business and finance and changes in volume and
price levels of securities and futures transactions. The U.S. securities
markets are characterized by considerable fluctuation and a downturn in these
markets could adversely affect our operating results. In October 1987 and
October 1989, the stock market suffered major declines, as a result of which
many firms in the industry suffered financial losses, and the level of
individual investor trading activity decreased after these events. Reduced
trading volume and prices have historically resulted in reduced transaction
revenues. When trading volume is low, our operating results may be adversely
affected because overhead remains relatively fixed. Severe market fluctuations
in the future could have a material adverse effect on our business, financial
condition and operating results. Some of our competitors with more diverse
product and service offerings might withstand such a downturn in the
securities industry better than we would. See "Risk Factors--Our business will
suffer if we cannot effectively compete."
Our brokerage business, by its nature, is subject to various other risks,
including customer default and employee misconduct and errors. We sometimes
allow customers to purchase securities on margin, therefore we are affected
because we are subject to risks inherent in extending credit. This risk is
especially great when the market is rapidly declining and the value of the
collateral we hold could fall below the amount of a customer's indebtedness.
Under specific regulatory guidelines, any time we borrow or lend securities,
we must correspondingly disburse or receive cash deposits. If we fail to
maintain adequate cash deposit levels at all times, we run the risk of loss if
there are sharp changes in market values of many securities and parties to the
borrowing and lending transactions fail to honor their commitments. Any such
losses could have a material adverse effect on our business, financial
condition and operating results.
Changes in interest rates may reduce Telebanc's profitability
The results of operations for Telebanc depend in large part upon the level
of its net interest income, that is, the difference between interest income
from interest-earning assets, such as loans and mortgage-backed securities,
and interest expense on interest-bearing liabilities, such as deposits and
borrowings. Many factors cause changes in interest rates, including
governmental monetary policies and domestic and international economic and
political conditions. If Telebanc is unsuccessful in managing the effects of
changes in interest rates, its financial condition and results of operations
could suffer.
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Changes in market interest rates could reduce the value of Telebanc's
financial assets. Fixed-rate investments, mortgage-backed and related
securities and mortgage loans generally decline in value as interest rates
rise.
We could lose customers and have difficulty attracting new customers if we are
unable to quickly introduce new products and services that satisfy changing
customer needs
Our future success depends, in part, on our ability to develop and enhance
our services and products. There are significant technical risks in the
development of new services and products or enhanced versions of existing
services and products. There can be no assurance that we will be successful in
achieving any of the following:
. effectively using new technologies;
. adapting our services and products to emerging industry standards;
. developing, introducing and marketing service and product enhancements;
or
. developing, introducing and marketing new services and products.
We may also experience difficulties that could delay or prevent the
development, introduction or marketing of these services and products. Our
status as a regulated savings and loan holding company resulting from the
acquisition of Telebanc could also lead to delays in or prevent the
development, introduction and marketing of new services and products.
Additionally, these new services and products may not adequately meet the
requirements of the marketplace or achieve market acceptance. If we are unable
to develop and introduce enhanced or new services and products quickly enough
to respond to market or customer requirements, or if they do not achieve
market acceptance, our business, financial condition and operating results
will be materially adversely affected.
Our success depends upon the growth of the Internet as a commercial
marketplace
The market for financial services, particularly over the Internet, is
rapidly evolving. Consequently, demand and market acceptance for recently
introduced services and products are subject to a high level of uncertainty.
For us, this uncertainty is compounded by the risks that consumers will not
continue to adopt online commerce and that commerce on the Internet will not
adequately develop or flourish to permit us to continue to grow.
Sales of many of our services and products will depend on consumers
continuing to adopt the Internet as a method of doing business. There can be
no assurance that the Internet infrastructure will continue to be able to
support the demands placed on it by this continued growth. In addition, the
Internet could be adversely affected by slow development or adoption of
standards and protocols to handle increased Internet activity, or due to
increased governmental regulation. Moreover, critical issues including
security, reliability, cost, ease of use, accessibility and quality of service
remain unresolved and may negatively affect the growth of Internet use or
commerce on the Internet.
Adoption of online commerce by individuals who have relied upon traditional
means of commerce in the past will require such individuals to accept new and
very different methods of conducting business. Moreover, our brokerage and
banking services over the Internet involve a new approach to securities
trading and banking which require extensive marketing and sales efforts to
educate prospective customers regarding their uses and benefits. For example,
consumers who trade with traditional brokerage firms, or even discount
brokers, may be reluctant or slow to change to obtaining brokerage services
over the Internet. Also, concerns about security and privacy on the Internet
may hinder the growth of online investing and banking, which could have a
material adverse effect on our business, financial condition and operating
results.
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<PAGE>
The market price of our common stock, like other technology stocks, may be
highly volatile and any significant decrease in our stock price may make it
difficult for our shareowners to sell their stock
The market price of our common stock has been, and is likely to continue to
be, highly volatile and subject to wide fluctuations due to various factors,
many of which may be beyond our control, including:
. quarterly variations in operating results;
. volatility in the stock market;
. volatility in the general economy;
. changes in interest rates;
. announcements of acquisitions, technological innovations or new
software, services or products by us or our competitors; and
. changes in financial estimates and recommendations by securities
analysts.
In addition, there have been large price and volume fluctuations in the
stock market which have affected the market prices of securities of many
technology, Internet and financial services companies, often unrelated to the
operating performance of such companies. These broad market fluctuations may
adversely affect the market price of our common stock. In the past, volatility
in the market price of a company's securities has often led to securities
class action litigation. Such litigation could result in substantial costs and
a diversion of our attention and resources, which could have a material
adverse effect on our business, financial condition and operating results.
Our success depends on our ability to protect our intellectual property and
any failure to do so could substantially harm our business
Our success and ability to compete are dependent to a significant degree on
our proprietary technology. We rely primarily on copyright, trade secret and
trademark law to protect our technology and our brand. Effective trademark
protection may not be available for our trademarks. Although we have
registered the trademark "E*TRADE" in the United States and certain other
countries, and have certain other registered trademarks, there can be no
assurance that we will be able to secure significant protection for these
trademarks. Our competitors or others may adopt product or service names
similar to "E*TRADE," thereby impeding our ability to build brand identity and
possibly leading to customer confusion. Our inability to adequately protect
the name "E*TRADE" could have a material adverse effect on our business,
financial condition and operating results. Despite any precautions we take, a
third party may be able to copy or otherwise obtain and use our software or
other proprietary information without authorization or to develop similar
software independently. Policing unauthorized use of our technology is made
especially difficult by the global nature of the Internet and difficulty in
controlling the ultimate destination or security of software or other data
transmitted on it. The laws of other countries may afford us little or no
effective protection for our intellectual property. There can be no assurance
that the steps we take will prevent misappropriation of our technology or that
agreements entered into for that purpose will be enforceable. In addition,
litigation may be necessary in the future to:
. enforce our intellectual property rights;
. protect our trade secrets;
. determine the validity and scope of the proprietary rights of others; or
. defend against claims of infringement or invalidity.
Such litigation, whether successful or unsuccessful, could result in
substantial costs and diversion of resources, either of which could have a
material adverse effect on our business, financial condition and operating
results.
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<PAGE>
We may face claims for infringement of third parties' proprietary rights and
it could be costly and time-consuming to defend against such claims, even
those without merit
We have received in the past, and may receive in the future, notices of
claims of infringement of other parties' proprietary rights. There can be no
assurance that claims for infringement or invalidity--or any indemnification
claims based on such claims--will not be asserted or prosecuted against us.
Any such claims, with or without merit, could be time consuming and costly to
defend or litigate, divert our attention and resources or require us to enter
into royalty or licensing agreements. There can be no assurance that such
licenses would be available on reasonable terms, if at all, and the assertion
or prosecution of any such claims could have a material adverse effect on our
business, financial condition and operating results.
Our attempts to enter new markets may be unsuccessful, which could decrease
our earnings and consequently decrease the market value of our common stock
One element of our strategy is to leverage the E*TRADE brand and technology
to enter new markets. No assurance can be given that we will be able to
successfully adapt our proprietary processing technology for use in other
markets. Even if we do adapt our technology, no assurance can be given that we
will be able to compete successfully in any such new markets. There can be no
assurance that our pursuit of any of these opportunities will be successful.
If these efforts are not successful, we could realize less than expected
earnings, which in turn could result in a decrease in the market value of our
common stock. Furthermore, such efforts may divert management attention or
inefficiently utilize our resources.
As a result of our recent merger with Telebanc, we face numerous new risks,
including possible failure to successfully integrate and assimilate Telebanc's
operations with our own
On January 12, 2000, we acquired Telebanc. Telebanc is an online provider
of Internet banking services. This represents a new line of business for us.
No assurance can be given that we will be successful in this market. We may
experience difficulty in assimilating Telebanc's products and services with
our own and we may not be able to integrate successfully the employees of
Telebanc into our organization. These difficulties may be exacerbated by the
geographical distance between our various locations and Telebanc's Virginia
location. If we fail to successfully integrate Telebanc's operations with our
own, our operating results and business could be adversely affected.
Telebank holds a loan portfolio consisting primarily of one- to four-family
residential loans. A critical component of the banking industry is the ability
to accurately assess credit risk and establish corresponding loan loss
reserves. Our status as a regulated savings and loan holding company resulting
from the acquisition of Telebanc could also lead to delays or prevent the
development, introduction and marketing of new services and products. This is
a new industry for E*TRADE and accordingly, we are dependent upon Telebanc
management and employees to advise us in this area.
Due to our recent merger with Telebanc, we may be restricted in expanding our
activities, and our inexperience with being regulated as a savings and loan
holding company could negatively affect both E*TRADE and Telebanc
Upon the completion of our acquisition of Telebanc and its subsidiary,
Telebank, on January 12, 2000, we became subject to regulation as a savings
and loan holding company. As a result, we are required to register with the
OTS and file periodic reports, and are subject to examination by the OTS.
Under financial modernization legislation recently enacted into law, our
activities are restricted to activities that are financial in nature and
certain real estate-related activities. We may also make merchant banking
investments in companies whose activities are not financial in nature, if
those investments are engaged in for the purpose of appreciation and ultimate
resale of the investment, and we do not manage or operate the company. Such
merchant banking investments may be subject to maximum holding periods and
special capital requirements.
35
<PAGE>
We believe that all of our existing activities and investments are
permissible under the new legislation, but the OTS has not yet issued
regulations or otherwise interpreted the new statute. Even if all of our
existing activities and investments are permissible, under the new legislation
we will be constrained in pursuing future new activities that are not
financial in nature. We are also limited in our ability to invest in other
savings and loan holding companies, and all transactions between E*TRADE and
Telebank must be conducted on an arms' length basis.
In addition to regulation of E*TRADE and Telebanc as savings and loan
holding companies, federal savings banks such as Telebank are subject to
extensive regulation of their activities and investments, their
capitalization, their risk management policies and procedures, and their
relationship with affiliated companies. In addition, as a condition to
approving our acquisition of Telebanc, the OTS imposed various notice and
other requirements, primarily a requirement that Telebank obtain prior
approval from the OTS of any future material changes to Telebank's business
plan. These regulations and conditions, and our inexperience with them, could
affect our ability to realize synergies from the merger, and could negatively
affect both E*TRADE and Telebank following the merger.
We face numerous risks associated with doing business in international markets
One component of our strategy is a planned increase in efforts to attract
more international customers. To date, we have limited experience in providing
brokerage services internationally, and Telebanc has had only limited
experience providing banking services to customers outside the United States.
There can be no assurance that our international licensees or subsidiaries
will be able to market our branded services and products successfully in
international markets. In addition, there are certain risks inherent in doing
business in international markets, particularly in the heavily regulated
brokerage and banking industries, such as:
. unexpected changes in regulatory requirements, tariffs and other trade
barriers;
. difficulties in staffing and managing foreign operations;
. the level of investor interest in cross-border trading;
. authentication of on-line customers;
. political instability;
. fluctuations in currency exchange rates;
. reduced protection for intellectual property rights in some countries;
. seasonal reductions in business activity during the summer months in
Europe and certain other parts of the world;
. the level of adoption of the Internet in international markets; and
. potentially adverse tax consequences.
Any of the foregoing could adversely impact the success of our
international operations. In addition, because some of these international
markets are served through license arrangements with others, we rely upon
these third parties for a variety of business and regulatory compliance
matters. We have limited control over the management and direction of these
third parties. We run the risk that their action or inaction could harm our
operations and/or the goodwill associated with our brand name. Additionally,
certain of our international licensees have the right to sell sub-licenses.
Generally, we have less control over sub-licensees than we do over licensees.
As a result, the risk to our operations and goodwill is higher. There can be
no assurance that one or more of the factors described above will not have a
material adverse effect on our future international operations, if any, and,
consequently, on our business, financial condition and operating results.
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<PAGE>
Any failure to successfully integrate the companies that we acquire into our
existing operations or failure to maintain our relationships with strategic
partners could harm our business
We recently acquired Telebanc, TIR and some of our European licensees. We
may also acquire other companies or technologies in the future, and we
regularly evaluate such opportunities. Acquisitions and mergers entail
numerous risks, including:
. difficulties in the assimilation of acquired operations and products;
. diversion of management's attention from other business concerns;
. amortization of acquired intangible assets; and
. potential loss of key employees of acquired companies.
We have limited experience in assimilating acquired organizations into our
operations. No assurance can be given as to our ability to integrate
successfully any operations, technology, personnel, services or new businesses
or products that might be acquired in the future. Failure to successfully
assimilate acquired organizations could have a material adverse effect on our
business, financial condition and operating results.
We have established a number of strategic relationships with online and
Internet service providers, as well as software and information service
providers. There can be no assurance that any such relationships will be
maintained, or that if they are maintained, they will be successful or
profitable. Additionally, we may not be able to develop any new relationships
of this type in the future. We also make investments, either directly or
through affiliated private investment funds, in equity securities of other
companies without acquiring control of those companies. There may be no public
market for the securities of the companies we invest in. In order for us to
realize a return on our investment, such companies must be sold or
successfully complete a public offering of their securities. There can be no
assurance that such companies will be acquired or complete a public offering
or that such an acquisition or public offering will allow us to sell our
securities at a profit, or at all.
Due to the foregoing factors, quarterly revenues and operating results are
difficult to forecast. We believe that period-to-period comparisons of our
operating results will not necessarily be meaningful and you should not rely
on them as any indication of future performance. Our future quarterly
operating results may not consistently meet the expectations of securities
analysts or investors, which in turn may have an adverse effect on the market
price of our common stock.
We have substantially increased our indebtedness, which may make it more
difficult to make payments on our debts or to obtain financing
As a result of our sale of 6% convertible subordinated notes, we have
incurred $650 million of additional indebtedness, increasing our ratio of debt
to equity (expressed as a percentage) to approximately 38% as of March 31,
2000. We may incur substantial additional indebtedness in the future. The
level of our indebtedness, among other things, could
. make it difficult for us to make payments on our debt;
. make it difficult for us to obtain any necessary financing in the future
for working capital, capital expenditures, debt service requirements or
other purposes;
. limit our flexibility in planning for, or reacting to, changes in our
business; and
. make us more vulnerable in the event of a downturn in our business.
There can be no assurance that we will be able to meet our debt service
obligations, including obligations under the notes.
37
<PAGE>
Loss or reductions in revenue from order flow rebates could harm our business
Order flow revenue as a percentage of revenue has decreased over the past
three years. There can be no assurance that payments for order flow will
continue to be permitted by the SEC, the NASD or other regulatory agencies,
courts or governmental units. Loss of any or all of these revenues could have
a material adverse effect on our business, financial condition and operating
results.
We may incur costs to avoid investment company status and may suffer adverse
consequences if we are deemed to be an investment company
We may incur significant costs to avoid investment company status and may
suffer other adverse consequences if we are deemed to be an investment company
under the Investment Company Act of 1940, which is commonly referred to as the
"1940 Act".
A company may be deemed to be an investment company if it owns investment
securities with a value exceeding 40% of its total assets, subject to certain
exclusions. After giving effect to the offering, we will have substantial
short-term investments until the net proceeds from the offering can be
deployed. In addition, we and our subsidiaries have made minority equity
investments in other companies that may constitute investment securities under
the 1940 Act. In particular, many of our publicly traded equity investments,
which are owned directly by us or through related venture funds, are deemed to
be investment securities. Although our investment securities currently
comprise less than 40% of our total assets, the value of these minority
investments has fluctuated in the past, and substantial appreciation in some
of these investments may, from time to time, cause the value of our investment
securities to exceed 40% of our total assets. These factors may result in us
being treated as an "investment company" under the 1940 Act.
We believe we are primarily engaged in a business other than investing,
reinvesting, owning, holding, or trading securities for our account and,
therefore, are not an investment company within the meaning of the 1940 Act.
However, in the event that such exemption is not available and the 40% limit
were to be exceeded (including through fluctuations in the value of our
investment securities), we may need to reduce our investment securities as a
percentage of our total assets. This reduction can be attempted in a number of
ways, including the sale of investment securities and the acquisition of non-
investment security assets, such as cash, cash equivalents and government
securities. If we sell investment securities, we may sell them sooner than we
intended. These sales may be at depressed prices and we may never realize
anticipated benefits from, or may incur losses on, these investments. Some
investments may not be sold due to normal contractual or legal restrictions or
the inability to locate a suitable buyer. Moreover, we may incur tax
liabilities if we sell these assets. We may also be unable to purchase
additional investment securities that may be important to our operating
strategy. If we decide to acquire non-investment security assets, we may not
be able to identify and acquire suitable assets, and will likely realize a
lower return on any such investments.
If we were deemed to be an investment company, we could become subject to
substantial regulation under the 1940 Act with respect to our capital
structure, management, operations, affiliate transactions and other matters.
As a consequence, we could be barred from engaging in business or issuing our
securities as we have in the past and might be subject to civil and criminal
penalties for noncompliance. In addition, some of our contracts might be
voidable, and a court-appointed receiver could take control of us and
liquidate our business in certain circumstances.
38
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
For quantitative and qualitative disclosures about market risk, the Company
has evaluated such risk for its brokerage and banking related operations
separately due to the recent acquisition of Telebanc which represents a new
line of business for the Company. The following discussion about the Company's
market risk disclosures includes forward-looking statements. Actual results
could differ materially from those projected in the forward-looking statements
as a result of certain factors, including those set forth in the section
entitled "Risk Factors" and elsewhere in this filing. Reference is made to
Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk,
in our Annual Report on Form 10-K/A for the year ended September 30, 1999.
Brokerage and Investment Operations
The Company is exposed to market risk related to changes in interest rates,
foreign currency exchange rates and equity security price risk. The Company
does not have derivative financial instruments for speculative or trading
purposes.
Interest Rate Sensitivity
During the quarter ended March 31, 2000, the Company had a variable rate
bank line of credit. As of March 31, 2000, the Company had $32.0 million
outstanding under this line. The line of credit and the monthly interest
payment are subject to interest rate risk. If market interest rates were to
increase immediately and uniformly by 10 percent at March 31, 2000, the
interest payments would increase by an immaterial amount.
Equity Price Risk
The Company has investments in publicly-traded equity securities. The fair
value of these securities at March 31, 2000 was $533.9 million. If the market
price of the securities held at March 31, 2000 were to decrease by 10%, the
fair value of the portfolio would decline by $53.4 million, which would not
have a material effect on the financial position of the Company. The Company
accounts for these securities as available-for-sale, and unrealized gains and
losses resulting from changes in the fair value of these securities are
reflected as a change in shareowners' equity, and not reflected in the
determination of operating results until the securities are sold. At March 31,
2000, unrealized gains on these securities were $498.4 million.
Financial Instruments
For its working capital and reserves, which are required to be segregated
under Federal or other regulations, the Company invests in money market funds,
resale agreements, certificates of deposit, and commercial paper. Money market
funds do not have maturity dates and do not present a material market risk.
The other financial instruments are fixed rate investments with short
maturities and do not present a material interest rate risk.
Banking Operations
The Company manages its banking related interest rate risk through the use
of financial derivatives such as interest rate cap, swap and floor agreements.
The Company uses these instruments to ensure that the market value of equity
and net interest income are protected from the impact of changes in interest
rates. The Company has experienced no material changes in market risk
pertaining to its banking operations during the quarter ended March 31, 2000.
39
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal and Administrative Proceedings
On November 21, 1997, a putative class action was filed in the Superior
Court of California, County of Santa Clara, by Larry R. Cooper on behalf of
himself and other similarly situated individuals. The action alleges, among
other things, that our advertising, other communications and business
practices regarding our commission rates and our ability to timely execute and
confirm transactions through our online brokerage services were false and
deceptive. The action seeks injunctive relief enjoining the purported
deceptive and unfair practices alleged in the action and also seeks
unspecified compensatory and punitive damages, as well as attorney fees. On
June 1, 1999, the court entered an order denying plaintiffs' motion for class
certification. While the court declined to certify a class as to any of
plaintiffs' alleged claims, it did indicate that plaintiffs may be able to
pursue one of their claims (relating to our commission structure) on a
representative basis. On January 25, 2000, the court ordered plaintiffs to
submit all claims (including representative claims) seeking monetary relief to
arbitration; claims for injunctive relief were not ordered to arbitration, but
were stayed pending arbitration. We are unable to predict the ultimate outcome
of this proceeding.
On February 11, 1999, a putative class action was filed in the Supreme
Court of New York, County of New York, by Evan Berger, on behalf of himself
and other similarly situated individuals. The action alleged, among other
things, that our advertising, other communications and business practices
regarding our ability to timely execute and confirm transactions through our
online brokerage services were false and deceptive. Plaintiff seeks damages
based on causes of action for breach of contract and violation of New York
consumer protection statutes. After we filed a motion to dismiss or stay the
complaint on April 14, 1999, the plaintiff chose to file an amended complaint.
In response to that amended complaint, we have moved to compel arbitration or,
alternatively, dismiss the amended complaint. By a Decision and Order, entered
by the Court on March 28, 2000, the Court granted our motion to compel
arbitration of plaintiff's breach of contract claim by dismissing plaintiff's
breach of contract claim and ordering plaintiff to proceed to arbitration of
that claim. The Court also granted our motion to dismiss by dismissing
plaintiff's claims based on violation of New York's consumer protection
statutes.
On March 1, 1999, a putative class action was filed in the Court of Common
Pleas, Cuyahoga County, Ohio, by Truc Q. Hoang. The Hoang complaint seeks
damages and injunctive relief arising out of, among other things, plaintiff's
alleged problems accessing her account and placing orders. Plaintiff alleges
causes of action for breach of contract, fiduciary duty and unjust enrichment,
fraud, unfair and deceptive trade practices, negligence/intentional tort and
injunctive relief. We have filed motions both to compel arbitration and to
dismiss the complaint. All discovery regarding the merits of plaintiff's
claims is stayed pending the determination of our motion to dismiss. On
September 1, 1999, the court denied our motion to compel arbitration. We
appealed the order and a hearing on the appeal took place on February 2, 2000.
By a Journal Entry and Opinion, dated March 16, 2000, the Court of Appeals
reversed the trial court's decision on the grounds that its resolution of our
motion to compel arbitration was premature prior to resolution of whether the
case should be certified as a class action. The Court of Appeals remanded the
case to the trial court. This proceeding is still at an early stage and we are
unable to predict its ultimate outcome.
On March 10, 1999, a putative class action was filed in the Superior Court
of California, County of Santa Clara, by Raj Chadha. The Chadha complaint
seeks damages and injunctive relief arising out of, among other things, the
February 3, 4 and 5, 1999, system interruptions. Plaintiff brings causes of
action for breach of fiduciary duty and violations of the Consumer Legal
Remedies Act and California Unfair Business Practices Act. In response to the
complaint, we filed a petition to compel arbitration. Among other things, we
argued that, in light of the Cooper court's decision to deny class
certification, all customers who were members of the alleged Cooper class--
including Chadha--are obligated to submit their claims to arbitration in
accordance with the customer agreement. The court granted the petition to
compel arbitration on July 29, 1999, and stayed all further proceedings
pending arbitration.
40
<PAGE>
On March 11, 1999, a putative class action was filed in the Superior Court
of California, County of Santa Clara, by Elie Wurtman. The Wurtman complaint
seeks damages and injunctive relief arising out of, among other things,
plaintiff's alleged problems accessing her account and placing orders. The
complaint also makes allegations regarding access problems relating to our
customers residing or traveling outside of the United States. Plaintiff brings
causes of action for negligence and violations of the Consumer Legal Remedies
Act and California Unfair Business Practices Act. In response to the
complaint, we filed a petition to compel arbitration. As in Chadha, we argued
that, in light of the Cooper court's decision to deny class certification,
Wurtman is obligated to submit his claims to arbitration in accordance with
the customer agreement. The petition to compel arbitration was heard by the
court on September 9, 1999 and was denied. On October 4, 1999, we appealed the
court's order denying the petition, and that appeal has the effect of staying
all further proceedings in the trial court. Our opening brief on appeal was
filed on March 28, 2000. This proceeding is still at an early stage and we are
unable to predict the ultimate outcome.
On April 14, 1999, a putative class action was filed in the Superior Court
of California, County of Los Angeles, by Matthew J. Rosenberg. Plaintiff seeks
injunctive relief based on alleged violations of the California Unfair
Business Practices Act regarding the extent to which shares in IPOs are made
available to our customers. We filed a demurrer and motion to strike on August
13, 1999, arguing (among other things) that the plaintiff has not alleged
facts sufficient to state a claim against us. On October 6, 1999, the court
dismissed the class action claims with prejudice. The claim for unfair
business practices was dismissed with leave to amend, but for injunctive
relief only and not money damages. Plaintiff filed an amended complaint on
October 26, 1999. We filed a petition to compel arbitration in response. On
December 29, 1999, the court granted the petition to compel arbitration and
dismissed the court proceeding. Plaintiff filed a notice of appeal on February
29, 2000. We are unable to predict the ultimate outcome of this proceeding.
On December 23, 1999, plaintiff Kathleen Nyquist filed a complaint in
federal court. Ms. Nyquist is a customer who brings claims for breach of
fiduciary duty, negligence/recklessness, unfair trade practices, securities
law violations and aiding and abetting. Her claims against us arise out of
allegedly unauthorized transactions and day-trading allegedly effected by her
husband in her IRA account as well as another account. Plaintiff alleges
losses totaling approximately $700,000 and also seeks attorney's fees,
punitive damages as well as treble damages under the South Carolina unfair
trade practices laws. We have made a motion to compel arbitration that is
currently pending before the court. This proceeding is still at an early stage
and we are unable to predict the ultimate outcome.
We believe that these claims are without merit and intend to defend against
them vigorously. An unfavorable outcome in any matters which are not covered
by insurance could have a material adverse effect on our business, financial
condition and results of operations. In addition, even if the ultimate
outcomes are resolved in our favor, 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 on our results of operation.
From time to time, we have been threatened with, or named as a defendant
in, lawsuits, arbitrations 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 against us could have a
material adverse effect on our business, financial condition and results of
operations. We are 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, we are required to
comply with many complex laws and rules and our ability to so comply is
dependent in large part upon the establishment and maintenance of a qualified
compliance system. We are aware of several instances of our noncompliance with
applicable regulations. In particular, in fiscal 1997, our failure to timely
renew its broker dealer registration in Ohio resulted in a $4.3 million pre-
tax charge against earnings.
41
<PAGE>
We maintain insurance in such amounts and with such coverages, deductibles
and policy limits as management believes are reasonable and prudent. The
principal risks that we insure against are comprehensive general liability,
commercial property, hardware/software damage, directors and officers, and
errors and omissions liability. We believe that such insurance coverages are
adequate for the purpose of our business.
Item 2. Changes in Securities and Use of Proceeds--Not applicable.
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
<TABLE>
<C> <S>
* 4.1 Indenture, dated February 1, 2000, by and between the Company and The
Bank of New York.
*10.1 Employment agreement, dated June 1, 1999, by and between the Company
and Christos M. Cotsakos.
*10.2 Employment agreement, dated June 1, 1999, by and between the Company
and Kathy Levinson.
*10.3 Purchase Agreement, dated February 1, 2000, by and among the Company,
FleetBoston Robertson Stephens Inc., Hambrecht & Quist LLC and
Goldman, Sachs & Co.
*10.4 Registration Rights Agreement, dated February 1, 2000, by and among the
Company, FleetBoston Robertson Stephens Inc., Hambrecht & Quist LLC
and Goldman, Sachs & Co.
*10.5 E*TRADE Ventures I, LLC, Limited Liability Company Operating Agreement.
*10.6 E*TRADE eCommerce Fund, L.P., Amended and Restated Limited Partnership
Agreement.
**10.7 E*TRADE Group, Inc. Note Secured by Deed of Trust dated March 17, 2000,
by and between the Company and Theodore J. Theophilos.
**10.8 E*TRADE Group, Inc. Amendment to Note Secured by Deed of Trust, dated
May 5, 1999, by and between the Company and Theodore J. Theophilos.
**27.1 Financial Data Schedule
*99.1 Press release, dated January 25, 2000, relating to the 6% convertible
subordinated notes due 2007.
*99.2 Press release, dated February 2, 2000, relating to the 6% convertible
subordinated notes due 2007.
</TABLE>
- --------
* Previously filed.
** Filed herewith.
(b) Reports on Form 8-K
On April 17, 2000, the Company filed a Current Report on Form 8-K to report
the first period of consolidated results of E*TRADE and Telebanc Financial
Corporation ("Telebanc"). The acquisition of Telebanc was completed on January
12, 2000 and was accounted for as a pooling of interests.
On January 27, 2000, the Company filed a Current Report on Form 8-K to
report the final closing of its merger with Telebanc Financial Corporation.
42
<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: May 15, 2000
/s/ Christos M. Cotsakos
By: _________________________________
Christos M. Cotsakos
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
/s/ Leonard C. Purkis
By: _________________________________
Leonard C. Purkis
Chief Financial Officer
(Principal Financial and
Accounting Officer)
43
<PAGE>
EXHIBIT 10.7
E*TRADE GROUP, INC.
NOTE SECURED BY DEED OF TRUST
-----------------------------
$4,000,000.00 March 17, 2000
Menlo Park, California
FOR VALUE RECEIVED, Theodore J. Theophilos (the "Maker") promises to
pay to the order of E*TRADE Group, Inc. (the ``Corporation''), at its corporate
offices at 4500 Bohannon Drive, Menlo Park, CA 94025, the principal sum of Four
Million Dollars ($4,000,000.00), together with all accrued interest thereon (the
"Loan"), upon the terms and conditions specified below.
1. Interest. No interest shall accrue on the unpaid balance
--------
outstanding under this Note during the first 36 months of the Loan. Commencing
on April 1, 2003, interest shall accrue on the unpaid balance outstanding from
time to time under this Note at six and eight tenths percent (6.8%), compounded
annually. 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.
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 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 (as defined
below), the Maker shall not be obligated to pay, and the Corporation 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 Corporation in connection with this Note under
applicable law.
2. Principal. The entire principal balance of this Note, together with
---------
all accrued and unpaid interest, shall become due and payable in one lump sum on
March 17, 2005.
3. Payment. All payments of principal and interest on the Loan shall
-------
be made without offset or deduction and shall be made in immediately available
lawful tender of the United States and shall be applied first to the payment of
all accrued and unpaid interest and then to the payment of principal.
Prepayment of the principal balance of this Note, together with all accrued and
unpaid interest, may be made in whole or in part at any time without penalty.
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.
<PAGE>
4. Representations and Warranties. The Maker represents and warrants
------------------------------
to the Corporation that this Note does not contravene any contractual or
judicial restriction binding on or affecting the Maker and that this Note is the
legal, valid and binding obligation of the Maker enforceable against him in
accordance with its terms.
5. Notice. The Maker agrees to notify the Corporation of the
------
incurrence of any other indebtedness secured by the Collateral (as defined
below) prior to the incurrence thereof.
6. Events of Acceleration. The entire unpaid principal balance of this
----------------------
Note, together with all accrued and unpaid interest, shall become immediately
due and payable prior to the specified due date of this Note upon the occurrence
of one or more of the following events:
a. the failure to make any payment of principal, interest or any
other amount payable hereunder when due under this Note or the breach of any
other condition, obligation or covenant under this Note;
b. the breach of any representation or covenant under the Deed
of Trust (as defined below);
c. the filing of a petition by or against the Maker 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 and the continuation of such
petition without dismissal for a period of thirty (30) days or more; or
appointment of a receiver, trustee, custodian or liquidator of or for all or any
part of the assets or property of the Maker; or the insolvency of the Maker; or
the making of a general assignment for the benefit of creditors by the Maker;
d. The Maker's death or incapacity;
e. any of the documents relating to the Collateral after
delivery thereof shall for any reason be revoked or invalidated, or otherwise
cease to be in full force and effect, or the Maker or any other person shall
contest in any manner the validity or enforceability thereof, or the Maker 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;
f. the incurrence by the Maker of any other indebtedness secured
by the Collateral which has not been consented to by the Corporation;
g. the expiration of the two (2)-month period following the date
the Maker ceases for any reason to remain in the Corporation's employ;
h. an acquisition of the Corporation (whether by merger or
acquisition of all or substantially all of the Corporation's assets or
outstanding voting stock) for consideration payable in cash or freely-tradable
securities; provided, however, that if the Pooling of Interest Method, as
described in Accounting Principles Board Opinion No. 16, is used to account for
the acquisition for financial reporting purposes, acceleration shall not occur
prior to the end of the
2
<PAGE>
sixty (60)-day period immediately following the end of the applicable
restriction period required under Accounting Series Release Numbers 130 and 135;
or
i. the occurrence of any event of default under the Deed of
Trust securing this Note or any obligation secured thereby.
7. Special Acceleration Event. In the event that the Maker sells
--------------------------
any shares of the common stock of the Corporation, the unpaid principal balance
of this Note shall become immediately due and payable to the extent of one
hundred percent (100%) of the after-tax proceeds realized upon such sale, and
the Maker shall promptly deliver those after-tax proceeds to the Company to the
extent necessary to satisfy the accelerated balance of this Note.
8. Late Fee; Default.
-----------------
a. If any payment hereunder is not paid on or before the fifth (5th)
business day of the month during which any such payment first became due and
payable, Maker shall pay to Corporation a reasonable late or administrative
charge in the amount of five percent (5%) of the amount so unpaid.
b. Upon and after the occurrence of a default hereunder or any other
agreement or instrument evidencing, governing or securing this Loan (an "Event
of Default"), the Loan shall bear interest, payable upon demand, at the lessor
of twelve percent (12%) or the maximum rate allowed by law (the "Default Rate").
c. If any interest payment hereunder is not paid on of before the
fifth (5th) business day of the month during which such payment first became due
and payable, any interest so unpaid shall bear interest from the first day of
the month during which such payment first became due and payable until paid at
the Default Rate. Interest on the amount of interest so unpaid shall be
compounded monthly and shall be payable upon demand.
d. Maker and Corporation agree that the actual damages and costs
sustained by Corporation due to the failure to make timely payments would be
extremely difficult to measure and that the charges specified herein represent a
reasonably estimate by Maker and Corporation of a fair average compensation for
such damages and costs. Such charges shall be paid by Maker without prejudice
to the right of Corporation to collect any other amounts provided to be paid
under this Note or any other agreement or, with respect to late payments, to
declare an Event of Default.
9. Employment. For purposes of applying the provisions of this Note,
----------
the Maker shall be considered to remain in the Corporation's employ for so long
as the Maker renders services as a full-time employee of the Corporation, any
successor entity or one or more of the Corporation's fifty percent (50%)-or-more
owned (directly or indirectly) subsidiaries.
10. Use of Proceeds; Security. The proceeds of the loan evidenced by
-------------------------
this Note shall be applied solely to the payment of the purchase price of
Maker's principal residence in the San Francisco Bay Area. The obligations of
Maker under this Note shall be secured by a mortgage security interest in such
home (the "Collateral"), which security interest shall be more
3
<PAGE>
specifically described by a deed of trust on such home to be executed by the
Maker in favor of the Corporation immediately upon completion of the purchase of
such home (the "Deed of Trust"), in substantially the same form as the deed of
trust attached hereto as Exhibit A. The Maker shall remain personally liable for
payment of this Note, and any other assets of the Maker, in addition to the
Collateral, may be applied to the satisfaction of the Maker's obligations
hereunder.
11. Collection. The Maker agrees to pay on demand all the losses,
----------
costs, and expenses (including, without limitation, attorneys' fees and
disbursements) which the Corporation incurs in connection with enforcement or
attempted enforcement of this Note, or the protection or preservation of the
Corporation's rights under this 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.
12. Waiver. A waiver of any term of this Note, the Deed of Trust or
------
of any of the obligations secured thereby must be made in writing and signed by
a duly-authorized officer of the Corporation and any such waiver shall be
limited to its express terms. No delay by the Corporation in acting with respect
to the terms of this Note or the Deed of Trust shall constitute a waiver of any
breach, default, or failure of a condition under this Note, the Deed of Trust or
the obligations secured thereby. No single or partial exercise of any power
under this Note shall preclude any other or further exercise of such power or
exercise of any other power. The Maker waives presentment, demand, notice of
dishonor, notice of default or delinquency, notice of acceleration, notice of
protest and nonpayment, notice of costs, expenses or losses and interest
thereon, notice of interest on interest and diligence in taking any action to
collect any sums owing under this Note or in proceeding against any of the
rights or interests in or to properties securing payment of this Note. The Maker
agrees to make all payments under this Note without set-off of deduction and
regardless of any counterclaim or defense.
13. Conflicting Agreements. In the event of any inconsistencies
----------------------
between the terms of this Note and the terms of any other document related to
the loan evidenced by the Note, the terms of this Note shall prevail.
14. Governing Law. This Note shall be construed in accordance with
-------------
the laws of the State of California. This Note shall be binding on the Maker and
his successors, assigns, personal representatives, heirs, and legatees, and
shall be binding upon and inure to the benefit of the Corporation, any future
holder of this Note and their respective successors and assigns. The Maker may
not assign or transfer this Note or any of his obligations hereunder without the
Corporation's prior written consent.
4
<PAGE>
15. Time of Essence. Time is of the essence with respect to every
---------------
provision hereof.
/s/ Theodore J. Theophilos
-----------------------------
Theodore J. Theophilos
5
<PAGE>
EXHIBIT A
DEED OF TRUST
<PAGE>
RECORDING REQUESTED BY
AND WHEN RECORDED MAIL TO:
NAME: Brobeck, Phleger & Harrison LLP
ADDRESS: One Market
Spear Street Tower
San Francisco, CA 94105
Attn:
- --------------------------------------------------------------------------------
SPACE ABOVE THIS LINE FOR RECORDER'S USE
DEED OF TRUST WITH ASSIGNMENT OF RENTS
THIS DEED OF TRUST WITH ASSIGNMENT OF RENTS (this "Deed of Trust") is
made as of this 17 day of March, 2000, by Theodore J. Theophilos and Anne A.
Theophilos, husband and wife (collectively, "Trustor"), whose address is 510
Eucalyptus Avenue, Hillsborough, CA 94010, to CHICAGO TITLE COMPANY, a
California corporation ("Trustee"), for the benefit of E*TRADE GROUP, INC., a
Delaware corporation ("Beneficiary").
Trustor irrevocably grants, transfers and assigns to Trustee in trust,
with power of sale that certain property located at 510 Eucalyptus Avenue,
Hillsborough, San Mateo County, California, more particularly described in
Exhibit A attached hereto, together with all improvements thereon, rights
appurtenant thereto and the rents, issues and profits thereof (collectively, the
"Property"), subject, however, to the right, power and authority hereinafter
given to and conferred upon Beneficiary to collect and apply such rents, issues
and profits, for the purpose of securing: (i) payment of the sum of Four Million
Dollars ($4,000,000.00) with interest thereon according to the terms of that
certain Note Secured by Deed of Trust dated as of March 17, 2000 ("Note") made
by Trustor, payable to the order of Beneficiary, and extensions or renewals
thereof; (ii) the performance of each agreement of Trustor incorporated by
reference or contained herein or reciting it is so secured; and (iii) payment of
additional sums and interest thereon which may hereafter be loaned to Trustor,
or his or her successors or assigns, when evidenced by a promissory note or
notes reciting that they are secured by this Deed of Trust. The Property and
any and all other collateral pledged as security to Beneficiary are collectively
referred to herein as the "Collateral."
A. To protect the security of this Deed of Trust, and with respect to the
Property, Trustor agrees:
(1) To keep the Property in good condition and repair; not to remove
or demolish any building thereon; to complete or restore promptly and in good
and workmanlike manner any building which may be constructed, damaged or
destroyed thereon and to pay when
<PAGE>
due all claims for labor performed and materials furnished therefor; to comply
with all laws affecting the Property or requiring any alterations or
improvements to be made thereon; not to commit or permit waste thereof; not to
commit, suffer or permit any act upon the Property in violation of law; to
cultivate, irrigate, fertilize, fumigate, prune and do all other acts which from
the character or use of the Property may be reasonably necessary, the specific
enumerations herein not excluding the general.
(2) To provide maintain and deliver to Beneficiary insurance policies
satisfactory to and with loss payable to Beneficiary. The amount collected
under any earthquake, fire or other insurance policy may be applied by
Beneficiary upon any indebtedness secured hereby and in such order as
Beneficiary may determine, or at option of Beneficiary the entire amount so
collected or any part thereof may be released to Trustor. Such application or
release shall not cure or waive any default or notice of default hereunder or
invalidate any act done pursuant to the Note or otherwise.
(3) To appear in and defend any action or proceeding purporting to
affect the security hereof or the rights or powers of Beneficiary or Trustee;
and to pay all costs and expenses, including cost of evidence of title and
attorney's fees in a reasonable sum, in any action or proceeding in which
Beneficiary or Trustee may appear, and in any suit brought by Beneficiary or
Trustee to foreclose this Deed of Trust.
(4) To pay, at least ten days before delinquency all taxes and
assessments affecting the Property, including assessments on appurtenant water
stock; and to pay, when due, all encumbrances, charges and liens, with interest,
on the Property or any part thereof, which appear to be prior or superior hereto
and all costs, fees and expenses incurred by Beneficiary or Trustee in
connection with this Deed of Trust.
Should Trustor fail to make any payment or to do any act as herein
provided, then Beneficiary or Trustee, but without obligation so to do and
without notice to or demand upon Trustor and without releasing Trustor from any
obligation hereof, may: make or do the same in such manner and to such extent
as either may deem necessary to protect the security hereof, Beneficiary or
Trustee being authorized to enter upon the Property for such purposes; appear in
and defend any action or proceeding purporting to affect the security hereof or
the rights or powers of Beneficiary or Trustee; pay, purchase, contest or
compromise any encumbrance, charge, or lien which in the judgment of either
appears to be prior or superior hereto and, in exercising any such powers, pay
necessary expenses, employ counsel and pay his or her reasonable fees.
(5) To pay immediately and without demand all sums so expended by
Beneficiary or Trustee, with interest from date of expenditure at the amount
then applicable under the Note, and to pay for any statement provided for by law
in effect at the date hereof regarding the obligation secured hereby, any amount
demanded by Beneficiary or Trustee not to exceed the maximum allowed by law at
the time when said statement is demanded.
B. It is further agreed:
2
<PAGE>
(1) That any award of damages in connection with any condemnation for
public use of or injury to the Property or any part thereof is hereby assigned
and shall be paid to Beneficiary who may apply or release such moneys received
in the same manner and with the same effect as above provided for disposition of
proceeds of insurance.
(2) That by accepting payment of any sum secured hereby after its due
date, Beneficiary does not waive its right either to require prompt payment when
due of all other sums so secured or to declare default for failure so to pay.
(3) That at any time or from time to time, without liability therefor
and without notice, upon written request of Beneficiary and presentation of this
Deed of Trust and the Note for endorsement, and without affecting the personal
liability of any person for payment of the indebtedness secured hereby,
Beneficiary or Trustee may: reconvey any part of the Property, consent to the
making of any map or plat thereof, join in granting any easement thereon, or
join in any extension agreement or any agreement subordinating the lien or
charge hereof.
(4) That upon written request of Beneficiary stating that all sums
secured hereby have been paid, and upon surrender of this Deed of Trust and the
Note to Trustee for cancellation and retention or other disposition as Trustee
in its sole discretion may choose and upon payment of its fees, Trustee shall
reconvey, without warranty, the Property then held hereunder. The Grantee in
such reconveyance may be described as "the person or persons legally entitled
thereto."
(5) That as additional security, Trustor hereby gives to and confers
upon Beneficiary the right, power and authority, during the continuance of these
trusts to collect the rents, issues and profits of the Property, reserving unto
Trustor the right, prior to any default by Trustor in payment of any
indebtedness secured hereby or in performance of any agreement hereunder or
under the Note, to collect and retain such rents, issues and profits as they
become due and payable. Upon any such default, Beneficiary may at any time
without notice, either in person, by agent, or by a receiver to be appointed by
a court, and without regard to the adequacy of any security for the indebtedness
hereby secured, enter upon and take possession of the Property or any part
thereof, in its own name sue for or otherwise collect such rents, issues, and
profits, including those past due and unpaid, and apply the same, less costs and
expenses of operation and collection, including reasonable attorneys' fees, upon
any indebtedness secured hereby, and in such order as Beneficiary may determine.
The entering upon and taking possession of the Property, the collection of such
rents, issues and profits and the application thereof as aforesaid, shall not
cure or waive any default or notice of default hereunder or invalidate any act
done pursuant to such notice.
(6) That upon default by Trustor in the payment of any indebtedness
secured hereby or in performance of any agreement hereunder, or upon the
occurrence of any Event of Acceleration or any other default by Trustor in the
payment or performance of any obligation under the Note, Beneficiary may declare
all sums secured hereby immediately due and payable by delivery to Trustee of
written declaration of default and demand for sale and of written notice of
default and of election to cause the Property to be sold, which notice Trustee
shall cause to be
3
<PAGE>
filed for record. Beneficiary also shall deposit with Trustee this Deed of
Trust, the Note and all documents evidencing expenditures secured hereby.
After the lapse of such time as may then be required by law following
the recordation of said notice of default, and notice of sale having been given
as then required by law, Trustee, without demand on Trustor, shall sell the
Property at the time and place fixed by it in said notice for sale, either as a
whole or in separate parcels, and in such order as it may determine, at public
auction to the highest bidder for cash in lawful money of the United States,
payable at the time of sale. Trustee may postpone the sale of all or any
portion of the Property by public announcement at such time and place of sale,
and from time to time thereafter may postpone such sale by public announcement
at the time fixed by the preceding postponement. Trustee shall deliver to such
purchaser its deed conveying the property so sold, but without any covenant or
warranty, express or implied. The recitals in such deed of any matters of facts
shall be conclusive proof of the truthfulness thereof. Any person, including
Trustor, Trustee, or Beneficiary as hereinafter defined, may purchase at such
sale.
After deducting all costs, fees and expenses of Trustee and of this
trust, including cost of evidence of title in connection with sale, Trustee
shall apply the proceeds of sale to payment of (in the following order of
priority): all sums owing under the terms hereof or under the Note, not then
repaid, with accrued interest at the amount allowed by law in effect at the date
hereof; all other sums then secured hereby; and the remainder, if any, to the
person or persons legally entitled thereto.
(7) Beneficiary or any successor in ownership of any indebtedness
secured hereby may, from time to time, by instrument in writing, substitute a
successor or successors to any Trustee named herein or acting hereunder, which
instrument, executed by Beneficiary and duly acknowledged and recorded in the
office of the recorder of the county or counties where the Property is situated,
shall be conclusive proof of proper substitution of such successor Trustee or
Trustees, who shall, without conveyance from Trustee's predecessor, succeed to
all its title, estate, rights, powers and duties. Said instrument must contain
the name of the original Trustor, Trustee and Beneficiary hereunder, the book
and page where this Deed of Trust is recorded and the name and address of the
new Trustee.
(8) This Deed of Trust applies to, inures to the benefit of, and binds
all parties hereto, their heirs, legatees, devisees, administrators, executors,
successors, and assigns. The term "Beneficiary" shall mean the owner and
holder, including pledgees, of the Note secured hereby, whether or not named as
Beneficiary herein. In this Deed of Trust, whenever the context so requires,
the masculine gender includes the feminine and/or the neuter, and the singular
number includes the plural.
(9) Trustee accepts this trust when this Deed of Trust, duly executed
and acknowledged, is made a public record as provided by law. Trustee is not
obligated to notify any party hereto of pending sale under any other Deed of
Trust or of any action or proceeding in which Trustor, Beneficiary or Trustee
shall be a party unless brought by Trustee.
(10) Beneficiary may charge for a statement regarding the obligation
secured hereby, provided the charge thereof does not exceed the maximum allowed
by law.
4
<PAGE>
(11) The undersigned Trustor, requests that a copy of any notice of
default and any notice of sale hereunder be mailed to him or her at his or her
address hereinbefore set forth.
(12) This Deed of Trust is further subject to the terms and conditions
set forth in Addendum to this Deed of Trust attached hereto and incorporated
herein by this reference.
(13) This Deed of Trust shall be governed by the laws of the state of
California and all applicable federal laws.
(14) Any married person who executes this Deed of Trust as a Trustor
and who is obligated under the Note or any other instrument relating thereto or
hereto agrees that any money judgment which Beneficiary or Trustee obtains
pursuant to the terms of this Deed of Trust or any other obligation of that
married person secured by this Deed of Trust may be collected by execution upon
that person's separate property and any community property of which that person
is a manager.
IN WITNESS WHEREOF, Trustor has executed this Deed of Trust effective
as of the date first set forth above.
/s/ Theodore J. Theophilos
--------------------------------
Theodore J. Theophilos
/s/ Anne A. Theophilos
--------------------------------
Anne A. Theophilos
STATE OF CALIFORNIA )
COUNTY OF SAN MATEO )
On _______________, 2000 before me, _____________________, Notary
Public, personally appeared _____________, personally known to me (or proved to
me on the basis of satisfactory evidence) to be the person whose name is
subscribed to the within instrument and acknowledged to me that he executed the
same in his authorized capacity, and that by his signature on the instrument the
person, or the entity upon behalf of which the person acted, executed the
instrument.
WITNESS my hand and official seal. (SEAL)
----------------------------------
Signature of Notary
5
<PAGE>
STATE OF CALIFORNIA )
COUNTY OF SAN MATEO )
On _______________, 2000 before me, _____________________, Notary
Public, personally appeared ______________, personally known to me (or proved to
me on the basis of satisfactory evidence) to be the person whose name is
subscribed to the within instrument and acknowledged to me that he executed the
same in his authorized capacity, and that by his signature on the instrument the
person, or the entity upon behalf of which the person acted, executed the
instrument.
WITNESS my hand and official seal. (SEAL)
---------------------------------
Signature of Notary
6
<PAGE>
EXHIBIT A
7
<PAGE>
ADDENDUM
THIS ADDENDUM is attached to, and made a part of, that certain Deed of
Trust With Assignment of Rents (the "Deed of Trust") dated March 17, 2000
executed by Theodore J. Theophilos and Anne A. Theophilos, as Trustor, to
CHICAGO TITLE COMPANY, a California corporation, as Trustee, for the benefit and
security of E*TRADE GROUP, INC., a Delaware corporation, as Beneficiary.
Capitalized terms used herein and not otherwise defined herein shall have the
same meaning as in the Deed of Trust.
In addition to the terms and conditions set forth in the Deed of
Trust, the following provisions are hereby incorporated as if fully set forth
therein.
1. Due on Sale or Encumbrance. If Trustor shall convey or alienate
--------------------------
the Property or any part thereof or interest therein, or shall be divested of
its title to the Property in any manner, whether voluntary or involuntary, any
indebtedness or obligation secured by the Deed of Trust, irrespective of the
maturity date expressed in the Note, shall become immediately due and payable at
the option of Beneficiary, without demand or notice.
2. Hazardous Materials. Trustor represents and warrants that, to the
-------------------
best of its knowledge, no hazardous materials (which shall mean any material or
substance that, whether by its nature or use, is now or hereafter defined as a
hazardous waste, hazardous substance, pollutant or contaminant under any
environmental laws or regulations or which is toxic, explosive, corrosive,
flammable, infectious, radioactive, carcinogenic, mutagenic or otherwise
hazardous) are located at, on, in, under or about the Property and that the
Property is in full compliance with all such environmental laws and regulations.
Trustor shall comply in all respects with all environmental laws and regulations
and will not generate, release, store, handle, process, dispose of or otherwise
use any hazardous materials on or about the Property. Trustor shall defend,
indemnify and hold harmless Beneficiary and its officers, directors and
shareholders from and against any and all claims, demands, penalties, causes of
actions, fines, liabilities, settlements, damages, costs or expenses of whatever
kind or nature, known or unknown, foreseen or unforeseen, contingent or
otherwise arising out of, or in any way related to (i) any breach by Trustor of
the provisions of this paragraph, (ii) the release, disposal, spillage,
discharge, emission, leakage, generation, release or threatened release of any
hazardous materials in, on, under or about the Property, (iii) any personal
injury arising out of or related thereto or (iv) any violation of any such
environmental laws or regulations. To the extent applicable, Beneficiary shall
have all the rights and remedies under California Code of Civil Procedure
Sections 564(c) and 726.5 and California Civil Code Section 2929.5.
3. Events of Default. In addition to the defaults set forth in the
-----------------
Deed of Trust (which shall be deemed "Events of Acceleration" for purposes of
the Note), each of the following events shall also constitute an Event of
Default:
a. Trustor shall become insolvent or generally shall not be
paying its debts as they become due, as defined in the Bankruptcy Reform Act,
Title 11 of the United States Code, as amended from time to time (the
"Bankruptcy Code") or shall file a voluntary petition in bankruptcy seeking to
effect a plan or other arrangement with creditors or seek any
8
<PAGE>
other relief under the Bankruptcy Code or under any other state or federal law
relating to bankruptcy or other relief for debtors;
b. Any court or similar tribunal shall enter a decree or order
appointing a receiver, trustee, assignee in bankruptcy or insolvency of Trustor
or of the Property or shall enter a decree or order for relief in any
involuntary case under the Bankruptcy Code; or
c. The occurrence of any breach, default or failure under any
other deed of trust, mortgage or other security agreement or interest
encumbering the Property.
d. The failure of Trustor to pay any principal or interest
evidenced by that certain Note Secured by Deed of Trust (the "Note") of even
date herewith from Trustor to Beneficiary, within five (5) days of the date so
provided for therein;
e. The failure by Trustor to perform or comply with any other
material obligation, covenant or condition contained in this Deed of Trust
within ten (10) days following written notice from Beneficiary of such failure;
or
f. If any hazardous materials are found in, on, under or about
the Property, or if Trustor becomes subject to any proceeding or investigation
pertaining to the release by Trustor or any other person of any hazardous
materials into the environment or to any violation of any environmental laws and
Trustor fails to cure the same within such time as may be provided by applicable
law.
"Trustor"
/s/ Theodore J. Theophilos
--------------------------------
Theodore J. Theophilos
/s/ Anne A. Theophilos
--------------------------------
Anne A. Theophilos
9
<PAGE>
STATE OF CALIFORNIA )
COUNTY OF SAN MATEO )
On _______________, 2000 before me, _____________________, Notary
Public, personally appeared ___________, personally known to me (or proved to me
on the basis of satisfactory evidence) to be the person whose name is subscribed
to the within instrument and acknowledged to me that he executed the same in her
authorized capacity, and that by his signature on the instrument the person, or
the entity upon behalf of which the person acted, executed the instrument.
WITNESS my hand and official seal. (SEAL)
------------------------------------
Signature of Notary
STATE OF CALIFORNIA )
COUNTY OF SAN MATEO )
On _______________, 2000 before me, _____________________, Notary
Public, personally appeared ______________, personally known to me (or proved to
me on the basis of satisfactory evidence) to be the person whose name is
subscribed to the within instrument and acknowledged to me that he executed the
same in his authorized capacity, and that by his signature on the instrument the
person, or the entity upon behalf of which the person acted, executed the
instrument.
WITNESS my hand and official seal. (SEAL)
------------------------------------
Signature of Notary
10
<PAGE>
EXHIBIT 10.8
E*TRADE GROUP, INC.
AMENDMENT TO NOTE SECURED BY DEED OF TRUST
The Note Secured by Deed of Trust dated March 17, 2000 between E*TRADE Group,
Inc. and Theodore J. Theophilos (the "Note") is hereby amended, effective
___________ as follows:
1. Section 6 (g ) is hereby amended in its entirety to read as follows:
g. the expiration of the two (2)-month period following the date the Maker
ceases for any reason to remain in the Corporation's employ, provided, however
that if Maker ceases to remain in the Corporation's employ due to an Involuntary
Termination, such acceleration shall occur one (1) year following the
Involuntary Termination;
2. For purposes of the Note an "Involuntary Termination" shall mean the
termination of Maker's Service by reason of: (i) the Maker's involuntary
dismissal or discharge by the Company for reasons other than for Misconduct, or
(ii) the Maker's voluntary resignation following (A) a change in Maker's
position with the Company (or Parent or Subsidiary employing Maker)which
materially reduces Maker's duties and responsibilities, (B) a reduction in
Maker's level of compensation (including base salary, fringe benefits and target
bonuses under any corporate-performance based incentive programs) by more than
fifteen percent (15%) or (C) a relocation of Maker's place of employment by more
than fifty (50) miles, provided and only if such change, reduction or relocation
is effected by the Company without Maker's consent. Misconduct shall mean the
commission of any act of fraud, embezzlement or dishonesty by the Maker, any
unauthorized use or disclosure by such person of confidential information or
trade secrets of the Company or any other intentional misconduct by such person
adversely affecting the business or affairs of the Company in a material manner.
3. Except as modified by this Amendment, all the terms and provisions of the
Note as in effect on the date hereof shall continue in full force and effect.
E*TRADE GROUP, INC.
by: /s/ Christos M. Cotsakos
--------------------------
title: Chairman of the Board and Chief Executive Officer
-------------------------------------------------
/s/ Theodore J. Theophilos
------------------------------
THEODORE J. THEOPHILOS
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS INCLUDED IN THIS REGISTRATION STATEMENT FILING AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> MAR-31-2000
<CASH> 371,136
<RECEIVABLES> 9,420,049
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 659,377
<INSTRUMENTS-OWNED> 1,353,148
<PP&E> 225,094
<TOTAL-ASSETS> 15,709,886
<SHORT-TERM> 3,223,599
<PAYABLES> 5,550,992
<REPOS-SOLD> 0
<SECURITIES-LOANED> 5,042,596
<INSTRUMENTS-SOLD> 0
<LONG-TERM> 0
0
0
<COMMON> 2,897
<OTHER-SE> 1,859,187
<TOTAL-LIABILITY-AND-EQUITY> 15,709,886
<TRADING-REVENUE> (28)
<INTEREST-DIVIDENDS> 399,872
<COMMISSIONS> 406,908
<INVESTMENT-BANKING-REVENUES> 0
<FEE-REVENUE> 0
<INTEREST-EXPENSE> (240,921)
<COMPENSATION> 0
<INCOME-PRETAX> (36,697)
<INCOME-PRE-EXTRAORDINARY> (27,980)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (27,980)
<EPS-BASIC> (0.11)
<EPS-DILUTED> (0.11)
</TABLE>
