eTrade 1999 Annual Report Download

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X]Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Fiscal Year Ended September 30, 1999
or
[_]Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Transition Period from to .
Commission file number 1-11921
E*TRADE Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware 94-2844166
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
Number)
4500 Bohannon Drive, Menlo Park, CA 94025
(Address of principal executive offices and zip code)
(650) 331-6000
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Title of each class
Common Stock--$0.01 par value
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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [_]
As of October 18, 1999 the aggregate market value of voting stock held by nonaffiliates of the registrant was approximately
$3,773,550,000 (based upon the closing price for shares of the Registrant's Common Stock as reported by the National Market System
of the National Association of Securities Dealers Automated Quotation System on that date). Shares of Common Stock held by each
officer, director, and holder of 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed
to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
The number of shares of Common Stock outstanding as of October 18, 1999 was 244,433,966 shares.
2002. EDGAR Online, Inc.

Table of contents

  • Page 1
    ... $3,773,550,000 (based upon the closing price for shares of the Registrant's Common Stock as reported by the National Market System of the National Association of Securities Dealers Automated Quotation System on that date). Shares of Common Stock held by each officer, director, and holder...

  • Page 2
    ... Proxy Statement relating to the Company's 1999 Annual Meeting to be filed hereafter (incorporated into Part III hereof). E*TRADE Group, Inc. Form 10-K Annual Report For the Fiscal Year ended September 30, 1999 Table of Contents Page ---PART I Item 1. Item 2. Item 3. Item 4. Business...Properties...

  • Page 3
    ... related to other aspects of electronic commerce. Free resources available to the public on E*TRADE's Web site include breaking financial news, real-time stock and option price quotes, company financial information and news announcements, live market commentary, personalized investment portfolios...

  • Page 4
    ...of self-directed investors. The Company's services include fully automated stock, option, fixed income and mutual fund order processing and online investment portfolio tracking and financial market news and information. The Company offers its services to consumers through a broad range of electronic...

  • Page 5
    ...Financial Information E*TRADE continuously receives a direct feed of detailed quote data, market information and news. Customers can create their own personal lists of stocks and options for quick access to current pricing information. E*TRADE provides its customers and members free real-time quotes...

  • Page 6
    ...customers to open and monitor investment accounts and to place orders for equity, option, mutual fund and fixed income transactions. E*TRADE's core technology is based on E*TRADE's proprietary stateless architecture. The architecture provides the key drivers of the Company's techno-business strategy...

  • Page 7
    ... or customer requests. 7 The Company is making significant investments in systems technology and has established technology centers in both Rancho Cordova, California and Alpharetta, Georgia. These facilities support systems, network services, trading, customer service, transaction redundancy...

  • Page 8
    ...available in the news section of the quotes and research tab. . Bridge Information Systems. Beginning in November 1998, Power E*TRADE customers executing 74+ trades per calendar quarter were given free access to The Pulse, an advanced market analysis tool by Bridge. The Pulse features streaming real...

  • Page 9
    ... provides easy access to commentary, market data, research, and analytical tools, including a sophisticated screening capability. This easy to use tool allows investors to quickly search through a wide range of executable fixed income securities based on price, yield, maturity, issuer, credit rating...

  • Page 10
    ... of E*TRADE's brand, products and services and positions E*TRADE as a better way of handling securities transactions, accessing financial and market data, and managing portfolios for the individual investor. Advertising is increasingly directing interested prospects to the Company's Web site for...

  • Page 11
    ... customer free credit balances and securities for use in margin lending activities subject to Securities and Exchange Commission ("SEC") and NASD rules. In July 1996, the Company signed a seven-year agreement with BETA Systems for the provision of computer services to support order entry, order...

  • Page 12
    ... the market value of the securities in a margin account, the Company is obligated to require the customer to deposit additional securities or cash in the account so that at all times the customer's equity in the account is at least 25% of the value of the securities in the account. E*TRADE's current...

  • Page 13
    ...Chief Financial Officer Chief International Officer Chief Business Development and Legal and Corporate Secretary of the Board of Directors Chief Information Officer Chief People Officer Chief Service Quality Officer Chief Marketing Officer Chief Electronic Trading Officer Chief Community Development...

  • Page 14
    ... is a Certified Public Accountant. 15 Brigitte VanBaelen is Chief Community Development Officer and Assistant Corporate Secretary for E*TRADE Group, Inc. since January 1999. Ms. VanBaelen held various management positions in marketing and executive services since joining the company in August 1996...

  • Page 15
    ... with Systems Failure We receive and process trade orders mostly through the Internet, online service providers and touch-tone telephone. Thus, we depend heavily on the integrity of the electronic systems supporting this type of trading, including our internal software programs and computer systems...

  • Page 16
    ... of online investing services and products; . the pace of development of the market for online commerce; . changes in trading volume in securities markets; . trends in securities markets; 18 . domestic and international regulation of the brokerage and internet industries; . changes in pricing...

  • Page 17
    ...-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 securities...

  • Page 18
    ... 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...

  • Page 19
    ... 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...

  • Page 20
    ... online investing services, and we expect this business to continue to account for almost all of our revenues in the foreseeable future. We, like other securities firms, are directly affected by economic and political conditions, broad trends in business and finance and changes in volume and price...

  • Page 21
    ... will require such individuals to accept new and very different methods of conducting business. Moreover, our brokerage services over the Internet involve a new approach to securities trading which requires extensive marketing and sales efforts to educate prospective customers regarding its uses and...

  • Page 22
    ...any such claims could have a material adverse effect on our business, financial condition and operating results. Risks Associated with Entering New Markets 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...

  • Page 23
    ...and could be subject to capital requirements that are not currently applicable to holding companies under Office of Thrift Supervision regulation. Such changes could result in increased costs and harm our operating results and business. Telebank holds a loan portfolio consisting primarily of one- to...

  • Page 24
    ... similarly situated individuals. The action alleges, among other things, that the Company's advertising, other communications and business practices regarding the Company's commission rates and its ability to timely execute and confirm transactions through its online brokerage services were false...

  • Page 25
    ... traded on the Nasdaq National Market under the symbol EGRP since the Company's initial public offering on August 16, 1996. The following table shows the high and low sale prices of the Company's common stock as reported by the Nasdaq National Market for the periods indicated. 2002. EDGAR Online...

  • Page 26
    ... 4(2) of the Securities Act based on the fact that the common stock was sold by the issuer in a sale not involving a public offering. On July 12, 1999, the Company entered into an agreement whereby the Company issued 4,488,000 shares of its common stock in connection with the acquisition of TIR...

  • Page 27
    ... of the Securities Act based on the fact that the common stock was sold by the issuer in a sale not involving a public offering. On September 30, 1999, the Company entered into an agreement whereby the Company issued 314,000 shares of its common stock in connection with the acquisition of Confluent...

  • Page 28
    ... Statement of Operations Data*: Revenues: Transaction revenues...Global and institutional...Interest--net of interest expense...Other...Net revenues...Cost of services...Operating expenses: Selling and marketing...Technology development...General and administrative...Merger related expenses...Total...

  • Page 29
    ... news, investor community areas and other information services. Free resources available to the public on E*TRADE's Web site include breaking financial news, real-time stock and option price quotes, company financial information and news announcements, live market commentary, personalized investment...

  • Page 30
    ..., financial condition and operating results. The Company is making significant investments in systems technology and has established technology centers in Rancho Cordova, California, and Alpharetta, Georgia. These facilities support systems, network services, trading, customer service, transaction...

  • Page 31
    ... a third-party service bureau, BETA Systems, for its customer record keeping and data processing services. 34 The Company has experienced substantial changes in, and expansion of, its business and operations since it began offering online investing services in 1992 and Internet investing services in...

  • Page 32
    ... revenues...100.0 ----Cost of services...45.7 ----Operating expenses: Selling and marketing...48.5 Technology development...12.4 General and administrative...13.7 Merger related expenses...1.0 ----Total operating expenses...75.6 ----Total cost of services and operating expenses...121.3 ----Operating...

  • Page 33
    ...securities on margin, fees on its customer assets invested in money market accounts and interest earned on investment securities, offset by 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...

  • Page 34
    ...electronic systems outside of the Company's control, such as online and Internet service providers, and third-party software, such as Internet browsers. A failure of any such system in the trading process, even for a short time, could cause interruption to the Company's business. The year 2000 issue...

  • Page 35
    ... prevent the Company from delivering its services to its customers, which could have a material adverse effect on the Company's business, results of operations and financial condition. In addition, other third parties' year 2000 processing failures, not currently identified by the Company as mission...

  • Page 36
    ...statements, including without limitation, anticipated costs and the dates by which the Company expects to complete certain actions, are based on management's best current estimates, which were derived utilizing numerous assumptions about future events, including the continued availability of certain...

  • Page 37
    ... on the Company's business, financial condition and operating results. Cash used in operating activities was $106.3 million in fiscal 1999, primarily as a result of the net loss in fiscal 1999 of $54.4 million, deferred income taxes of $39.0 million, a $50.0 million gain on sale of investments, and...

  • Page 38
    ... 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 The Company maintains a short-term investment portfolio...

  • Page 39
    ... results of their operations and their cash flows for each of the three years in the period ended September 30, 1999 in conformity with generally accepted accounting principles. As discussed in Note 16, the consolidated financial statements give retroactive effect to the acquisitions of ClearStation...

  • Page 40
    ...and equivalents...$ 85,734 47,776 Cash and investments required to be segregated under Federal or other regulations 103,500 5,000 Investment securities...189,145 502,534 Brokerage receivables--net...2,912,581 1,365,247 Other assets...41,987 24,287 Total current assets...3,332,947 1,944,844 Property...

  • Page 41
    See notes to consolidated financial statements. 46 E*TRADE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) 2002. EDGAR Online, Inc.

  • Page 42
    ... Revenues: Transaction revenues...Global and institutional...Interest--net of interest expense (A)...Other...Net revenues...Cost of services...Operating expenses: Selling and marketing...Technology development...General and administrative...Merger related expenses...Total operating expenses...Total...

  • Page 43
    CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY (in thousands) 2002. EDGAR Online, Inc.

  • Page 44
    ...of issuance costs...Exercise of stock options, including tax benefit...Associate Stock Purchase Plan...Cash dividends-ShareData/TIR...Other stock transactions...Balance, September 30, 1997...Net income...Unrealized gain on available-for-sale securities...Foreign currency translation...Tax expense on...

  • Page 45
    See notes to consolidated financial statements. 48 E*TRADE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) 2002. EDGAR Online, Inc.

  • Page 46
    ... OptionsLink...Distributions received from equity investment...Net cash provided by (used in) investing activities...(175,423) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock, net of issuance costs...Proceeds from stock purchase plan and exercise of stock options...Cash...

  • Page 47
    ... fees on customer assets invested in money market accounts and interest earned on investment securities. These revenues are reported net 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...

  • Page 48
    ..., money market funds, and brokerage receivables and payables to be reasonable estimates of fair value. The Company uses available market information as of the balance sheet dates and appropriate valuation methodologies in deriving amounts reported for financial instruments. Stock-Based Compensation...

  • Page 49
    ... new standard. Use of Estimates--The preparation of the Company's consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and related...

  • Page 50
    ... and payable to brokers, dealers and clearing organizations result from the Company's brokerage activities. Receivable from customers represents credit extended to customers to finance their purchases of securities on margin. At September 30, 1999 and 1998, credit extended to customers with respect...

  • Page 51
    ...(in thousands): September 30 1999 Publicly-traded equity securities, at market (cost of $35,533 and $24,916 in 1999 and 1998, respectively)...$317,788 $45,761 Equity method investments: Joint ventures...20,862 10,153 Archipelago...25,149 Venture funds...36,270 E*OFFERING...11,391 KAP Group...2,000...

  • Page 52
    .... ("E*OFFERING"), a full-service, Internet-based investment bank. E*OFFERING provides individual and institutional investors access to public offerings. E*OFFERING leverages the Internet to help improve the process of raising capital for companies by reducing time to market and underwriting costs...

  • Page 53
    ... in May 1999. 7. LONG-TERM NOTES PAYABLE AND SHORT-TERM FUNDING The principal source of financing for E*TRADE Securities' margin lending is cash balances in customers' accounts and financing obtained from other broker- dealers through E*TRADE Securities' stock loan program. E*TRADE Securities also...

  • Page 54
    ......1,505 Deferred compensation...1,373 Capitalized research and development...5,290 Undistributed earnings in subsidiaries...5,261 Other...2,437 -------Total deferred tax assets...98,549 -------Deferred tax liabilities: Internally developed software...(1,709) (5,783) Gain on investments...(115,361...

  • Page 55
    ...and offering expenses of $14.8 million, were $188.8 million. In July 1998, the Company entered into an agreement to issue and sell 62,600,000 shares of common stock to SOFTBANK Holdings, Inc. for an aggregate purchase price of $400 million. Stock Option Plans The Company's stock option plans provide...

  • Page 56
    ... Program allows for individuals to be issued shares of common stock directly through the purchase of such shares at a price not less than the fair market value of those shares at the time of issuance or as a bonus tied to the performance of services. Under the Automatic Option Grant Program, options...

  • Page 57
    ...16 $ 7.84 8,823 $ 4.26 Weighted Average Number Weighted Exercisable Stock Purchase Plan In July 1996, the shareowners of the Company approved the 1996 Stock Purchase Plan (the "Purchase Plan"), and reserved 2,600,000 shares of common stock for sale to associates at a price no less than 85% of the...

  • Page 58
    ...developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company's stock option awards. These models also require subjective assumptions, including future stock price volatility and expected time to exercise...

  • Page 59
    ... because the options' exercise price was greater than the average market price of the Company's common stock for the years ended September 30, 1998 and 1997, respectively, and therefore would be anti-dilutive for purposes of this calculation. 12. REGULATORY REQUIREMENTS E*TRADE Securities is subject...

  • Page 60
    ...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...

  • Page 61
    ... to timely execute and confirm online transactions; . Damages arising from alleged problems in accessing accounts and placing orders; . Damages arising from the February 3, 4, and 5, 1999 system interruptions; . Unfair business practices regarding the extent to which initial public offering shares...

  • Page 62
    ... for the purpose of its business. The Company has entered into employment agreements with several of its key executive officers. These employment agreements provide for annual base salary compensation, stock option acceleration and severance payments in the event of termination of employment under...

  • Page 63
    ..."), an international financial services company offering global multi-currency securities execution and settlement services, and a leader in providing independent research to institutional investors. The Company issued 4,488,000 shares of common stock in exchange for all outstanding common stock of...

  • Page 64
    ... 1999 has been attributed to internal-use software and will be depreciated over two years, in accordance with the Company's existing policy. The operating results of Confluent prior to the acquisition were insignificant. 65 17. QUARTERLY DATA (Unaudited) The unaudited quarterly financial information...

  • Page 65
    ...fourth quarters of fiscal 1999 include pre-tax gains on the sale of investments of $33,367,000, $4,303,000 and $12,287,000, respectively. 66 18. SEGMENT AND GEOGRAPHICAL INFORMATION Segment Information The Company provides securities brokerage and related investment services. With the acquisition of...

  • Page 66
    E*TRADE Group ---------Fiscal 1999 Interest--net of interest expense...$ 121,425 Non-interest revenue...391,747 ---------Net revenues...513,172 ========== Operating income (loss)...(139,010) (132,402) Pre-tax income (loss)...(98,156) (91,536) Segment assets...3,771,370 TIR Total 883 $ 122,308 107,...

  • Page 67
    ... Total No one single customer accounted for greater than 10% of total revenues for the fiscal years ended September 30, 1999, 1998 and 1997. 19. SUBSEQUENT EVENTS The Company has entered into definitive agreements to acquire a controlling interest in two of its international affiliates in exchange...

  • Page 68
    ... 28, 1999, the Company filed a Current Report on Form 8-K, relating to a press release announcing an acquisition agreement with TIR (Holdings) Limited, a Cayman Islands company ("TIR"), pursuant to which E*TRADE has agreed to acquire all of the outstanding ordinary shares of TIR in exchange for an...

  • Page 69
    ...Subscription Agreement between E*TRADE Securities, Inc. and BETA Systems Inc. dated June 27, 1996 (Incorporated by reference to Exhibit 10.13 of the Company's Registration Statement Form S-1, Registration Statement No. 333-05525.) 10.15 Stock Purchase Agreement among the Registrant, General Atlantic...

  • Page 70
    ...Consent of Independent Auditors. *27.1 Financial Data Schedule for the fiscal year ended September 30, 1999. * Filed herewith 71 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report 2002. EDGAR Online, Inc.

  • Page 71
    ... duly authorized. E*TRADE Group, Inc. /s/ Christos M. Cotsakos By: _____ Christos M. Cotsakos Chairman of the Board and Chief Executive Officer Dated: October 22, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on...

  • Page 72
    ... of the Board and 1999 _____ Chief Executive Officer (Christos M. Cotsakos) (principal executive officer) /s/ Leonard C. Purkis Chief Financial Officer 1999 _____ (principal financial and (Leonard C. Purkis) accounting officer) /s/ William A. Porter Chairman Emeritus 1999 _____ (William A. Porter...

  • Page 73
    ...TYPE FISCAL YEAR END PERIOD START PERIOD END CASH RECEIVABLES SECURITIES RESALE SECURITIES BORROWED INSTRUMENTS OWNED PP&E TOTAL ASSETS SHORT TERM PAYABLES REPOS SOLD SECURITIES LOANED INSTRUMENTS SOLD LONG TERM PREFERRED MANDATORY PREFERRED COMMON OTHER SE TOTAL LIABILITY AND EQUITY TRADING REVENUE...

  • Page 74
    End of Filing 2002. EDGAR Online, Inc.