eTrade 2004 Annual Report Download - page 55

Table of Contents
Index to Financial Statements
the Gramm-Leach-Bliley Act, our activities are restricted to those that are financial in nature and certain real estate-related activities. We may
make merchant banking investments in companies whose activities are not financial in nature if those investments are made 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 recordkeeping and risk management requirements.
We believe all of our existing activities and investments are permissible under the Gramm-Leach-Bliley Act, but the OTS has not yet
fully interpreted these provisions. Even if our existing activities and investments are permissible, we are unable to pursue future activities that
are not financial in nature. We are also limited in our ability to invest in other savings and loan holding companies.
In addition, the Bank is subject to extensive regulation of its activities and investments, capitalization, community reinvestment, risk
management policies and procedures and relationships with affiliated companies. Acquisitions of and mergers with other financial institutions,
purchases of deposits and loan portfolios, the establishment of new Bank subsidiaries and the commencement of new activities by Bank
subsidiaries require the prior approval of the OTS, and in some cases the FDIC, which may deny approval or limit the scope of our planned
activity. These regulations and conditions could place us at a competitive disadvantage in an environment in which consolidation within the
financial services industry is prevalent. Also, these regulations and conditions could affect our ability to realize synergies from future
acquisitions, could negatively affect us following the acquisition and could also delay or prevent the development, introduction and marketing
of new products and services.
Risks Relating to Owning Our Stock
We have incurred losses in the past and we cannot assure you that we will be profitable
We have incurred losses in the past and we may do so in the future. While we reported net income for 2004 and 2003, we reported a net
loss of $186.4 million for 2002.
We expect that expensing stock options granted to our employees will have a material impact on our financial results
We are not currently required to record any compensation expense in connection with stock option grants to employees that have an
exercise price at or above fair market value. In December 2004, however, the Financial Accounting Standards Board (“FASB”) issued SFAS
No. 123 (Revised 2004), Share
-Based Payment, which among other things requires public companies to expense employee stock options and
other share-based payments at their fair value when issued. This statement is effective for public companies as of the beginning of the first
interim or annual reporting period that begins after June 15, 2005, and we plan to adopt this statement effective July 1, 2005. We expect that
the adoption of this statement will have a material impact on our net income and earnings per share for the last six months of fiscal 2005 and
for subsequent periods. As a result of this impact on our financial results, we may be forced to decrease or eliminate employee stock option
grants, which could, in turn, have a negative impact on our ability to attract and retain qualified employees.
We are substantially restricted by the terms of our senior notes
In June 2004, we completed a private offering of an aggregate principal amount of $400 million of senior notes due June 2011. The
indenture governing the senior notes contains various covenants and restrictions that limit our ability and certain of our subsidiaries’ ability to,
among other things:
49
•
incur additional indebtedness;
•
create liens;
•
pay dividends or make other distributions;
•
repurchase or redeem capital stock;