eTrade 2007 Annual Report Download - page 91

New Balance Sheet Reporting Format—During the year ended December 31, 2007, the Company
re-presented its balance sheet to report margin receivables and customer payables directly on the face of the
balance sheet. The remaining components of brokerage receivables and brokerage payables are now reported in
the “Other assets” and “Accounts payable, accrued and other liabilities” line items, respectively. The Company
also re-presented its balance sheet to report “Investment in FHLB stock” directly on the face of the balance sheet.
This item was previously reported in the “Available-for-sale mortgage-backed and investment securities” line
item.
Use of Estimates—The financial statements were prepared in accordance with GAAP, which require
management to make estimates and assumptions that affect the amounts reported in the financial statements and
related notes for the periods presented. Actual results could differ from management’s estimates. Material
estimates in which management believes near-term changes could reasonably occur include allowance for loan
losses and uncollectible margin receivables; classification and valuation of certain investments; valuation of
certain debt instruments; valuation and accounting for financial derivatives; estimates of effective tax rates;
deferred taxes and valuation allowances; valuation of goodwill and other intangibles; and valuation and
expensing of share-based payments.
Citadel Investment—The operating environment during 2007, particularly during the second half of the
year, was extremely challenging as the Company’s exposure to the crisis in the residential real estate and credit
markets adversely impacted its financial performance and led to a disruption in its customer base. As a result, the
Company believes it was necessary to obtain a significant infusion of cash, which would in turn stabilize its
balance sheet and its customer base.
On November 29, 2007, the Company entered into an agreement to receive a $2.5 billion cash infusion from
Citadel. In consideration for the cash infusion, Citadel received three primary items: substantially all of our asset-
backed securities portfolio (approximately $3.0 billion in amortized cost), 84.7 million shares of common stock(1)
in the Company and approximately $1.8 billion in 12
1
⁄ 2 % springing lien notes(2).
The items in this transaction were negotiated at arms length and transacted simultaneously and in
contemplation of one another. As a result, the $2.5 billion in proceeds were allocated to each item based on their
relative fair values at the time of the transaction.
The key components of our accounting for this transaction were as follows:
• Asset-backed securities portfolio sale, which resulted in a pre-tax loss on sale of approximately
$2.2 billion;
• Issuance of common stock, which resulted in an increase to common stock/paid in capital of
approximately $340 million; and
• Issuance of springing lien notes, which had approximately $500 million of discount assigned to them and
will be amortized as an increase to interest expense using the effective interest method over the 10 year
term of the notes.
Financial Statement Descriptions and Related Accounting Policies—Below are descriptions and
accounting policies for the Company’s financial statement categories.
Cash and Equivalents—For the purpose of reporting cash flows, the Company considers all highly liquid
investments with original or remaining maturities of three months or less at the time of purchase that are not
(1) The 84.7 million shares of common stock were issued in increments: 14.8 million upon initial closing in November 2007; 23.2 million
upon Hart-Scott-Rodino Antitrust Improvements Act approval in December 2007; and 46.7 million shares are expected to be issued in
the first quarter of 2008 as the Company has received all necessary regulatory approvals.
(2) Included in the $1.8 billion issuance is the issuance of $186 million of 12 1
⁄ 2 % springing lien notes in exchange for $186 million of the
Company’s senior notes that were owned by Citadel. The $1.8 billion in 12 ½% springing lien notes includes $100 million in notes
issued to BlackRock in connection with the transaction. The $1.8 billion in 12 ½% springing lien notes represents the amount
outstanding as of December 31, 2007 and does not include the additional $150 million of springing lien notes issued in January 2008 in
accordance with the terms of the agreement with Citadel.
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