eTrade 1999 Annual Report Download - page 34

customer base and market share, and maintaining customer retention rates. Beginning in the fourth quarter of fiscal 1998, the Company
significantly expanded its marketing efforts including the launch of Destination E*TRADE, expanded national television advertising
and new strategic marketing alliances with key business partners, such as AOL and Yahoo!. These increased expenditure levels are
expected to continue in fiscal 2000. Selling and marketing expenses also include TIR's selling and marketing costs, which are
predominantly sales-related and non-account generating.
Technology development expenses increased to $76.9 million in fiscal 1999, up 128% from $33.7 million in fiscal 1998, which was up
150% from $13.5 million in fiscal 1997. The increased level of expense was incurred to enhance the Company's existing product
offerings, including maintenance of the Company's Web site, development efforts related to the launch of Destination E*TRADE and
proprietary stateless architecture, and reflects the Company's continuing commitment to invest in new products and technologies.
General and administrative expenses increased to $85.1 million in fiscal 1999, up 104% from $41.8 million in fiscal 1998, which was
up 54% from $27.1 million in fiscal 1997. These increases were the result of personnel additions, the development of administrative
functions resulting from the overall growth in the Company, and the costs associated with the opening of the facility in Alpharetta,
Georgia.
Merger related expenses of $6.3 million were recognized in the third and fourth quarters of fiscal 1999 and primarily relate to the
transaction costs associated with the TIR and ClearStation acquisitions and the pending merger with Telebanc. In fiscal 1998, the
Company recognized $1.2 million of transaction costs associated with the ShareData acquisition. Additional costs associated with the
Company's mergers and acquisitions are expected to be incurred during fiscal 2000.
Non-operating Income (Expense)
In fiscal 1999, the Company sold a portion of its holdings in Knight/Trimark and CriticalPath, recognizing pre-tax gains of $50.0
million on the sales. These investments have been classified as available-for-sale under the provisions of SFAS 115.
Equity in losses of investments was $9.1 million in fiscal 1999, which resulted from the Company's minority ownership in its
investments that are accounted for under the equity method. These investments include E*TRADE U.K., 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 to incur operating losses for at least the next 12 months, which will result in future charges being recorded
by the Company to reflect its proportionate share of losses.
Income Tax Expense (Benefit)
Income tax expense (benefit) represents the provision for federal and state income taxes at an effective rate of (40.5%), 10.4% and
34.5% for fiscal 1999, 1998 and 1997, respectively. The fiscal 1998 rate reflects expected tax benefits from tax-exempt interest
income and certain nondeductible acquisition costs.
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Year 2000 Compatibility
Many computer systems use only two digits to identify a specific year and therefore may not accurately recognize and handle dates
beyond the year 1999. If not corrected, these computer applications could fail or create erroneous results by, or in, the year 2000. The
Company utilizes, and is dependent upon, data processing systems and software to conduct its business. The data processing systems
and software include those developed and maintained by the Company's third-party data processing vendors and software which is run
on in- house computer networks. Due to the Company's dependence on computer technology to conduct its business, and the
dependence of the financial services industry on computer technology, the nature and impact of year 2000 processing failures on the
Company's business, financial position, results of operations or cash flows could be material.
In addition, the method of trading employed by the Company is heavily dependent on the integrity of electronic systems outside of the
Company's control, such as online and Internet service providers, and third-party software, such as Internet browsers. A failure of any
such system in the trading process, even for a short time, could cause interruption to the Company's business. The year 2000 issue
could lower demand for the Company's services while increasing the Company's costs. The combination of these factors, while not
quantifiable, could have a material adverse impact on the Company's financial results.
During the first quarter of fiscal 1998, the Company initiated a review and assessment of its hardware and software to evaluate whether
they will function properly in the year 2000 without material errors or interruptions. The Company's year 2000 efforts address the
Company's computer systems and equipment, as well as business partner relationships considered essential to the Company's ability to
conduct its business. The objective of the Company's year 2000 project is to identify the core business processes and associated
2002. EDGAR Online, Inc.