eTrade 2002 Annual Report Download - page 64

Table of Contents
Index to Financial Statements
closing of the merger, we will have a 19.9% investment in the newly merged entity. We do not expect to record a gain or loss upon the closing
of the merger. Losses in fiscal 2001 reflected our investment in Wit Soundview Group, Inc. (“Wit”), accounted for under the equity method
until it was disposed of on August 20, 2001, and our equity investment in eAdvisor, partially offset by income recorded primarily from our
equity investment in E*TRADE Japan K.K. In fiscal 2000, losses resulted primarily from E*OFFERING in which our investment was sold in
October 2000. See Note7 to Consolidated Financial Statements.
Unrealized losses on venture funds were $9.7 million in fiscal 2002, $34.7 million in fiscal 2001 and $0.7million in fiscal 2000. In fiscal 2002
and fiscal 2001, we recorded unrealized losses on our participation in the Softbank Capital Partners, L.P. Fund, E*TRADE eCommerce Fund I
(“Fund I”) and Arrow Path Fund II. These changes represent market fluctuations on public investments held by the funds and changes in the
estimated value of their non-public investments. Fund I was formed in the first quarter of fiscal 2000 and the Arrow Path Fund II was formed in
the third quarter of fiscal 2000. In October 2001, we amended our agreement in Fund I to increase our capital commitment by $7.5 million and
modify the order in which Fund I distributions are to occur. The change provides for cash contributing partners to receive priority in
distribution until they reach a 15% annual rate of return on their initial investment. The securities contributing partners would then receive a
15% annual rate of return; additional distributions, if any, would be allocated proportionately to all limited partners. Most of our contribution to
Fund I was made in the form of private securities and, with respect to this contribution, we will be entitled to distributions behind the
cash-contributing partners of Fund I, which include certain of our executive officers and directors. Due to this change in allocation method, we
recorded an additional equity loss of $11.1 million.
Fair value adjustments of financial derivatives were $11.7 million in fiscal 2002 and $3.1 million in fiscal 2001. In fiscal 2002, the amounts
primarily represent losses for the ineffective portions of changes in the fair value of derivatives in effective hedging relationships. In fiscal
2001, the amount represents a $3.7 million loss on the valuation of warrants, partially offset by a $0.6million gain representing the ineffective
portions of changes in the fair value of derivatives in effective hedging relationships. We owned warrants to purchase shares of common stock
of Wit through August20, 2001. The adjustment to the fair value of these warrants is reflected in the fair value adjustments of financial
derivatives. We returned these warrants to Wit on August 20, 2001.
Gain on early extinguishment of debt was $5.3 million in fiscal 2002, $49.3 million in fiscal 2001 and none in fiscal 2000. In fiscal 2002, gain
on early extinguishment of debt included a $8.6 million gain on the exchanges of $64.9 million of our 6% convertible subordinated notes for
approximately 6.5 million shares of our common stock, offset by a $3.3 million loss as a result of the early redemption of $100 million
adjustable rate advances from the FHLB. In fiscal 2001, gain on early extinguishment of debt included a $59.9 million gain from retirement of
$214.8 million of our 6% convertible subordinated notes in exchange for approximately 19.2million shares of our common stock and $15.3
million paid in cash, offset by a $10.6 million loss recorded as a result of the early redemption of $827.0 million of adjustable and fixed rate
advances from the FHLB. The FHLB advances were entered into as a result of normal funding requirements of our Banking operations. The
loss consisted primarily of prepayment penalties and costs associated with these early redemptions.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections. SFAS No.145 requires that any gains or losses on extinguishment of debt that were classified as an extraordinary item in
prior periods that are not unusual in nature and infrequent in occurrence be reclassified. In the fourth quarter of fiscal 2002, we adopted the
requirements of SFAS No. 145 in our consolidated financial statements, resulting in a reclassification of our extraordinary gains (losses) on
early extinguishment of debt to non-operating income (expense).
In September 2002, the Emerging Issues Task Force (“EITF”) reached a consensus on Issue 02-15, Determining Whether Certain Conversions
of Convertible Debt to Equity Securities Are within the Scope of FASB Statement No. 84, Induced Conversions of Convertible Debt. The Task
Force reached a consensus that SFAS No. 84 applies to all conversions that occur pursuant to revised conversion privileges that are exercisable
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