eTrade 2003 Annual Report Download - page 33

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Table of Contents
Index to Financial Statements
million in 2001. See the section titled “Analysis of Segment Revenues” for a detailed discussion about the changes in revenue for each
segment.
Cost of Services and Operating Expenses
In each of 2003 and 2002, the Company implemented a number of initiatives to restructure and streamline our operations to improve the
overall efficiency of the Company. Cost of services, which represents the compensation, transaction, infrastructure and overhead costs that we
incur to provide service to our customers, increased to $618.4 million in 2003 from $567.2 million in 2002 and $595.6 million in 2001. The
increase in 2003 is largely attributable to the cost associated with offering new products and services, including the cost of service associated
percentage of net revenues, decreased to 42% in 2003 from 43% in 2002 and 47% in 2001. The decrease in cost of services as a percentage of
net revenue was caused primarily by scale efficiencies in the brokerage business. E*TRADE Professional was acquired in June 2002 and the
operations added $26.2 million in cost of services in 2003, over the amount in 2002. Other brokerage businesses experienced a reduction in
cost of services despite a significant increase in customer trading activity.
General and administrative expense, which consists principally of compensation and overhead for executive and administrative personnel
and other corporate costs, increased 21% from $210.6 million in 2002 to $255.7 million in 2003 and decreased 11% from $236.4 million in
2001 to 2002. The increase in 2003 was caused primarily by an increase in employee bonus of $28.5 million and litigation settlement accruals
of $14.3 million. In addition, the increase in general and administrative expenses reflects the operations of E*TRADE Consumer Finance of
$11.5 million, which we acquired in December 2002 and the operations of E*TRADE Professional which we acquired in June 2002 of $5.0
million. The decrease from 2001 to 2002 related to our 2001 restructuring plan and savings from execution of a new employment agreement
with our former CEO.
Selling and marketing reflects expenditures for advertising campaigns, independent research provided to our institutional customers and
fees paid by our market makers to outside broker-dealers for orders received for execution. Selling and marketing expenses decreased 15%
from $203.6 million in 2002 to $173.1 million in 2003 primarily due to the end of a significant rebranding campaign, which included
sponsorship of the 2002 Superbowl. In addition, we realized savings from the recent closure of E*TRADE FINANCIAL Centers and Zones,
which were part of our 2003 restructuring plan. Selling and marketing expenses decreased 20% from $253.4 million in 2001 to 2002, primarily
due to the implementation of a strategy that focuses on higher-
value customers, which allowed a reduction in advertising, online, direct mailing
and other promotion activities. We expect to increase brokerage-related advertising spending in 2004 in an effort to acquire additional
customers and increase volume in a rising equity market environment.
Facility restructuring and other exit charges were $134.6 million in 2003, $16.5 million in 2002 and $202.8 million in 2001. The charges
for 2003 resulted from the 2003 restructuring plan of $113.0 million, recognition of additional facility restructuring expense of $16.4 million,
resulting from updated estimates of sublease income and a delay in sublease start dates anticipated in our 2001 restructuring plan and $5.2
million related to other exit activity. In 2001, we announced a restructuring plan aimed at streamlining operations primarily by consolidating
facilities in the United States and Europe. This restructuring resulted in a charge of $202.8 million in 2001. The charge also included a write-
off
of leasehold improvements and furniture and fixtures totaling $38.6 million for 2001. In 2001, we also recorded a non-cash charge of $52.5
million related to the write-off of capitalized software and hardware, related to certain technology projects and other fixed assets, which are
longer used.
Non-Operating Income (Expense)
Corporate interest expense primarily reflects the interest expense resulting from the issuance of $325 million of 6.75% convertible
subordinated notes in 2001 and $650 million of 6% convertible subordinated notes in 2000.
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