-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MlLYTZFQjgTGwB4ZxtG3NIQzomSF+PC88IVw2GIVvstuWbThXwJg6MIigEOcxgPW 8JNdb1K2rNTeMEuANmjvbQ== 0001015780-97-000002.txt : 19970222 0001015780-97-000002.hdr.sgml : 19970222 ACCESSION NUMBER: 0001015780-97-000002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970214 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: E TRADE GROUP INC CENTRAL INDEX KEY: 0001015780 STANDARD INDUSTRIAL CLASSIFICATION: SECURITY BROKERS, DEALERS & FLOTATION COMPANIES [6211] IRS NUMBER: 942844166 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-11921 FILM NUMBER: 97532230 BUSINESS ADDRESS: STREET 1: FOUR EMBARCADERO PLACE 2400 GENG ROAD CITY: PALO ALTO STATE: CA ZIP: 94303 BUSINESS PHONE: 4158422500 MAIL ADDRESS: STREET 1: FOUR EMBARCADERO PLACE 2400 GENG ROAD CITY: PALO ALTO STATE: CA ZIP: 94303 10-Q 1 1997 FIRST QUARTER FORM 10Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended December 31, 1996 Commission File Number: 1-11921 E*TRADE Group, Inc. (Exact name of registrant as specified in its charter) Delaware 94-2844166 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) Four Embarcadero Place, 2400 Geng Rd. Palo Alto, CA 94303 (Address of principal executive offices and zip code) Registrant's telephone number, including area code: (415) 842-2500 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: As of February 7, 1997 the number of shares outstanding of the registrant's common stock was 29,605,207. 2 E*TRADE Group, Inc. Form 10-Q Quarterly Report For the Quarter Ended December 31, 1996 Table of Contents Part I - Financial Information: Item 1. Financial Statements Consolidated Statements of Operations 3 Consolidated Balance Sheets 4 Consolidated Statements of Cash Flows 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 Part II- Other Information: Item 1. Legal Proceedings 10 Item 2. Changes in Securities 10 Item 3. Defaults Upon Senior Securities 10 Item 4. Submission of Matters to a Vote of Security Holders 10 Item 5. Other Information 10 Item 6. Exhibits and Reports on Form 8-K 10 Signatures 11 UNLESS OTHERWISE INDICATED, REFERENCES TO "COMPANY" MEAN E*TRADE GROUP, INC. AND ITS SUBSIDIARIES. FORWARD-LOOKING STATEMENTS In addition to the historical information contained throughout this interim report, there are forward-looking statements that reflect management's expectations for the future. These statements relate to the Company's strategy, sources of liquidity and capital expenditures. Many factors could cause actual results to differ materially from these statements. These factors include, but are not limited to: the timing of introductions of enhancements to online financial services and products by the Company or its competitors; market acceptance of online financial services and products; the pace of development of the market for online commerce; changes in transaction volume on the securities markets; trends in the securities markets; changes in pricing policies by the Company or its competitors; changes in strategy; the success of or costs associated with acquisitions, joint ventures or other strategic relationships; changes in key personnel; seasonal trends; the extent of international expansion; the mix of international and domestic sales; changes in the level of operating expenses to support projected growth; and general economic conditions. The Company disclaims any obligation to update its forward-looking statements. 3 Part I. Financial Information Item 1. Financial Statements E*TRADE GROUP, INC. AND SUBSIDIARIES Consolidated Statements of Operations (Unaudited)
Three Months Ended December 31, ------------------------ 1996 1995 ----------- ----------- Revenues: Transaction revenues $20,372,000 $ 7,329,000 Interest, net of interest expense of $2,297,000 and $3,000 in fiscal 1997 and 1996, respectively 3,854,000 593,000 Computer services and other 797,000 506,000 ----------- ----------- Net revenues 25,023,000 8,428,000 ----------- ----------- Cost of services: Cost of services 13,278,000 4,523,000 Self-clearing start-up costs - 166,000 ----------- ----------- Total cost of services 13,278,000 4,689,000 ----------- ----------- Operating expenses: Selling and marketing 3,128,000 1,127,000 Technology development 1,567,000 253,000 General and administrative 3,162,000 892,000 ----------- ----------- Total operating expenses 7,857,000 2,272,000 ----------- ----------- Total cost of services and operating expenses 21,135,000 6,961,000 ----------- ----------- Pre-tax income 3,888,000 1,467,000 Income tax expense 1,628,000 589,000 ----------- ----------- Net income $ 2,260,000 $ 878,000 =========== =========== Net income per share $ 0.07 $ 0.03 =========== =========== Weighted average number of common and common equivalent shares outstanding 33,374,000 26,811,000
See Notes to Consolidated Financial Statements. 4 E*TRADE GROUP, INC. AND SUBSIDIARIES Consolidated Balance Sheets
December 31, September 30, 1996 1996 ------------ ------------ (Unaudited) ASSETS Current assets: Cash and equivalents $ 13,414,000 $ 14,641,000 Cash and investments required to be segregated under Federal or other regulations 47,000,000 35,500,000 Investment securities 31,458,000 35,003,000 Brokerage receivables - net 251,599,000 193,228,000 Other assets 1,089,000 2,203,000 ------------ ------------ Total current assets 344,560,000 280,575,000 Property and equipment - net 9,632,000 9,228,000 Equity investment 2,984,000 2,860,000 Other assets 5,965,000 2,218,000 ------------ ------------ Total assets $363,141,000 $294,881,000 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Brokerage payables $282,598,000 $219,483,000 Income taxes payable 383,000 - Accounts payable, accrued liabilities and other 8,685,000 6,072,000 ------------ ------------ Total current liabilities 291,666,000 225,555,000 Long-term portion of capital leases 12,000 22,000 ------------ ------------ Total liabilities 291,678,000 225,577,000 ------------ ------------ Shareholders' equity: Common stock, $.01 par: shares authorized, 50,000,000; shares issued and outstanding: December 1996, 29,545,147; September 1996, 29,539,147 295,000 295,000 Additional paid-in capital 68,637,000 68,738,000 Retained earnings 2,531,000 271,000 ------------ ------------ Total shareholders' equity 71,463,000 69,304,000 ------------ ------------ Total liabilities and shareholders' equity $363,141,000 $294,881,000 ============ ============ See Notes to Consolidated Financial Statements.
5 E*TRADE GROUP, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended December 31, --------------------------- 1996 1995 ------------- ------------- Cash flows from operating activities: Net income $ 2,260,000 $ 878,000 Non-cash items included in net income: Deferred income taxes 571,000 - Depreciation and amortization 533,000 36,000 Equity income from investment (231,000) (64,000) Net effect of changes in: Cash and investments required to be segregated under Federal or other regulations (11,500,000) - Brokerage receivables (58,371,000) 141,000 Other assets (57,000) (1,363,000) Brokerage payables 63,115,000 - Accounts payable, accrued liabilities and other 2,996,000 470,000 ------------- ------------- Net cash provided by (used in) operating activities (684,000) 98,000 ------------- ------------- Cash flows from investing activities: Purchase of property and equipment (937,000) (1,159,000) Purchase of investment securities (198,711,000) - Sale/maturity of investment securities 202,256,000 - Relocation loan (3,147,000) - Distributions received from equity investment 107,000 - ------------- ------------- Net cash used in investing activities (432,000) (1,159,000) ------------- ------------- Cash flows from financing activities: Costs from initial public offering (102,000) - Proceeds from exercise of stock options 1,000 61,000 Repayment of capital leases (10,000) (4,000) ------------- ------------- Net cash provided by (used in) financing activities (111,000) 57,000 ------------- ------------- Decrease in cash and equivalents (1,227,000) (1,004,000) Cash and equivalents - Beginning of period 14,641,000 9,624,000 ------------- ------------- Cash and equivalents - End of period $ 13,414,000 $ 8,620,000 ============= ============= Supplemental disclosures: Cash paid for interest $ 2,397,000 $ 2,000 Cash paid for income taxes $ - $ 580,000
See Notes to Consolidated Financial Statements. 6 E*TRADE Group, Inc. and Subsidiaries Notes to Consolidated Financial Statements Note 1. - General The accompanying unaudited consolidated financial statements include E*TRADE Group, Inc. and its subsidiaries (collectively the "Company"). E*TRADE Group, Inc. is a holding company engaged, through its subsidiaries, in securities brokerage and related investment services. E*TRADE Group Inc.'s principal operating subsidiary, E*TRADE Securities, Inc. ("E*TRADE Securities") is a securities broker-dealer. These financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") and, in the opinion of management, reflect all adjustments necessary to present fairly the financial position, results of operations and cash flows for the periods presented in conformity with generally accepted accounting principles. All adjustments were of a normal recurring nature. All material intercompany balances and transactions have been eliminated. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's 1996 Annual Report to Shareholders and Form 10-K for the fiscal year ended September 30, 1996. Certain items in prior periods' financial statements have been reclassified to conform to the fiscal 1997 presentation. Note 2. - Recently Issued Accounting Standards The Company is required to adopt Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation, in fiscal 1997. SFAS No. 123 establishes accounting and disclosure requirements using a fair-value based method of accounting for stock based employee compensation plans. Under SFAS No. 123, the Company may either adopt the new fair-value based accounting method or continue the intrinsic value based method and provide pro forma disclosures of net income and earnings per share as if the accounting provisions of SFAS No. 123 had been adopted. The Company plans to adopt only the disclosure requirements of SFAS No. 123; therefore, such adoption will have no effect on the Company's consolidated net income or cash flows. On June 28, 1996, the Financial Accounting Standards Board issued SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, effective for transfers of financial assets made after December 31, 1996. This new statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. The Company does not expect SFAS No. 125 to and servicing of financial assets and extinguishments of liabilities. The Company does not expect SFAS No. 125 to have a material effect on its consolidated financial statements. Note 3. - Relocation Loan Receivable During the fourth calendar quarter of 1996, the Company made a relocation loan to Mr. Christos Cotsakos, its Chief Executive Officer and a Director, in the aggregate principal amount of $3,147,000. The proceeds of this loan were used to fund the purchase by Mr. Cotsakos of a personal residence in the Silicon 7 Valley area. In providing this relocation loan, the Compensation Committee of the Board of Directors considered, among the other things, the rapid escalation of residential housing costs in the Silicon Valley area as well as the costs incurred by Mr. Cotsakos in relocating from Brussels, Belgium to California. The relocation loan accrues interest at the rate of 7% per annum which, together with the principal amount, is due and payable in November 1999. The loan is required to be collateralized by a combination of assets, including the residence purchased. The due date of the relocation loan is subject to acceleration upon the occurrence of certain events including the voluntary cessation of employment with the Company by Mr. Cotsakos. Note 4. - Regulatory Requirements E*TRADE Securities is subject to the Uniform Net Capital Rule (the "Rule") under the Securities Exchange Act of 1934 administered by the Securities and Exchange Commission and the National Association of Securities Dealers, Inc., which requires the maintenance of minimum net capital. E*TRADE Securities has elected to use the alternative method permitted by the Rule, which requires that the Company maintain minimum net capital equal to the greater of $250,000 or 2 percent of aggregate debit balances arising from customer transactions, as defined. At December 31, 1996, E*TRADE Securities had net capital of $18,308,000 (8% of aggregate debit balances), which was $13,494,000 in excess of its required net capital of $4,814,000. Under the alternative method, a broker-dealer may not repay subordinated borrowings, pay cash dividends or make any unsecured advances or loans to its parent or employees if such payment would result in net capital of less than 5% of aggregate debit balances or less than 120% of its minimum dollar amount requirement. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations TRANSACTION REVENUE Transaction revenue increased 178% to $20,372,000 for the first quarter of fiscal 1997 up from $7,329,000 for the same period in fiscal 1996. Of these amounts, commission revenue for the first fiscal quarter of 1997 increased 146% to $13,837,000 up from $5,621,000 for the same period a year ago. Commissions per trade declined from $23.30 in the first quarter of fiscal 1996 to $20.10 in the first quarter of fiscal 1997 due to the planned reduction in listed market order commissions in February 1996. Payments for order flow increased 283% to $6,535,000 in the first quarter of fiscal 1997, up from $1,708,000 for the same period in the prior year. The average revenue per security transaction was $29.59 in the first quarter of fiscal 1997 and $30.38 in the same period a year ago. The increase in transaction revenue resulted primarily from an increase in the number of transactions processed by the Company. Transactions for the first quarter of fiscal 1997 totaled 688,000 or an average of 10,750 trades per day. This is an increase of 181% over the average daily transaction volume of 3,830 for the same period last year. INTEREST NET OF INTEREST EXPENSE Net interest revenue for the first quarter of fiscal 1997 increased 550% to $3,854,000 up from $593,000 for the same period in 1996. This increase is a 8 result of customer average margin debit balances increasing 144% to $206 million, customer average credit balances increasing 1,005% to $226 million and average money market fund balances increasing 116% to $466 million compared to average balances in the first quarter of fiscal 1996. COMPUTER SERVICES AND OTHER Computer services and other revenue increased 58% to $797,000 in the first quarter of fiscal 1997 up from $506,000 for the comparable period in 1996. The increase consists primarily of the Company's return on its investment in Roundtable Partners LLC and to a lesser extent, an increase in connect time and other fees. COST OF SERVICES Total cost of services increased 183% to $13,278,000 for the first quarter of fiscal 1997 from $4,689,000 for the comparable period in 1996. The increase results from the higher volume of customer transactions processed by the Company, a related increase in customer service inquiries, and operations and maintenance costs associated with the secondary data center in Rancho Cordova, California. OPERATING EXPENSES Selling and marketing expenses increased 178% to $3,128,000 for the first quarter of fiscal 1997 up from $1,127,000 for the comparable period in 1996. The increase reflects the Company's increases in expenditures for advertising placements, creative development and collateral materials resulting from an advertising campaign directed at building a dominant brand, growing customer base and market share, and maintaining high customer retention rates. Technology development costs increased 519% to $1,567,000 for the first quarter of fiscal 1997 up from $253,000 for the comparable period in 1996. The 1997 level of expenses was incurred to enhance the Company's existing product offerings. General and administrative costs increased 254% to $3,162,000 for the first quarter of fiscal 1997 up from $892,000 in the comparable 1996 quarter. The increase is the result of increased costs associated with personnel additions, relocation to larger facilities, and an increased use of consultants by the Company. INCOME TAX EXPENSE Income tax expense represents the provision for federal and state income taxes at an effective rate of 41.9% for the first quarter of 1997 and 40.1% for the comparable period in 1996. VARIABILITY OF RESULTS The Company expects to experience significant fluctuations in future quarterly operating results that may be caused by many factors, including the following: the timing of introductions of enhancements to online financial services and products by the Company or its competitors; market acceptance of online 9 financial services and products; the pace of development of the market for online commerce; changes in transaction volume on the securities markets; trends in the securities markets; changes in pricing policies by the Company or its competitors; changes in strategy; the success of or costs associated with acquisitions, joint ventures or other strategic relationships; changes in key personnel; seasonal trends; the extent of international expansion; the mix of international and domestic sales; changes in the level of operating expenses to support projected growth; and general economic conditions. Due to the foregoing factors, quarterly revenues and operating results are difficult to forecast, and the Company believes that period-to-period comparisons of its operating results will not necessarily be meaningful and should not be relied upon as an indication of future performance. It is likely that the Company's future quarterly operating results from time to time will not meet the expectations of securities analysts or investors, which may have an adverse effect on the market price of the Company's Common Stock. LIQUIDITY AND CAPITAL RESOURCES The Company currently anticipates that its available cash resources and credit facilities will be sufficient to meet its presently anticipated working capital and capital expenditure requirements for at least the next 12 months. However, the Company may need to raise additional funds in order to support more rapid expansion, develop new or enhanced services and products, respond to competitive pressures, acquire complementary businesses or technologies or respond to unanticipated requirements. If additional funds are raised through the issuance of equity securities, the percentage ownership of the shareholders of the Company will be reduced, shareholders may experience additional dilution in net book value per share or such equity securities may have rights, preferences or privileges senior to those of the holders of the Company's Common Stock. There can be no assurance that additional financing will be available when needed on terms favorable to the Company, if at all. If adequate funds are not available on acceptable terms, the Company may be unable to develop or enhance its services and products, take advantage of future opportunities or respond to competitive pressures or unanticipated requirements, any of which could have a material adverse effect on the Company's business, financial condition and operating results. Cash used in operating activities was $684,000 in the first quarter of fiscal 1997 primarily as a result of the recording of new brokerage receivable and payable balances and related statutorily required segregated balances since the end of fiscal 1996 offset by net income and a high level of accrued liabilities. Cash used in investing activities was $432,000 for the first quarter of fiscal 1997 primarily as a result of cash used for investments in property and equipment and the relocation loan (see Note 3 to Consolidated Financial Statements) partially offset by the net sales and maturities of short term interest bearing investment securities. The Company expects that it will have $20.0 million of capital expenditures during the fiscal year ending September 30, 1997. 10 Part II. Other Information Item 1. Legal proceedings - The Company is not currently a party to any litigation that it believes could have a material adverse effect on the Company's business, financial condition or operating results. However, from time to time the Company has been threatened with, or named as a defendant in, lawsuits and administrative claims. Compliance and trading problems that are reported to the NASD or the SEC by dissatisfied customers are investigated by the NASD or the SEC, and, if pursued by such customers, may rise to the level of arbitration or disciplinary action. One or more of such lawsuits, claims or disciplinary actions decided adversely to the Company could have a material adverse effect on the Company's business, financial condition and results of operations. The Company is also subject to periodic regulatory audits and inspections. Item 2. Changes in Securities - None Item 3. Defaults Upon Senior Securities - Not applicable Item 4. Submission of Matters to a Vote of Security Holders - None Item 5. Other Information - None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 10.1 Form of Loan Agreement Between Christos M. Cotsakos and E*TRADE Group, Inc. 11.1 Statement regarding computation of per share earnings. 27.1 Financial Data Schedule, EDGAR Filing only. (b) Form 8-K: No reports on Form 8-K were filed during the three months ended December 31, 1996. 11 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. E*TRADE Group, Inc. (Registrant) Dated: February __, 1997 /s/ Christos M. Cotsakos ------------------------ Christos M. Cotsakos, President, Chief Executive Officer and Director (principal executive officer) /s/ Stephen C. Richards ----------------------- Stephen C. Richards Senior Vice President, Finance and Administration, Chief Financial Officer and Treasurer(principal financial and accounting officer) EX-10.1 2 EXHIBIT 10.1 1 FORM OF LOAN DOCUMENTS PROMISSORY NOTE $_______________ Dated: _______________, 19_____ FOR VALUE RECEIVED, the undersigned, Christos M. Cotsakos (the "Borrower"), HEREBY UNCONDITIONALLY PROMISES TO PAY to the order of E*Trade Group, Inc. (the "Lender"), the principal sum of ____________________ DOLLARS ($_________), on ____________________. The Borrower further promises to pay interest on the outstanding principal amount of this Promissory Note from the date hereof until maturity, in arrears, on _______________, 19_____, at a rate per annum equal at all times to 7%. In the event that any amount of principal or interest, or any other amount payable hereunder, is not paid in full when due (whether at stated maturity, by acceleration or otherwise), the Borrower agrees to pay interest on such unpaid principal or other amount, from the date such amount becomes due until the date such amount is paid in full, payable on demand, at a rate per annum equal at all times to 9%. All computations of interest shall be made on the basis of a year of 360 days for the actual number of days (including the first day but excluding the last day) occurring in the period for which such interest is payable. All payments hereunder shall be made in lawful money of the United States of America, to the Lender, at such place or to such account as the Lender from time to time shall designate in a written notice to the Borrower. Whenever any payment hereunder shall be stated to be due, or whenever any interest payment date or any other date specified hereunder would otherwise occur, on a day other than a Business Day (as defined below), then such payment shall be made, and such interest payment date or other date shall occur, on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of payment of interest hereunder. As used herein, "Business Day" means a day (i) other than Saturday or Sunday, and (ii) on which commercial banks are open for business in San Francisco, California. Anything herein to the contrary notwithstanding, if during any period for which interest is computed hereunder, the amount of interest computed on the basis provided for in this Promissory Note, together with all fees, charges and other payments which are treated as interest under applicable law, as provided for herein or in any other document executed in connection herewith, would exceed the amount of such interest computed on the basis of the Highest Lawful Rate, the Borrower shall not be obligated to pay, and the Lender shall not be entitled to charge, collect, receive, reserve or take, interest in excess of the Highest Lawful Rate, and during any such period the interest payable hereunder shall be computed on the basis of the Highest Lawful Rate. As used herein, "Highest Lawful Rate" means the maximum non-usurious rate of interest, as in effect from time to time, which may be charged, contracted for, reserved, received or collected by the Lender in connection with this Promissory Note under applicable law. The Borrower may prepay the outstanding amount hereof in whole or in part at any time, without premium or penalty. Together with any such prepayment the Borrower shall pay accrued interest on the amount prepaid. Any partial prepayment shall be applied to the 2 installments of principal hereof in reverse order of maturity. So long as any amount payable by the Borrower hereunder shall remain unpaid, the Borrower will furnish to the Lender from time to time such information respecting the Borrower's financial condition and the Collateral (as defined below) as the Lender may from time to time reasonably request. The Borrower represents and warrants to the Lender that this Promissory Note does not contravene any contractual or judicial restriction binding on or affecting the Borrower and that this Promissory Note is the legal, valid and binding obligation of the Borrower enforceable against him in accordance with its terms. The Borrower agrees to notify the Lender of the incurrence of any other indebtedness secured by the Collateral prior to the incurrence thereof and to certify in writing to the Lender, at the end of each annual period occurring after the date hereof, that it has maintained, in full force and effect, without material modification, all insurance policies required to be delivered to the Lender under the Deed of Trust (as defined below). The occurrence of any of the following shall constitute an "Event of Default" under this Promissory Note: i) the failure to make any payment of principal, interest or any other amount payable hereunder when due under this Promissory Note or the breach of any other condition or obligation under this Promissory Note; ii) the breach of any representation or covenant under the Pledge Agreement (as defined below) or Deed of Trust; iii) the filing of a petition by or against the Borrower under any provision of the Bankruptcy Reform Act, Title 11 of the United States Code, as amended or recodified from time to time, or under any similar law relating to bankruptcy, insolvency or other relief for debtors; or appointment of a receiver, trustee, custodian or liquidator of or for all or any part of the assets or property of the Borrower; or the insolvency of the Borrower; or the making of a general assignment for the benefit of creditors by the Borrower; iv) the Borrower's death or incapacity; v) any of the documents relating to the Collateral after delivery thereof shall for any reason be revoked or invalidated, or other- wise cease to be in full force and effect, or the Borrower or any other person shall contest in any manner the validity or enforceability thereof, or the Borrower or any other person shall deny that it has any further liability or obligation thereunder; or any of the documents relating to the Collateral for any reason, except to the extent permitted by the terms thereof, shall cease to create a valid and perfected first priority lien in any of the Collateral purported to be covered thereby; vi) the failure of the Borrower to maintain at any time Collateral with a fair market value (as determined by the Lender) of at least 140% of the outstanding principal amount of the loan and then unpaid interest hereunder, provided, that the value of the Collateral utilized to satisfy such Collateral maintenance requirement shall be reduced by the amount of all indebtedness owed by Borrower that is secured by such Collateral; or 3 vii) the incurence by the Borrower of any other indebtedness secured by the Collateral which has not been consented to by the Lender. Upon the occurrence of any Event of Default, the Lender, at its option, may i) by notice to the Borrower, declare the unpaid principal amount of this Promissory Note, all interest accrued and unpaid hereon and all other amounts payable hereunder to be immediately due and payable, whereupon the unpaid principal amount of this Promissory Note, all such interest and all such other amounts shall become immediately due and payable, without presentment, demand, protest or further notice of any kind, provided that if an event described in paragraph (iii) above shall occur, the result which would otherwise occur only upon giving of notice by the Lender to the Borrower as specified above shall occur automatically, without the giving of any such notice; and (ii) whether or not the actions referred to in clause (i) have been taken, exercise any or all of the Lender's rights and remedies under the Pledge Agreement and Deed of Trust and proceed to enforce all other rights and remedies available to the Lender under applicable law. The Borrower agrees to pay on demand all the losses, costs, and expenses (including, without limitation, attorneys' fees and disbursements) which the Lender incurs in connection with enforcement or attempted enforcement of this Promissory Note, or the protection or preservation of the Lender's rights under this Promissory Note, whether by judicial proceedings or otherwise. Such costs and expenses include, without limitation, those incurred in connection with any workout or refinancing, or any bankruptcy, insolvency, liquidation or similar proceedings. The Borrower hereby waives diligence, demand, presentment, protest or further notice of any kind. The Borrower agrees to make all payments under this Promissory Note without setoff or deduction and regardless of any counterclaim or defense. No single or partial exercise of any power under this Promissory Note shall preclude any other or further exercise of such power or exercise of any other power. No delay or omission on the part of the Lender in exercising any right under this Promissory Note shall operate as a waiver of such right or any other right hereunder. 4 This Promissory Note shall be binding on the Borrower and his successors, assigns, personal representatives, heirs, and legatees, and shall be binding upon and inure to the benefit of the Lender, any future holder of this Promissory Note and their respective successors and assigns. The Borrower may not assign or transfer this Promissory Note or any of his obligations hereunder without the Lender's prior written consent. This Promissory Note is secured by certain collateral (the "Collateral") more specifically described in the Pledge Agreement of even date herewith between the Borrower and the Lender (the "Pledge Agreement") and the Deed of Trust with Assignment of Rents of even date herewith by the Borrower in favor of the Lender (the "Deed of Trust"). THIS PROMISSORY NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH CALIFORNIA LAW. ___________________________________ Christos M. Cotsakos Address: ___________________________________ ___________________________________ ___________________________________ Acknowledged and Agreed: ___________________________________ Hannah B. Cotsakos 5 PLEDGE AGREEMENT In order to secure payment of that certain _______________, 19_____, promissory note (the "Note") payable by the undersigned to the order of E*Trade Group, Inc. ("the Company"), the undersigned hereby grants the Company a security interest in, and assigns, transfers to and pledges with the Company, the following securities and other property: (i) options to purchase __________ shares of the common stock ("Common Stock") of the Company (the "Common Stock Options") owned and held by the undersigned as described further on Schedule A; (ii) any and all new, additional or different securities or other property subsequently distributed with respect to the Common Stock Options and Common Stock identified in subparagraph (i) that are to be delivered to and deposited with the Company pursuant to the requirements of paragraph 3 of this agreement; (iii) any and all other property and money that is delivered to or comes into the possession of the Company pursuant to the terms and provisions of this agreement; and (iv) the proceeds of any sale, exchange or disposition of the property and securities described in subparagraphs (i), (ii) or (iii) above. All securities, property and money so assigned, transferred to and pledged with the Company shall be herein referred to as the "Collateral" and shall be accompanied, if such Collateral is Common Stock or similar securities, by one or more stock power assignments properly endorsed by the undersigned. The Company shall hold the Collateral in accordance with the following terms and provisions: 1. No Liens. The undersigned hereby warrants that the undersigned is the owner of the Collateral and has the right to pledge the Collateral and that the Collateral is free from all liens, adverse claims and other security interests (other than those created hereby). 2. Rights and Powers. The Company may, without obligation to do so, exercise at any time and from time to time one or more of the following rights and powers with respect to any or all of the Collateral: (a) accept in its discretion other property of the undersigned in exchange for all or part of the Collateral and release Collateral to the undersigned to the extent necessary to effect such exchange, and in such event the money, property or securities received in the exchange shall be held by the Company as substitute security for the Note and all other indebtedness secured hereunder; (b) perform such acts as are necessary to preserve and protect the Collateral and the rights, powers and remedies granted with respect to such Collateral by this agreement; and (c) transfer record ownership of the Collateral to the Company or its nominee 6 and receive, endorse and give receipt for, or collect by legal proceedings or otherwise, dividends or other distributions made or paid with respect to the Collateral, provided and only if there exists at the time an outstanding event of default under paragraph 7 of this agreement. Any action by the Company pursuant to the provisions of this paragraph 2 may be taken without notice to the undersigned. Expenses reasonably incurred in connection with such action shall be payable by the undersigned and form part of the indebtedness secured hereunder as provided in paragraph 9. So long as there exists no event of default under paragraph 7 of this agreement, the undersigned may exercise all rights to determine when to purchase the Common Stock of the Company subject to the Common Stock Options and all stockholder voting rights, and be entitled to receive any and all cash dividends paid on the Collateral. Accordingly, until such time as an event of default occurs under this agreement, all proxy statements and other stockholder materials pertaining to the Collateral shall be delivered to the undersigned at the address indicated below. Any cash sums that the Company may receive in the exercise of its rights and powers under paragraph 2(c) above shall be applied to the payment of the Note and any other indebtedness secured hereunder, in such order of application as the Company deems appropriate. Any remaining cash shall be paid over to the undersigned. 3. Duty to Deliver. Any new, additional or different securities that may now or hereafter become distributable with respect to the Collateral by reason of (i) any stock dividend, stock split or reclassification of the capital stock of the Company or (ii) any merger, consolidation or other reorganization affecting the capital structure of the Company shall, upon receipt by the undersigned, be promptly delivered to and deposited with the Company as part of the Collateral hereunder. Such securities shall be accompanied by one or more properly-endorsed stock power assignments as required by the Company. 4. Care of Collateral. The Company shall exercise reasonable care in the custody and preservation of the Collateral, but shall have no obligation to initiate any action with respect to, or otherwise inform the undersigned of, any conversion, call, exchange right, preemptive right, subscription right, purchase offer or other right or privilege relating to or affecting the Collateral. The Company shall have no duty to preserve the rights of the undersigned against adverse claims or to protect the Collateral against the possibility of a decline in market value. The Company shall not be obligated to take any action with respect to the Collateral requested by the undersigned unless the request is made in writing and the Company determines that the requested action will not unreasonably jeopardize the value of the Collateral as security for the Note and other indebtedness secured hereunder. The Company may at any time prior to the repayment in full of all indebtedness outstanding under the Note, the Deed of Trust (as defined in the Note), and hereunder, in its sole discretion, release and deliver all or part of the Collateral to the undersigned, and the receipt thereof by the undersigned shall constitute a complete and full acquittance for the Collateral so released and delivered. The Company shall accordingly be discharged from any further liability or responsibility for the Collateral, and the released Collateral shall no longer be subject to the provisions of this agreement. 5. Payment of Taxes and Other Charges. The undersigned shall pay, prior to the delinquency date, all taxes, liens, assessments and other charges against the Collateral, and in 7 the event of the undersigned's failure to do so, the Company may at its election pay any or all of such taxes and charges without contesting the validity or legality thereof. The payments so made shall become part of the indebtedness secured hereunder and until paid shall bear interest at the per annum rate equal to the rate then applicable under the Note. 6. Transfer of Collateral. In connection with the transfer or assignment of the Note (whether by negotiation, discount or otherwise), the Company may transfer all or any part of the Collateral, and the transferee shall thereupon succeed to all the rights, powers and remedies granted the Company hereunder with respect to the Collateral so transferred. Upon such transfer, the Company shall be fully discharged from all liability and responsibility for the transferred Collateral. 7. Events of Default. The occurrence of one or more of the following events shall constitute an event of default under this agreement: (a) the failure of the undersigned to pay when due under the Note, any installment of principal or accrued interest; (b) the failure of the undersigned to perform any obligation imposed upon the undersigned by reason of this agreement, the Note or the Deed of Trust; or (c) the breach of any warranty of the undersigned contained in this agreement, the Note or the Deed of Trust. Upon the occurrence of any such event of default, the Company may, at its election, declare the Note and all other indebtedness secured hereunder to become immediately due and payable and may exercise any or all of the rights and remedies granted to a secured party under the provisions of the California Uniform Commercial Code (as now or hereafter in effect), including (without limitation) the power to dispose of the Collateral by public or private sale or to accept the Collateral in full payment of the Note and all other indebtedness secured hereunder. Any proceeds realized from the disposition of the Collateral pursuant to the foregoing power of sale shall be applied first to the payment of expenses incurred by the Company in connection with such disposition, then to the payment of the Note and finally to any other indebtedness secured hereunder. Any surplus proceeds shall be paid over to the undersigned. 8. Other Remedies. The rights, powers and remedies granted to the Company pursuant to the provisions of this agreement shall be in addition to all rights, powers and remedies granted to the Company under any statute or rule of law. Any forbearance, failure or delay by the Company in exercising any right, power or remedy under this agreement shall not be deemed to be a waiver of such right, power or remedy. Any single or partial exercise of any right, power or remedy under this agreement shall not preclude the further exercise thereof, and every right, power and remedy of the Company under this agreement shall continue in full force and effect unless such right, power or remedy is specifically waived by an instrument executed by the Company. 9. Costs and Expenses. All costs and expenses (including reasonable attorneys fees) incurred by the Company in the exercise or enforcement of any right, power or 8 remedy granted it under this agreement shall become part of the indebtedness secured hereunder and shall constitute a personal liability of the undersigned payable immediately upon demand and bearing interest until paid at the per annum rate equal to the rate then applicable under the Note. 10. Applicable Law. This agreement shall be governed by and construed in accordance with the laws of the State of California and shall be binding upon the executors, administrators, heirs and assigns of the undersigned. 11. Severability. If any provision of this agreement is held to be invalid under applicable law, then such provision shall be ineffective only to the extent of such invalidity, and neither the remainder of such provision nor any other provisions of this agreement shall be affected thereby. IN WITNESS WHEREOF, this agreement has been executed by the undersigned on this _____ day of _______________, 19_____. By: ____________________ Christos M. Cotsakos Address: Agreed to and Accepted by: E*TRADE GROUP, INC. By: ____________________ Dated: _______________, 19_____ Agreed to and Accepted by: Hannah B. Cotsakos as a co-pledgor and to the fullest extent of her marital interest By: ____________________ Hannah B. Cotsakos EX-11.1 3 EXHIBIT 11.1 1 Exhibit 11.1 Earnings per share is based on the fully diluted weighted average number of common and common equivalent shares outstanding during the period. Pursuant to rules of the Securities and Exchange Commission, all common and common equivalent shares issued and options, warrants and other rights to acquire shares of common stock at a price less than the initial public offering price granted by the Company during the 12 months preceding the offering date (using the treasury stock method until shares are issued) have been included in the computation of common and common equivalent shares outstanding for all periods prior to the initial public offering. E*TRADE GROUP, INC. STATEMENT RE: COMPUTATION OF PER-SHARE EARNINGS
THREE MONTHS ENDED DECEMBER 31 -------------------------- 1996 1995 -------- -------- (in thousands, except per share amounts) Weighted average shares outstanding................... 29,542 15,078 Series A convertible preferred stock............. -- 6,000 Series B convertible preferred stock............. -- 949 Stock options ................ 3,832 4,784 -------- -------- Shares used to compute per share data.................... 33,374 26,811 ======== ======== Net income (loss).............. $ 2,260 $ 878 ======== ======== Net income (loss) per share.... $ 0.07 $ 0.03 ======== ========
EX-27 4 EXHIBIT 27.1 - FINANCIAL DATA SCHEDULE
BD Exhibit 27.1 - FINANCIAL DATA SCHEDULE This schedule contains summary financial information extracted from the Consolidated Statements of Operations and Consolidated Balance Sheets of the Company's Quarterly Report on Form 10-Q for the period ended December 31, 1996, and is qualified in its entirety by reference to such financial statements. 1000 3-MOS SEP-30-1997 DEC-31-1996 13414 251599 0 0 34442 9632 363141 9068 282598 0 0 0 12 301 0 0 71162 363141 0 3854 20372 0 0 2297 0 3888 2260 0 0 2260 0.07 0.07
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