As filed with the Securities and Exchange Commission on August 20, 2002
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
Under
The Securities Act of 1933
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E*TRADE GROUP, INC.
(Exact name of registrant as specified in its charter)
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Delaware 94-2844166
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
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4500 Bohannon Drive
Menlo Park, California 94025
(650) 331-6000
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive
Offices)
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Christos M. Cotsakos
Chairman and Chief Executive Officer
E*TRADE Group, Inc.
4500 Bohannon Drive
Menlo Park, California 94025
(650) 331-6000
(Name and Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent For Service)
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Copy to:
Bruce K. Dallas, Esq.
Davis Polk & Wardwell
1600 El Camino Real
Menlo Park, CA 94025
(650) 752-2000
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Approximate date of commencement of proposed sale to the public: From time
to time after this Registration Statement becomes effective.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
===================================================================================================================================
Proposed Maximum Proposed Maximum
Title of Each Class of Offering Price Per Aggregate Offering Amount of
Securities to be Registered Amount to Be Registered Share(1) Price(1) Registration Fee
-----------------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $0.01
per share 3,380,879 $4.22 $14,267,309 $1,312
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(1) The price of $4.22, which was the average of the high and low prices of the
Common Stock on the New York Stock Exchange on August 16, 2002, is set forth
solely for the purpose of computing the registration fee pursuant to Rule
457(c).
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The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
THE INFORMATION CONTAINED IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND
MAY BE CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL AND IT IS NOT SOLICITING AN OFFER TO BUY
THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED AUGUST 20, 2002
PROSPECTUS
3,380,879 Shares
E*TRADE GROUP, INC.
Common Stock
This prospectus relates to the offer and sale from time to
time of 3,380,879 shares of our common stock held by the stockholders
named in this prospectus.
The prices at which selling stockholders may sell the shares
will be determined by the prevailing market price for the shares or in
negotiated transactions. We will not receive any of the proceeds from
the sale of the shares.
The shares offered by this prospectus were originally issued
in connection with a private placement of our common shares to E*TRADE
Japan K.K., a Japanese corporation.
Our common stock is listed on the New York Stock Exchange
under the symbol "ET." On August 16, 2002, the closing price for our
common stock was $4.37.
Investing in our common stock involves risks. See "Risk
Factors" included in this prospectus beginning on page 7.
-------------------------------
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these securities
or passed upon the adequacy or accuracy of this prospectus. Any
representation to the contrary is a criminal offense.
-------------------------------
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The date of this prospectus is August , 2002
TABLE OF CONTENTS
Special Note Regarding Forward-Looking Statements...........................2
E*TRADE Group, Inc..........................................................3
Recent Developments.........................................................5
Risk Factors................................................................7
Market for Our Common Equity...............................................18
Plan of Distribution.......................................................19
Selling Stockholders.......................................................22
Available Information......................................................23
Incorporation of Certain Documents by Reference............................23
Legal Matters..............................................................25
Experts....................................................................25
You should rely only on the information contained in or incorporated by
reference in this prospectus. No one has been authorized to provide you with
different information. This prospectus is not an offer of these securities in
any state where the offer is not permitted. You should not assume that the
information contained in or incorporated by reference in this prospectus or in
any prospectus supplement is accurate as of any date other than the date on the
front of the document.
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
Any statements in this prospectus and in our filings with the Commission
incorporated by reference in this prospectus that are not statements of
historical information are forward-looking statements made pursuant to the safe
harbor provisions of the Private Litigation Reform Act of 1995. These
forward-looking statements, as well as other oral and written forward-looking
statements made by or on behalf of us from time to time, including statements
contained in our other filings with the Commission and our reports to
shareowners, involve known and unknown risks and assumptions about our business
and other factors which may cause our actual results in future periods to
differ materially from those expressed in any forward-looking statements. Any
such statement is qualified by reference to the risks and factors discussed
under "Risk Factors" beginning on page 7 of this prospectus. We caution that
the risks and factors discussed in this prospectus are not exclusive. We have
no obligation to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or risks. New
information, future events or risks may cause the forward-looking events we
discuss in this prospectus and in the filings with the Commission we
incorporate by reference in this prospectus not to occur.
2
E*TRADE GROUP, INC.
E*TRADE Group, Inc., a diversified financial services holding company, by
and through its subsidiaries is a global provider of financial services to
retail, corporate and institutional customers. Building on our foundation in
online investing, we have expanded to provide retail customers with an
integrated and personalized suite of investing, banking, lending, planning and
advice services primarily through online channels, under our new brand,
"E*TRADE Financial." In the United States, we also offer corporate services,
including employee stock plan administration, market-making services to
brokerage firms, as well as onsite trading services. In addition, we provide
global institutional customers with a range of securities brokerage products
and services, including institutional trading. A key tenet of our strategy is
to use our proprietary technology and the Internet to deliver an integrated,
personalized and value-added financial services experience to all of our
customers. We execute against this strategy through the services provided by
our wholly-owned subsidiaries, including, but not limited to, E*TRADE
Securities, Incorporated, referred to in this prospectus as E*TRADE Securities,
a securities broker-dealer, TIR (Limited) Holdings, a provider of global
securities brokerage and other related services to institutional clients,
E*TRADE Financial Corporation, referred to in this prospectus as ETFC, a
provider of financial services whose primary business is conducted by its
subsidiary, E*TRADE Bank, referred to in this prospectus as the Bank. The Bank
is a federally chartered savings bank that provides credit products and deposit
products insured by the Federal Deposit Insurance Corporation, commonly
referred to as the FDIC, to customers nationwide.
We offer financial products and services in the following three primary
categories:
o Domestic retail brokerage - our domestic retail brokerage products
and services include fully-automated stock, option, fixed income and
mutual fund order processing, online investment portfolio tracking,
market making activities in listed and over-the-counter issues,
onsite trading services and access to financial market news and
information. Revenues from these products and services were 53% of
our net revenues for the fiscal year ended December 31, 2001 and
50.1% of our net revenues for the six months ended June 30, 2002.
o Banking - through our banking operations, we provide a wide range of
FDIC-insured and other banking products and services through the
Internet, telephones and ATMs. Revenues from these products and
services were 28.6% of our net revenues for the fiscal year ended
December 31, 2001 and 32.2% of our net revenues for the six months
ended June 30, 2002.
o Global and institutional - our global brokerage products and services
are similar to those of our domestic retail brokerage operations
except that they are provided to foreign investors through our
international subsidiaries. Our institutional brokerage products and
services are provided to institutional investors as opposed to retail
investors. Revenues from these products and services were 12.9% of
our net revenues for the fiscal year ended December 31, 2001 and
12.3% of our net revenues for the six months ended June 30, 2002.
In addition, we provide wealth management and other services consisting
primarily of our mutual fund operations and stock option and stock purchase
plan services provided to corporations. Revenues from these wealth management
and other services were 5.5% of our net revenues for the fiscal year ended
December 31, 2001 and 5.4% of our net revenues for the six months ended June
30, 2002.
We provide service 24 hours a day, 7 days a week, by means of the
Internet, automated telephone service, direct modem access, Internet-enabled
wireless devices and live telephone support. In addition, customers can visit
any of five E*TRADE Financial Centers located in New York City, Boston, Beverly
Hills, Denver and San Francisco or our E*TRADE Financial Zones located in
select SuperTarget(R) stores across the country. Customers can also access
their cash through our network of more than 11,000 automated teller machines.
Our proprietary transaction-enabling brokerage system includes a wide
variety of functions and services that allow customers to open and monitor
investment accounts and to place orders for equity, option, mutual fund and
fixed income transactions. The primary components of our transaction-enabling
system include a graphical user interface, the session manager, the transaction
process monitor, the data manager and the transaction processor. As our
proprietary transaction-enabling system is designed and proven to be a
flexible, "front-end" system, we are able
3
to integrate it with a wide range of computing platforms used throughout the
financial services industry in executing electronic commerce transactions. We
believe that our proprietary technology can be adapted to provide
transaction-enabling services in the financial services industry, including,
but not limited to, investment banking, insurance and correspondent clearing
operations.
Our principal executive office is located at 4500 Bohannon Drive, Menlo
Park, California 94025. Our telephone number is (650) 331-6000. The address of
our web site is www.etrade.com. The information on our web site does not form
part of this prospectus. References to E*TRADE, "we", "us" and "our" in this
prospectus refer to E*TRADE Group, Inc. and its subsidiaries unless the context
requires otherwise.
4
RECENT DEVELOPMENTS
On January 1, 2002, we adopted SFAS No. 142, Goodwill and Other Intangible
Assets, which requires that all intangible assets with finite useful lives be
amortized and that goodwill and intangible assets with indefinite lives not be
amortized, but rather tested upon adoption and at least annually for
impairment. In accordance with SFAS No. 142, we discontinued the amortization
of our recorded goodwill as of that date, identified our reporting units based
on our current segment reporting structure and allocated all recorded goodwill,
as well as other assets and liabilities, to the reporting units. We determined
the fair value of our reporting units utilizing discounted cash flow models and
relative market multiples for comparable businesses. We then compared the fair
value of each of our reporting units to its carrying value. As previously
reported in our Quarterly Report on Form 10-Q for the period ended June 30,
2002, this evaluation indicated that goodwill associated with our reporting
units in the global and institutional segment and our wealth management segment
were impaired. This impairment is primarily attributable to the change in the
evaluation criteria for goodwill from an undiscounted cash flow approach, which
was previously utilized under the guidance in Accounting Principle Board
Opinion No. 17, to the fair value approach, which is stipulated in SFAS No.
142. A non-cash charge totaling $299.4 million has been recorded as a change in
accounting principle effective January 1, 2002 to write-off goodwill of $292.6
million in the global and institutional segment and $6.8 million in the wealth
management segment.
The changes in carrying value of the remaining goodwill following this
impairment write down, by segment, as of June 30, 2002 was (in thousands):
Domestic
Retail
Brokerage
and Other Banking Total
--------- ------- -----
Balance as of January 1, 2002 $ 147,336 $114,046 $ 261,382
Goodwill due to Tradescape acquisition 71,708 -- 71,708
----------- -------- ---------
Balance as of June 30, 2002 $ 219,044 $114,046 $ 333,090
=========== ======== =========
A reconciliation of previously reported net income and earnings per share
to the amounts adjusted for the exclusion of goodwill amortization is provided
below (in thousands except per share amounts):
Three Months
Year Ended Ended Year Ended Year Ended
December 31, December 31, September 30, September 30,
2001 2000 2000 1999
------------ ------------ ------------- -------------
Reported income (loss) before extraordinary items
and cumulative effect of accounting change...... $(270,801) $ 1,436 $19,152 $ (54,315)
Add: Goodwill amortization ...................... 29,208 6,549 21,835 2,439
--------- ------- ------- ---------
Adjusted income (loss) before extraordinary items (241,593) 7,985 40,987 (51,876)
Extraordinary items and cumulative effect of
accounting change.............................. 29,269 (83) -- (2,454)
--------- ------- ------- ---------
Adjusted net income (loss) ...................... $(212,324) $ 7,902 $40,987 $ (54,330)
========= ======= ======= =========
Basic earnings per share
Reported income (loss) per share before
extraordinary items and cumulative effect of $ (0.81) $ 0.00 $ 0.06 $ (0.20)
accounting change...............................
Goodwill amortization per share.................. 0.09 0.03 0.08 0.00
Extraordinary items and cumulative effect of
accounting change per share.................... 0.08 -- -- 0.00
--------- ------- ------- ---------
Adjusted net income (loss) per share............. $ (0.64) $ 0.03 $ 0.14 $ (0.20)
========= ======= ======= =========
5
Diluted earnings per share
Reported income (loss) per share before
extraordinary items and cumulative effect of
accounting change.............................. $ (0.81) $ 0.00 $ 0.06 $ (0.20)
Goodwill amortization per share................. 0.09 0.02 0.07 0.00
Extraordinary items and cumulative effect of
accounting change per share................... 0.08 -- -- 0.00
--------- ------- ------- ---------
Adjusted net income (loss) per share............ $ (0.64) $ 0.02 $ 0.13 $ (0.20)
========= ======= ======= =========
Shares used to calculate per share data
Basic........................................... 332,370 311,413 301,926 272,832
Diluted......................................... 332,370 321,430 319,336 272,832
6
RISK FACTORS
RISKS RELATING TO THE NATURE OF THE ONLINE FINANCIAL SERVICES BUSINESS
We face competition from competitors, some of whom have significantly greater
financial, technical, marketing and other resources, which could cause us to
lower our prices or to lose a significant portion of our market share
The market for financial services delivered through technology-enabled
media, including the Internet is rapidly evolving and intensely competitive. We
expect competition to continue and intensify in the future. We face direct
competition from retail and institutional brokerage firms, banks, thrifts and
other savings and lending institutions, mortgage companies, specialists, market
makers, insurance companies, electronic communication networks ("ECNs"), mutual
fund companies, credit card companies, Internet portals, providers of equity
compensation and other corporate-focused financial products, financial
advisors, financial media providers and other financial products and services
organizations.
Many of our competitors have longer operating histories and significantly
greater financial, technical, marketing and other resources than we do. In
addition, many of our competitors offer a wider range of brokerage, lending,
banking, advisory and other financial services and products than we do, and
thus may be able to respond more quickly to new or changing opportunities or
demands. Many of our competitors also have greater name recognition and/or
greater acceptance as providers of a full range of financial products and
services, and larger customer bases that could be leveraged, thereby gaining
market share from us. These competitors may conduct more extensive promotional
activities and offer better terms and lower prices to customers than we do,
possibly even sparking price wars in various areas of the financial service
industry in which we compete. Moreover, some of our competitors have
established cooperative relationships among themselves or with third parties to
enhance their services and products. It is possible that new competitors,
alliances or industry consolidation among existing or future competitors may
significantly reduce our market share or our ability to compete effectively.
If we do not act or are unable to take advantage of consolidation opportunities
in the online financial services industry, or if we overextend our
consolidation efforts, we could be at a competitive disadvantage, or lose our
independence
There has been significant consolidation in the online financial services
industry over the last several years, particularly in those financial services
primarily offered on-line, and the consolidation is likely to continue and even
accelerate in the future. Should we fail to take advantage of viable
consolidation opportunities, we could be placed at a competitive disadvantage
relative to our competitors who have taken appropriate advantage of these
opportunities. Similarly, if we overextend our efforts in such a way that we
acquire businesses that we are unable to integrate or properly manage, we could
also be placed at a competitive disadvantage relative to competitors who did
not make such consolidation investments. In addition, our diversification
strategy could make us unattractive to potential acquirors whose business lines
are not as diverse as ours, thereby limiting shareowner value.
As a significant portion of our revenues come from online investing services,
downturns or disruptions in the securities markets have harmed and could
further significantly harm our business, including by reducing transaction
volumes and margin borrowing and increasing our dependence on our more active
customers who receive lower prices
A significant portion of our revenues in recent years has been from online
investing services, and although we continue to diversify our revenue sources,
we expect this business to continue to account for a significant portion of our
revenues in the foreseeable future. We, like other financial services firms,
are directly affected by economic and political conditions, broad trends in
business and finance, and changes in volume and price levels of securities and
futures transactions. The U.S. securities markets are characterized by
considerable fluctuation and downturns in these markets have harmed our
operating results, including our transaction volume and the rate of growth of
new accounts, and could continue to do so in the future.
7
Significant downturns in the U.S. securities markets occurred in October
1987 and October 1989, and a significant downturn has been occurring since
March 2000. Consequently, transaction volume has decreased industry-wide, and
many broker-dealers, including E*TRADE Securities, have been adversely
affected. The decrease in transaction volume has been more significant with
respect to our less active customers, increasing our dependence on our more
active Power E*TRADE and Tradescape customers who receive more favorable
pricing based on their transaction volume. Decreases in volumes, as well as
security prices, are also typically associated with a decrease in margin
borrowing. Because we generate revenue from interest charged on margin
borrowing, such decreases result in a reduction of revenue to E*TRADE
Securities. When transaction volume is low, our operating results are harmed in
part because some of our overhead costs remain relatively fixed. The
possibility exists that prices and transaction volumes in U.S. securities
markets will continue to move downward, either of which could harm our business
going forward. Some of our competitors with more diverse product and service
offerings might withstand such a downturn in the securities industry better
than we could.
Downturns in the securities markets increase the risk that parties to margin
lending or stock loan transactions with us will fail to honor their commitments
and that the value of the collateral we hold in connection with those
transactions will not be adequate, increasing our risk of losses from our
margin lending or stock loan activities
We sometimes allow customers to purchase securities on margin, and we are
therefore subject to the risk inherent in extending credit. This risk is
especially great when the market declines rapidly and the value of the
collateral we hold could potentially fall below the amount of a customer's
indebtedness. Similarly, as part of our broker-dealer operations, we frequently
enter into arrangements with other broker-dealers for the lending of various
securities. Under specific regulatory guidelines, any time we borrow or lend
securities, we must simultaneously disburse or receive cash deposits. If we
fail to maintain adequate cash deposit levels at all times, we risk losses if
there are sharp changes in market values of many securities and the
counterparties to the borrowing and lending transactions fail to honor their
commitments. The significant downturn in public equity markets since their
record high in March 2000 has led to a greater risk that parties to stock
lending transactions may fail to meet their commitments. Any such losses could
harm our financial position and results of operations.
If we are unsuccessful in managing the effects of changes in interest rates and
the interest-bearing assets in our portfolio, our financial condition and
results of operations could suffer
The results of operations for the Bank depend in large part upon the level
of its net interest income, that is, the difference between interest income
from interest-earning assets (such as loans and mortgage-backed securities) and
interest expense on interest-bearing liabilities (such as deposits and
borrowings). Changes in market interest rates and the yield curve could reduce
the value of the Bank's financial assets and thereby reduce net interest
income. Fixed-rate investments, mortgage-backed and related securities and
mortgage loans generally decline in value as interest rates rise. Many factors
affect interest rates, including governmental monetary policies and domestic
and international economic and political conditions. Currently, the Bank's net
interest income would be harmed by material fluctuations in interest rates.
The Bank attempts to mitigate this interest rate risk by using derivative
contracts that are designed to offset, in whole or in part, the variability in
value or cash flow of various assets or liabilities caused by changes in
interest rates. There can be no assurances that these derivative contracts move
either directionally or proportionately as intended. SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities, which we adopted on October
1, 2000 and have followed since that time, requires that the hedge
ineffectiveness, or the difference between the changes in value of the hedged
item versus the change in value of the hedging instruments, be recognized in
earnings as of the reporting date. Our financial results may prove to be more
volatile due to this reporting requirement.
Further, as part of its diversified portfolio of interest-bearing assets,
the Bank holds a portfolio of corporate bonds. With the downturn in the
securities markets and general economic conditions, there is a risk that some
of these corporate bonds may become impaired before they reach maturity, or
that upon maturity they may not realize their full principal value. If this
were to occur, the Bank's portfolio could suffer impairment charges as losses
are realized, and ultimately our financial position could suffer.
8
The Bank's diversification of its asset portfolio to include higher-yielding
investments which carry a higher inherent risk of default in its portfolio may
increase the risk of charge-offs which could reduce our profitability
As the Bank diversifies its asset portfolio through purchases of
higher-yielding asset classes, such as automobile loans and recreational
vehicle loans, we will have to manage assets that carry a higher inherent risk
of default than we have experienced with our existing portfolio. Consequently,
the level of charge-offs associated with these assets may be higher than
previously experienced. If expectations of future charge-offs increase, a
corresponding increase in the amount of our loan loss allowance would be
required. The increased level of provision for loan losses recorded to meet
additional loan loss allowance requirements could adversely impact our
financial results if those higher yields do not cover the provision for loan
losses.
If we are unable to quickly introduce new products and services that satisfy
changing customer needs, we could lose customers and have difficulty attracting
new customers
Our future profitability depends significantly on our ability to innovate
by developing, maintaining and enhancing our services and products. There are
significant challenges to such development, maintenance and enhancement,
including technical risks. There can be no assurance that we will be successful
in achieving any of the following:
o effectively using new technologies;
o adapting our services and products to meet emerging industry
standards; or
o developing, introducing and marketing new services and products to
meet customer demand.
If we are unable to develop and introduce enhanced or new services and
products quickly enough to respond to market or customer requirements, or if
they do not achieve market acceptance, our business could be harmed.
Risks associated with trading transactions at our specialist/market maker could
result in trading losses
A majority of our specialist and market making revenues at Dempsey are
derived from trading by Dempsey as a principal. Dempsey may incur trading
losses relating to the purchase, sale or short sale of securities for its own
account. In any period, Dempsey also may incur trading losses in its specialist
stocks and market maker stocks for reasons such as price declines, lack of
trading volume and the required performance of specialist and market maker
obligations. From time to time, Dempsey may have large position concentrations
in securities of a single issuer or issuers engaged in a specific industry. In
general, because Dempsey's inventory of securities is marked to market on a
daily basis, any downward price movement in those securities will result in a
reduction of our revenues and operating profits. Dempsey also operates a
proprietary trading desk separately from its specialist and market maker
operations. We may incur trading losses as a result of these trading
activities.
Reduced spreads in securities pricing, levels of trading activity and trading
through market makers and/or specialists could harm our specialist and market
maker business
The listed marketplaces other than Nasdaq moved from trading using
fractional share prices to trading using decimals in January 2001, and the
Nasdaq initiated decimalization in March 2001. As a result, spreads that
specialists and market makers receive in trading equity securities have
declined and may continue to decline, which could harm revenues generated by
Dempsey and, in turn, harm our operating results. Also, the advent of
decimalization led to a decline in order flow revenue received by us from
market makers and marketplaces. Similarly, a reduction in the volume and/or
volatility of trading activity could also reduce spreads that specialists and
market makers receive, also harming revenues generated by Dempsey and, in turn,
our operating results.
9
Alternative trading systems that have developed over the past few years
could also reduce the levels of trading of exchange-listed securities through
specialists and the levels of over-the-counter trading through market makers,
also potentially harming Dempsey's, and in turn, our revenues. We cannot assure
that these developments will not cause a decrease in the transaction volumes of
Dempsey's specialist operations.
In addition, Electronic Communication Networks, or ECN's, have emerged as
an alternative forum to which broker-dealers and institutional investors can
direct their limit orders. This allows broker-dealers and institutional
investors to avoid directing their trades through market makers. As a result,
Dempsey may experience a reduction in its flow of limit orders. It is possible
that ECNs will continue to capture a greater amount of limit order flow.
If our international efforts are not successful, our business growth will be
harmed and our resources will not have been used efficiently
One component of our strategy is a planned increase in efforts to attract
more international customers. To date, we have limited experience in providing
brokerage services internationally, and the Bank has had only limited
experience providing banking services to customers outside the United States.
There can be no assurance that we and/or our international licensees will be
able to market our branded services and products successfully in international
markets.
In order to expand our services globally, we must comply with the
regulatory controls of each specific country in which we conduct business. Our
international expansion could be limited by the compliance requirements of
other regulatory jurisdictions, including the European Union's Privacy
Directive regulating the use and transfer of customer data. We intend to rely
primarily on local third parties and our subsidiaries for regulatory compliance
in foreign jurisdictions.
In addition, there are certain risks inherent in doing business in
international markets, particularly in the heavily regulated brokerage and
banking industries, such as:
o unexpected changes in regulatory requirements and trade barriers;
o difficulties in staffing and managing foreign operations;
o the level of investor interest in cross-border trading;
o authentication of online customers;
o political instability;
o fluctuations in currency exchange rates;
o reduced protection for intellectual property rights in some
countries;
o seasonal reductions in business activity during the summer months in
Europe and certain other parts of the world;
o the level of acceptance and adoption of the Internet in international
markets; and
o potentially adverse tax consequences.
Any of the foregoing could harm our international operations. In addition,
because some of these international markets are served through license
arrangements with others, we rely upon these third parties for a variety of
business and regulatory compliance matters. We have limited control over the
management and direction of these third parties. We run the risk that their
action or inaction, including their failure to follow proper practices with
respect to their own corporate governance, could harm our operations and/or our
reputation. Additionally, certain of
10
our international licensees have the right to grant sublicenses. Generally, we
have less control over sublicensees than we do over licensees. As a result, the
risk to our operations and reputation is higher.
Our failure to successfully integrate the companies that we acquire into our
existing operations could harm our business
In recent years, we have acquired E*TRADE Access, eInvesting, E*TRADE
Advisory Services, E*TRADE Technologies, E*TRADE Mortgage, Web Street, several
of our international affiliates, Dempsey and Tradescape. We may also acquire
other companies or technologies in the future, and we regularly evaluate such
opportunities. Acquisitions entail numerous risks, including, but not limited
to:
o difficulty in retaining or hiring skilled personnel who have proven
management expertise in the business line we acquire;
o difficulties in the assimilation and integration of acquired
operations and products;
o diversion of management's attention from other business concerns;
o existence of undetected problems or potential liabilities that could
have a significant, negative impact on the business or operations of
the acquired company;
o failure to achieve anticipated cost savings;
o failure to retain existing customers of the acquired companies;
o amortization of acquired intangible assets, with the effect of
reducing our reported earnings; and
o potential loss of key associates of acquired companies.
No assurance can be given as to our ability to integrate successfully any
operations, technology, personnel, services or new businesses or products that
might be acquired in the future. Failure to successfully assimilate acquired
organizations could harm our business. In addition, there can be no assurance
that we will realize a positive return on any of these investments or that any
of our future acquisitions will not be dilutive to earnings.
Our ratio of debt to equity may make it more difficult to make payments on our
debts or to obtain financing
At June 30, 2002, we had an outstanding balance of $695.3 million in
convertible subordinated notes. Combined with decreases in shareowners' equity
reflecting the facility restructuring and nonrecurring charge in August 2001,
the effects of the share buyback program through June 2002, and the cumulative
effect of accounting change recorded in the quarter ended March 31, 2002, our
ratio of debt (our convertible debt, capital lease obligations and term loans)
to equity (expressed as a percentage) was 48% as of June 30, 2002. We may incur
additional indebtedness in the future. The level of our indebtedness, among
other things, could:
o make it more difficult to make payments on our debt;
o make it more difficult or costly for us to obtain any necessary
financing in the future for working capital, capital expenditures,
debt service requirements or other purposes;
o limit our flexibility in planning for or reacting to changes in our
business; and
o make us more vulnerable in the event of a downturn in our business.
Our efforts to expand recognition of the E*TRADE brand to areas of the
financial services industry other than online trading may not be effective
11
As we diversify the scope of the products and services we offer, the brand
"E*TRADE" or "E*TRADE Financial" may not be as effective for us in the future,
which could harm our revenues. In addition, our efforts to further our brand as
a diversified financial services institution are largely dependent on our use
of effective marketing and advertising efforts. If these efforts are not
successful, we will not have used resources effectively.
RISKS RELATING TO THE REGULATION OF OUR BUSINESS
If changes in government regulation, including banking and securities rules and
regulations, favor our competition or restrict our business practices, our
ability to attract and retain customers and our profitability may suffer
The securities and banking industries in the United States are subject to
extensive regulation under both federal and state laws. Because we are a
self-clearing broker-dealer, we have to comply with many additional laws and
rules. These include rules relating to possession and control of customer funds
and securities, margin lending and execution and settlement of transactions.
Our ability to comply with these rules depends largely on the establishment and
maintenance of a qualified compliance system. We are also subject to additional
laws and rules as a result of our specialist and market maker operations in
Dempsey.
Similarly, E*TRADE Group and ETFC, as savings and loan holding companies,
and E*TRADE Bank, as a federally chartered savings bank and subsidiary of ETFC,
are subject to extensive regulation, supervision and examination by the OTS,
and, in the case of the Bank, the FDIC. Such regulation covers all banking
business, including lending practices, safeguarding deposits, capital
structure, record keeping, transactions with affiliates and conduct and
qualifications of personnel.
Because of our international presence, we are also subject to the
regulatory controls of each specific country in which we conduct business.
Because we operate in an industry subject to extensive regulation, the
competitive landscape in our industry can change significantly as a result of
new regulation, changes in existing regulation, or changes in the
interpretation or enforcement of existing laws and rules.
There can be no assurance that federal, state or foreign agencies will not
further regulate our business. We may also be subject to additional regulation
as the market for online commerce evolves. We may also be subject to federal,
state or foreign money transmitter laws and state and foreign sales or use tax
laws. If such laws are enacted or deemed applicable to us, our business or
operations could be rendered more costly or burdensome, less efficient or even
impossible. Any of the foregoing could harm our business, financial condition
and operating results.
If we fail to comply with applicable securities, banking and insurance
regulations, we could be subject to disciplinary actions, damages, penalties or
restrictions that could significantly harm our business
The SEC, the NASD or other self-regulatory organizations and state
securities commissions can, among other things, censure, fine, issue
cease-and-desist orders or suspend or expel a broker-dealer or any of its
officers or employees. The OTS may take similar action with respect to our
banking activities. Our ability to comply with all applicable laws and rules is
largely dependent on our establishment, maintenance and enforcement of an
effective compliance system. Our failure to establish and enforce proper
compliance procedures, or failure of any of our associates to follow these
procedures and applicable laws and regulations, regardless of whether such
failure is intentional, could subject us to significant losses, disciplinary or
other actions due to actual or claimed noncompliance in the future, which could
harm our business.
If we do not maintain the capital levels required by regulators, we may be
fined or forced out of business
The SEC, NASD, OTS and various other regulatory agencies have stringent
rules with respect to the maintenance of specific levels of net capital by
securities broker-dealers and regulatory capital by banks. Net capital is the
net worth of a broker or dealer (assets minus liabilities), less deductions for
certain types of assets. If a
12
securities firm fails to maintain the required net capital it may be subject to
suspension or revocation of registration by the SEC and suspension or expulsion
by the NASD, and could ultimately lead to the firm's liquidation. In the past,
our broker-dealer subsidiaries have depended largely on capital contributions
by us in order to comply with net capital requirements. If such net capital
rules are changed or expanded, or if there is an unusually large charge against
net capital, regardless of the basis for such charge, operations that require
an intensive use of capital could be limited. Such operations may include
investing activities, marketing and the financing of customer account balances.
Also, our ability to withdraw capital from brokerage subsidiaries could be
restricted, which in turn could limit our ability to pay dividends, repay debt
and redeem or purchase shares of our outstanding stock. A large operating loss
or charge against net capital could adversely affect our ability to expand or
even maintain our present levels of business, which could harm our business.
See the footnote regarding regulatory requirements in our most recent financial
statements for the minimum net capital requirements for our domestic
broker-dealer subsidiaries for the most recent reporting period.
Similarly, banks, such as the Bank, are subject to various regulatory
capital requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken, could harm
a bank's operations and financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, a bank must meet
specific capital guidelines that involve quantitative measures of a bank's
assets, liabilities and certain off-balance-sheet items as calculated under
regulatory accounting practices. A bank's capital amounts and classification
are also subject to qualitative judgments by the regulators about the strength
of components of the bank's capital, risk weightings of assets and
off-balance-sheet transactions, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require a bank to maintain minimum amounts and ratios of Total and Tier 1
Capital to risk-weighted assets and of Core Capital to adjusted tangible
assets. To satisfy the capital requirements for a well capitalized financial
institution, a bank must maintain minimum Total and Tier 1 Capital to
risk-weighted assets and Core Capital to adjusted tangible assets ratios. See
the footnote regarding regulatory requirements in our most recent financial
statements for the capital adequacy requirements for the Bank for the most
recent reporting period.
Regulatory review of our advertising practices could hinder our ability to
operate our business and result in fines and other penalties
All marketing activities by E*TRADE Securities are regulated by the NASD,
and all marketing materials must be reviewed by an E*TRADE Securities Series 24
licensed principal prior to release. The NASD has in the past asked us to
revise certain marketing materials. In June 2001, we settled a formal NASD
investigation into our advertising practices and were fined by the NASD in
connection with three advertisements that were placed in 1999. The NASD can
impose certain penalties for violations of its advertising regulations,
including:
o censures or fines;
o suspension of all advertising;
o the issuance of cease-and-desist orders; or
o the suspension or expulsion of a broker-dealer or any of its officers
or employees.
In addition, the federal banking agencies impose restrictions on bank
advertising of non-deposit investment products to minimize the likelihood of
customer confusion.
If we were deemed to solicit orders from our customers or make investment
recommendations, we would become subject to additional regulations that could
be burdensome and subject us to fines and other penalties
If we were deemed to solicit orders from our customers or make investment
recommendations, we would become subject to additional rules and regulations
governing, among other things, sales practices and the suitability
13
of recommendations to customers. Compliance with these regulations could be
burdensome, and, if we fail to comply, we could be subject to fines and other
penalties.
Due to our acquisition of ETFC, we are subject to regulations that could
restrict our ability to take advantage of good business opportunities and that
may be burdensome to comply with
Upon the completion of our acquisition of ETFC and its subsidiary, the
Bank, in January, 2000, we became subject to regulation as a savings and loan
holding company. As a result, we, as well as the Bank, are required to file
periodic reports with the OTS, and are subject to examination by the OTS. The
OTS also has certain types of enforcement powers over ETFC and us, including
the ability to issue cease-and-desist orders, force divestiture of the Bank and
impose civil money penalties for violations of federal banking laws and
regulations or for unsafe or unsound banking practices. In addition, under the
Graham-Leach-Bliley Act, our activities are now restricted to activities that
are financial in nature and certain real estate-related activities. We may make
merchant banking investments in companies whose activities are not financial in
nature, if those investments are engaged in for the purpose of appreciation and
ultimate resale of the investment and we do not manage or operate the company.
Such merchant banking investments may be subject to maximum holding periods and
special record keeping and risk management requirements.
We believe that all of our existing activities and investments are
permissible under the new legislation, but the OTS has not yet interpreted
these provisions. Even if all of our existing activities and investments are
permissible, under the new legislation we will be constrained in pursuing
future new activities that are not financial in nature. We are also limited in
our ability to invest in other savings and loan holding companies. These
restrictions could prevent us from pursuing certain activities and transactions
that could be beneficial to us.
In addition to regulation of us and ETFC as savings and loan holding
companies, federal savings banks such as the Bank are subject to extensive
regulation of their activities and investments, their capitalization, their
risk management policies and procedures and their relationship with affiliated
companies. In addition, as a condition to approving our acquisition of ETFC,
the OTS imposed various notice and other requirements, primarily a requirement
that the Bank obtain prior approval from the OTS of any future material changes
to the Bank's business plan. Acquisitions of and mergers with other financial
institutions, purchases of deposits and loan portfolios, the establishment of
new Bank subsidiaries and the commencement of new activities by Bank
subsidiaries require the prior approval of the OTS. These regulations and
conditions could place us at a competitive disadvantage in an environment in
which consolidation within the financial services industry is prevalent. Also,
these regulations and conditions could affect our ability to realize synergies
from future acquisitions, could negatively affect both us and the Bank
following the acquisition and could also delay or prevent the development,
introduction and marketing of new products and services.
RISKS RELATING TO OWNING OUR STOCK
Our historical quarterly results have fluctuated and do not reliably indicate
future operating results
We do not believe that our historical operating results should be relied
upon as an indication of our future operating results. We expect to experience
large fluctuations in future quarterly operating results that may be caused by
many factors, including the following:
o fluctuations in interest rates, which will impact our investment and
loan portfolios and the volume of our loan originations;
o changes in trading volume in securities markets;
o the success of, or costs associated with, acquisitions, joint
ventures or other strategic relationships;
o changes in key personnel;
o fluctuations in the fair market value of our equity investments in
other companies, including
14
through existing or future private investment funds managed by us;
o seasonal trends;
o purchases and sales of securities and other assets as part of the
Bank's portfolio restructuring efforts;
o customer acquisition costs, which may be affected by competitive
conditions in the marketplace;
o the timing of introductions or enhancements to online financial
services and products by us or our competitors;
o market acceptance of online financial services and products;
o domestic and international regulation of the brokerage, banking and
Internet industries;
o accounting for derivative instruments and hedging activities;
o changes in domestic or international tax rates;
o changes in pricing policies by us or our competitors;
o fluctuation in foreign exchange rates; and
o changes in the level of operating expenses to support projected
growth.
We have also experienced fluctuations in the average number of customer
transactions per day. Thus, the rate of growth in customer transactions at any
given time is not necessarily indicative of future transaction activity.
We have incurred losses in the past and we cannot assure you that we will be
profitable
Although we earned $32.8 million for the three months ended June 30, 2002,
we have incurred operating losses in prior periods and we may incur operating
losses in the future. We reported net losses of $276.0 million for the three
months ended March 31, 2002, which includes an extraordinary gain on
extinguishment of debt of $4.1 million and a cumulative effect of accounting
change of $(299.4) million, net loss of $241.5 million in fiscal 2001, which
includes facility restructuring and other nonrecurring charges of $202.8
million, net income of $19.2 million in fiscal 2000 and net loss of $56.8
million in fiscal 1999. Although we achieved profitability in fiscal 2000 due
in part to sales of investment securities, we cannot assure you that
profitability will be achieved in future periods.
Similarly, from time to time we provide certain guidance or forward looking
statements concerning our expected operating metrics for a particular future
period, based on good faith estimates. As set forth more particularly in our
standard "safe harbor" statements, we cannot assure you that we will meet or
exceed any expected operating metrics for any particular period.
The market price of our common stock may continue to be volatile which could
cause litigation against us and the inability of shareowners to resell their
shares at or above the prices at which they acquired them
From January 1, 2001 through August 16, 2002, the price per share of our
common stock has ranged from a high of $15.38 to a low of $2.81. The market
price of our common stock has been, and is likely to continue to be, highly
volatile and subject to wide fluctuations due to various factors, many of which
may be beyond our control, including:
o quarterly variations in operating results;
o volatility in the stock market;
15
o volatility in the general economy;
o large block transactions in our common stock by institutional
investors;
o changes in investor sentiment;
o changes in interest rates;
o announcements of acquisitions, technological innovations or new
software, services or products by us or our competitors; and
o changes in financial estimates and recommendations by securities
analysts.
In addition, there have been large fluctuations in the prices and trading
volumes of securities of many technology, Internet and financial services
companies. This volatility is often unrelated or disproportionate to the
operating performance of these companies. Broad market and industry factors may
decrease the market price of our common stock. In the past, volatility in the
market price of a company's securities has often led to securities class action
litigation. Such litigation could result in substantial costs to us and divert
our attention and resources, which could harm our business. Declines in the
market price of our common stock or failure of the market price to increase
could also harm our ability to retain key associates, reduce our access to
capital and otherwise harm aspects of our business.
We may need additional funds in the future which may not be available and which
may result in dilution of the value of our common stock
In the future, we may need to raise additional funds for various purposes,
including to expand our technology resources, to hire additional associates, to
make acquisitions or to increase the Bank's total assets or deposit base.
Additional financing may not be available on favorable terms, if at all. If
adequate funds are not available on acceptable terms, we may be unable to fund
our business growth plans. In addition, if funds are available, the result of
our issuing securities could be to dilute the value of shares of our common
stock and cause the market price to fall.
Provisions in our certificate of incorporation and bylaws, our stockholder
rights plan, stock incentive plans, contracts and management retention
agreements and Delaware law could prevent or delay an acquisition of us that a
shareowner may consider to be favorable
Certain provisions of our certificate of incorporation and bylaws may
discourage, delay or prevent a third party from acquiring control of us in a
merger, acquisition or similar transaction that a shareowner may consider
favorable. Such provisions include:
o authorization for the issuance of "blank check" preferred stock;
o provision for a classified Board of Directors with staggered,
three-year terms;
o the prohibition of cumulative voting in the election of directors;
o a super-majority voting requirement to effect business combinations
or certain amendments to our certificate of incorporation and bylaws;
o limits on the persons who may call special meetings of shareowners;
o the prohibition of shareowner action by written consent; and
o advance notice requirements for nominations to the Board of Directors
or for proposing matters that can be acted on by shareowners at
shareowner meetings.
16
Attempts to acquire control of E*TRADE may also be delayed or prevented by
our stockholder rights plan. The stockholder rights plan is designed to enhance
the ability of our Board of Directors to protect shareowners against, among
other things, unsolicited attempts to acquire control of E*TRADE that do not
offer an adequate price to all shareowners or are otherwise not in the best
interests of the company and our shareowners. In addition, certain provisions
of our stock incentive plans, management retention and employment agreements
(including severance payments, stock option acceleration and loan forgiveness
with associated tax gross-ups), and Delaware law may also discourage, delay or
prevent someone from acquiring or merging with us.
17
MARKET FOR OUR COMMON EQUITY
The following table shows the high and low sale prices of our common stock
as reported by the Nasdaq National Market or the New York Stock Exchange, as
applicable (we relisted from the Nasdaq National Market to the New York Stock
Exchange in January 2001), for the periods indicated.
High Low
-------- -------
Fiscal 2000:
First Quarter...............................................$ 40.00 $21.63
Second Quarter..............................................$ 34.25 $19.19
Third Quarter...............................................$ 31.19 $13.13
Fourth Quarter..............................................$ 20.19 $13.19
Transition Period:
Three Months Ended December 31, 2000........................$ 16.50 $ 6.66
Fiscal 2001:
First Quarter...............................................$ 15.38 $ 6.35
Second Quarter..............................................$ 10.20 $ 5.32
Third Quarter...............................................$ 6.82 $ 4.07
Fourth Quarter..............................................$ 11.10 $ 5.59
Fiscal 2002:
First Quarter...............................................$ 12.64 $ 7.61
Second Quarter..............................................$ 9.54 $ 4.60
Third Quarter (through August 16, 2002) ....................$ 5.47 $ 2.81
18
PLAN OF DISTRIBUTION
We are registering for resale all 3,380,879 shares of our common stock,
par value of $0.01 per share, on behalf of E*TRADE Japan K.K., a Japanese
corporation, or pledgees, donees, transferees or other successors in interest
that receive the shares as a gift, partnership distribution or other non-sale
related transfer, referred to in this prospectus as the selling stockholders.
We will receive no proceeds from this offering. All of the shares were
originally issued by us in a transaction in which E*TRADE Japan K.K., a
Japanese corporation, purchased the shares of our common stock and we purchased
shares of common stock of E*TRADE Japan, resulting in an increase in our
ownership interest in E*TRADE Japan to approximately 36.1% of the equity of
E*TRADE Japan.
The selling stockholders may sell shares of common stock from time to time
as follows (if at all):
o to or through underwriters, brokers or dealers;
o directly to one or more other purchasers;
o through agents on a best-efforts basis; or
o otherwise through a combination of any of these methods of sale.
If a selling stockholder sells shares of common stock through
underwriters, dealers, brokers or agents, those underwriters, dealers, brokers
or agents may receive compensation in the form of discounts, concessions or
commissions from the selling stockholder and/or the purchasers of the shares of
common stock.
The shares of common stock may be sold from time to time:
o in one or more transactions at a fixed price or prices, which may be
changed;
o at market prices prevailing at the time of sale;
o at prices related to prevailing market prices;
o at varying prices determined at the time of sale; or
o at negotiated prices.
These sales may be effected in transactions:
o on any national securities exchange or quotation service on which our
common stock may be listed or quoted at the time of sale;
o in the over-the-counter market;
o in block transactions in which the broker or dealer so engaged will
attempt to sell the shares of common stock as agent but may position
and resell a portion of the block as principal to facilitate the
transaction, or in crosses, in which the same broker acts as an agent
on both sides of the trade;
o in transactions otherwise than on exchanges or services or in the
over-the-counter market;
o through the writing of options; or
o through other types of transactions.
In connection with sales of common stock or otherwise, the selling
stockholders may enter into hedging transactions with broker-dealers or others,
who may in turn engage in short sales of the common stock in the course
19
of hedging the positions they assume. The selling stockholders may pledge or
grant a security interest in some or all of the common stock and, if it
defaults in the performance of its secured obligations, the pledgees or secured
parties may offer and sell the common stock from time to time pursuant to this
prospectus. The selling stockholders also may transfer and donate shares of
common stock in other circumstances in which case the transferees, donees,
pledgees or other successors in interest will be the selling stockholders for
purposes of this prospectus. The selling stockholders may sell short the common
stock and may deliver this prospectus in connection with short sales and use
the shares of common stock covered by the prospectus to cover these short
sales. In addition, any shares of common stock covered by this prospectus that
qualify for sale pursuant to Rule 144 or any other available exemption from
registration under the Securities Act may be sold under Rule 144 or another
available exemption.
At the time a particular offering of shares of common stock is made, a
prospectus supplement, if required, will be distributed which will set forth
the aggregate amount of shares of common stock being offered and the terms of
the offering, including the name or names of any underwriters, dealers, brokers
or agents, if any, and any discounts, commissions or concessions allowed or
reallowed to be paid to brokers or dealers.
E*TRADE Japan has agreed that without our prior written consent it will
not sell more than 1,000,000 of the shares offered by this prospectus (as
adjusted for stock splits, reverse stock splits, stock dividends, combinations
and other recapitalizations) during any 90 day period, and that it will not
sell more than (Y)1,000,000,000 worth of these shares during the period ending
May 31, 2003. E*TRADE Japan has also agreed that it may only sell the shares
offered by this prospectus during periods when officers and directors of
E*TRADE are generally permitted to trade in our shares pursuant to our internal
trading policies. E*TRADE Japan has agreed that it shall effect any sales of
the shares offered hereby only through E*TRADE Institutional Securities, Inc.
In addition, E*TRADE Japan has agreed that prior to making any sale of our
common shares, E*TRADE Japan will notify us and we will have the right to
purchase those shares at a price equal to the volume weighted average price of
the shares on the proposed date of sale (or if that date is not a trading day,
on the next trading day). To our knowledge, except as disclosed in this
prospectus there are currently no other agreements, arrangements or
understandings with respect to the sale of any of the shares offered hereby.
Selling stockholders and any underwriters, dealers, brokers or agents who
participate in the distribution of the shares of common stock may be deemed to
be "underwriters" within the meaning of the Securities Act and any profits on
the sale of the shares of common stock by them and any discounts commissions or
concessions received by any underwriters, dealers, brokers or agents may be
deemed to be underwriting discounts and commissions under the Securities Act.
In the event of any offering of the securities offered hereby,
underwriting discounts and commissions received by any NASD member or
independent broker-dealer on securities sold in any distribution will not
exceed 8% of the offering proceeds.
The selling stockholders and any other person participating in a
distribution of the shares of common stock will be subject to applicable
provisions of the Securities Exchange Act of 1934, as amended, referred to in
this prospectus as the Exchange Act, and the rules and regulations under the
Exchange Act, including, without limitation, Regulation M which may limit the
timing of purchases and sales of shares of common stock by the selling
stockholders and any other person participating in the distribution.
Furthermore, Regulation M under the Exchange Act may restrict the ability of
any person engaged in a distribution of the shares of common stock to engage in
market-making activities with respect to the shares of common stock being
distributed for a period of up to five business days prior to the commencement
of the distribution. All of the foregoing may affect the marketability of the
shares of common stock and the ability of any person or entity to engage in
market-making activities with respect to the shares of common stock.
The selling stockholders will be responsible for any fees and expenses of
any counsel or other advisor for the selling stockholders. All other expenses
incurred in connection with the registration of the shares, including printer's
and accounting fees and the fees, disbursements and expenses of our counsel
will be borne by us. Commissions, brokerage fees and discounts, if any,
attributable to the sales of the shares of common stock will be borne by the
selling stockholders. The selling stockholders may agree to indemnify any
broker-dealer or agent that participates in transactions involving sales of the
shares of common stock against certain liabilities, including liabilities
arising
20
under the Securities Act. We and E*TRADE Japan will be indemnified by
the other against certain liabilities under the Securities Act.
Because we are an affiliate of E*TRADE Securities, sales of the shares of
common stock under the registration statement of which this prospectus forms a
part may be subject to the applicable provisions of Rule 2720 of the National
Association of Securities Dealers Rules of Conduct. Because a bona fide
independent market exists for the shares of common stock, no "qualified
independent underwriter" is required or will be appointed as a result of our
affiliation with E*TRADE Securities.
We have undertaken to keep the registration statement of which this
prospectus constitutes a part effective until the earlier to occur of April 23,
2004 or such time as all of the shares offered hereby have been sold pursuant
to a registration statement or pursuant to Rule 144 under the Securities Act.
After this period, if we choose not to maintain the effectiveness of the
registration statement of which this prospectus constitutes a part, the
securities offered hereby may not be sold, pledged, transferred or assigned,
except in a transaction which is exempt under the provisions of the Securities
Act.
21
SELLING STOCKHOLDERS
We are registering the sale of the shares of common stock offered
hereby on behalf of E*TRADE Japan. As of July 19, 2002, we are the beneficial
owners of an approximately 36.1% interest in E*TRADE Japan. We also are party
to a license and related agreements with E*TRADE Japan under which we provide
E*TRADE Japan with a limited license to use the E*TRADE name as well as
hardware, software and services used in the E*TRADE Japan business. In
addition, Christos M. Cotsakos, our Chairman of the Board and Chief Executive
Officer, and Jarrett Lillien, the Chief Brokerage Officer and President of
E*TRADE Securities, Inc. serve as directors of E*TRADE Japan. The following
table sets forth the number and percentage of our shares of common stock owned
by E*TRADE Japan and the other selling stockholders, and the number and
percentage of our shares of common stock that will be owned assuming the sale
of all the shares offered hereby:
Number of Shares Percentage of
Percentage of of Common Stock Common Stock
Number of Shares of Common Stock Beneficially Beneficially Owned
Common Stock Beneficially Owned After After
Name of Selling Stockholder Beneficially Owned Owned(1) Offering(2) Offering(1)(2)
--------------------------- ------------------ -------- ----------- --------------
E*TRADE Japan K.K.(3) 3,380,879 0.92% -- --
Other holders or future transferees,
pledgees, donees or successors of
any holders (4) -- -- -- --
------------ ------------ ---------- ------------
Total . . . . . . . . . . . . . . . 3,380,879 0.92% -- --
(1) Calculated based on Rule 13d-3(d)(1)(i) of the Exchange Act using
366,384,496 shares of common stock outstanding as of June 30, 2002 and
1,661,744 shares issued by EGI Canada Corporation, exchangeable on a
one-for-one basis for E*TRADE common stock, outstanding as of June 30,
2002.
(2) Assumes the sale of all the shares offered hereby.
(3) SOFTBANK Finance Corporation, a wholly-owned subsidiary of SOFTBANK
Corporation, owns an approximately 44.56% interest in E*TRADE Japan.
Masayoshi Son is the President and Chief Executive Officer of SOFTBANK
Corporation and owns an approximately 39.91% interest in SOFTBANK
Corporation. Accordingly, securities owned by E*TRADE Japan may be
regarded as being beneficially owned by SOFTBANK Finance Corporation;
securities owned by SOFTBANK Finance Corporation may be regarded as being
beneficially owned by SOFTBANK Corporation; and securities owned by
SOFTBANK Corporation may be regarded as being beneficially owned by
Masayoshi Son. In addition to the shares owned by E*TRADE Japan, SOFTBANK
America Inc., a wholly-owned subsidiary of SOFTBANK Holdings Inc., which
in turn is a wholly-owned subsidiary of SOFTBANK Corporation, owns
15,401,688 shares of E*TRADE common stock, or 4.2% of the outstanding
shares. Ronald D. Fisher, a director of SOFTBANK Corporation, has been one
of our directors since October 2000. Prior to that time, Masayoshi Son,
President and Chief Executive Officer of SOFTBANK Corporation, was one of
our directors.
(4) Information about other selling stockholders will be set forth in
prospectus supplements, if required. Assumes that any other holders of the
shares, or any future transferees, pledgees, donees or successors of or
from any such other holders of shares, do not beneficially own any common
stock other than the shares.
We prepared this table based on the information supplied to us by the
selling stockholders named in the table and we have not sought to verify this
information. The selling stockholders listed in the above table may have sold
or transferred, in transactions exempt from the registration requirements of
the Securities Act, some or all of their shares of common stock since the date
on which the information in the above table is presented. Information about the
selling stockholders may change over time. Any changed information will be set
forth in supplements or amendments to this prospectus if and when necessary.
22
AVAILABLE INFORMATION
We are subject to the informational requirements of the Exchange Act, and
in accordance with the Exchange Act file reports, proxy statements, information
statements and other information with the Securities and Exchange Commission,
referred to in this prospectus as the Commission. Reports, proxy statements and
other information filed by us may be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and you may obtain information about the operation of
these public reference facilities by calling the Commission at 1-800-SEC-0330.
The Commission maintains an Internet web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. The address of the Commission's web site is
http://www.sec.gov.
We have filed with the Commission a registration statement on Form S-3
under the Securities Act with respect to the shares of common stock offered by
this prospectus, referred to in this prospectus, together with all amendments
and exhibits thereto, as the Registration Statement. This prospectus does not
contain all of the information set forth in the Registration Statement, certain
parts of which are omitted in accordance with the rules and regulations of the
Commission. For further information regarding us and the shares of common stock
offered by this prospectus, reference is hereby made to the Registration
Statement and to the exhibits and schedules filed with the Registration
Statement. The Registration Statement, including the exhibits and schedules
filed with the Registration Statement, may be inspected at the public reference
facilities maintained by the Commission at Room 450, Fifth Street, N.W.,
Washington, D.C. 20549 and copies of all or any part may be obtained from that
office upon payment of the prescribed fees.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission (File No. 1-11921)
pursuant to the Exchange Act are incorporated herein by reference:
1. Our Annual Report on Form 10-K for the year ended December 31, 2001,
filed on April 1, 2002;
2. Our Quarterly Report on Form 10-Q for the period ended March 31,
2002, filed May 15, 2002;
3. Our Current Report on Form 8-K, filed on May 10, 2002;
4. Our Current Report on Form 8-K, filed on July 26, 2002;
5. Our Quarterly Report on Form 10-Q for the period ended June 30, 2002,
filed August 12, 2002;
6. Our Current Report on Form 8-K, filed on August 12, 2002;
7. The description of our common stock, $0.01 par value per share, and
associated rights, contained in our registration statement on Form
8-A 12B, filed on July 12, 1996, as amended by Amendment No. 1 on
Form 8-A12B/A filed on February 12, 2001, including any amendment or
report filed for the purpose of updating this description; and
8. All reports and other documents filed by us pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date
of this prospectus and prior to the termination of the offering.
Any statement contained in a document incorporated by reference in this
prospectus shall be deemed to be incorporated by reference in this prospectus
and to be part of this prospectus from the date of filing of the document. Any
statement modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this prospectus. We will provide upon
written or oral request without charge to each person to whom this prospectus
is delivered a copy of any or all of the documents which are incorporated in
this prospectus by reference (other than exhibits to those documents unless
those exhibits are specifically incorporated by reference into the documents
that this prospectus incorporates). Written requests for copies should be
directed to E*TRADE Group,
23
Inc., Investor Relations, 4500 Bohannon Drive, Menlo Park, California 94025.
Our telephone number is (650) 331-6000.
24
LEGAL MATTERS
The validity of the securities offered by this prospectus will be passed
upon for us by Davis Polk & Wardwell, Menlo Park, California.
EXPERTS
The consolidated financial statements of E*TRADE Group, Inc. and its
consolidated subsidiaries (the "Company") as of December 31, 2001 and September
30, 2000 and for the year ended December 31, 2001, the three months ended
December 30, 2000 and the years ended September 30, 2000 and 1999, incorporated
by reference in this prospectus have been audited by Deloitte & Touche LLP,
independent auditors, except for E*TRADE Financial Corporation and subsidiaries
("ETFC") for the years ended September 30, 2000 and 1999, as stated in their
report which is incorporated herein by reference and have been so incorporated
by reference in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
For the years ended September 30, 2000 and 1999, the independent public
accountant for ETFC was Arthur Andersen LLP. As a result, the consolidated
financial statements of ETFC (consolidated with those of the Company and not
presented separately herein) have been audited by Arthur Andersen LLP, as
stated in their report incorporated herein by reference. The consolidated
financial statements of the Company are incorporated herein by reference in
reliance in part upon the report of such firm given upon their authority as
experts in accounting and auditing. On March 14, 2002, Arthur Andersen was
indicted on federal obstruction of justice charges arising from the
government's investigation of Enron Corporation. SEC rules require us to
present audited financial statements in various SEC filings, along with Arthur
Andersen's consent to our inclusion of its audit report in those filings.
Because the engagement partner and audit partner for ETFC have left Arthur
Andersen, we have not been able to obtain, after reasonable efforts, the
written consent of Arthur Andersen to our naming it in this prospectus as
having certified the applicable consolidated financial statements of E*TRADE
Financial Corporation and its subsidiaries, as required by Section 7 of the
Securities Act. Section 11(a) of the Securities Act, provides that if any part
of a registration statement at the time such part becomes effective contains an
untrue statement of a material fact or an omission to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading, any person acquiring a security pursuant to such registration
statement (unless it is proved that at the time of such acquisition such person
knew of such untruth or omission) may sue, among others, every accountant who
has consented to be named as having prepared or certified any part of the
registration statement, or as having prepared or certified any report or
valuation which is used in connection with the registration statement, with
respect to the statement in such registration statement, report or valuation
which purports to have been prepared or certified by the accountant. The SEC
recently has provided regulatory relief through Rule 437a under the Securities
Act designed to allow companies that file reports with the SEC to dispense with
the requirement to file a consent of Arthur Andersen in certain circumstances,
but you will not be able to sue Arthur Andersen pursuant to Section 11(a) of
the Securities Act and therefore your right of recovery under that section may
be limited as a result of the lack of consent. To the extent provided in
Section 11(b)(3)(C) of the Securities Act, however, other persons who are
liable under Section 11(a) of the Securities Act, including the Company's
officers and directors, may still rely on Arthur Andersen's original audit
reports as being made by an expert for purposes of establishing a due diligence
defense under Section 11(b) of the Securities Act.
25
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by E*TRADE Group, Inc. in
connection with the sale of common stock being registered. All amounts are
estimates except the SEC registration fee and NASD filing fee.
SEC Registration Fee............... $ 1,312
NASD Filing Fee 1,926
Legal Fees and Expenses 9,383
Accounting Fees and Expenses 6,000
Miscellaneous 5,000
-------
Total $23,621
=======
* Only represents fees to be paid by the Company, selling stockholders
will pay their own legal fees.
Item 15. Indemnification of Directors and Officers
Article Tenth of the registrant's Certificate of Incorporation, as
amended, provides that, to the fullest extent permitted by the Delaware General
Corporation Law (the "DGCL"), as the same exists or as it may hereafter be
amended, as described below, no director of the registrant shall be personally
liable to the registrant or its stockholders for monetary damages for breach of
fiduciary duty as a director.
Article 5 of the registrant's Bylaws further provides that the registrant
shall, to the maximum extent and in the manner permitted by the DGCL, as
described below, indemnify each of its directors and officers against expenses
(including attorneys' fees), judgments, fines, settlements and other amounts
actually and reasonably incurred in connection with any proceeding, arising by
reason of the fact that such person is or was an agent of the registrant.
In addition, the registrant has entered into indemnification agreements
with each of its directors and executive officers, and maintains officers' and
directors' liability insurance.
Subsection (a) of Section 145 of the DGCL empowers a corporation to
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding whether
civil, criminal, administrative or investigative (other than an action by or in
the right of the corporation) by reason of the fact that he is or was a
director, officer, employee or agent of the corporation, or is or was serving
at the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
Subsection (b) of Section 145 of the DGCL empowers a corporation to
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action or suit by right of the
corporation to procure a judgment in its favor by reason of the fact that such
person acted in any of the capacities set forth above, against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, except that no indemnification may be
made in respect to any claim, issue or matter as to which such person shall
have been adjudged to be liable to the corporation unless and only to the
extent that the Court of Chancery or the court in which such action or suit was
brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which the Court
of Chancery or such other court shall deem proper.
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Section 145 of the DGCL further provides that to the extent a director or
officer of a corporation has been successful on the merits or otherwise in the
defense of any such action, suit or proceeding referred to in subsections (a)
and (b) of Section 145 or in the defense of any claim, issue or matter therein,
he shall be indemnified against expenses (including attorneys' fees) actually
and reasonably incurred by him in connection therewith; that the
indemnification provided for by Section 145 shall not be deemed exclusive of
any other rights which the indemnified party may be entitled; that
indemnification provided by Section 145 shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of such
person's heirs, executors and administrators; and empowers the corporation to
purchase and maintain insurance on behalf of a director or officer of the
corporation against any liability asserted against him and incurred by him in
any such capacity, or arising out of his status as such, whether or not the
corporation would have the power to indemnify him against such liabilities
under Section 145.
Section 102(b)(7) of the DGCL provides that a certificate of incorporation
may contain a provision eliminating or limiting the personal liability of a
director to the corporation or its stockholders for monetary damages for breach
of fiduciary duty as a director, provided that such provision shall not
eliminate or limit the liability of the director (i) for any breach of the
director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law, (iii) under Section 174 of the DGCL or (iv) for any
transaction from which the director derived an improper personal benefit.
Item 16. Exhibits
5.1 Opinion of Davis Polk & Wardwell.
23.1 Consent of Deloitte & Touche LLP, independent auditors.
23.2 Consent of Davis Polk & Wardwell (included with Exhibit 5.1).
24.1 Power of Attorney (included on the signature page of this Registration
Statement).
Item 17. Undertakings
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement to include any material
information with respect to the plan of distribution not previously disclosed
in the Registration Statement or any material change to such information in the
Registration Statement;
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof; and
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of
the offering.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Exchange Act of 1934 that is incorporated by reference in the Registration
Statement shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the
II-2
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form S-3, and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Menlo Park, State of California on July 19,
2002.
E*TRADE GROUP, INC.
By: /s/ Leonard C. Purkis
---------------------------------
Name: Leonard C. Purkis
Title: Chief Financial Officer
POWER OF ATTORNEY
The undersigned officers and directors of E*TRADE Group, Inc., a Delaware
corporation, do hereby constitute and appoint Brigitte VanBaelen, Russell S.
Elmer and Leonard C. Purkis, and each one of them, the lawful attorneys-in-fact
and agents with full power and authority to do any and all acts and things and
to execute any and all instruments which said attorneys and agents, or any one
of them, determine may be necessary or advisable or required to enable said
corporation to comply with the Securities Act of 1933, as amended, and any
rules or regulations or requirements of the Securities and Exchange Commission
in connection with this Registration Statement. Without limiting the generality
of the foregoing power and authority, the powers granted include the power and
authority to sign the names of the undersigned officers and directors in the
capacities indicated below to this Registration Statement, to any and all
amendments, both pre-effective and post-effective, and supplements to this
Registration Statement, and to any and all instruments or documents filed as
part of or in conjunction with this Registration Statement or amendments or
supplements thereof, and each of the undersigned hereby ratifies and confirms
all that said attorneys and agents, or any one of them, shall do or cause to be
done by virtue hereof. This Power of Attorney may be signed in several
counterparts.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney as of the date indicated.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Christos M. Cotsakos
-------------------------
Christos M. Cotsakos Chairman of the Board and Chief Executive July 19, 2002
Officer (Principal Executive Officer)
/s/ Leonard C. Purkis
-------------------------
Leonard C. Purkis Chief Financial Officer July 19, 2002
(Principal Financial and Accounting Officer)
II-4
/s/ William A. Porter
-------------------------
William A. Porter Chairman Emeritus July 19, 2002
/s/ Peter Chernin
-------------------------
Peter Chernin Director July 19, 2002
/s/ Ronald D. Fisher
-------------------------
Ronald D. Fisher Director July 19, 2002
/s/ William E. Ford
-------------------------
William E. Ford Director July 19, 2002
/s/ George Hayter
-------------------------
George Hayter Director July 19, 2002
/s/ Lewis E. Randall
-------------------------
Lewis E. Randall Director July 23, 2002
/s/ Lester C. Thurow
-------------------------
Lester C. Thurow Director July 19, 2002
II-5
Index to Exhibits
Exhibit
Number Exhibit Title
-------- -------------
5.1 Opinion of Davis Polk & Wardwell.
23.1 Consent of Deloitte & Touche LLP, independent auditors.
23.2 Consent of Davis Polk & Wardwell (included with Exhibit 5.1).
24.1 Power of Attorney (included on the signature page of this
Registration Statement).