<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 7, 1996
REGISTRATION NO. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
E*TRADE GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 6211 94-2844166
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
INCORPORATION OR
ORGANIZATION)
FOUR EMBARCADERO PLACE
2400 GENG ROAD
PALO ALTO, CA 94303
(415) 842-2500
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
CHRISTOS M. COTSAKOS
PRESIDENT AND CHIEF EXECUTIVE OFFICER
E*TRADE GROUP, INC.
FOUR EMBARCADERO PLACE
2400 GENG ROAD
PALO ALTO, CA 94303
(415) 842-2500
(NAME AND ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA
CODE, OF AGENT FOR SERVICE)
---------------
COPIES TO:
THOMAS A. BEVILACQUA KENNETH L. GUERNSEY
THOMAS J. LIMA KARYN R. SMITH
VALERIE J. HORWITZ JONATHAN S. DICKSTEIN
BROBECK, PHLEGER & HARRISON LLP COOLEY GODWARD CASTRO HUDDLESON &
ONE MARKET, SPEAR STREET TOWER TATUM
SAN FRANCISCO, CA 94105 ONE MARITIME PLAZA, 20TH FLOOR
(415) 442-0900 SAN FRANCISCO, CA 94111
--------------- (415) 693-2000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS
PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
---------------
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 check the following box. [_]
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. [_]
---------------
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TITLE OF EACH CLASS OF AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM
SECURITIES TO BE TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) REGISTRATION FEE
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value
$.01 per share......... 7,820,000 $13.00 $101,660,000 $35,056
</TABLE>
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- -------------------------------------------------------------------------------
(1) Includes 1,020,000 shares which the Underwriters have the option to
purchase to cover over-allotments, if any.
(2) Estimated solely for the purpose of computing the registration fee.
---------------
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, AS AMENDED, OR UNTIL THIS
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES
AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
E*TRADE GROUP, INC.
CROSS-REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
SHOWING LOCATION IN PROSPECTUS OF INFORMATION REQUIRED BY ITEMS ON FORM S-1
<TABLE>
ITEM NUMBER AND HEADING
IN FORM S-1 REGISTRATION LOCATION IN PROSPECTUS
- -------------------------------------------------------------------------------
<C> <S>
1.Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus.. Outside Front Cover Page
2.Inside Front and Outside Back Cover Pages
of Prospectus........................... Inside Front and Outside Back
Cover Pages
3.Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges...... Prospectus Summary; Risk
Factors; Inside Front Cover
Page
4.Use of Proceeds........................... Prospectus Summary; Use of
Proceeds
5.Determination of Offering Price........... Outside Front Cover Page;
Underwriting
6.Dilution.................................. Dilution
7.Selling Security Holders.................. Principal and Selling
Stockholders
8.Plan of Distribution...................... Outside Front Cover Page;
Underwriting
9.Description of Securities to be
Registered.............................. Prospectus Summary;
Capitalization; Description of
Capital Stock
10.Interests of Named Experts and Counsel.... Not Applicable
11.Information with Respect to the
Registrant.............................. Outside Front Cover Page;
Prospectus Summary; Risk
Factors; Dividend Policy;
Capitalization; Selected
Financial Data; Management's
Discussion and Analysis of
Financial Condition and Results
of Operations; Business;
Management; Certain
Transactions; Principal and
Selling Stockholders;
Description of Capital Stock;
Shares Eligible for Future
Sale; Experts; Additional
Information; Consolidated
Financial Statements
12.Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities............................. Not Applicable
</TABLE>
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JUNE 7, 1996
[E*TRADE LOGO]
6,800,000 SHARES
COMMON STOCK
Of the 6,800,000 shares of Common Stock offered hereby, 6,250,000 shares are
being sold by E*TRADE Group, Inc. ("E*TRADE" or the "Company") and 550,000
shares are being sold by the Selling Stockholders. See "Principal and Selling
Stockholders." The Company will not receive any of the proceeds from the sale
of shares by the Selling Stockholders. Prior to this offering, there has been
no public market for the Common Stock of the Company. It is currently estimated
that the initial public offering price will be between $ and $ per share.
See "Underwriting" for information relating to the method of determining the
initial public offering price.
-----------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
--------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS
PRICE TO DISCOUNTS AND PROCEEDS TO TO SELLING
PUBLIC COMMISSIONS COMPANY(1) STOCKHOLDERS
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share.............. $ $ $ $
- -------------------------------------------------------------------------------
Total(2)............... $ $ $ $
</TABLE>
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- --------------------------------------------------------------------------------
(1)Before deducting expenses payable by the Company, estimated at $ .
(2) The Company and a Selling Stockholder have granted to the Underwriters a
30-day option to purchase up to an additional 1,020,000 shares of Common
Stock solely to cover over-allotments, if any. See "Underwriting." If such
option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions, Proceeds to Company and Proceeds to Selling
Stockholders will be $ , $ , $ and $ , respectively.
The Common Stock is offered by the Underwriters as stated herein, subject to
receipt and acceptance by them and subject to their right to reject any order
in whole or in part. It is expected that delivery of such shares will be made
through the offices of Robertson, Stephens & Company LLC ("Robertson, Stephens
& Company"), San Francisco, California, on or about , 1996.
--------
ROBERTSON, STEPHENS & COMPANY
HAMBRECHT & QUIST
DEUTSCHE MORGAN GRENFELL
The date of this Prospectus is , 1996
<PAGE>
E*TRADE: INNOVATION, TECHNOLOGY, SERVICE, VALUE.
E*TRADE is an electronic services company providing value-added transaction
processing services over a broad range of convenient electronic media.
Currently, E*TRADE's business consists of online retail brokerage services
available through the Internet, direct modem link, America Online, CompuServe,
touch-tone telephone and, to a lesser extent, interactive television.
The Company's mission is to be a recognized leader in electronic commerce
through a combination of automation, innovation, technology, service and value.
ELECTRONIC
COMMERCE
E*TRADE: Average Daily Transactions
January 1, 1993--May 31, 1996
[Bar graph showing Company transactions in 1993, 1994, 1995 and 1996]
Average daily trading volumes by month
Historic growth should not be deemed an indication of future growth.
THE INTERNET: INNOVATIVE BUSINESS OPPORTUNITIES.
Just as the microprocessor changed computing, the emergence of the Internet as
a tool for communication and commerce is driving a revolution in online
transactions and information services, providing organizations and individuals
around the world with new ways of conducting business.
SOLUTIONS
[collage graphic]
TECHNOLOGY
<PAGE>
ELECTRONIC COMMERCE: PAST, PRESENT AND FUTURE.
With the emergence of the Internet, companies that have traditionally con-
ducted business in person, through the mail or by phone are increasingly look-
ing to electronic commerce.
THE E*TRADE SOLUTION
E*TRADE is a leading provider of cost-effective, secure electronic brokerage
services with automated order placement, portfolio tracking and related market
information, news, and other information services available 24 hours a day,
seven days a week by means of the Internet, CompuServe, America Online, direct
modem access and touch-tone telephone. The benefits provided by E*TRADE's
services have lead to the increased transaction volume depicted below:
INNOVATION
[collage graphic]
E*TRADE: Real-time Universal Access
[graphic of processor]
<PAGE>
THE E*TRADE MISSION: TO BE A RECOGNIZED LEADER IN ELECTRONIC COMMERCE
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN
THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY
BE DISCONTINUED AT ANY TIME.
<PAGE>
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, ANY SELLING STOCKHOLDER OR ANY OF THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES OTHER THAN THE SHARES OF COMMON STOCK TO WHICH IT
RELATES OR AN OFFER TO, OR A SOLICITATION OF, ANY PERSON IN ANY JURISDICTION
WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
COMPANY OR THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
-------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary................................................................... 4
Risk Factors.............................................................. 7
Use of Proceeds........................................................... 19
Dividend Policy........................................................... 19
Capitalization............................................................ 20
Dilution.................................................................. 21
Selected Consolidated Financial Data...................................... 22
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 23
Business.................................................................. 32
Management................................................................ 52
Certain Transactions...................................................... 61
Principal and Selling Stockholders........................................ 63
Description of Capital Stock.............................................. 64
Shares Eligible for Future Sale........................................... 67
Underwriting.............................................................. 69
Legal Matters............................................................. 71
Experts................................................................... 71
Additional Information.................................................... 71
Index to Consolidated Financial Statements................................ F-1
</TABLE>
-------------
The Company intends to furnish its stockholders with an annual report
containing financial statements audited by its independent accountants for
each fiscal year and with quarterly reports containing unaudited summary
information for each of the first three quarters of each fiscal year.
E*TRADE (R) is a registered trademark of the Company. TELE*MASTER(TM), among
other marks, is an additional common law trademark of the Company. This
Prospectus also includes trademarks of entities other than the Company.
3
<PAGE>
SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors," and the consolidated financial
statements and notes thereto, appearing elsewhere in this Prospectus. Investors
should consider carefully the information discussed under the heading "Risk
Factors."
THE COMPANY
E*TRADE Group, Inc. ("E*TRADE or the "Company") is a leading provider of
cost-effective, secure electronic brokerage services. The Company offers
automated order placement, portfolio tracking and related market information,
news, and other information services 24 hours a day, seven days a week by means
of the, CompuServe, America Online, direct modem access, touch-tone telephone
and, to a lesser extent, interactive television. E*TRADE's proprietary
transaction processing technology enables it to offer highly automated, easy-
to-use and cost-effective services that empower its customers to take control
of their own financial transactions. Further, the Company's technology can be
adapted to provide information and transaction processing services related to
other aspects of electronic commerce.
Advancements in telecommunications and information technology have
fundamentally altered the way individuals conduct business. Just as the
microprocessor dramatically changed the way individuals use computers, the
emergence of the Internet as a tool for communications and commerce is bringing
about a revolution in the world of financial transaction and information
services. This phenomenon is providing individual investors with direct access
to information and transaction processing capabilities previously available
only through full-commission securities brokerage firms. As a result, consumers
are increasingly taking direct control over their personal investment
transactions, not simply because they are able to, but because they find it
more convenient and cost-effective than relying on full-commission or even
traditional discount brokers.
E*TRADE provides its customers the ability to place orders for stock trades
and other investment transactions directly, at a lower, more predictable
transaction cost than traditional full-commission or discount brokerage firms.
The Company's services feature an easy-to-use graphical user interface, the
ability to create "personalized environments" reflecting users' individual
needs and interests, accessibility from virtually anywhere at any time via
multiple gateways, unbundled services for cost-effective pricing and highly
secure services through the use of encryption and authentication technology.
The Company had over 65,000 accounts as of May 31, 1996, with an average
monthly growth in accounts of 11% since January 1, 1996, and had an average
daily trading volume of approximately 9,300 in May 1996, an increase from 4,200
in December 1995, representing an average monthly growth of 17% over that
period. The Company's Internet access is its most rapidly growing gateway, with
trading volume increasing from approximately 1,300 Internet trades for the
first week the Company offered trading on the Internet (the week ended February
23, 1996) to over 11,000 for the week ended May 24, 1996.
E*TRADE's objective is to leverage its leading position as a provider of
electronic brokerage and information services through automation, innovation,
technology, service and value. The Company's strategy to accomplish this
objective includes continued aggressive marketing of its electronic brokerage
services to further establish E*TRADE brand name recognition and increase its
share of the electronic brokerage market, continual broadening of the
functionality of its services and enhancement of its customers' online
experience, leveraging the benefits of its highly automated services to enhance
their cost-effectiveness, establishment of additional strategic relationships
with online service, software and information service providers, and expansion
into international markets and new aspects of electronic commerce.
4
<PAGE>
In June 1996, an affiliate of SOFTBANK Corporation purchased Preferred Stock
convertible automatically upon the completion of this offering into 670,800
shares of Common Stock for an aggregate price of $9.0 million. As a result, the
SOFTBANK affiliate will own approximately 2.2% of the Company's outstanding
Common Stock upon the completion of this offering. SOFTBANK Corporation is
Japan's largest distributor of computer software, peripherals and systems, as
well as Japan's largest publisher of computer-related magazines and books.
The Company was incorporated in California in 1982 and is expected to be
reincorporated in Delaware prior to the commencement of this offering. Its
principal corporate offices are located at Four Embarcadero Place, 2400 Geng
Road, Palo Alto, California 94303, and its telephone number is (415) 842-2500.
Unless otherwise indicated, all references in this Prospectus to "E*TRADE" and
the "Company" refer to E*TRADE Group, Inc., a Delaware corporation, E*TRADE
Securities, Inc., its broker-dealer subsidiary ("E*TRADE Securities"), its
other subsidiaries and its predecessor California corporation. The Company's
World Wide Web ("Web") site is located at http://www.etrade.com. Information
contained in the Company's Web site shall not be deemed to be a part of this
Prospectus.
5
<PAGE>
THE OFFERING
<TABLE>
<C> <S>
Common Stock offered by the Company........ 6,250,000 shares
Common Stock offered by the Selling
Stockholders.............................. 550,000 shares
Common Stock to be outstanding after the
Offering.................................. 30,212,896 shares(1)
Use of Proceeds............................ To repay debt and for working
capital and general corporate
purposes, including capital
expenditures and potential
acquisitions. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol..... EGRP
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
(in thousands, except per share and operating data)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
----------------------------------------- ---------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF INCOME DATA:
Total revenues.......... $ 832 $ 848 $ 2,974 $10,905 $23,340 $ 8,391 $18,878
Pre-tax income (loss)... (108) (283) 103 244 4,309 1,803 1,785
Net income (loss)....... (110) (285) 99 785 2,581 1,080 1,063
Net income (loss) per
common share........... $ (0.01) $ (0.01) $ -- $ 0.03 $ 0.10 $ 0.04 $ 0.04
Shares used to compute
per share data(2)...... 24,175 25,175 27,024 26,533 26,828 25,719 27,325
OPERATING DATA:
Average customer trades
per day................ -- 12 194 869 2,335 1,586 4,513
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
----------------------------
PRO AS
ACTUAL FORMA(3) ADJUSTED(4)
------- -------- -----------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and equivalents............................... $ 8,694 20,481 $
Total assets....................................... 18,325 30,113
Long-term obligations.............................. 1,992 1,992
Stockholders' equity............................... 12,603 24,390
</TABLE>
- --------
(1) Excludes 5,928,120 shares of Common Stock issuable upon the exercise of
outstanding options as of May 31, 1996. See "Management--Associate Benefit
Plans" and Notes 5 and 10 of Notes to Consolidated Financial Statements.
(2) See Note 1 of Notes to Consolidated Financial Statements.
(3) Reflects (i) the sale of 20,336 shares of Series B Preferred Stock for an
aggregate $2.8 million in April 1996, which shares will convert
automatically into 1,220,160 shares of Common Stock upon the completion of
this offering (the "Series B Investment"), and (ii) the sale of 11,180
shares of Series C Preferred Stock for $9.0 million to SOFTBANK Holdings
Inc. ("SOFTBANK"), an affiliate of SOFTBANK Corporation (the "SOFTBANK
INVESTMENT"), which shares will convert automatically into 670,800 shares
of Common Stock upon the completion of this offering.
(4) Adjusted to give effect to the sale of 6,250,000 shares of Common Stock
offered by the Company hereby at an assumed initial public offering price
per share of $ and the receipt and application of the estimated net
proceeds therefrom. See "Use of Proceeds" and "Capitalization."
----------------
Except as set forth in the consolidated financial statements or as otherwise
indicated, all information in this Prospectus (i) gives effect to the
conversion of all outstanding shares of Preferred Stock into Common Stock,
which will occur automatically upon the completion of this offering, (ii)
assumes no exercise of the Underwriters' over-allotment option and (iii)
reflects the filing of the Restated Certificate of Incorporation, the
anticipated reincorporation of the Company in Delaware in July 1996 and the
related conversion of each share of Common Stock of the Company into 60 shares
of Common Stock of the Delaware corporation.
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in "Risk
Factors" and elsewhere in this Prospectus.
6
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following risk factors should be considered in evaluating the Company and its
business before purchasing shares of the Common Stock offered hereby. This
Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in "Risk
Factors" and elsewhere in this Prospectus.
MANAGEMENT OF A CHANGING BUSINESS
The Company has experienced substantial changes in and expansion of its
business and operations since it began offering electronic brokerage services
in 1992 and expects to continue to experience periods of rapid change. The
Company's past expansion has placed, and any future expansion would place,
significant demands on the Company's administrative, operational, financial
and other resources. The Company expects operating expenses and staffing
levels to increase substantially in the future. In particular, the Company
intends to hire a significant number of additional skilled personnel in 1996
and later years. Competition for such personnel is intense, and there can be
no assurance that the Company will be able to attract, assimilate or retain
additional highly qualified senior managers and technical persons in the
future. The Company also expects to expend resources with respect to future
expansion of its accounting and internal management systems and the
implementation of a variety of new systems and procedures. In addition, the
Company expects that future expansion will continue to challenge the Company's
ability to train, motivate and manage its associates. If the Company's
revenues do not increase in proportion to its operating expenses, the
Company's management systems do not expand to meet increasing demands, the
Company fails to attract, assimilate and retain qualified personnel, or the
Company's management otherwise fails to manage the Company's expansion
effectively, there would be a material adverse effect on the Company's
business, financial condition and operating results. See "Business--
Associates" and "Management."
The rapid growth in the use of the Company's services has strained its
ability to adequately expand technologically. The haste required in bringing
in new equipment and applications may cause the process of testing and
validation of hardware and software to become less rigorous, causing possible
production problems. In addition, the Company relies on a number of third
parties to process its transactions, including online access providers, back
office processing organizations, services providers and market makers, all of
which need to expand their operations accordingly. Any backlog caused by a
third party's inability to expand at the rate necessary to meet the Company's
needs could have a material adverse effect on the Company's business,
financial condition and operating results. An additional strain that will be
placed on the Company as a result of rapid growth will be its ability to
quickly integrate qualified personnel required to handle certain transactions
that are reviewed by a licensed broker before the order is processed. As
trading volume increases, the Company may have difficulty hiring and training
qualified personnel at the necessary pace, and the shortage of such personnel
could cause a backlog in the processing of trades requiring review, exposing
the Company not only to unsatisfied customers, but to liability for
transactions that were ordered, but not executed on a timely basis.
One element of the Company's strategy is to leverage the E*TRADE brand and
technology to enter new markets. No assurance can be given that the Company
can successfully adapt its proprietary processing technology to provide
information and transaction processing services in other markets, or that, if
successful, it will successfully compete in any such new markets.
RISKS OF SYSTEMS FAILURE
The Company receives and processes trade orders principally through the
Internet, online services or touch-tone telephone. This method of trading is
heavily dependent on the integrity of the mechanical and
7
<PAGE>
electronic systems supporting it. Orders placed from the close of the stock
markets one day until the opening the next business day must be processed
through the Company's system in a short period of time prior to the opening of
the stock markets. Heavy stress placed on the Company's systems during peak
trading times could cause the Company's systems to fail. Any failure of the
Company's systems or any other systems in the trading process (e.g., online
service providers, record keeping and data processing functions performed by
third parties and third-party software such as Internet browsers), even for a
short time, could cause customers to suffer delays in trading. Such delays
could cause substantial losses for customers, and could subject the Company to
claims from customers for losses, including litigation claiming fraud or
negligence. The Company has experienced such systems failures in the past and,
most recently, experienced two such failures in May 1996. In order to promote
customer satisfaction and protect the E*TRADE brand name, the Company has
compensated customers for verifiable losses arising in connection with systems
failures. As a result, for example, the Company anticipates making such
payments to customers in an aggregate amount in excess of $1.7 million for
systems failures in May 1996. Notwithstanding these payments, the Company has
observed electronic third-party communications in which a potential class
action lawsuit against the Company relating to such system failures is
discussed. During a systems failure, the Company may be able to take orders by
telephone. However, all Company associates accepting telephone orders must
have securities brokers' licenses. Adequate numbers of personnel with
securities brokers' licenses may not be available to take calls in the event
of a systems failure. There can be no assurance that the Company's network
structure will operate appropriately in the event of a sub-system, component
or software failure, or that, in the event of an earthquake, fire or any other
natural disaster, power or telecommunications failure, act of God or act of
war, the Company will be able to prevent an extended systems failure. Any
systems failure that causes interruptions in the Company's operations could
have a material adverse effect on the Company's business, financial condition
and operating results. See "Business--E*TRADE Processing Technology."
RISKS ASSOCIATED WITH THE SECURITIES BUSINESS; CONCENTRATION OF SERVICES
Substantially all of the Company's revenues in recent years have been from
electronic brokerage services, and the Company expects its electronic
brokerage services to continue to account for substantially all of its
revenues for the foreseeable future. E*TRADE, like other securities firms, is
directly affected by national and international economic and political
conditions, broad trends in business and finance, and substantial fluctuations
in volume and price levels of securities and futures transactions. In October
1987 and in October 1989, the stock market suffered two of the largest
declines in history. As a result of these declines, many firms in the industry
suffered financial losses and the level of individual investor trading
activity decreased. Reduced trading volume and prices generally result in
reduced transaction revenues. In periods of low volume, the Company's
profitability would be adversely affected because certain expenses, consisting
primarily of salaries and benefits, computer hardware and software costs, and
occupancy expenses, remain relatively fixed. Such a severe market fluctuation
in the future could have a material adverse effect on the Company's business,
financial condition and operating results. Certain of the Company's
competitors with more diverse product and service offerings may be better
positioned to withstand such a downturn in the securities industry. See "--
Competition."
E*TRADE's brokerage business, by its nature, is subject to various other
risks, including customer default and employees' misconduct and errors. In
addition, to the extent E*TRADE permits customers to purchase securities on
margin, the Company is subject to risks inherent in extending credit,
especially during periods of rapidly declining markets in which collateral
value could fall below the amount of a customer's indebtedness. Under specific
regulatory guidelines, the borrowing and lending of securities by E*TRADE are
accompanied, respectively, by the disbursement and receipt of cash deposits.
Failure to maintain cash deposit levels at all times at least equal to the
value of the related securities can subject E*TRADE to risk of loss, should
there be sharp changes in market values of substantial amounts of securities
and parties to the borrowing and lending transactions fail to honor their
commitments. Any such losses could have a material adverse effect on the
Company's business, financial condition and operating results. See "Business--
Operations."
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DEPENDENCE ON IMPROVED CUSTOMER SERVICE OPERATIONS
The Company believes that providing an effective customer service team to
handle customer needs is critical to its success. The Company's customer
service capacity is severely strained. During April and May 1996, the
Company's customer service department serviced approximately 80% of its
inquiries through telephone calls and approximately 20% through e-mail. This
department handles only non-revenue calls from customers needing extra
assistance and generally is not involved in order processing. The Company
currently falls far short of its target response time for customer service
calls, with callers frequently waiting over 20 minutes during peak times.
Continued sub-optimal customer service could damage the E*TRADE name and lead
some customers to transfer their business to other, less congested online
brokers, limit their trading activity, or choose to refrain from electronic
trading entirely. The Company is seeking to address the problem through
significant investment in technology and personnel. However, such attempts
have proven ineffective, as growth in inquiries has, over certain periods,
exceeded the growth in the Company's capacity to handle such volumes. There
can be no assurance that the Company will be able to address its customer
service capacity constraints, and the failure to do so could have a material
adverse effect on the Company's business, financial condition and operating
results. See "Business--Customer Service."
RISKS ASSOCIATED WITH PLANNED CONVERSION TO SELF-CLEARING OPERATIONS
The Company is in the process of implementing self-clearing operations and
expects to complete the transition in July 1996. Clearing services include the
confirmation, receipt, execution, settlement and delivery functions involved
in securities transactions. Prior to completion of its conversion to self-
clearing operations, the Company will continue to clear all of its customer
trades as a fully-disclosed correspondent of Herzog, Heine, Geduld, Inc.
("Herzog"), a broker-dealer that provides clearing services. Because this is a
new area of operations for the Company, there can be no assurance that the
Company will perform these operations as accurately and efficiently as they
were performed in the past. Self-clearing securities firms are subject to
substantially more regulatory control and examination than the Company has
experienced in the past. Errors in performing clearing functions or in
reporting could lead to civil penalties imposed by the Securities and Exchange
Commission (the "SEC") or the National Association of Securities Dealers, Inc.
(the "NASD"). Self-clearing operations, especially where conducted by firms
such as the Company without significant prior experience, involve substantial
risks of losses due to errors. Errors in the clearing process may also lead to
civil liability for actions in negligence brought by parties who are
financially harmed as a result of such errors. Any liability that arises as a
result of self-clearing operations could have a material adverse effect on the
Company's business, financial condition and operating results. Clearing
operations currently account for a significant portion of the Company's cost
of services, and there can be no assurance that becoming a self-clearing firm
will not result in significantly higher clearing costs in the future. During
the Company's transition to self-clearing operations, it is running conversion
tests to verify the accuracy of its internal systems, while at the same time
continuing to incur substantial expenses to Herzog for clearing services.
There can be no assurance that such activities are accurately testing the
reliability of the Company's clearing operations. The failure of the Company
to perform self-clearing operations accurately and cost-effectively could have
a material adverse effect on the Company's business, financial condition and
operating results. See "Business--Operations."
As a self-clearing firm, the Company will assume direct responsibility for
the possession and control of customer securities and other assets and
clearance of customer securities transactions. Having this responsibility will
require the Company to record on its balance sheet the customer receivables
and customer payables to the Company that are a result of customer margin
loans (i.e., loans made to customers that are collateralized by securities in
the customers' margin accounts at the Company) and customer free credit
balances (i.e., customer cash balances maintained by the Company),
respectively. In addition, to the extent that the Company's customer debit
balances exceed customer free credit balances, the Company must obtain
financing for any excess debit balance. As a result, upon conversion to its
self-clearing operations, the Company will record receivables from customers,
payables to customers and collateralized bank loans, which
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will have a significant effect on the Company's total assets and total
liabilities. If the conversion had been effected at May 31, 1996, the Company
would have recorded receivables from customers of $170 million and payables to
customers of $110 million. In addition, as a self-clearing firm, the Company's
customer record keeping and data processing will be performed by a third-party
service bureau, Beta Systems, Inc., a subsidiary of Thomson Information
Services, Inc. ("Beta Systems"). The Company currently relies on Herzog and
its data processor for these services. A loss in the availability of these
services from Beta Systems and the inability of the Company to make
alternative arrangements in a timely manner, if at all, would have a material
adverse effect on the Company's business, financial condition and operating
results.
POTENTIAL LOSS OF FUTURE ORDER FLOW PAYMENTS
The Company has arrangements with various Nasdaq market makers, third market
firms and exchanges to receive cash payments in exchange for routing trade
orders to these firms for execution. This practice of receiving payments for
order flow is widespread in the securities industry. Under applicable SEC
regulations, receipt of these payments requires disclosure of such payments by
the Company to its customers. The revenues received by the Company under these
arrangements for the year ended September 30, 1995 and the six months ended
March 31, 1996 amounted to 20% and 21% of total revenues, respectively. There
can be no assurance that these revenues will continue at their present levels
or that the Company will be able to continue its present arrangements and
terms for such payments for order flow. In particular, there can be no
assurance that payments for order flow will continue to be permitted by the
SEC, the NASD or other regulatory agencies, courts or governmental units. Loss
of any or all of these revenues could have a material adverse effect on the
Company's business, financial condition and operating results. See "Business--
Operations."
SIGNIFICANT FLUCTUATIONS IN QUARTERLY OPERATING RESULTS; POTENTIAL LOSS IN
QUARTER ENDING JUNE 30, 1996
The Company expects to experience significant fluctuations in future
quarterly operating results that may be caused by many factors, including the
following: the timing of introductions or enhancements of online brokerage
services and products by the Company or its competitors; market acceptance of
online brokerage services and products; the pace of development of the market
for online commerce; changes in trading volume in the securities markets;
trends in the securities markets; changes in pricing policies by the Company
or its competitors; changes in strategy; the success of or costs associated
with acquisitions, joint ventures or other strategic relationships; changes in
key personnel; seasonal trends; the extent of international expansion; the mix
of international and domestic sales; changes in the level of operating
expenses to support projected growth; and general economic conditions. In
addition, the Company intends, in the near term, to increase significantly its
personnel, particularly its customer service personnel. The timing of such
expansion and the rate at which new customer service personnel and additional
equipment become productive could also cause material fluctuations in the
Company's quarterly operating results.
Due to the foregoing factors, quarterly revenues and operating results are
difficult to forecast, and the Company believes that period-to-period
comparisons of its operating results will not necessarily be meaningful and
should not be relied upon as any indication of future performance. It is
likely that the Company's future quarterly operating results from time to time
will not meet the expectations of securities analysts or investors, which may
have an adverse effect on the market price of the Company's Common Stock.
In connection with its planned transition to self-clearing operations, the
Company began hiring and training associates, in fiscal 1995, to perform
clearing functions that are currently performed by Herzog. As a consequence,
the Company has incurred not only significant nonrecurring costs associated
with the hiring and training of its associates, but also ongoing personnel and
other costs associated with its transition to self-clearing operations and the
integration of its own systems, while still incurring expenses to Herzog for
clearing operations.
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As a result of the costs associated with the planned conversion and the
Company's recent systems failures, the Company may incur a loss in the quarter
ending June 30, 1996. See "--Risks of Systems Failure," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business--Operations."
SUBSTANTIAL COMPETITION
The market for electronic brokerage services, particularly over the
Internet, is new, rapidly evolving and intensely competitive. The Company
expects competition to continue and intensify in the future. The Company
encounters direct competition from discount brokerage firms providing either
touch-tone telephone or online brokerage services, or both. Discount brokerage
firms generally effect transactions for their customers on an "execution only"
basis without offering other services such as portfolio valuation, investment
recommendations and research. These competitors include such discount
brokerage firms as Charles Schwab & Co., Inc. ("Charles Schwab"), Fidelity
Brokerage Services, Inc., Waterhouse Securities, Inc., Quick & Reilly, Inc.
("Quick & Reilley"), Pacific Brokerage Services, Inc., National Discount
Brokers, Lombard Institutional Brokerage, Inc. and eBroker, among others. The
Company also encounters competition from established full-commission brokerage
firms such as Dean Witter Reynolds Inc., Paine Webber Incorporated and Merrill
Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), among others.
The Company competes with financial institutions, mutual fund sponsors and
other organizations, some of which provide electronic brokerage services.
The general financial success within the securities industry over the past
several years has strengthened existing competitors. Management believes that
such success will continue to attract competitors such as banks, software
development companies, insurance companies, providers of online financial and
information services and others as they expand their product lines. Commercial
banks and other financial institutions have become a competitive factor by
offering their customers certain corporate and individual financial services
traditionally provided by securities firms. The current trend toward
consolidation in the commercial banking industry could further increase
competition in all aspects of the Company's business. Commercial banks
generally are expanding their securities activities, as well as their
activities relating to the provision of financial services. While it is not
possible to predict the type and extent of competitive services which
commercial banks and other financial institutions ultimately may offer or
whether administrative or legislative barriers will be repealed or modified,
brokerage firms such as the Company may be adversely affected. Particularly as
financial services and products proliferate, to the extent such competitors
are able to attract and retain customers on the basis of the convenience of
one-stop shopping, the Company's business or its ability to grow could be
adversely affected. In many instances, the Company is competing with such
organizations for the same customers. In addition, competition among financial
services firms also exists for experienced technical and other personnel.
Many of the Company's competitors have longer operating histories and
significantly greater financial, technical, marketing and other resources than
the Company. In addition, many of these competitors also offer a wider range
of services and financial products than the Company, and thus may be able to
respond more quickly to new or changing opportunities, technologies and
customer requirements. Also, many current and potential competitors have
greater name recognition and more extensive customer bases that could be
leveraged, thereby gaining market share to the Company's detriment. Such
competitors may be able to undertake more extensive promotional activities,
offer more attractive terms to customers than the Company and adopt more
aggressive pricing policies, possibly even sparking a price war in the
electronic brokerage business. Moreover, current and potential competitors
have established or may establish cooperative relationships among themselves
or with third parties to enhance their services and products. For example,
Charles Schwab's One-Source mutual fund service and similar, more complete
services may discourage potential customers from using the Company's brokerage
services. Accordingly, it is possible that new competitors or alliances among
competitors may emerge and rapidly acquire significant market share.
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There can be no assurance that the Company will be able to compete
effectively with current or future competitors or that the competitive
pressures faced by the Company will not have a material adverse effect on the
Company's business, financial condition and operating results. See "Business--
Competition."
EARLY STAGE OF MARKET DEVELOPMENT; DEPENDENCE ON ONLINE COMMERCE AND THE
INTERNET
The market for electronic brokerage services, particularly over the
Internet, is at an early stage of development and is rapidly evolving. As is
typical for new and rapidly evolving industries, demand and market acceptance
for recently introduced services and products are subject to a high level of
uncertainty. With respect to the Company, this uncertainty is compounded by
the risks that consumers will not adopt online commerce and that an
appropriate infrastructure necessary to support increased commerce on the
Internet will fail to develop, in each case, to a sufficient extent and within
an adequate time frame to permit the Company to succeed.
Sales of many of the Company's services and products will depend upon the
adoption of the Internet as a widely used medium for commerce and
communication. The Internet may not prove to be a viable commercial
marketplace because of inadequate development of the necessary infrastructure,
such as a reliable network backbone, or timely development of complementary
services and products, such as high speed modems and high speed communication
lines. The Internet has experienced, and is expected to continue to
experience, significant growth in the number of users and amount of traffic.
There can be no assurance that the Internet infrastructure will continue to be
able to support the demands placed on it by this continued growth. In
addition, the Internet could lose its viability due to delays in the
development or adoption of new standards and protocols to handle increased
levels of Internet activity or due to increased governmental regulation.
Moreover, critical issues concerning the commercial use of the Internet
(including security, reliability, cost, ease of use, accessibility and quality
of service) remain unresolved and may negatively affect the growth of Internet
use or the attractiveness of commerce and communication on the Internet.
Because global commerce and online exchange of information on the Internet and
other similar open wide area networks are new and evolving, there can be no
assurance that the Internet will prove to be a viable commercial marketplace.
If critical issues concerning the commercial use of the Internet are not
favorably resolved, if the necessary infrastructure is not developed, or if
the Internet does not become a viable commercial marketplace, the Company's
business, financial condition and operating results will be materially
adversely affected.
Adoption of online commerce, particularly by those individuals that have
historically relied upon traditional means of commerce, will require a broad
acceptance of new and substantially different methods of conducting business.
Moreover, the Company's brokerage services over the Internet involve a new
approach to securities trading and, as a result, intensive marketing and sales
efforts may be necessary to educate prospective customers regarding the uses
and benefits of the Company's brokerage services and products in order to
generate demand for the Company's services and products. For example,
consumers who already obtain brokerage services from more traditional full-
commission brokerage firms, or even discount brokers, may be reluctant or slow
to change to obtaining brokerage services over the Internet. Moreover, the
security and privacy concerns of existing and potential users of the Company's
services may inhibit the growth of online commerce generally, and online
brokerage trading in particular, which could have a material adverse effect on
the Company's business, financial condition and operating results. See
"Business--Background."
RAPID TECHNOLOGICAL CHANGE; DELAYS IN INTRODUCTION OF NEW SERVICES AND
PRODUCTS
The information services and communications industries are characterized by
rapid technological change, changes in customer requirements, frequent new
service and product introductions and enhancements, and emerging industry
standards. The introduction of services or products embodying new technologies
and the emergence of new industry standards and practices can render existing
services or products obsolete and unmarketable. The Company's future success
will depend, in part, on its ability to develop leading
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<PAGE>
technologies, enhance its existing services and products, develop new services
and products that address the increasingly sophisticated and varied needs of
its prospective customers, and respond to technological advances and emerging
industry standards and practices on a timely and cost-effective basis. The
development of new services and products or enhanced versions of existing
services and products entails significant technical risks. There can be no
assurance that the Company will be successful in effectively using new
technologies, adapting its services and products to emerging industry
standards, developing, introducing and marketing service and product
enhancements, or new services and products, or that it will not experience
difficulties that could delay or prevent the successful development,
introduction or marketing of these services and products, or that its new
service and product enhancements will adequately meet the requirements of the
marketplace and achieve market acceptance. If the Company is unable, for
technical or other reasons, to develop and introduce new services and products
or enhancements of existing services and products in a timely manner in
response to changing market conditions or customer requirements, or if new
services and products do not achieve market acceptance, the Company's
business, financial condition and operating results will be materially
adversely affected. See "Business--Strategy," "--Brokerage and Information
Services and Products" and "--E*TRADE Processing Technology."
RISKS ASSOCIATED WITH ENCRYPTION TECHNOLOGY
A significant barrier to online commerce and communication is the secure
transmission of confidential information over public networks. The Company
relies on encryption and authentication technology, including public key
cryptography technology licensed from RSA Data Security, Inc. ("RSA"), to
provide the security and authentication necessary to effect secure
transmission of confidential information. There can be no assurance that
advances in computer capabilities, new discoveries in the field of
cryptography or other events or developments will not result in a compromise
or breach of the RSA or other algorithms used by the Company to protect
customer transaction data. If any such compromise of the Company's security
were to occur, it could have a material adverse effect on the Company's
business, financial condition and operating results. See "Business--Brokerage
and Information Services and Products."
DEPENDENCE ON INTELLECTUAL PROPERTY RIGHTS
The Company's success and ability to compete are dependent to a significant
degree on its proprietary technology. The Company relies primarily on
copyright, trade secret and trademark law to protect its technology. The
Company has no patents. Effective trademark protection may not be available
for the Company's trademarks. The Company has registered the trademark
"E*TRADE" in over 35 countries including the United States and has certain
other registered trademarks. In addition, the Company has applied to register
certain other trademarks, but there can be no assurance that the Company will
be able to secure trademark registrations or other significant protection for
these trademarks. It is possible that competitors of the Company or others
will adopt product or service names similar to "E*TRADE," thereby impeding the
Company's ability to build brand identity and possibly leading to customer
confusion. Notwithstanding the precautions taken by the Company, it may be
possible for a third party to copy or otherwise obtain and use the Company's
software or other proprietary information without authorization or to develop
similar software independently. Policing unauthorized use of the Company's
technology is difficult, particularly because the global nature of the
Internet makes it difficult to control the ultimate destination or security of
software or other data transmitted. The laws of other countries may afford the
Company little or no effective protection of its intellectual property. There
can be no assurance that the steps taken by the Company will prevent
misappropriation of its technology or that agreements entered into for that
purpose will be enforceable. In addition, litigation may be necessary in the
future to enforce the Company's intellectual property rights, to protect the
Company's trade secrets, to determine the validity and scope of the
proprietary rights of others, or to defend against claims of infringement or
invalidity. Such litigation, whether successful or unsuccessful, could result
in substantial costs and diversions of resources, either of which could have a
material adverse effect on the Company's business, financial condition and
operating results. See "Business--Intellectual Property and Other Proprietary
Rights."
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RISK OF INFRINGEMENT
The Company may, in the future, receive notices of claims of infringement of
other parties' proprietary rights. There can be no assurance that claims for
infringement or invalidity (or claims for indemnification resulting from
infringement claims) will not be asserted or prosecuted against the Company.
Any such claims, with or without merit, could be time consuming to defend,
result in costly litigation, divert management's attention and resources or
require the Company to enter into royalty or licensing agreements. There can
be no assurance that such licenses would be available on reasonable terms, if
at all, and the assertion or prosecution of any such claims could have a
material adverse effect on the Company's business, financial condition and
operating results. See "Business--Intellectual Property and Other Proprietary
Rights."
DEPENDENCE ON KEY PERSONNEL
The Company's success has been, and will be, dependent to a large degree on
its ability to retain the services of its existing executive officers and to
attract and retain qualified additional senior and middle managers and key
personnel in the future. The Company does not have "key person" life insurance
policies on any of its officers or associates. The loss of the services of any
of the key personnel or the inability to identify, hire, train and retain
other highly qualified technical and managerial personnel, including qualified
customer service personnel, in the future could have a material adverse effect
on the Company's business, financial condition and operating results.
Competition for such personnel is intense. There can be no assurance that the
Company will be able to attract, assimilate or retain qualified technical and
managerial personnel in the future, and the failure of the Company to do so
would have a material adverse effect on the Company's business, financial
condition and operating results. See "Business--Associates" and "Management."
GOVERNMENT REGULATION
The securities industry in the United States is subject to extensive
regulation under both federal and state laws. Broker-dealers are subject to
regulations covering all aspects of the securities business, including sales
methods, trade practices among broker-dealers, use and safekeeping of
customers' funds and securities, capital structure, record keeping and the
conduct of directors, officers and employees. E*TRADE Securities, as a fully-
disclosed correspondent of Herzog, is subject to many of these laws and rules.
Upon the implementation of self-clearing operations, the Company will be
required to comply with many complex laws and rules to which it previously has
not been subject including rules relating to possession and control of
customer funds and securities, margin lending and execution and settlement of
transactions.
Additional legislation, changes in rules promulgated by the SEC, the NASD,
the Board of Governors of the Federal Reserve System, the various stock
exchanges and other self-regulatory organizations, or changes in the
interpretation or enforcement of existing laws and rules, may directly affect
the mode of operation and profitability of broker-dealers. The SEC, the NASD
or other self-regulatory organizations and state securities commissions may
conduct administrative proceedings which can result in censure, fine, the
issuance of cease-and-desist orders or the suspension or expulsion of a
broker-dealer or any of its officers or employees. The Company's ability to
comply with all applicable laws and rules is dependent in large part upon the
establishment and maintenance of a compliance system reasonably designed to
ensure such compliance, as well as the Company's ability to attract and retain
qualified compliance personnel. The Company's growth has placed considerable
strain on its ability to ensure such compliance and it has experienced recent
turnover in its compliance personnel. The principal purpose of regulation and
discipline of broker-dealers is the protection of customers and the securities
markets, rather than protection of creditors and stockholders of broker-
dealers. The Company could in the future be subject to disciplinary or other
actions due to claimed noncompliance which could have a material adverse
effect on the Company's business, financial condition and operating results.
The Company has initiated an aggressive marketing campaign designed to bring
brand name recognition to E*TRADE. All marketing activities by E*TRADE
Securities are regulated by the NASD, and all such
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marketing materials are required by the NASD to be reviewed by E*TRADE
Securities' compliance officer prior to release. The Company has in the past
been requested by the NASD to discontinue the use of certain marketing
materials. The NASD can impose certain penalties, including censure, fine, the
issuance of cease-and-desist orders or the suspension or expulsion of a
broker-dealer or any of its officers or employees for violations of the NASD's
advertising regulations. The Company does not currently solicit orders from
its customers or make investment recommendations. However, if the Company were
to engage in such activities, it would become subject to additional rules and
regulations governing, among other things, the suitability of recommendations
to customers and sales practices.
It is the Company's intent to expand its business in United States
securities to other countries through the Internet and other gateways. For the
six months ended March 31, 1996, the Company received approximately 2.6% of
its commission revenues from customers with addresses in 46 foreign countries.
In order to expand its services globally, E*TRADE Securities must comply with
the regulatory controls of each specific country in which it conducts
business. E*TRADE Securities is regulated in the United States primarily by
the NASD and the SEC. The Company considers that the need to meet the
differing compliance requirements of other national regulatory jurisdictions
will impose a limit to its rate of international expansion.
There can be no assurance that other federal, state or foreign agencies will
not attempt to regulate the Company's online and other electronic activities.
The Company anticipates that it may be required to comply with record keeping,
data processing and other requirements as a result of proposed federal
legislation or otherwise, and the Company may be subject to additional
regulation as the market for online commerce evolves. Because of the growth in
the electronic commerce market, Congress has held hearings on whether to
regulate providers of services and transactions in the electronic commerce
market, and federal or state authorities could enact laws, rules or
regulations affecting the Company's business or operations. The Company also
may be subject to federal, state and foreign money transmitter laws and state
and foreign sales and use tax laws. If enacted or deemed applicable to the
Company, such laws, rules or regulations could be imposed on the Company's
activities or its business, thereby rendering the Company's business or
operations more costly or burdensome, less efficient or impossible, any of
which could have a material adverse effect on the Company's business,
financial condition and operating results.
Due to the increasing popularity of the Internet, it is possible that laws
and regulations may be enacted with respect to the Internet, covering issues
such as user privacy, pricing, content and quality of products and services.
The Telecommunications Act of 1996, which was enacted in January 1996,
prohibits the transmission over the Internet of certain types of information
and content. The increased attention focused upon these liability issues as a
result of the Telecommunications Act could adversely affect the growth of
Internet and private network use. In addition, the adoption of other laws or
regulations may reduce the rate of growth of the Internet, which could in turn
decrease the demand for the Company's services or could otherwise have a
material adverse effect on the Company's business, financial condition and
operating results. See "Business--Government Regulation; Net Capital
Requirements."
EFFECT OF NET CAPITAL REQUIREMENTS
The SEC, the NASD and various other regulatory agencies have stringent rules
with respect to the maintenance of specific levels of net capital by
securities brokers, including the SEC's Uniform Net Capital Rule (the "Net
Capital Rule") which governs both E*TRADE Securities and ET Execution
Services, a currently nonoperational broker-dealer subsidiary of E*TRADE
Group, Inc. ("ET Execution Services"). Failure to maintain the required net
capital may subject a firm to suspension or revocation of registration by the
SEC and suspension or expulsion by the NASD and other regulatory bodies and
ultimately may require its liquidation. In addition, a change in the net
capital rules, the imposition of new rules or any unusually large charge
against net capital could limit those operations of the Company that require
the intensive use of capital, such as trading activities and the financing of
customer account balances, and also could restrict the Company's ability to
withdraw capital from its brokerage subsidiaries which in turn could limit the
Company's
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ability to pay dividends, repay debt and redeem or purchase shares of its
outstanding stock. A significant operating loss or any unusually large charge
against net capital could adversely affect the ability of the Company to
expand or even maintain its present levels of business, which could have a
material adverse effect on the Company's business, financial condition and
operating results. See "Business--Government Regulation; Net Capital
Requirements."
As of May 31, 1996, E*TRADE Securities was required to maintain minimum net
capital of $250,000 and had total net capital of approximately $ , or
approximately $ in excess of the minimum amount required. In
February 1996, ET Execution Services undertook to act as guarantor pursuant to
an agreement between the Company and Merrill Lynch Business Financial
Services, Inc. This undertaking caused ET Execution Services to be in
violation of the Net Capital Rule, causing ET Execution Services to fall short
of its minimum net capital requirement. The Company has reported the violation
of ET Execution Services to the SEC and the NASD and is awaiting their
decisions. There can be no assurance that either or both of the SEC or the
NASD will not impose a penalty, including fines, restrictions on business
activities or suspension of trading activities, and the imposition of any such
penalty will not have a material adverse effect on the Company's business,
financial condition and operating results. In addition, there can be no
assurance that a violation of the Net Capital Rule will not occur in the
future. See "Business--Government Regulation--Net Capital Requirements."
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING
The Company currently anticipates that its available cash resources,
combined with the net proceeds of this offering, will be sufficient to meet
its presently anticipated working capital and capital expenditure requirements
for at least the next 12 months. However, the Company may need to raise
additional funds in order to support more rapid expansion, develop new or
enhanced services and products, respond to competitive pressures, acquire
complementary businesses or technologies or respond to unanticipated
requirements. If additional funds are raised through the issuance of equity
securities, the percentage ownership of the stockholders of the Company will
be reduced, stockholders may experience additional dilution in net book value
per share or such equity securities may have rights, preferences or privileges
senior to those of the holders of the Company's Common Stock. There can be no
assurance that additional financing will be available when needed on terms
favorable to the Company, if at all. If adequate funds are not available on
acceptable terms, the Company may be unable to develop or enhance its services
and products, take advantage of future opportunities or respond to competitive
pressures or unanticipated requirements, which could have a material adverse
effect on the Company's business, financial condition and operating results.
See "Dilution" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
RISKS ASSOCIATED WITH ACQUISITIONS, JOINT VENTURES AND OTHER STRATEGIC
RELATIONSHIPS
While the Company has no current agreements or negotiations underway with
respect to any potential acquisitions, the Company may make acquisitions in
the future, and the Company regularly evaluates such opportunities.
Acquisitions entail numerous risks, including difficulties in the assimilation
of acquired operations and products, diversion of management's attention to
other business concerns, amortization of acquired intangible assets and
potential loss of key employees of acquired companies. The Company has no
experience in assimilating acquired organizations into the Company's
operations. No assurance can be given as to the ability of the Company to
integrate successfully any operations, personnel, services or products that
might be acquired in the future, and the failure of the Company to do so could
have a material adverse effect on the Company's business, financial condition
and operating results.
The Company has established a number of strategic relationships with online
service providers and software and information service providers. A
significant number of such relationships have only recently been entered into.
There can be no assurance that any such relationships will be maintained, that
if such relationships are maintained, they will be successful or profitable,
or that the Company will develop any new such relationships. See "Business--
Strategic Relationships and Business Development."
16
<PAGE>
RISKS ASSOCIATED WITH INTERNATIONAL STRATEGY
A component of the Company's strategy is its planned increase in efforts to
attract more international customers. To date, the Company has limited
experience in providing brokerage services internationally. There can be no
assurance that the Company will be able to successfully market its services
and products in international markets. In addition, there are certain risks
inherent in doing business in international markets, particularly in the
heavily regulated brokerage industry, such as unexpected changes in regulatory
requirements, tariffs and other trade barriers, difficulties in staffing and
managing foreign operations, political instability, fluctuations in currency
exchange rates, reduced protection for intellectual property rights in some
countries, seasonal reductions in business activity during the summer months
in Europe and certain other parts of the world, and potentially adverse tax
consequences, any of which could adversely impact the success of the Company's
international operations. There can be no assurance that one or more of such
factors will not have a material adverse effect on the Company's future
international operations, if any, and, consequently, on the Company's
business, financial condition and operating results. See "Business--Strategy"
and "--Marketing."
CONCENTRATION OF STOCK OWNERSHIP
Upon the completion of this offering, the Company's present directors and
executive officers and their respective affiliates will beneficially own
approximately 48% of the outstanding Common Stock. As a result, these
stockholders, if they act together, will be able to exercise significant
influence over all matters requiring stockholder approval, including the
election of directors and approval of significant corporate transactions. Such
concentration of ownership may also have the effect of delaying, preventing or
deterring a change in control of the Company. See "Principal Stockholders" and
"Description of Capital Stock--Certain Provisions Affecting Stockholders."
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this offering, there has been no public market for the Company's
Common Stock, and there can be no assurance that an active public market for
the Common Stock will develop or be sustained after the offering. The initial
offering price will be determined by negotiation among the Company,
representatives of the Selling Stockholders and the representatives of the
Underwriters based upon several factors. For a discussion of the factors to be
taken into account in determining the initial public offering price, see
"Underwriting." The market price of the Company's Common Stock is likely to be
highly volatile and could be subject to wide fluctuations in response to
quarterly variations in operating results, announcements of technological
innovations or new software, services or products by the Company or its
competitors, changes in financial estimates by securities analysts or other
events or factors, many of which are beyond the Company's control. In
addition, the stock market has experienced significant price and volume
fluctuations that have particularly affected the market prices of equity
securities of many technology and services companies and that often have been
unrelated to the operating performance of such companies. These broad market
fluctuations may adversely affect the market price of the Company's Common
Stock. In the past, following periods of volatility in the market price for a
company's securities, securities class action litigation has often been
instituted. Such litigation could result in substantial costs and a diversion
of management attention and resources, which could have a material adverse
effect on the Company's business, financial condition and operating results.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial numbers of shares of Common Stock in the public market
following this offering could adversely affect the market price of the Common
Stock. Upon the completion of this offering, the Company will have outstanding
an aggregate of 30,212,896 shares of Common Stock, based upon the number of
shares outstanding as of May 31, 1996. Of these shares, all of the shares sold
in this offering will be freely tradeable without restriction or further
registration under the Securities Act of 1933, as amended (the
17
<PAGE>
"Securities Act"), unless such shares are purchased by "affiliates" of the
Company, as that term is defined in Rule 144 under the Securities Act
("Affiliates"). The remaining 23,962,896 shares of Common Stock held by
existing stockholders (the "Restricted Shares") are "restricted securities" as
that term is defined in Rule 144 under the Securities Act. Restricted Shares
may be sold in the public market only if registered or if they qualify for an
exemption from registration under Rule 144 or Rule 701 promulgated under the
Securities Act. As a result of contractual restrictions and the provisions of
Rule 144 and Rule 701, additional shares will be available for sale in the
public market as follows: (i) 933,060 Restricted Shares will be eligible for
immediate sale on the date of this Prospectus; (ii) approximately 630,540
Restricted Shares will be eligible for sale 90 days after the date of this
Prospects; (iii) approximately 12,147,420 Restricted Shares will be eligible
for sale upon expiration of the lock-up agreements 180 days after the date of
this Prospectus; and (iv) the remainder of the Restricted Shares will be
eligible for sale from time to time thereafter upon expiration of their
respective two-year holding periods. Pursuant to an agreement between the
Company and the holders (or their permitted transferees) of approximately
12,992,760 shares of Common Stock, these holders are entitled to certain rights
with respect to the registration of such shares under the Securities Act. See
"Description of Capital Stock" and "Shares Eligible for Future Sale."
IMMEDIATE AND SUBSTANTIAL DILUTION
Investors participating in this offering will incur immediate and substantial
dilution. To the extent outstanding options or warrants to purchase the Common
Stock are exercised, there will be further dilution. See "Dilution."
EFFECTS OF CERTAIN CHARTER AND BYLAW PROVISIONS
The Company's Board of Directors has the authority to issue up to an
additional 868,484 shares of Preferred Stock and to determine the price,
rights, preferences and privileges of those shares without any further vote or
action by the Company's stockholders. The rights of the holders of Common Stock
will be subject to, and may be adversely affected by, the rights of the holders
of Preferred Stock. While the Company has no present intention to issue shares
of Preferred Stock, such issuance, while providing desirable flexibility in
connection with the possible acquisitions and other corporate purposes, could
have the effect of delaying, deferring or preventing a change in control of the
Company and entrenching existing management. In addition, such Preferred Stock
may have other rights, including economic rights senior to the Common Stock,
and, as a result, the issuance thereof could have a material adverse effect on
the market value of the Common Stock. The Company is also subject to the anti-
takeover provisions of Section 203 of the Delaware General Corporation Law,
which restricts certain "business combinations" with "interested stockholders"
for three years following the date the person becomes an interested
stockholder, unless the Board of Directors approves the Business Combination.
By delaying and deterring unsolicited takeover attempts, these provisions could
adversely affect prevailing market prices for the Company's Common Stock.
Certain other provisions of the Company's Restated Certificate of Incorporation
or Restated Bylaws, including elimination of the ability of stockholders to act
by written consent, a staggered Board of Directors, advance notice for
stockholder proposals and director nominations and a provision which provides
that special meetings of the stockholders may not be called by the
stockholders, may have the effect of delaying or preventing changes of control
or management of the Company, which could adversely affect the market price of
the Company's Common Stock. See "Description of Capital Stock."
18
<PAGE>
USE OF PROCEEDS
The net proceeds from the sale of the 6,250,000 shares of Common Stock
offered by the Company hereby are estimated to be approximately $
($ if the Underwriters' over-allotment option is exercised in full),
assuming an initial public offering price of $ per share and after
deducting estimated underwriting discounts and commissions and offering
expenses payable by the Company. The Company will not receive any proceeds
from the sale of shares of Common Stock by the Selling Stockholders. See
"Principal and Selling Stockholders."
The principal purposes of the offering are to increase the Company's working
capital and equity base, to provide a public market for its Common Stock, to
permit future acquisitions using cash or publicly tradeable Common Stock and
to facilitate future access to public capital markets. The net proceeds will
be used to repay approximately $2.5 million of debt and for working capital
and general corporate purposes, which will include capital expenditures,
increasing capacity and funding potential acquisitions. The loan being repaid
was obtained in February 1996 from Merrill Lynch Business Financial Services
Inc. to provide financing for equipment purchases. The loan can be drawn in
installments of a minimum of $100,000 and with a maximum outstanding of $2.5
million. The loan bears an interest rate equal to 2.70% over the 30 day
commercial paper rate as published in the Wall Street Journal.
The Company continues to evaluate potential acquisition opportunities;
however, none are presently under active consideration. Pending such uses, the
Company will invest the net proceeds of this offering in short-term,
investment-grade, interest-bearing securities.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its capital stock.
The Company currently intends to retain all of its earnings, if any, for use
in its business and does not anticipate paying any cash dividends in the
foreseeable future. The payment of any future dividends will be at the
discretion of the Company's Board of Directors and will depend upon a number
of factors, including future earnings, the success of the Company's business
activities, capital requirements, the general financial condition and future
prospects of the Company, general business conditions and such other factors
as the Board of Directors may deem relevant.
19
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1996 (i) on an actual basis, (ii) on a pro forma basis to reflect the
Series B Investment, the SOFTBANK Investment and the automatic conversion of
all outstanding shares of Preferred Stock into 7,890,960 shares of Common
Stock that will occur automatically upon the completion of this offering and
(iii) on such pro forma basis as adjusted to reflect the sale by the Company
of 6,250,000 shares of Common Stock offered hereby at an assumed initial
public offering price of $ per share and the receipt and application of
the estimated net proceeds therefrom. This table should be read in conjunction
with the consolidated financial statements and notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1996
------------------------
PRO AS
ACTUAL FORMA ADJUSTED
------- ------- --------
(in thousands)
<S> <C> <C> <C>
Current portion of long-term obligations(1)........... $ 521 $ 521 $ 21
======= ======= ======
Long-term obligations, net of current portion(1)...... $ 1,992 $ 1,992 $ 34
------- ------- ------
Stockholders' equity:
Preferred Stock, issuable in series, $.01 par value;
1,000,000 shares authorized, 100,000 shares
outstanding, actual; no shares outstanding, pro forma
and as adjusted...................................... 1 -- --
Common Stock, $.01 par value, 50,000,000 shares
authorized, 15,636,276 shares outstanding, actual;
23,527,236 shares outstanding, pro forma; and
29,777,236 shares outstanding, as adjusted(2)........ 156 235 298
Additional paid-in capital ........................... 10,284 21,993
Retained earnings..................................... 2,162 2,162 2,162
------- ------- ------
Total stockholders' equity........................ 12,603 24,390
------- ------- ------
Total capitalization............................ $14,595 $26,382 $
======= ======= ======
</TABLE>
- --------
(1) See Notes 3 and 7 of Notes to Consolidated Financial Statements.
(2) Excludes 4,000,000 shares of Common Stock reserved for issuance under the
Company's 1996 Stock Incentive Plan and also excludes 5,928,120 shares of
Common Stock as of May 31, 1996 reserved for issuance pursuant to the
exercise of options granted under the Company's 1993 Stock Option Plan and
1983 Employee Incentive Stock Option Plan and the exercise of other
outstanding nonqualified options. Also excludes 650,000 shares of Common
Stock reserved for issuance under the Company's 1996 Stock Purchase Plan.
See "Management--Associate Benefit Plans" and Notes 5 and 10 of Notes to
Consolidated Financial Statements.
20
<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of March 31, 1996
would have been $24.4 million, or $1.04 per share of Common Stock. Pro forma
net tangible book value per share represents the amount of the Company's total
assets less total liabilities, divided by the pro forma number of shares of
Common Stock outstanding, after giving effect to the Series B Investment, the
SOFTBANK Investment, and the conversion of all outstanding shares of Preferred
Stock into Common Stock automatically upon the completion of this offering.
Pro forma net tangible book value dilution per share represents the difference
between the amount per share paid by purchasers of shares of Common Stock in
the offering made hereby and the pro forma net tangible book value per share
of Common Stock immediately after the completion of this offering. After
giving effect to the sale of the 6,250,000 shares of Common Stock offered by
the Company hereby at an assumed initial public offering price of $ per
share and after deduction of estimated underwriting discounts and commissions
and offering expenses payable by the Company, the pro forma net tangible book
value of the Company as of March 31, 1996 would have been $ , or $
per share. This represents an immediate increase in pro forma net tangible
book value of $ per share to the existing stockholders and an immediate
dilution of $ per share to purchasers of Common Stock in this offering.
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................ $
Pro forma net tangible book value per share as of March 31,
1996......................................................... $1.04
Increase per share attributable to new stockholders...........
-----
Pro forma net tangible book value per share at March 31, 1996
after the offering............................................
----
Dilution per share to new stockholders......................... $
====
</TABLE>
The following table summarizes, on a pro forma basis as of March 31, 1996,
the number of shares of Common Stock purchased from the Company, the total
consideration paid to the Company and the average price per share paid by
existing stockholders and by new stockholders purchasing shares of Common
Stock in this offering (based on an assumed initial public offering price of
$ per share and before the deduction of estimated underwriting discounts,
commissions and offering expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED(1) TOTAL CONSIDERATION AVERAGE
------------------------------------------ PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ --------------------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)... 23,527,236 79.0% $26,283,000 % $1.12
New stockholders........... 6,250,000 21.0
------------ ------- ----------- -----
Total.................... 29,777,236 100.0% $ 100.0%
============ ======= =========== =====
</TABLE>
- --------
(1) Sales by the Selling Stockholders in this offering will cause the number
of shares held by existing stockholders to be reduced to
shares, or % ( shares, or %, if the Underwriters' over-
allotment option is exercised in full) of the total number of shares of
Common Stock to be outstanding after this offering, and will increase the
number of shares held by new stockholders to shares, or %
( shares, or %, if the Underwriters' over-allotment option is
exercised in full) of the total number of shares of Common Stock to be
outstanding after the offering. See "Principal and Selling Stockholders."
The foregoing assumes (i) the conversion of outstanding Preferred Stock and
(ii) no exercise of options to purchase Common Stock after March 31, 1996. As
of March 31, 1996, there were options outstanding to purchase a total of
4,773,780 shares of Common Stock under the Company's 1993 Stock Option Plan
and 1983 Employee Incentive Stock Option Plan and other nonqualified stock
option agreements, at a weighted average exercise price of $0.91 per share. To
the extent that any of these options or other options granted after March 31,
1996 are exercised, there will be further dilution to new stockholders. See
"Management--Associate Benefit Plans" and Notes 5 and 10 of Notes to
Consolidated Financial Statements.
21
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth for the periods indicated selected
consolidated financial data for the Company. The consolidated statement of
income data for the years ended September 30, 1993, 1994 and 1995 and the
consolidated balance sheet data at September 30, 1994 and 1995 have been
derived from the Company's consolidated financial statements included
elsewhere in this Prospectus. The following selected consolidated financial
data are qualified by the more detailed consolidated financial statements of
the Company and the notes thereto included elsewhere in this Prospectus and
should be read in conjunction with such consolidated financial statements and
notes and the discussion under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
Prospectus. The consolidated statement of income data for the year ended
September 30, 1992 and the consolidated balance sheet data at September 30,
1993 has been derived from audited financial statements not included in this
Prospectus. The consolidated statement of income data for the year ended
September 30, 1991 and for the six months ended March 31, 1995 and 1996 and
the consolidated balance sheet data at September 30, 1991 and 1992 and March
31, 1996 are derived from unaudited consolidated financial statements which,
in the opinion of management, have been prepared on the same basis as the
audited consolidated financial statements and contain all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the results of operations for such periods. The results of
operations for the six months ended March 31, 1996 are not necessarily
indicative of results to be expected for the full year.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
------------------------------------------- -----------------
1991 1992 1993 1994 1995 1995 1996
------------------ ------- ------- ------- -------- --------
CONSOLIDATED STATEMENT OF INCOME
DATA: (in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues
Transaction revenues... $ 184 $ 327 $ 2,158 $ 9,548 $20,835 $ 7,478 $ 16,489
Computer services...... 455 480 709 953 1,425 547 1,079
Interest and other..... 193 41 107 404 1,080 366 1,310
-------- ------- ------- ------- ------- -------- --------
Total revenues....... 832 848 2,974 10,905 23,340 8,391 18,878
-------- ------- ------- ------- ------- -------- --------
Cost of services
Cost of services....... 470 579 1,973 6,796 12,678 4,529 10,228
Self-clearing start-up
costs................. -- -- -- -- 141 41 635
-------- ------- ------- ------- ------- -------- --------
Total cost of
services............ 470 579 1,973 6,796 12,819 4,570 10,863
-------- ------- ------- ------- ------- -------- --------
Operating expenses
Selling and marketing.. 17 116 282 998 2,466 1,037 3,518
Technology development. 189 176 216 335 943 128 612
General and
administrative........ 264 260 400 2,532 2,803 853 2,100
-------- ------- ------- ------- ------- -------- --------
Total operating
expenses............ 470 552 898 3,865 6,212 2,018 6,230
-------- ------- ------- ------- ------- -------- --------
Total cost of
services
and operating
expenses............ 940 1,131 2,871 10,661 19,031 6,588 17,093
-------- ------- ------- ------- ------- -------- --------
Pre-tax income (loss).... (108) (283) 103 244 4,309 1,803 1,785
Income tax expense
(benefit)............... 2 2 4 (541) 1,728 723 722
-------- ------- ------- ------- ------- -------- --------
Net income (loss).... $ (110) $ (285) $ 99 $ 785 $ 2,581 $ 1,080 $ 1,063
======== ======= ======= ======= ======= ======== ========
Net income (loss) per
common share............ $ (0.01) $ (0.01) $ -- $ 0.03 $ 0.10 $ 0.04 $ 0.04
======== ======= ======= ======= ======= ======== ========
Shares used to compute
per share data.......... 24,175 25,175 27,024 26,533 26,828 25,719 27,325
======== ======= ======= ======= ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------------------------ MARCH 31,
1991 1992 1993 1994 1995 1996
------ ------- ------- ------- ------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA:
Cash and equivalents..... $ 50 $ 48 $ 36 $ 692 $ 9,624 $ 8,694
Total assets............. 140 226 728 2,163 14,164 18,325
Long-term obligations.... 1,085 1,146 1,227 1,314 -- 1,992
Stockholders' equity
(deficit)............... (1,022) (1,107) (788) (92) 11,148 12,603
</TABLE>
22
<PAGE>
MANAGEMENT'S DISUCSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the consolidated
financial statements and notes thereto included elsewhere in this Prospectus.
This discussion contains forward-looking statements which involve risks and
uncertainties. The Company's actual results may differ materially from those
anticipated in these forward-looking statements as a result of certain
factors, including, but not limited to, those set forth under "Risk Factors"
and elsewhere in this Prospectus.
OVERVIEW
E*TRADE is an electronic services company using information technology to
provide value-added commercial transaction processing services over a broad
range of convenient electronic media. Founded in 1982, the Company operated
initially as a service bureau, providing automated online stock trading
services to various brokerage firms, including Fidelity Brokerage Services,
Inc., Quick & Reilly and, through an agreement with Bank of America, Charles
Schwab. In 1992, the Company formed E*TRADE Securities and began to offer
retail brokerage services, with automated order placement now available 24
hours a day, seven days a week by means of the Internet, direct modem access,
America Online Inc. ("America Online"), CompuServe, Inc. ("CompuServe"),
touch-tone telephone and, to a lesser extent, interactive television.
The Company's revenues consist principally of transaction revenues, which
include securities brokerage commissions and payments based on order flow
(described below), interest and certain other fees related to the Company's
product offerings. The Company has experienced substantial growth in its
revenues since the inception of E*TRADE Securities. At the end of fiscal 1992,
the Company was processing slightly over 100 trades per day, and by September
30, 1995, the end of the Company's most recent fiscal year, the Company was
processing in excess of 3,800 trades per day. By March 31, 1996, the Company's
average daily trade volume had grown to 5,800 trades per day. Although
increases in the overall activity in the securities markets have contributed
to the Company's growth, the Company believes that its growth has also been
due in part to the success of its advertising campaign to bring brand name
recognition to E*TRADE, the launch of Internet access to E*TRADE and the
continuing successful integration of new system developments.
The Company uses other broker-dealers to execute its customers' orders and,
in recent years, has derived a significant portion of its revenues from these
broker-dealers for such order flow. The revenues received by the Company under
these arrangements for the year ended September 30, 1995 and the six months
ended March 31, 1996 amounted to 20% and 21% of total revenues, respectively.
There can be no assurance that these revenues will continue at their present
levels or that the Company will be able to continue its present relationships
and terms for such payments for order flow. In addition, there can be no
assurance that payments for order flow will continue to be permitted by the
SEC, the NASD or other regulatory agencies, courts or governmental units. Loss
of any or all of these revenues could have a material adverse effect on the
Company's business, financial condition and operating results.
The Company is making significant investments in systems technology and has
designed a "hot" back-up site in Rancho Cordova, California. The Company
expects that the Rancho Cordova site will become fully operational in July
1996. This new facility, together with the Company's existing facility in Palo
Alto, California, will give the Company fully redundant capabilities and
substantially increased capacity. The Company is also making significant
investments in its customer service department. The Company's customer service
capacity is severely strained and the Company is seeking to address this
problem through significant investments in technology and personnel. See "Risk
Factors--Dependence on Improved Customer Service Operations."
As registered broker-dealers and members of the NASD, E*TRADE Securities and
ET Execution Services are subject to the Net Capital Rule. In February 1996,
ET Execution Services undertook to act as guarantor pursuant to an agreement
between the Company and Merrill Lynch Business Financial Services,
23
<PAGE>
Inc. This undertaking caused ET Execution Services to be in violation of the
Net Capital Rule through May 1996 when ET Execution Services was released from
the guarantee. See "Risk Factors--Effect of Net Capital Requirements."
The Company is in the process of implementing self-clearing operations and
expects to complete the transition in July 1996. Clearing services include the
confirmation, receipt, execution, settlement and delivery functions involved
in securities transactions. Prior to the completion of its conversion to self-
clearing operations, the Company will continue to clear all of its customer
trades as a fully-disclosed correspondent of Herzog. In the first quarter of
fiscal 1996, the Company began hiring and training associates to perform the
clearing functions that are currently performed by Herzog. As a consequence,
the Company has incurred not only significant non-recurring costs associated
with the hiring and training of its associates, but also personnel and other
costs associated with the transition to self-clearing operations and the
integration of its own systems, while still incurring expenses to Herzog for
clearing operations. The Company believes that its conversion to self-clearing
operations is a strategic investment in the Company's future that will allow
the Company to realize significant future savings, although there can be no
assurance in that regard. See "Risk Factors--Risks of Systems Failures" and
"--Risks Associated with Planned Conversion to Self-clearing Operations."
As a self-clearing firm, the Company will assume direct responsibility for
the possession and control of customer securities and other assets and
clearance of customers securities transactions. Having this responsibility
will require the Company to record on its balance sheet the customer
receivables and customer payables to the Company that are a result of customer
margin loans (i.e., loans made to customers that are collateralized by
securities held in the customers' margin account at the Company) and customer
free credit balances (i.e., customer cash balances maintained by the Company),
respectively. In addition, to the extent that the Company's customer debit
balances exceed customer free credit balances, the Company must obtain
financing for any excess debit balance. As a result, upon conversion to its
self-clearing operations, the Company will record receivables from customers,
payables to customers and collateralized bank loans, which will have a
significant effect on the Company's total assets and total liabilities. If the
conversion had been effected at May 31, 1996, the Company would have recorded
receivables from customers of $170 million and payables to customers of $110
million. The difference between receivables from customers and payables to
customers would have been, and will be, financed through a combination of
corporate resources, settlement facilities and customer collateralized bank
loans. In connection with the transition to self-clearing operations, the
Company has obtained bank financing to finance its customer balances. In
addition, as a self-clearing firm, the Company has contracted with a third
party service bureau, Beta Systems for its customer record keeping and data
processing services. The Company currently relies on Herzog and its data
processor for these services. A loss in the availability of these services
from Beta Systems and the inability of the Company to make alternative
arrangements in a timely manner, if at all, would have a material adverse
effect on the Company's business, financial condition and operating results.
In accordance with the Company's conversion agreement with Herzog, Herzog will
continue to provide access to its system and activity reports for a period of
not less than 60 days from the date that the Company completes its conversion
to self-clearing operations. See "--Liquidity and Capital Resources."
The Company's transaction revenues have grown from $327,000 in fiscal 1992,
the first year that the Company began to offer retail brokerage services, to
$20.8 million in fiscal 1995. Transaction revenues include securities
brokerage transactions and, since late fiscal 1994, payments based on order
flow. Computer service revenues have grown from $480,000 in fiscal 1992 to
$1.4 million in fiscal 1995, and are comprised primarily of fees for the time
customers are connected to the Company online. Interest and other revenues
have grown from $41,000 in fiscal 1992 to $1.1 million in fiscal 1995. The
Company participates in the interest spread on its customer debit and credit
balances through its clearing agreement with Herzog. The Company began
receiving fees on its customers' assets invested in money market accounts in
September 1994. Other revenues represent the Company's return on its
investment in Roundtable Partners LLC, a consortium of broker-dealers that
provides the Company with an alternative broker-dealer to which to route its
customers' orders for execution. The Company also participates in the
operating results of Roundtable Partners LLC as an equity owner.
24
<PAGE>
The Company's cost of services have grown from $579,000 in fiscal 1992 to
$12.8 million in fiscal 1995. Cost of services includes clearing fees paid to
the Company's clearing broker, system maintenance and communication expenses,
and the Company's operations and customer service departments. In connection
with its conversion to self-clearing operations, the Company will incur
ongoing expenses such as payroll and systems expenditures.
Selling and marketing expenses have grown from $116,000 in fiscal 1992 to
$2.5 million in fiscal 1995 and consist primarily of the costs associated with
the actual placement expenses as well as the creative development of
advertising.
Technology development expenses have grown from $176,000 in fiscal 1992 to
$943,000 in fiscal 1995 and consist of payroll and consulting costs associated
with the development and enhancement of the Company's product offerings.
General and administrative expenses have grown from $260,000 in fiscal 1992
to $2.8 million in fiscal 1995 and consist primarily of facilities costs,
equipment and maintenance expenses, as well as corporate management costs,
including accounting, human resources and other administrative expenses.
Self-clearing operations, especially where conducted by firms such as the
Company, without significant prior experience, involve substantial risks of
losses due to errors. Errors in the clearing process may also lead to civil
liability for actions in negligence brought by parties who are financially
harmed as a result of such errors. Any liability that arises as a result of
self-clearing operations could have a material adverse effect on the Company's
business, financial condition and operating results. Clearing operations
currently account for a significant portion of the Company's cost of services,
and there can be no assurance that becoming a self-clearing firm will not
result in significantly higher clearing costs in the future. During the
Company's transition to self-clearing operations, it is running conversion
tests to verify the accuracy of its internal systems, while at the same time
continuing to incur substantial expenses to Herzog for clearing services. The
failure of the Company to perform self-clearing operations accurately and
cost-effectively could have a material adverse effect on the Company's
business, financial condition and operating results.
The Company has experienced substantial changes in and expansion of its
business and operations since it began offering electronic brokerage services
in 1992 and expects to continue to experience periods of rapid change. The
Company's past expansion has placed, and any future expansion would place,
significant demands on the Company's administrative, operational, financial
and other resources. The Company expects operating expenses and staffing
levels to increase substantially in the future. In particular, the Company
intends to hire a significant number of additional skilled personnel in 1996
and later years. Competition for such personnel is intense, and there can be
no assurance that the Company will be able to attract, assimilate or retain
additional highly qualified senior managers and technical persons. The Company
also expects to expend resources with respect to future expansion of its
accounting and internal management systems and the implementation of a variety
of new systems and procedures. In addition, the Company expects that future
expansion will continue to challenge the Company's ability to train, motivate
and manage its associates. If the Company's revenues do not increase in
proportion to its operating expenses, the Company's management systems do not
expand to meet increasing demands, the Company fails to attract, assimilate
and retain qualified personnel, or the Company's management otherwise fails to
manage the Company's expansion effectively, there would be a material adverse
effect on the Company's business, financial condition and operating results.
See "Risk Factors--Management of a Changing Business," "Business--Associates"
and "Management."
The Company receives and processes trade orders principally through the
Internet, online services or touch-tone telephone. This method of trading is
heavily dependent on the integrity of the mechanical and electronic systems
supporting it. Orders placed from the close of the stock markets one day until
the opening the next business day must be processed through the Company's
system in a short period of time prior to the opening of the stock markets.
Heavy stress placed on the Company's systems during peak trading times could
cause the Company's systems to fail. Any failure of the Company's systems or
any other systems in the trading process (e.g., online service providers,
record keeping and data processing functions performed by third
25
<PAGE>
parties and third-party software such as Internet browsers), even for a short
time, could cause customers to suffer delays in trading. Such delays could
cause substantial losses for customers, and could subject the Company to
claims from customers for losses, including litigation claiming fraud or
negligence. The Company has experienced such system failures in the past and,
most recently, experienced two such failures in May 1996. In order to promote
customer satisfaction and protect the E*TRADE brand name, the Company has
compensated customers for verifiable losses arising in connection with systems
failures. As a result, for example, the Company anticipates making such
payments to customers in an aggregate amount in excess of $1.7 million for
systems failures in May 1996. Notwithstanding these payments, the Company has
observed electronic third-party communications in which a potential class
action lawsuit against the Company relating to such system failures is
discussed. Any systems failure that causes interruptions in the Company's
operations could have a material adverse effect on the Company's business,
financial condition and operating results. As a result of the costs associated
with the planned conversion and the Company's recent systems failures, the
Company may incur a loss in the quarter ending June 30, 1996. See "Risk
Factors--Significant Fluctuations in Quarterly Operating Results; Potential
Loss in Quarter Ending June 30, 1996."
RESULTS OF OPERATIONS
The following table sets forth the percentage of total revenues represented
by certain items on the Company's consolidated statements of income for the
periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
SEPTEMBER 30, MARCH 31,
------------------- ------------
1993 1994 1995 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues
Transaction revenues....................... 72.6% 87.6% 89.3% 89.1% 87.3%
Computer services.......................... 23.8 8.7 6.1 6.5 5.8
Interest and other......................... 3.6 3.7 4.6 4.4 6.9
----- ----- ----- ----- -----
Total revenues........................... 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- -----
Cost of services
Cost of services........................... 66.3 62.3 54.3 54.0 54.1
Self-clearing start-up costs............... -- -- 0.6 0.5 3.4
----- ----- ----- ----- -----
Total cost of services................... 66.3 62.3 54.9 54.5 57.5
----- ----- ----- ----- -----
Operating expenses
Selling and marketing...................... 9.5 9.2 10.6 12.4 18.6
Technology development..................... 7.3 3.1 4.0 1.5 3.4
General and administrative................. 13.4 23.2 12.0 10.1 11.0
----- ----- ----- ----- -----
Total operating expenses................. 30.2 35.5 26.6 24.0 33.0
----- ----- ----- ----- -----
Total cost of services and
operating expenses...................... 96.5 97.8 81.5 78.5 90.5
----- ----- ----- ----- -----
Pre-tax income .............................. 3.5 2.2 18.5 21.5 9.5
Income tax expense (benefit)................. .2 (5.0) 7.4 8.6 3.9
----- ----- ----- ----- -----
Net income............................... 3.3% 7.2% 11.1% 12.9% 5.6%
===== ===== ===== ===== =====
</TABLE>
Six Months Ended March 31, 1996 and 1995
Revenues
Transaction revenues increased 120% to $16.5 million for the six months
ended March 31, 1996 from $7.5 million for the comparable period in 1995. Of
that amount, payments for order flow increased 175% to $4.0 million for the
six months ended March 31, 1996 from $1.5 million for the comparable period in
1995. The increase in transaction revenues was primarily the result of the
rise in the number of securities transactions processed by the Company, offset
in part by reductions in the commission rates charged for certain
transactions. The average revenue per securities transaction was $28.27 for
the six months ended March 31, 1996 compared with $32.54 during the same
period in the prior year. Computer services revenues
26
<PAGE>
increased 97% to $1.1 million for the six months ended March 31, 1996 from
$547,000 for the comparable period in 1995, primarily due to an increase in
the amount of connect time utilized by customers. Interest and other revenues
increased 258% to $1.3 million for the six months ended March 31, 1996 from
$366,000 for the comparable period in 1995. The increase was largely due to an
increase in customer margin debt of 177% to $100 million, an increase in
customer free credit balances of 84% to $25 million and an increase in
customer money market fund balances of 100% to $248 million.
Cost of Services
Cost of services increased 126% to $10.2 million for the six months ended
March 31, 1996 from $4.5 million for the comparable period in 1995, due to the
increase in the number of securities transactions processed by the Company.
Self-clearing startup costs increased to $635,000 for the six months ended
March 31, 1996 from $41,000 for the comparable period in 1995. The Company
incurred these expenses as it continued to hire associates and utilize
consultants in preparation of the conversion to self-clearing operations.
Operating Expenses
Selling and marketing expenses increased 239% to $3.5 million for the six
months ended March 31, 1996 from $1.0 million for the comparable period in
1995. This increase reflects the brand name advertising campaign that was
initiated by the Company during the six months ended March 31, 1996 as well as
the advertising costs associated with the launch of the Company's Web site in
February 1996. The Company expects that these expenses will fluctuate as a
percent of revenue from period to period.
Technology development expenses increased 378% to $612,000 for the six
months ended March 31, 1996 from $128,000 for the comparable period in 1995.
This increase was attributable to an acceleration of the Company's development
efforts associated with the launch of the Web site in February 1996 as well as
the work associated with designing and implementing the Company's "hot" back-
up site in Rancho Cordova, California.
General and administrative expenses increased 145% to $2.1 million for the
six months ended March 31, 1996 from $853,000 for the comparable period in
1995. This increase was a result of increased costs associated with personnel
additions in the finance, human resources, facilities and compliance
departments, a $200,000 increase in customer claims and bad debt reserves, a
relocation to larger facilities and an increased use of consultants by the
Company. The increase in personnel and the Company's relocation to new
facilities were undertaken to accommodate the growth experienced during the
period.
Income Tax Expense
Income tax expense represents the provision for federal and state income
taxes at an effective rate of 40.1% for both the six-month period ended March
30, 1996 and the comparable period in 1995.
Fiscal Years Ended September 30, 1995 and 1994
Revenues
Transaction revenues increased 118% to $20.8 million for fiscal 1995 from
$9.5 million for fiscal 1994. The increase was attributable to an increase in
the number of securities transactions processed by the Company. The average
revenue per securities transaction increased to $31.61 in fiscal 1995 from
$29.68 in fiscal 1994 because of the initiation of order flow payments
partially offset by reductions of the base commission rate charged to
customers for securities transactions late in fiscal 1994. Computer services
revenues increased 50% to $1.4 million for fiscal 1995 from $953,000 for
fiscal 1994. The increase was due to an increase in amount of connect time
utilized by customers. Interest and other revenues increased 167% to $1.1
million for fiscal 1995 from $404,000 for fiscal 1994. The increase was
largely due to an increase of 172% in customer margin debt to $68.9 million,
an increase of 85% in customer credit balances to $18.7 million and an
increase of 160% in customer money market fund balances to $209.4 million.
27
<PAGE>
Cost of Services
Cost of services increased 87% to $12.7 million for fiscal 1995 from $6.8
million for fiscal 1994. The increase was largely attributable to an increase
in the Company's payments to its clearing broker and, to a lesser extent,
modest increases in brokerage operations and quotation expenses. Self-clearing
start-up costs were $141,000 for fiscal 1995, as the Company began to hire
associates and utilize consultants in preparation of its conversion to self-
clearing operations. No such expenses were incurred in fiscal 1994.
Operating Expenses
Selling and marketing expenses increased 147% to $2.5 million for fiscal
1995 from $998,000 for the comparable period in fiscal 1994. This increase was
due to increased expenditures on advertising placements, creative development
and collateral materials.
Technology development expenses increased 181% to $943,000 for fiscal 1995
from $335,000 for the comparable period in fiscal 1994. This increase was
attributable to activities associated with enhancing the Company's existing
product offerings, as well as costs associated with the development of the
Company's Web site, which was launched in February 1996.
General and administrative expenses increased 11% to $2.8 million for fiscal
1995 from $2.5 million for the comparable period in fiscal 1994. In fiscal
1994 the Company settled claims in the amount of $850,000 made by its former
clearing broker. Excluding this claim, fiscal 1995 general and administrative
expenses increased 67% over fiscal 1994. This increase was a result of
additional expenses incurred for customer bad debts, claims resulting from a
systems failure in the fourth quarter of fiscal 1995 and increases in the
number of corporate associates needed to accommodate the growth experienced by
the Company during the period.
Income Tax Expense
Income tax expense represents the provision for federal and state income
taxes at an effective rate of 40.1% for fiscal 1995. The Company recorded a
net income tax benefit of $541,000 for fiscal 1994, due to full recognition of
net operating loss carryforwards generated in prior years.
Fiscal Years Ended September 30, 1994 and 1993
Revenues
Transaction revenues increased 342% to $9.5 million for fiscal 1994 from
$2.2 million for fiscal 1993. The increase was attributable to an increase in
the number of securities transactions processed by the Company. Computer
services revenues increased 34% to $953,000 for fiscal 1994 from $709,000 for
fiscal 1993. This increase was due to an increase in the connect time access
charges utilized by the customers. Interest and other revenue increased 279%
to $404,000 for fiscal 1994 from $107,000 for fiscal 1993. The increase was
due to an overall increase in customer margin debit and free credit balances.
Cost of Services
Cost of services increased 245% to $6.8 million for fiscal 1994 from $2.0
million for fiscal 1993. This increase was attributable to increases in
clearing fees and communication expenses.
Operating Expenses
Selling and marketing expenses increased 253% to $998,000 for the fiscal
1994 from $282,000 for fiscal 1993. This increase was a result of increased
advertising expenses. Technology development expenses increased 55% to
$335,000 for fiscal 1994 from $216,000 for fiscal 1993. This increase was a
result of additional resources being applied to product development. General
and administrative expenses increased 533% to $2.5 million for fiscal 1994
from $401,000 for fiscal 1993. This increase was attributable to increases in
customer claims and bad debt reserves as well as the $850,000 settlement in
fiscal 1995 noted above.
28
<PAGE>
QUARTERLY RESULTS
The following table sets forth certain unaudited quarterly financial data
for the six quarters ended March 31, 1996. In the opinion of the Company's
management, this unaudited information has been prepared on the same basis as
the audited consolidated financial statements contained herein and includes
all adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the information set forth therein when read in conjunction with
the consolidated financial statements and footnotes. The operating results for
any quarter are not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1994 1995 1995 1995 1995 1996
------------ --------- -------- ------------- ------------ ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Revenues
Transaction revenues.. $3,272 $4,206 $6,114 $7,243 $7,329 $9,160
Computer services..... 267 280 364 514 455 623
Interest and other.... 162 204 280 434 644 667
------ ------ ------ ------ ------ ------
Total revenues...... 3,701 4,690 6,758 8,191 8,428 10,449
------ ------ ------ ------ ------ ------
Cost of services
Cost of services...... 2,049 2,480 3,482 4,667 4,373 5,855
Self-clearing start-up
costs................ 2 39 44 56 166 469
------ ------ ------ ------ ------ ------
Total cost of
services........... 2,051 2,519 3,526 4,723 4,539 6,324
Operating expenses
Selling and marketing. 459 578 502 928 1,127 2,391
Technology
development.......... 63 65 410 404 253 359
General and
administrative....... 415 438 533 1,417 1,042 1,057
------ ------ ------ ------ ------ ------
Total operating
expenses........... 937 1,081 1,445 2,749 2,422 3,807
------ ------ ------ ------ ------ ------
Total cost of
services and
operating expenses. 2,988 3,600 4,971 7,472 6,961 10,131
------ ------ ------ ------ ------ ------
Pre-tax income.......... 713 1,090 1,787 719 1,467 318
Income tax expense...... 286 437 717 288 589 133
------ ------ ------ ------ ------ ------
Net income.......... $ 427 $ 653 $1,070 $ 431 $ 878 $ 185
====== ====== ====== ====== ====== ======
<CAPTION>
AS A PERCENTAGE OF TOTAL REVENUES
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues
Transaction revenues.. 88.4% 89.7% 90.4% 88.4% 87.0% 87.7%
Computer services..... 7.2 6.0 5.4 6.3 5.4 6.0
Interest and other.... 4.4 4.3 4.2 5.3 7.6 6.3
------ ------ ------ ------ ------ ------
Total revenues...... 100.0 100.0 100.0 100.0 100.0 100.0
------ ------ ------ ------ ------ ------
Cost of services
Cost of services...... 55.4 52.9 51.5 57.0 51.9 56.0
Self-clearing start-up
costs................ -- 0.8 0.7 0.7 2.0 4.5
------ ------ ------ ------ ------ ------
Total cost of
services........... 55.4 53.7 52.2 57.7 53.9 60.5
------ ------ ------ ------ ------ ------
Operating expenses
Selling and marketing. 12.4 12.3 7.4 11.3 13.4 22.9
Technology
development.......... 1.7 1.4 6.1 4.9 3.0 3.4
General and
administrative....... 11.2 9.3 7.9 17.3 12.3 10.1
------ ------ ------ ------ ------ ------
Total operating
expenses........... 25.3 23.0 21.4 33.5 28.7 36.4
------ ------ ------ ------ ------ ------
Total cost of
services and
operating expenses. 80.7 76.7 73.6 91.2 82.6 96.9
------ ------ ------ ------ ------ ------
Pre-tax income.......... 19.3 23.3 26.4 8.8 17.4 3.1
Income tax expense...... 7.8 9.4 10.6 3.5 7.0 1.3
------ ------ ------ ------ ------ ------
Net income.......... 11.5% 13.9% 15.8% 5.3% 10.4% 1.8%
====== ====== ====== ====== ====== ======
</TABLE>
29
<PAGE>
The Company expects to experience significant fluctuations in future
quarterly operating results that may be caused by many factors, including the
following: the timing of introductions or enhancements of online brokerage
services and products by the Company or its competitors; market acceptance of
online brokerage services and products; the pace of development of the market
for online commerce; changes in trading volume on the securities markets;
trends in the securities markets; changes in pricing policies by the Company
or its competitors; changes in strategy; the success of or costs associated
with acquisitions, joint ventures or other strategy relationships; changes in
key personnel; seasonal trends; the extent of international expansion; the mix
of international and domestic sales; changes in the level of operating
expenses to support projected growth; and general economic conditions. In
addition, the Company intends, in the near term, to increase significantly its
personnel, particularly its customer service personnel. The timing of such
expansion and the rate at which new customer service personnel and additional
equipment become productive could also cause material fluctuations in the
Company's quarterly operating results.
Due to the foregoing factors, quarterly revenues and operating results are
difficult to forecast, and the Company believes that period-to-period
comparisons of its operating results will not necessarily be meaningful and
should not be relied upon as any indication of future performance. It is
likely that the Company's future quarterly operating results from time to time
will not meet the expectations of securities analysts or investors, which may
have an adverse effect on the market price of the Company's Common Stock. In
connection with its planned transition to self-clearing operations, in fiscal
1995, the Company began hiring and training associates to perform clearing
functions that are currently performed by Herzog. As a consequence, the
Company has incurred not only significant non-recurring costs associated with
the hiring and training of its associates, but also ongoing personnel and
other costs associated with the transition to self-clearing operations and the
integration of its own systems, while still incurring expenses to Herzog for
clearing operations.
As a result of the costs associated with the conversion and the Company's
recent systems failures, the Company may incur a loss in the quarter ending
June 30, 1996. See "Risk Factors--Significant Fluctuations in Quarterly
Operating Results; Potential Loss in Quarter Ending June 30, 1996."
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its activities through cash
provided by operations, the private placement of Common Stock and Preferred
Stock and, to a lesser extent, equipment financing. In September 1995, the
Company privately placed $12.3 million of convertible Preferred Stock, of
which $3.8 million was used to repurchase and retire outstanding Common Stock
from existing stockholders. In April 1996, the Company sold an additional
20,336 shares of convertible Preferred Stock for $2.8 million. In June 1996,
the Company sold an additional 11,180 shares of convertible Preferred Stock to
SOFTBANK for $9.0 million.
In February 1996, the Company obtained $2.5 million in equipment financing
from Merrill Lynch Business Financial Services, Inc. to finance the purchase
of equipment and facilities at the Company's new corporate headquarters in
Palo Alto, California. In May 1996, the Company obtained $100 million in
committed lines of financing, to be collateralized by customer securities,
which will be available upon completion of its conversion to self-clearing
operations. In addition, the Company has entered into numerous agreements with
other broker-dealers to provide financing for the Company's stock loan
activities.
As part of the Company's planned conversion to self-clearing operations, the
Company is negotiating an agreement among E*TRADE Securities, Herzog and a
bank whereby Herzog will agree to guarantee the Company's settlement
obligations to the bank so that the Company may settle those transactions
which clear on the Company's first full day of self-clearing operations. The
proposed agreement provides for a one-day loan which will be repaid in full on
the second full day of self-clearing operations when the Company receives all
its customers' securities and cash from the corresponding customer accounts at
Herzog.
The Company currently anticipates that its available cash resources,
combined with the net proceeds to it of this offering, will be sufficient to
meet its presently anticipated working capital and capital expenditure
30
<PAGE>
requirements for at least the next 12 months. However, the Company may need to
raise additional funds in order to support more rapid expansion, develop new
or enhanced services and products, respond to competitive pressures, acquire
complementary businesses or technologies or respond to unanticipated
requirements. If additional funds are raised through the issuance of equity
securities, the percentage ownership of the stockholders of the Company will
be reduced, stockholders may experience additional dilution in net book value
per share or such equity securities may have rights, preferences or privileges
senior to those of the holders of the Company's Common Stock. There can be no
assurance that additional financing will be available when needed on terms
favorable to the Company, if at all. If adequate funds are not available on
acceptable terms, the Company may be unable to develop or enhance its services
and products, take advantage of future opportunities or respond to competitive
pressures or unanticipated requirements, which could have a material adverse
effect on the Company's business, financial condition and operating results.
Cash provided by operating activities was $598,000 for the six months ended
March 31, 1996 compared to $1.4 million for the comparable period in 1995. The
cash provided by operating activities of both periods was the result of net
income, which for the six months ended March 31, 1996 was reduced by an
increase in other assets. Cash provided by (used in) operating activities was
$(112,000), $891,000 and $3.4 million in fiscal 1993, 1994 and 1995
respectively. The increases were due to higher net income during the periods.
Cash used in investing activities was $1.7 million for the six months ended
March 31, 1996 compared to $914,000 for the comparable period in 1995 and was
$114,000, $124,000 and $1.7 million in fiscal 1993, 1994 and 1995,
respectively. The increases were primarily a result of additional purchases of
office facilities, equipment and leasehold improvements.
Cash provided by financing activities was $148,000 for the six months ended
March 31, 1996 compared to cash used in financing activities for the
comparable period in 1995. The Company sold stock and received the proceeds
from exercised warrants in the six months ended March 31, 1996 and retired
long-term notes payable in the comparable period in 1995. Cash provided by
(used in) financing activities was $215,000, ($111,000) and $7.3 million in
fiscal 1993, 1994 and 1995 respectively. The increases and decreases in each
fiscal period are the net result of the issuance and retirement of Company
securities, respectively.
RECENTLY ISSUED ACCOUNTING STANDARDS
The Company is required to adopt SFAS No. 123, Accounting for Stock-Based
Compensation, in fiscal 1997. SFAS No. 123 establishes accounting and
disclosure requirements using a fair value based method of accounting for
stock based employee compensation plans. Under SFAS No. 123, the Company may
either adopt the new fair value based accounting method or continue the
intrinsic value based method and provide pro forma disclosures of net income
and earnings per share as if the accounting provisions of SFAS No. 123 had
been adopted. The Company plans to adopt only the disclosure requirements of
SFAS No. 123; therefore, such adoption will have no effect on the Company's
consolidated net income or cash flows.
The Company is also required to adopt SFAS No. 121, Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
in fiscal 1997. SFAS No. 121 establishes the accounting and reporting
requirements for recognizing and measuring impairment of long-lived assets to
be either held and used or held for disposal. The Company does not expect SFAS
No. 121 to have a material effect on its consolidated financial statements.
31
<PAGE>
BUSINESS
The following discussion of the Company's business contains forward-looking
statements which involve risks and uncertainties. The Company's actual results
may differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including, but not limited to,
those set forth under "Risk Factors" and elsewhere in this Prospectus.
OVERVIEW
E*TRADE Group, Inc. ("E*TRADE or the "Company") is a leading provider of
cost-effective, secure electronic brokerage services. The Company offers
automated order placement, portfolio tracking and related market information
news and other information services 24 hours a day, seven days a week by means
of the CompuServe, America Online, direct modem access, touch-tone telephone
and, to a lesser extent, interactive television. E*TRADE's proprietary
transaction processing technology enables it to offer highly automated, easy-
to-use and cost-effective services that empower its customers to take control
of their own financial transactions. Further, the Company's technology can be
adapted to provide information and transaction processing services related to
other aspects of electronic commerce.
E*TRADE provides its customers the ability to place orders for stock trades
and other investment transactions directly, at a lower, more predictable
transaction cost than traditional full-commission or discount brokerage firms.
The Company's services feature an easy-to-use graphical user interface, the
ability to create "personalized environments" reflecting users' individual
needs and interests, accessibility from virtually anywhere at any time via
multiple gateways, unbundled services for cost-effective pricing and highly
secure services through the use of encryption and authentication technology.
The Company had over 65,000 accounts as of May 31, 1996, with an average
monthly growth in accounts of 11% since January 1, 1996, and had an average
daily trading volume of approximately 9,300 in May 1996, from 4,200 in
December 1995, representing an average monthly growth of 17% over that period.
The Company's Internet access is its most rapidly growing gateway, with
trading volume increasing from approximately 1,300 Internet trades for the
first week the Company offered trading on the Internet (the week ended
February 23, 1996) to over 11,000 for the week ended May 24, 1996.
E*TRADE's objective is to leverage its leading position as a provider of
electronic brokerage and information services through automation, innovation,
technology, service and value. The Company's strategy to accomplish this
objective includes continued aggressive marketing of its electronic brokerage
services to further establish E*TRADE brand name recognition and increase its
share of the electronic brokerage market, continual broadening of the
functionality of its services and enhancement of its customers' online
experience, leveraging the benefits of its highly automated services to
enhance their cost-effectiveness, establishment of additional strategic
relationships with online service, software and information service providers,
and expansion into international markets and new aspects of electronic
commerce.
BACKGROUND
Advancements in telecommunications and information technology have
fundamentally altered the way individuals conduct business. For example, the
development of the microprocessor and the personal computer revolutionized the
way individuals use computers by putting inexpensive and powerful capabilities
under their direct control. Consumers have embraced the personal computer and
expressed strong preferences for the convenience and control it provided. In a
similar fashion, consumers also have begun using a variety of other electronic
services such as the automatic teller machine ("ATM") and the facsimile
machine, which consumers now see as valuable tools for expediting and
controlling transactions and eliminating intermediaries.
Just as the microprocessor changed computing, the emergence of the Internet
as a tool for communication and commerce is driving a revolution in the world
of information services and online
32
<PAGE>
transactions. Consumers are rapidly embracing the Internet because it is
simple to access, makes vast amounts of information available and allows
individuals to communicate with people all over the world. With the rapid
penetration of personal computers and modems and the development of easy-to-
use Web browsers, use of the Internet grew to 56 million worldwide users by
the end of 1995 according to International Data Corporation, which estimates
that the number will reach approximately 200 million by the end of 1999.
The Emergence of Electronic Commerce
The Internet and online services have provided organizations and individuals
with innovative ways of conducting business. With the emergence of the
Internet as a globally accessible, fully interactive and individually
addressable communications and computing medium, companies that have
traditionally conducted business in person, through the mail or over the
telephone are increasingly utilizing electronic commerce. Over the last
decade, electronic execution of financial transactions has increased
substantially. Increased use of credit cards, ATMs, electronic funds transfers
and online banking and bill paying has automated, simplified and reduced the
costs of financial transactions for consumers, businesses and financial
institutions. Consumers are increasingly showing strong preferences for
transacting certain types of business--such as paying bills, buying insurance,
booking airline tickets and trading securities--electronically, rather than in
person or over the telephone. These transactions are being streamlined through
online commerce and can now be performed directly by individuals virtually
anywhere at any time. Consumers have accepted and even welcomed self-directed
online transactions because such transactions can be faster, less expensive
and more convenient than transactions conducted through an intermediary.
Development of Online Brokerage Services
In the past, the individual investor could access the financial markets only
through a full-commission broker, who would give investment advice and place
trades. With the deregulation of brokerage commissions in 1975 and the
resulting unbundling of brokerage services, investors began to realize that
they could separate financial advisory services from securities trading. This
brought about the advent of the discount brokerage firm, which provided an
alternative investment approach by completing trades at a reduced cost.
With the emergence of electronic brokerage services, investors are being
given more options to further unbundle the costs associated with the human
interaction typified by full-commission and traditional discount brokerage
firms. By requiring a human being to handle the transaction, most traditional
brokerage firms restrict their customers' access to trading and information to
the availability of the person processing the transaction. In addition,
although full-commission and discount brokerage firms are able to offer
electronic trading services, their continued reliance on personnel, branches
and the associated infrastructure for a major part of their business prevents
them from reducing their cost structure to the lower level achievable through
an all electronic model. Forrester Research, Inc. reports that the number of
online brokerage accounts is expected to grow from 600,000 at year-end 1995 to
1.3 million at year-end 1998.
A shift in demographics and societal norms is fundamentally altering the way
consumers manage their personal financial assets. Increasingly consumers are
taking direct control over their personal financial affairs, not simply
because they are able to, but because they find it more convenient and less
expensive than relying on financial intermediaries. Investors want the
flexibility to invest at times and places that are convenient for them. The
broad availability of financial information online has dramatically narrowed
the gap between the resources available to the individual investor and the
institutional investor. Individual investors have become increasingly
sophisticated and knowledgeable about investing, having experienced greater
access to stock quotes, company financial information, investment advice and
other investment information on the Web or through other online services. As
investors obtain even more access to investment information, the Company
believes they will desire greater control over their financial decisions and
seek alternative ways to invest more conveniently and cost-effectively and
with less interaction with brokers and other financial services professionals.
The Company believes that this trend has created a growing opportunity to
provide online trading services that are easy to access, easy to use, cost-
effective and secure.
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THE E*TRADE SOLUTION
E*TRADE uses its proprietary processing technology to provide consumers with
easy-to-use and cost-effective online securities brokerage services. E*TRADE's
service is accessible through multiple gateways--the Internet, direct modem
access, America Online, CompuServe, touch-tone telephone and, to a lesser
extent, interactive television. The Company offers order placement services 24
hours a day, seven days a week, thereby shifting the financial transactions
paradigm from a business-hours-only, intermediary-based model to one in which
the consumers have ultimate control over where and when they initiate
transactions. The Company's services are highly automated, with most customer
orders being entered, processed and confirmed electronically and without human
intervention. By avoiding the inefficiencies and personnel requirements and
associated costs of non-automated order entry and processing, the Company is
able to provide its services at a lower cost than traditional brokerage firms.
The Company's technology is based on a modular architecture which is scalable
to handle increasing transaction volumes. The Company's first target market
for the application of its proprietary processing technology is the electronic
brokerage industry. However, this technology can be readily adapted to provide
information and transaction processing services related to other aspects of
electronic commerce.
E*TRADE empowers its customers to take control of their own financial
transactions through the following features:
. User-Friendly Web Trading Interface. Through its easy-to-use graphical
trading interface, E*TRADE has made online trading simple, fast and fun.
Consumers accessing E*TRADE for the first time are able to quickly
understand the wide variety of services available and how to access
those services. The barriers to first-time trading online have been
reduced, as new users are just as comfortable trading online as the
technologically savvy, early adopters. The look and feel of the
graphical user interface on the Web is being replicated on other
gateways.
. Personalized Environments. Customers are able to create "personalized
environments," including personalized watch lists and portfolios for
tracking securities. A customer's trading experience is enhanced with
portfolio, account and market information readily available prior to
initiating a trade. The Company plans to enable customers to further
customize their user interfaces by allowing them to select the market
indicators, portfolio views and value-added information services,
including news, charts and market analysis, that are most valuable to
their own trading preferences.
. Anywhere Any Time Access. By maintaining multiple gateways through which
customers may access E*TRADE virtually anywhere at any time, the Company
can increase the number of customers served and trades processed. As
depicted below, customers are able to trade securities through the
Internet, direct modem access, CompuServe, America Online, touch-tone
telephone and, to a lesser extent, interactive television.
(INSERT GRAPHIC #4 HERE)
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. Cost-effective Services. By unbundling the services that many full-
commission brokerage firms include in their high transaction costs, the
Company is able to offer customers just the services that they want at
lower costs. The Company, through its proprietary processing technology,
is able to charge a lower price, yet provide value-added products and
services.
. Secure Operations. The Company believes that account security is one of
the key factors for success in the brokerage industry. By offering
highly secure services through the use of encryption and authentication
technology, the Company has achieved a leadership position in the secure
provision of online brokerage services.
The Company believes that the robust processing technology that it has
developed for the provision of online electronic brokerage services can be
adapted for the provision of additional services within that market segment,
as well as for application to other aspects of electronic commerce.
STRATEGY
The Company's objective is to be a leader in the provision of commercial
transaction processing services through automation, innovation, technology,
service and value. The key elements to the Company's strategy to accomplish
this objective are as follows:
. Enhance E*TRADE Brand Awareness. The Company intends to continue to
aggressively market its online brokerage services to further establish
E*TRADE brand name recognition through media reports, both in print and
on television, and through advertisements in mass market publications.
. Increase Electronic Brokerage Market Share. Through aggressive mass
market advertising, the Company intends to increase consumer awareness
and generate new accounts to increase its share of the electronic
brokerage market. The Company's brokerage accounts increased from over
39,000 at December 31, 1995 to over 65,000 at May 31, 1996.
. Continue to Broaden Service Offerings. The Company continually strives
to increase the functionality of its services, as well as to offer new
services that enhance its customers' online experiences. For example,
the Company currently provides portfolio tracking and records
management, market data and access to delayed quotes on the Internet at
no additional price, while real-time quotes can be obtained online for a
small fee. The Company intends to expand its existing services to
include immediate access to breaking news and research reports, stock
charts, company financial information and an automatic deposit program.
The Company also plans to adapt its proprietary processing technology to
provide additional online brokerage services, such as mutual fund
trading, fixed income securities, 401(k) plan administration and stock
option plan management.
. Leverage Benefits of Highly-Automated Operations. The Company's services
are highly automated, with most customer orders being entered, processed
and confirmed electronically without human intervention. By avoiding the
inefficiencies and personnel requirements and associated costs of non-
automated order entry and processing, the Company is able to provide its
services at a lower cost than traditional brokerage firms. The Company
continually seeks ways to automate other aspects of its business, such
as the application process, new account fulfillment and customer service
functions. In addition, the Company is in the process of implementing
self-clearing operations, which it expects will further reduce the cost
of providing its services to customers.
. Develop and Maintain Strategic Relationships. In order to enhance
accessibility of its services and provide new service offerings, the
Company has established strategic relationships with CompuServe and
America Online, whose subscribers are potential consumers for online
brokerage services, as well as certain software and information service
providers. The Company believes that these relationships help build
E*TRADE's brand name and enable the low-cost acquisition of additional
customers. E*TRADE also seeks to develop and maintain alternative
distribution channels through the expansion of its service bureau
business.
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. Leverage E*TRADE Brand and Technology to Enter New Markets. E*TRADE
seeks to capitalize on its brand name recognition by leveraging its
branded proprietary processing technology to provide other individual
and business-to-business clients with electronic services. E*TRADE's
proprietary processing technology, while currently used for the
processing of online brokerage transactions, can be adapted to provide
information and transaction processing services related to other aspects
of electronic commerce.
. Penetrate International Customer Base. The Internet, America Online and
CompuServe permit the Company's customers to access its system without
regard to geographic location. Although E*TRADE currently has no
marketing program directed specifically at consumers outside the United
States, it already has over 400 accounts for customers with addresses in
46 foreign countries and plans to increase its marketing efforts to
attract more international customers. The Company plans to create
"localized" user interfaces, with local languages and specialized
services. The Company has been discussing possible alliances with local
institutions such as brokers and banks to make portfolio management, the
purchase and sales process and the transfer of funds easier for foreign
investors and for foreign securities, and to ensure the Company is in
compliance with local laws and regulations.
The Company's strategy involves substantial risk. There can be no assurance
that the Company will be successful in implementing its strategy or that its
strategy, even if implemented, will lead to successful achievement of the
Company's objectives. If the Company is unable to implement its strategy
effectively, the Company's business, financial condition and operating results
would be materially adversely affected.
BROKERAGE AND INFORMATION SERVICES AND PRODUCTS
The Company's consumer services are based on proprietary processing
technology and are designed to meet the needs of individuals who make their
own investment decisions. The Company's services include fully automated stock
and option order processing via personal computer or touch-tone telephone,
online investment portfolio tracking and financial market news and
information. The Company offers its services to consumers through a broad
range of electronic access points, including the Internet, direct modem
access, America Online, CompuServe, touch-tone telephone and, to a lesser
extent, interactive television. All records are maintained on one centralized
system, so that regardless of gateway, customers always have access to current
account information and are able to use different types of access methods.
The Company continually strives to increase the functionality of its
services, as well as to offer new services that enhance its customers' online
trading experiences. The Company's services give consumers increased control
of their personal investments by providing a direct link to the financial
markets through a customized user interface. The Company's existing and
anticipated services and product offerings include those described below:
Stock and Option Trading
Customers can directly place orders to buy and sell Nasdaq and exchange-
listed securities, as well as equity options, through the E*TRADE automated
order processing system. E*TRADE supports a range of order types, including
market, limit (good-till-cancelled or day), stop orders and short sales.
System intelligence automatically checks the parameters of an order, and the
customer's buying power and positions held, communicating any inconsistencies
prior to executing an order. All transaction and portfolio records are
automatically updated to reflect trading activity. Buy and sell orders placed
when the markets are closed are automatically submitted prior to the next
day's opening. Account holders receive electronic notification of order
executions, printed trade confirmations and detailed monthly statements. The
Company intends to implement a "frequent trader" program in which high-volume
customers are given credit for a number of free trades or free access to
services that are ordinarily priced separately, such as real-time quotes and
market data. In addition, the Company is exploring providing mutual fund
trading capabilities in the future.
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All listed market orders (subject to certain size limitations) are executed
at the National Best Bid/Offer ("NBBO") at the time of receipt by the third
market firm or exchange. Eligible orders are exposed to the marketplace for
possible price improvement, but in no case are orders executed at a price
inferior to the NBBO. Limit orders are executed based on an indicated price
and time priority. All Nasdaq market orders (subject to certain size
limitations) are executed at the Best Bid/Offer (Inside Market) at the time of
receipt by the market-maker.
Market Data
During trading hours, E*TRADE continually receives a direct feed of detailed
quote data, market information and news. Customers can create their own
personal lists of stocks and options for quick access to current pricing
information. E*TRADE provides its customers 20-minute delayed data, including
quotes, major market indices, and most active issues, gainers and losers for
the major exchanges. Users are alerted when there is current news on an
identified stock and when a stock has reached a user-defined price threshhold.
Upon placing an order, the customer is provided with a real-time quote, bid
and ask, at no extra charge. For $30 per month, individual investors can
obtain unlimited real-time quotes and market data on the Company's system. The
Company's Web site provides links to other business and financial Web sites,
including the CNN Financial Network and the SEC's EDGAR database, which
provides access to SEC filings of public companies. The Company intends to
expand its existing services to include immediate access to breaking news,
charts, analysts reports and company financial information.
Portfolio Tracking and Records Management
Customers have online access to a listing of all their portfolio assets held
through E*TRADE, including data on the date of purchase, cost basis, current
price and current market value. The system automatically calculates unrealized
profits and losses for each asset held. Detailed account balance and
transaction information includes cash and money fund balances, buying power,
net market portfolio value, dividends paid, interest earned, deposits and
withdrawals. Brokerage history includes all orders, changes and cancellations.
Tax records include total short-term or long-term gain/loss and commissions
paid. Customers can also create "shadow" portfolios to include any number of
financial instruments a customer is interested in tracking --for example,
portfolio assets held at another firm. These shadow portfolios can include
stocks, options, bonds and mutual funds.
Cash Management Services
The Company provides certain cash management services to its customers. For
example, uninvested funds earn interest in a credit interest program or can be
invested in one of five money market funds. In addition, the Company provides
limited checking services through a commercial bank and is exploring expanding
these services. The Company plans to expand its cash management offerings to
include the ability to transfer funds electronically via the Internet and an
automatic deposit program to allow scheduled periodic transfers of funds into
customers' accounts.
Account Security
The Company uses a combination of proprietary and industry standard security
measures to protect customers' assets. Customers are assigned unique user
identifications and passwords that must be used each time they log on to the
system. The Company relies on encryption and authentication technology,
including public key cryptography technology licensed from RSA, to provide the
security and authentication necessary to effect the secure exchange of
information. Telephone transactions are secured through a personal
identification number (PIN)--the same technology used in ATMs. A second level
of password protection is used prior to order placement.
Access and Delivery of Services
The Company's services are widely accessible through multiple gateways, with
automated order placement available 24 hours a day, seven days a week by
personal computer. In addition, customers can access E*TRADE by touch-tone
telephone and, in a limited number of markets, through interactive television.
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Personal Computer. Customers using personal computers can access the E*TRADE
system through the Internet, America Online, CompuServe or direct modem
access. Accessing E*TRADE through the Web offers the customer platform
independence. The Company's Web site combines a universally accepted graphical
user interface with the trading capabilities experienced investors demand. The
Web-based system also includes direct links to many investment-related
resources on the Web. Alternatively, accessing E*TRADE by dialing directly
through a modem offers an efficient method for connecting to the trading
system independent of either the Internet or a proprietary online service.
Touch-tone Telephone. TELE*MASTER, an interactive voice response system,
provides a convenient way for customers to access quote information, place
stock and options trades, review account balances and check messages through
any touch-tone telephone.
Interactive Television. GTE MainStreet, an interactive television system
operated by GTE Corporation, is available as a gateway to the Company's
brokerage service. GTE MainStreet has been on the air over certain cable
television franchises on a pilot basis for approximately four years and is now
in three test markets. Revenues and volume of trades through GTE MainStreet
represents a de minimis portion of the Company's business.
E*TRADE PROCESSING TECHNOLOGY
The E*TRADE engine is a proprietary transaction processor that automates
traditionally labor-intensive transactions. Because it was custom-tailored for
electronic marketplace use, the E*TRADE engine provides customers with
efficient service and has the added advantage of being scalable and adaptable
as usage increases and service offerings are expanded. Beyond these features,
the design of the E*TRADE engine and related software allows for rapid
expansion of network and computing capacity without interrupting service or
requiring replacement of existing hardware or software. No assurance can be
given that the Company can successfully adapt its proprietary processing
technology to provide information and transaction processing services in other
markets, or that if successful, it will successfully compete in any such new
markets.
(INSERT GRAPHIC #5 HERE)
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The E*TRADE Engine
A wide variety of functions and services have been designed to allow
customers to initiate and monitor brokerage accounts and to execute equity and
option trading. The engine also has been structured so that it could be
adapted for use by other service providers, enabling them to integrate
E*TRADE's transaction processor into their own front-end applications so that
they can create or expand electronic services.
The Company believes that the E*TRADE engine acts as a significant barrier
to entry by competitors. E*TRADE's core technology, which has taken years to
develop, is comprised of three parts: the graphical user interface that the
customer sees; the universal server which connects the customer to the
processor; and the automated processor that executes the transactions.
. Graphical User Interface ("GUI"). E*TRADE's GUI environment is based on
Netscape's Secure Commerce Server and today can run on any Netscape-
enabled computer. It is also being adapted to a second Internet browser,
Microsoft Internet Explorer. The GUI is scalable: as volume increases,
additional servers can be added quickly. Security is provided by an
Internet firewall and by requiring two applications of passwords--one
for access to the secured Web site, and a second for every time a trade
is executed.
. The Universal Server. The Universal Server's primary function is to
provide access to an efficient, standard transaction processor from all
gateways. The Server enables communications through multiple platforms
and allows different platforms to communicate with each other. Beyond
these features, the Universal Server also has been designed to be
scalable and portable and runs in an environment that is both fully
redundant and secure.
. The Automated Processor. The core of the E*TRADE engine is the Automated
Processor, designed to provide the highest degree of automation for all
E*TRADE transactions. The Automated Processor was written for the
Digital Equipment Corporation ("DEC") hardware and operating system to
rapidly read data files, process transactions and transmit information
back to the customer. Because of this, the Company is able to process
approximately 90% of its transactions without any manual intervention.
Dual facilities that run independently share load balancing and provide
redundancy, as well as scalability. The proprietary nature of the
system, along with internal security from DEC, and user ID and password
protection at the application level provide security for the Automated
Processor. Internet access to the Processor is through the Company's Web
site, which is protected by a firewall.
The Company maintains an internal development staff to continually enhance
its software and develop new services and transactions. The Company's software
is designed to be versatile and adaptable, so that the E*TRADE engine can be
configured to meet the differing demands of strategic relationships or
individual customer needs.
The Company is in the final stages of establishing a remote back-up data
center in Rancho Cordova, California, which it anticipates will be operational
by July 1996. This facility will replace the current back-up facility. The new
back-up facility will provide a continuously updated remote copy of each CPU
from the Company's headquarters in Palo Alto, California, thereby creating a
fully operational system in the event of a service interruption at the Palo
Alto facility. To provide for system continuity during short outages, the
Company also has equipped its computer facilities with uninterruptible power
supply units as well as back-up generators.
STRATEGIC RELATIONSHIPS AND BUSINESS DEVELOPMENT
The Company recently formed a division, E*TRADE Online Ventures, with the
objective of leveraging its transaction-processing capabilities, access to
online consumers and brand name recognition into growth
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and diversification opportunities. E*TRADE Online Ventures continues the
Company's focus on strategic alliances and represents a new emphasis on
acquisitions and internal development of new businesses. These efforts are
designed to expand the Company's core business, offer new products and
services to its online customers and diversify its customer base and revenue
stream by providing transaction-processing services in areas outside its core
business.
Core Business Expansion
With respect to expanding the Company's core business, E*TRADE Online
Ventures has secured or is actively pursuing alliances with (i) Internet
access and service providers, (ii) Internet software providers, (iii)
providers of home and online banking services, (iv) financial advisors and
money managers, (v) electronic commerce and currency companies and (vi) other
companies either requiring an efficient operation or wanting to offer new
services to their established customer bases. Although the focus with these
alliances is on utilizing the Company's brand name, private branding
opportunities are considered on occasion. The Company intends that these
alliances will increase its core customer base, trading volume and operational
efficiency and will further enhance its brand name recognition.
To date, the Company has concentrated principally on securing alliances with
online service providers. While a majority of the Company's customers access
its services directly through the Internet, direct modem access or
TELE*MASTER, many go through online service providers such as CompuServe and
America Online. Strategic relationships with such service providers allow the
Company to access a greater number of potential customers and allow the online
service providers to offer their subscribers a broader range of service
options.
.[LOGO America Online. America Online and the Company have had a
APPEARS business relationship for over nine years. The Company is
HERE] negotiating a non-exclusive agreement with America Online to
place E*TRADE in America Online's new Investment Area,
currently scheduled for release in mid-summer 1996. E*TRADE
would receive a more prominent presence, accessible through an icon to an
upgraded graphical user interface. E*TRADE's current non-graphical, ASCII
interface through the America Online service can now be accessed only
through a key word search. There can be no assurance that the Company will
reach agreement with America Online on terms favorable to the Company, or
at all, or that, absent a formal written agreement with America Online,
the Company's relationship with America Online will continue on the same
basis as it has in the past, or at all.
.[LOGO CompuServe. CompuServe and the Company have had a non-
APPEARS exclusive contractual relationship for over ten years.
HERE] Initially, CompuServe served as an access point for the
Company's service bureau business. The Company's current
agreement with CompuServe permits the customers of
CompuServe to open brokerage accounts with E*TRADE and access those
accounts through CompuServe and via TELE*MASTER. The economics of this
relationship were recently restructured in a three-year contract to
provide for the Company to pay CompuServe a fee for these trades. The
Company has also entered into a three-year network agreement with
CompuServe Network Services for the provision of network access for the
Company's customers that wish to access E*TRADE using direct dial-up
software.
.[LOGO GTE. The Company entered into an agreement with GTE
APPEARS Corporation ("GTE") in 1989 to develop an online interactive
HERE] television brokerage service that would be made available
through GTE MainStreet, an interactive television system
operated by GTE Corporation over certain cable television
franchises. GTE MainStreet has been on the air on a pilot basis for
approximately four years and is now in three test markets. Revenues and
volume of trades through GTE MainStreet represent a de minimis portion of
the Company's business.
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.[LOGO Intuit. The Company has signed a letter of intent for a
APPEARS strategic relationship with Quicken Investment Services, Inc.,
HERE] a subsidiary of Intuit, Inc. ("Intuit"), pursuant to which the
services of Intuit would permit Intuit users to download
information from E*TRADE to the Intuit software resident on an
Intuit user's personal computer. In addition, it is intended that these
same users will be able to link to E*TRADE for the purpose of entering and
executing trades via their E*TRADE accounts. There can be no assurance
that the Company will reach agreement with Intuit on terms favorable to
the Company, or at all.
.[LOGO Data Broadcasting Corporation. Data Broadcasting Corporation
APPEARS ("DBC"), a provider of financial and sports information to
HERE] individual investors, and the Company have entered into an
agreement whereby DBC will provide direct access to E*TRADE's
services from their own Internet Web site and that of the Brand
Labeled Quote Sites they provide to others.
New Products and Services
E*TRADE Online Ventures is also pursuing opportunities to increase the
number of products and services offered to its customers. These include: (i)
other investment products, including mutual funds, additional fixed income
securities and foreign securities; (ii) electronic cash; (iii) preferred
vendor relationships; and (iv) insurance, health care, travel and
entertainment products. In addition, E*TRADE Online Ventures is exploring the
possibility of establishing investment banking operations focused on
underwriting equity securities offerings over the Internet and offering
private equity securities to its qualified customers.
Significant relationships formed to date are as follows:
.[LOGO CyberCash. The Company has signed a memorandum of understanding
APPEARS for a strategic relationship with CyberCash, Inc. ("CyberCash")
HERE] pursuant to which E*TRADE would use the software and services
of CyberCash to permit E*TRADE customers to perform direct
deposits into their E*TRADE accounts via the Internet from
accounts at third-party institutions. There can be no assurance that the
Company will reach agreement with CyberCash on terms favorable to the
Company, or at all.
.[LOGO Quote.com. Quote.com and the Company signed a letter of intent
APPEARS in June 1996 to provide value-added information to E*TRADE
HERE] Internet customers. Quote.com will provide current news and
charting capabilities that are directly linked to E*TRADE
customers' stock watch and quote lookup features. News provided
includes Reuters News, PR Newswire and BusinessWire. Charts provided
include intra-day, daily and weekly price graphs. These services will be
integrated into E*TRADE's Web site and will be free to E*TRADE customers.
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Alternative Distribution Channels Through Service Bureau Business
The Company began as an online brokerage transaction service bureau and
seeks to develop and maintain alternative distribution channels through the
expansion of its service bureau business. The Company's service bureau
business permits third-party institutions' customers to place brokerage
trades, access their accounts online and access other online resources using
the E*TRADE system. The Company has developed relationships with financial
institutions, such as Quick & Reilly and Bank of America, wanting to offer
online services to their customers. The Company believes that these financial
institutions are attracted in part by its ability to provide its services
"transparently" using its proprietary processing technology, giving the
financial institution the ability to offer its customers a branded brokerage
service. The advantage of this type of relationship is that the Company is
able to provide its services to a greater number of customers at little added
cost, eliminating the necessity to deal directly with customer service and
other administrative responsibilities of providing direct service.
A significant number of the Company's strategic relationships have only
recently been entered into. There can be no assurance that any such
relationships will be maintained, that if such relationships are maintained,
they will be successful or profitable, or that the Company will develop any
new such relationships.
The information services and communications industries are characterized by
rapid technological change, changes in customer requirements, frequent new
service and product introductions and enhancements, and emerging industry
standards. The introduction of services or products embodying new technologies
and the emergence of new industry standards and practices can render existing
services or products obsolete and unmarketable. The Company's future success
will depend, in part, on its ability to develop leading technologies, enhance
its existing services and products, develop new services and products that
address the increasingly sophisticated and varied needs of its prospective
customers, and respond to technological advances and emerging industry
standards and practices on a timely and cost-effective basis. The development
of new services or products or enhanced versions of existing services and
products entails significant technical risks. There can be no assurance that
the Company will be successful in effectively using new technologies, adapting
its services and products to emerging industry standards, developing,
introducing and marketing service and product enhancements, or new services
and products, including those identified above, or that it will not experience
difficulties that could delay or prevent the successful development,
introduction or marketing of these services and products, or that its new
service enhancements will adequately meet the requirements of the marketplace
and achieve market acceptance. If the Company is unable, for technical or
other reasons, to develop and introduce new services and products or
enhancements of existing services and products in a timely manner in response
to changing market conditions or customer requirements, or if new services and
products do not achieve market acceptance, the Company's business, financial
condition and operating results will be materially adversely affected.
Substantially all of the Company's revenues in recent years have been from
electronic brokerage services, and the Company expects its electronic
brokerage services to continue to account for substantially all of its
revenues for the foreseeable future. E*TRADE, like other securities firms, is
directly affected by national and international economic and political
conditions, broad trends in business and finance, and substantial fluctuations
in volume and price levels of securities and futures transactions. In October
1987 and in October 1989, the stock market suffered two of the largest
declines in history. As a result of these declines, many firms in the industry
suffered financial losses and the level of individual investor trading
activity decreased. Reduced trading volume and prices generally result in
reduced transaction revenues. In periods of low volume, the Company's
profitability would be adversely affected because certain expenses, consisting
primarily of salaries and benefits, computer hardware and software costs, and
occupancy expenses, remain relatively fixed. Such a severe market fluctuation
in the future could have a material adverse effect on the Company's business,
financial condition and operating results. Certain of the Company's
competitors with more diverse product and service offerings may be better
positioned to withstand such a downturn in the securities industry. See "--
Competition."
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MARKETING
The Company's marketing strategy is based on an integrated marketing model
which employs a mix of several different media of communication. The goals of
the Company's marketing programs are to increase E*TRADE's brand name
recognition and to attract new customers. The Company pursues these goals
through direct-response advertising, marketing through its own Web site, an
aggressive public relations program and co-marketing. All communications by
E*TRADE Securities with the public are regulated by the NASD.
Direct Response Advertising; Web Site Marketing
The Company's advertising focuses on marketing online trading as a better
way of initiating transactions, building awareness of the E*TRADE brand, and
selling the benefits of E*TRADE services. Advertising is increasingly
directing interested prospects to the Company's Web site for additional
information, as opposed to generating primarily telephone-based inquiries. The
Company's aggressive advertising program has generated high growth rates in
new accounts. Print advertisements are placed in a broad range of business,
technology and financial publications, including the Wall Street Journal,
Forbes ASAP, Barron's, SmartMoney and Wired. E*TRADE also advertises regularly
on CNBC and on national business radio networks.
At the Web site, interested prospects can get detailed information on the
Company's services, use an interactive demonstration system, request
additional information, and/or complete an account application online. Since
May 1, 1996, a majority of the Company's new accounts have been generated
through the Internet. The increasing Internet focus is resulting in decreased
customer acquisition costs. The Company intends to capitalize on the
popularity of its Web site by selling advertising to third parties who are
interested in target marketing. The Company regards this revenue as additional
income, raised without a significant increase in overall costs and with no
increase in capital costs.
Public Relations Program
The Company aggressively pursues public relations opportunities to build
brand awareness. This campaign has resulted in appearances on The Today Show,
CNN and CNBC, in addition to profiles in Business Week, SmartMoney, Time
magazine, the Financial Times, Investor's Business Daily and the Wall Street
Journal. There are links to E*TRADE's home page from more than 800 sites on
the Web, which the Company believes is a significant factor in increasing
brand awareness and generating leads as consumers look to the Internet as a
key source of information and commercial activity. The Company also actively
seeks speaking opportunities at industry conferences and events.
Co-marketing/Promotion
The Company has established a number of significant co-marketing
relationships to promote its products. These include participation in:
Netscape's inbox promotional offer for the Netscape Navigator browser
available through retail outlets; Apple Computer's in-store interactive
demonstrations; and links with a number of Web-based information providers.
The Company intends to enter into additional co-marketing relationships as a
component of its marketing strategy.
A program under development by E*TRADE is a virtual shopping mall of
software, services and products that will help individuals make informed
investment decisions. Through E*TRADE's Web site, customers will be able to
purchase or subscribe to products available from this mall at special discount
prices. Goods and services offered will be reviewed and selected for inclusion
by E*TRADE based on overall "best value" within its product category.
Companies selected for inclusion in return will promote E*TRADE's service
through their Web sites and/or marketing materials.
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International Customer Base
The Company's customers are able to trade securities online from anywhere in
the world. The Internet, America Online and CompuServe permit the Company's
customers to access its system without regard to geographic location. Although
E*TRADE currently has no marketing program directed specifically at consumers
outside the United States, it has over 400 accounts for customers with
addresses in foreign 46 countries who open accounts directly with the Company.
The Company expects its international customer base to grow with the continued
proliferation of the Internet and increasing free trade, although there can be
no assurance in that regard.
A component of the Company's strategy is its planned aggressive increase in
marketing efforts to attract more international customers. The Company plans
to create "localized" user interfaces, with local languages and specialized
services. The Company has been discussing possible alliances with local
institutions such as brokers and banks to make portfolio management, the
purchase and sales process and the transfer of funds easier for foreign
investors and for foreign securities, and to ensure the Company is in
compliance with local laws and regulations. In addition, the Company
recognizes the revenue potential of providing online trading services for the
purchase of foreign securities and plans to pursue this market in the future.
To date, the Company has limited experience in providing brokerage services
internationally. There can be no assurance that the Company will be able to
successfully market its services and products in international markets. In
addition, there are certain risks inherent in doing business in international
markets, particularly in the heavily regulated brokerage industry, such as
unexpected changes in regulatory requirements, tariffs and other trade
barriers, difficulties in staffing and managing foreign operations, political
instability, fluctuations in currency exchange rates, reduced protection for
intellectual property rights in some countries, seasonal reductions in
business activity during the summer months in Europe and certain other parts
of the world, and potentially adverse tax consequences, any of which could
adversely impact the success of the Company's international operations. There
can be no assurance that one or more of such factors will not have a material
adverse effect on the Company's future international operations, if any, and,
consequently, on the Company's business, financial condition and operating
results.
CUSTOMER SERVICE
The Company believes that providing effective customer is critical to its
success. The Company's customer service organization helps customers get
online, handles product and service inquiries and addresses all brokerage and
technical questions. The customer service team also makes welcome and check-in
calls to ensure the satisfaction of its customers. The Company's customers
have access to a toll-free number from 9:00 a.m. to 8:00 p.m. Eastern time,
Monday through Friday. The Company's current policy specifies that customer
service associates have or obtain a securities broker's license.
The Company believes that it can further enhance the quality of its customer
service by leveraging currently available technology. For example, current
interactive voice response ("IVR") technology has the capability of allowing
customers to request forms from their touch-tone telephones and immediately
receive them via fax. The Company believes that these "faxes-on-demand" will
eliminate about 5% of the Company's current call volume. Also in development
is an electronic trouble ticket, allowing customers to answer via the Internet
or touch-tone telephone, most of their own system-related access questions. By
July 1996, much of the help text currently available on the Company's Internet
site will be available on the IVR system, accessible by those customers whose
access is telephonic rather than personal-computer based. The Company believes
that broadening the access of the most frequently asked questions regarding
terms, procedures and policies will result in a substantial reduction in the
number of customer service calls received by the Company.
The Company's customer service capacity is severely strained. During April
and May 1996, the Company's customer service department serviced approximately
80% of its inquiries through telephone calls and approximately 20% through e-
mail. This department handles only non-revenue calls from customers
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needing extra assistance and generally is not involved in order processing.
The Company currently falls far short of its target response time for customer
service calls, with callers frequently waiting over 20 minutes during peak
times. Continued sub-optimal customer service could damage the E*TRADE name
and lead some customers to transfer their business to other, less congested
online brokers, limit their trading activity, or choose to refrain from
electronic trading entirely. The Company is seeking to address the problem
through significant investment in technology and personnel. However, such
attempts have proven ineffective, as growth in inquiries has, over certain
periods, exceeded the growth in the Company's capacity to handle such volumes.
There can be no assurance that the Company will be able to address its
customer service capacity constraints, and the failure to do so could have a
material adverse effect on the Company's business, financial condition and
operating results.
OPERATIONS
Clearing
The Company is in the process of implementing self-clearing operations and
expects to complete the transition in July 1996. Clearing operations include
the confirmation, receipt, execution, settlement and delivery functions
involved in securities transactions. Performing its own clearing operations
will allow E*TRADE Securities to retain free credit balances and securities
for use in margin lending activities. Prior to the completion of its
conversion to self-clearing operations, the Company will continue to utilize
Herzog to process its clearing operations. See "Risk Factors--Risks Associated
with Planned Conversion to Self-clearing Operations."
Upon the implementation of self-clearing operations, customers' stock
certificates typically will be held by the Company in nominee name on deposit
at one or more of the recognized securities industry depository trust
companies, to facilitate ready transferability. The Company will collect
dividends and interest on securities held in nominee name and make the
appropriate credits to the customer's account. The Company will also
facilitate exercise of subscription rights on securities held for customers.
The Company will arrange for the transmittal of proxy and tender offer
materials and company reports to customers. E*TRADE Securities' operations
department intends to rely upon certificate counts and microfilming procedures
as deterrents to theft of securities and, as required by the NASD and certain
other regulatory authorities, to carry fidelity bonds covering loss or theft.
Lending and Borrowing Activities
Margin Lending. After the completion of its conversion to self-clearing
operations, the Company will be permitted to make loans to customers
collateralized by customer securities. Margin lending by the Company will be
subject to the margin rules of the Board of Governors of the Federal Reserve
System, NASD margin requirements and the Company's internal policies will be
more stringent than the Federal Reserve and NASD requirements. In permitting
customers to purchase on margin, the Company will take the risk of a market
decline that would reduce the value of its collateral below the customers'
indebtedness before the collateral can be sold. Under applicable NASD rules,
in the event of a decline in the market value of the securities in a margin
account, the Company will be obligated to require the customer to deposit
additional securities or cash in the account so that at all times the
customer's equity in the account is at least 25% of the value of the
securities in the account. E*TRADE's internal requirement, however, will be
that the customer's equity not fall below 30%. If it does, the customer will
be required to increase it to 40%. Margin lending to customers constitutes the
major portion of the basis on which net capital requirements of the Company
will be determined under the SEC's Net Capital Rule. As these activities
expand, the Company's net capital requirements will increase.
Securities Lending and Borrowing. Upon its conversion to self-clearing
operations, the Company will borrow securities both to cover short sales and
to complete customer transactions in the event a customer fails to deliver
securities for the required settlement date. The Company will collateralize
such borrowings by
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depositing cash or securities with the lender and receive a rebate (in the
case of cash collateral) or pay a fee calculated to yield a negotiated rate of
return. When lending securities, the Company will receive cash or securities
and generally pay a rebate (in the case of cash collateral) to the other party
in the transaction. It is anticipated that securities lending and borrowing
transactions will be executed pursuant to written agreements with
counterparties which require that the securities borrowed be "marked to
market" on a daily basis and that excess collateral be refunded or that
additional collateral be furnished in the event of changes in the market value
of the securities. The securities usually will be "marked to market" on a
daily basis through the facilities of various clearing houses.
Order Processing
All listed market orders (subject to certain size limitations based on the
size in the primary market) are executed at the National Best Bid/Offer
("NBBO"), at the time of receipt by the third market firm or exchange.
Eligible orders are exposed to the marketplace for possible price improvement,
but in no case are orders executed at a price inferior to the NBBO. Limit
orders are executed based on an indicated price and time priority. All Nasdaq
market orders (subject to certain size limitations based on the trading
characteristics of the particular security) are executed at the Best Bid/Offer
(Inside Market), at the time of receipt by the market-maker. Eligible orders
are subject to possible price improvement in the marketplace.
The rapid growth in the use of the Company's services has strained its
ability to adequately expand technologically. The haste required in bringing
in new equipment and applications may cause the process of testing and
validation of hardware and software to become less rigorous, causing possible
production problems. In addition, the Company relies on a number of third
parties to process its transactions, including online access providers, back
office processing organizations, services providers and market makers, all of
which need to expand their operations accordingly. Any backlog caused by a
third party's inability to expand at the rate necessary to meet the Company's
needs could have a material adverse effect on the Company's business,
financial condition and operating results. An additional strain that will be
placed on the Company as a result of rapid growth will be its ability to
quickly integrate qualified personnel required to handle certain transactions
that are reviewed by a licensed broker before the order is processed. As
trading volume increases, the Company may have difficulty hiring and training
qualified personnel at the necessary pace, and the shortage of such personnel
could cause a backlog in the processing of trades requiring review, exposing
the Company not only to unsatisfied customers, but to liability for
transactions that were ordered, but not executed on a timely basis.
COMPETITION
The market for electronic brokerage services, particularly over the
Internet, is new, rapidly evolving and intensely competitive. The Company
expects competition to continue and intensify in the future. The Company
encounters direct competition from discount brokerage firms providing either
touch-tone telephone or online brokerage services, or both. Discount brokerage
firms generally effect transactions for their customers on an "execution only"
basis without offering other services such as portfolio valuation, investment
recommendations and research. These competitors include such discount
brokerage firms as Charles Schwab, Fidelity Brokerage Services, Inc.,
Waterhouse Securities, Inc., Quick & Reilly, Pacific Brokerage Services, Inc.,
National Discount Brokers, Lombard Institutional Brokerage, Inc. and eBroker,
among others. The Company also encounters competition from established full-
commission brokerage firms such as Dean Witter Reynolds Inc., PaineWebber
Incorporated and Merrill Lynch, among others. The Company also competes with
financial institutions, mutual fund sponsors and other organizations, some of
which provide electronic and online brokerage services.
The principal competitive factors affecting the market for the Company's
electronic commercial transaction processing services are cost, service,
quality, execution, delivery platform capabilities, ease of use, graphical
user interface look and feel, depth and breadth of services, financial
strength and innovativeness. The Company believes that it presently competes
favorably with respect to each of these factors.
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The general financial success within the securities industry over the past
several years has strengthened existing competitors. Management believes that
such success will continue to attract competitors such as banks, software
development companies, insurance companies, providers of online financial and
information services and others as they expand their product lines. Commercial
banks and other financial institutions have become a competitive factor by
offering their customers certain corporate and individual financial services
traditionally provided by securities firms. The current trend toward
consolidation in the commercial banking industry could further increase
competition in all aspects of the Company's business. Commercial banks
generally are expanding their securities activities, as well as their
activities relating to the provision of financial services. While it is not
possible to predict the type and extent of competitive services which
commercial banks and other financial institutions ultimately may offer or
whether administrative or legislative barriers will be repealed or modified,
brokerage firms such as the Company may be adversely affected. Particularly as
financial services and products proliferate, to the extent such competitors
are able to attract and retain customers on the basis of the convenience of
one-stop shopping, the Company's business or its ability to grow could be
adversely affected. In many instances, the Company is competing with such
organizations for the same customers. In addition, competition among financial
services firms also exists for experienced technical and other personnel.
Many of the Company's competitors have longer operating histories and
significantly greater financial, technical, marketing and other resources than
the Company. In addition, many of these competitors also offer a wider range
of services and financial products than the Company, and thus may be able to
respond more quickly to new or changing opportunities, technologies and
customer requirements. Also, many current and potential competitors have
greater name recognition and more extensive customer bases that could be
leveraged, thereby gaining market share to the Company's detriment. Such
competitors may be able to undertake more extensive promotional activities,
offer more attractive terms to customers than the Company, and adopt more
aggressive pricing policies, possibly even sparking a price war in the
electronic brokerage business. Moreover, current and potential competitors
have established or may establish cooperative relationships among themselves
or with third parties to enhance their services and products. For example,
Charles Schwab's One-Source mutual fund service and similar, more complete
services may discourage potential customers from using the Company's brokerage
services. Accordingly, it is possible that new competitors or alliances among
competitors may emerge and rapidly acquire significant market share.
There can be no assurance that the Company will be able to compete
effectively with current or future competitors or that the competitive
pressures faced by the Company will not have a material adverse effect on the
Company's business, financial condition and operating results.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
The Company's success and ability to compete are dependent to a significant
degree on its proprietary technology. The Company relies primarily on
copyright, trade secret and trademark law to protect its technology. The
Company has no patents. Effective trademark protection may not be available
for the Company's trademarks. The Company has registered the trademark
"E*TRADE" in over 35 countries including the United States and has certain
other registered trademarks. In addition, the Company has applied to register
certain other trademarks, but there can be no assurance that the Company will
be able to secure trademark registrations or other significant protection for
these trademarks. It is possible that competitors of the Company or others
will adopt product or service names similar to "E*TRADE," thereby impeding the
Company's ability to build brand identity and possibly leading to customer
confusion. The source code for the Company's proprietary software is protected
both as a trade secret and as a copyrighted work. The Company's policy is to
enter into confidentiality and assignment agreements with its associates,
consultants and vendors and generally to control access to and distribution of
its software, documentation and other proprietary information. Notwithstanding
the precautions taken by the Company, it may be possible for a third party to
copy or otherwise obtain and use the Company's software or other proprietary
information without authorization or to develop similar software
independently. Policing unauthorized use of the Company's
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technology is difficult, particularly because the global nature of the
Internet makes it difficult to control the ultimate destination or security of
software or other data transmitted. The laws of other countries may afford the
Company little or no effective protection of its intellectual property. There
can be no assurance that the steps taken by the Company will prevent
misappropriation of its technology or that agreements entered into for that
purpose will be enforceable. In addition, litigation may be necessary in the
future to enforce the Company's intellectual property rights, to protect the
Company's trade secrets, to determine the validity and scope of the
proprietary rights of others, or to defend against claims of infringement or
invalidity. Such litigation, whether successful or unsuccessful, could result
in substantial costs and diversions of resources, either of which could have a
material adverse effect on the Company's business, financial condition and
operating results.
The Company may, in the future, receive notices of claims of infringement of
other parties' proprietary rights. There can be no assurance that claims for
infringement or invalidity (or claims for indemnification resulting from
infringement claims) will not be asserted or prosecuted against the Company.
Any such claims, with or without merit, could be time consuming to defend,
result in costly litigation, divert management's attention and resources or
require the Company to enter into royalty or licensing agreements. There can
be no assurance that such licenses would be available on reasonable terms, if
at all, and the assertion or prosecution of any such claims could have a
material adverse effect on the Company's business, financial condition and
operating results.
GOVERNMENT REGULATION; NET CAPITAL REQUIREMENTS
Securities Industry
The securities industry in the United States is subject to extensive
regulation under both federal and state laws. The SEC is the federal agency
responsible for the administration of the federal securities laws. E*TRADE
Securities is registered as a broker-dealer with the SEC. Much of the
regulation of broker-dealers has been delegated to self-regulatory
organizations, principally the NASD, which has been designated by the SEC as
E*TRADE Securities' primary regulator. These self-regulatory organizations
adopt rules (subject to approval by the SEC) that govern the industry and
conduct periodic examinations of E*TRADE Securities' operations. Securities
firms are also subject to regulation by state securities administrators in
those states in which they conduct business. E*TRADE Securities is registered
as a broker-dealer in all 50 states, the District of Columbia and Puerto Rico.
Broker-dealers are subject to regulations covering all aspects of the
securities business, including sales methods, trade practices among broker-
dealers, use and safekeeping of customers' funds and securities, capital
structure, record keeping and the conduct of directors, officers and
employees. E*TRADE Securities, as a fully-disclosed correspondent of Herzog,
is subject to many of these laws and rules. Upon the implementation of self-
clearing operations, the Company will be required to comply with many complex
laws and rules to which it previously has not been subject including rules
relating to possession and control of customer funds and securities, margin
lending and execution and settlement of transactions. Additional legislation,
changes in rules promulgated by the SEC, the NASD, the Board of Governors of
the Federal Reserve System, the various stock exchanges, and other self-
regulatory organizations, or changes in the interpretation or enforcement of
existing laws and rules, may directly affect the mode of operation and
profitability of broker-dealers. The SEC, the NASD or other self-regulatory
organizations and state securities commissions may conduct administrative
proceedings which can result in censure, fine, the issuance of cease-and-
desist orders or the suspension or expulsion of a broker-dealer or any of its
officers or employees. The Company's ability to comply with all applicable
laws and rules is dependent in large part upon the establishment and
maintenance of a compliance system reasonably designed to ensure such
compliance, as well as the Company's ability to attract and retain qualified
compliance personnel. The Company's growth has placed considerable strain on
its ability to ensure such compliance and it has experienced recent turnover
in its compliance personnel. The principal purpose of regulation and
discipline of broker-dealers is the protection of customers and the securities
markets, rather
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than protection of creditors and stockholders of broker-dealers. The Company
could in the future be subject to disciplinary or other actions due to claimed
noncompliance which could have a material adverse effect on the Company's
business, financial condition and operating results.
E*TRADE Securities is a member of Securities Investor Protection Corporation
("SIPC"), which provides, in the event of the liquidation of a broker-dealer,
protection for customers' accounts held by E*TRADE Securities of up to
$500,000 for each customer account, subject to a limitation of $100,000 for
claims for cash balances. In addition, E*TRADE Securities has obtained
protection, in excess of SIPC coverage, of $9.5 million for each account.
The Company has initiated an aggressive marketing campaign designed to bring
brand name recognition to E*TRADE. All marketing activities by E*TRADE
Securities are regulated by the NASD, and all such marketing materials are
required by the NASD to be reviewed by E*TRADE Securities' compliance officer
prior to release. The Company has in the past been requested by the NASD to
discontinue the use of certain marketing materials. The NASD can impose
certain penalties, including censure, fine, the issuance of cease-and-desist
orders or the suspension or expulsion of a broker-dealer or any of its
officers or employees for violations of the NASD's advertising regulations.
The Company does not currently solicit orders from its customers or make
investment recommendations. However, if the Company were to engage in such
activities, it would become subject to additional rules and regulations
governing, among other things, the suitability of recommendations to customers
and sales practices.
It is the Company's intent to expand its business in United States
securities to other countries through the Internet and other gateways. For the
six months ended March 31, 1996, the Company received approximately 2.6% of
its commission revenues from customers with addresses in 46 foreign countries.
In order to expand its services globally, E*TRADE Securities must comply with
the regulatory controls of each specific country in which it conducts
business. E*TRADE Securities is regulated in the United States primarily by
the NASD and the SEC. The Company considers that the need to meet the
differing compliance requirements of other national regulatory jurisdictions
will impose a limit to its rate of international expansion.
Net Capital Requirements
As registered broker-dealers and members of the NASD, E*TRADE Securities and
ET Execution Services are subject to the Net Capital Rule. The Net Capital
Rule, which specifies minimum net capital requirements for registered brokers
and dealers, is designed to measure the general financial integrity and
liquidity of a broker-dealer and requires that at least a minimum part of its
assets be kept in relatively liquid form.
E*TRADE Securities has elected to compute net capital under the alternative
method of calculation permitted by the Net Capital Rule. Under the alternative
method, E*TRADE Securities is required to maintain minimum net capital, as
defined in the Net Capital Rule, equal to the greater of $250,000 or 2% of the
amount of its "aggregate debit items" computed in accordance with the Formula
for Determination of Reserve Requirements for Brokers and Dealers. The
"aggregate debit items" are assets that have as their source transactions with
customers, primarily margin loans. Failure to maintain the required net
capital may subject a firm to suspension or revocation of registration by the
SEC and suspension or expulsion by the NASD and other regulatory bodies and
ultimately may require its liquidation. The Net Capital Rule prohibits
payments of dividends, redemption of stock, the prepayment of subordinated
indebtedness, and making any unsecured advance or loan to a stockholder,
employee or affiliate, if aggregate debit items rise beyond 5% of net capital.
The Net Capital Rule also provides that the SEC may restrict for up to 20
business days any withdrawal of equity capital, or unsecured loans or advances
to stockholders, employees or affiliates ("capital withdrawal") if such
capital withdrawal, together with all other net capital withdrawals during a
30-day period, exceeds 30% of excess net capital and the SEC concludes that
the capital withdrawal may be detrimental to the financial integrity of the
broker-dealer. The Net Capital Rule also provides that the total outstanding
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principal amount of a broker-dealer's indebtedness under certain subordination
agreements, the proceeds of which are included in its net capital, may not
exceed 70% of the sum of the outstanding principal amount of all subordinated
indebtedness included in net capital, par or stated value of capital stock,
paid in capital in excess of par, retained earnings and other capital accounts
for a period in excess of 90 days.
Net capital is essentially defined as net worth (assets minus liabilities),
plus qualifying subordinated borrowings and certain discretionary liabilities,
and less certain mandatory deductions that result from excluding assets that
are not readily convertible into cash and from valuing conservatively certain
other assets. Among these deductions are adjustments (called "haircuts") which
reflect the possibility of a decline in the market value of an asset prior to
disposition.
A change in the Net Capital Rule, the imposition of new rules or any
unusually large charge against net capital could limit those operations of the
Company that require the intensive use of capital, such as trading activities
and the financing of customer account balances, and also could restrict the
Company's ability to withdraw capital from its brokerage subsidiaries, which
in turn could limit the Company's ability to pay dividends, repay debt and
redeem or purchase shares of its outstanding stock. A significant operating
loss or any unusually large charge against net capital could adversely affect
the ability of the Company to expand or even maintain its present levels of
business, which could have a material adverse effect on the Company's
business, financial condition and operating results.
As of May 31, 1996, E*TRADE Securities was required to maintain minimum net
capital of $250,000 and had total net capital of approximately $ , or
approximately $ in excess of the minimum amount required. Prior to
May 31, 1996, ET Execution Services undertook to act as guarantor pursuant to
an agreement between the Company and Merrill Lynch Business Financial
Services, Inc. This undertaking caused ET Execution Services to be in
violation of the Net Capital Rule, causing ET Execution Services to fall short
of its minimum net capital requirement. The Company has reported the violation
of ET Execution Services to the SEC and the NASD and is awaiting their
decisions. The Company believes that any penalty imposed by the NASD will not
be substantial, as the subsidiary in violation is nonoperational and no
customer assets are now, nor ever have been, in jeopardy as a result of this
occurrence. However, there can be no assurance that either or both of the SEC
or the NASD will not impose a penalty, including fines, restrictions on
business activities on suspension of trading activities, and the imposition of
any such penalty will not have a material adverse effect on the Company's
business, financial condition and operating results. In addition, there can be
no assurance that a violation of the Net Capital Rule will not occur in the
future.
Electronic Commerce
There can be no assurance that other federal, state or foreign agencies will
not attempt to regulate the Company's online and other electronic activities.
The Company anticipates that it may be required to comply with record keeping,
data processing and other requirements as a result of proposed federal
legislation or otherwise, and the Company may be subject to additional
regulation as the market for online commerce evolves. Because of the growth in
the electronic commerce market, Congress has held hearings on whether to
regulate providers of services and transactions in the electronic commerce
market, and federal or state authorities could enact laws, rules or
regulations affecting the Company's business or operations. The Company also
may be subject to federal, state and foreign money transmitter laws and state
and foreign sales and use tax laws. If enacted or deemed applicable to the
Company, such laws, rules or regulations could be imposed on the Company's
activities or its business, thereby rendering the Company's business or
operations more costly or burdensome, less efficient or impossible, any of
which could have a material adverse effect on the Company's business,
financial condition and operating results.
Due to the increasing popularity of the Internet, it is possible that laws
and regulations may be enacted with respect to the Internet, covering issues
such as user privacy, pricing, content and quality of products and services.
The Telecommunications Act of 1996, which was enacted in January 1996,
prohibits the transmission
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over the Internet of certain types of information and content. The increased
attention focused upon these liability issues as a result of the
Telecommunications Act could adversely affect the growth of Internet and
private network use. In addition, the adoption of other laws or regulations
may reduce the rate of growth of the Internet, which could in turn decrease
the demand for the Company's services, or could otherwise have a material
adverse effect on the Company's business, financial condition and operating
results.
ASSOCIATES
At May 31, 1996, the Company had 245 full-time associates, of whom 64 were
employed by E*TRADE Group, Inc. and 181 were employed by E*TRADE Securities.
The 64 associates in E*TRADE Group, Inc. performed the following functions:
systems (36); marketing (9); strategic relationships (1); finance (5); human
resources and facilities (9); and administration (4). The 181 associates in
E*TRADE Securities performed the following functions: account initiation (36);
customer service (80); clearing operations (42); trading (15); compliance (5);
and administration (3).
The Company's success has been, and will be, dependent to a large degree on
its ability to retain the services of its existing executive officers and to
attract and retain qualified additional senior and middle managers and key
personnel in the future. Competition for such personnel is intense. There can
be no assurance that the Company will be able to attract, assimilate or retain
qualified technical and managerial personnel in the future, and the failure of
the Company to do so would have a material adverse effect on the Company's
business, financial condition and operating results. None of the Company's
associates is subject to collective bargaining agreements or is represented by
a union. The Company considers its relations with its associates to be good.
PROPERTIES
The Company currently leases two spaces for its corporate offices in Palo
Alto, California. The leases comprise an aggregate of 59,000 square feet and
expire in December 2002. The Company is seeking additional space in Palo Alto
for expansion of its corporate offices. The Company believes that it can
obtain adequate space on terms acceptable to the Company. The Company is in
the final stages of establishing a remote back-up data center in Rancho
Cordova, California. The Company anticipates that the Rancho Cordova facility
will be operational in July 1996, replacing a back-up facility currently in
Palo Alto. The Company leases an aggregate 70,000 square feet at this
facility. The lease expires in July 2006. In addition, the Company leases a
small office in New York City under a lease expiring in January 2001.
LEGAL AND ADMINISTRATIVE PROCEEDINGS
The Company is not currently a party to any litigation that it believes
could have a material adverse effect on the Company's business, financial
condition or operating results. However, from time to time the Company has
been threatened with or named as a defendant in lawsuits and administrative
claims. Compliance and trading problems that are reported to the NASD by
dissatisfied customers are investigated by the NASD, and, if pursued by such
customers, may rise to the level of arbitration or disciplinary action. The
Company is also subject to periodic government audits and inspections. See
"Risk Factors--Government Regulation."
The Company maintains insurance in such amounts and with such coverages,
deductibles and policy limits as management believes are reasonable and
prudent. The principal risks that the Company insures against are
comprehensive general liability, commercial property and hardware/software
damage. The Company believes that such insurance coverages are adequate for
the purposes of its business.
51
<PAGE>
MANAGEMENT
DIRECTORS, OFFICERS AND KEY PERSONNEL
The directors, officers and key personnel of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
William A. Porter(3).......... 67 Chairman of the Board
47 President, Chief Executive Officer and
Christos M. Cotsakos(3)....... Director
Wayne H. Heldt................ 56 Vice President, Corporate Investor Relations
and Managing Director, International Affairs
Stephen C. Richards........... 42 Senior Vice President, Finance and
Administration
and Chief Financial Officer
Kathy Levinson................ 41 Senior Vice President; President and Chief
Operating Officer of E*TRADE Securities, Inc.
David M. Traversi............. 37 Senior Vice President; President and Chief
Operating Officer of E*TRADE Online Ventures
David R. Ewing................ 40 Senior Vice President, Systems and Chief
Information Officer
Rebecca L. Patton............. 40 Vice President, Marketing, Communications and
Quality
Rodney E. Paterson............ 47 Vice President, Corporate Development
Robin N. Rosenberg............ 41 Vice President, Human Resources
Richard S. Braddock(2)........ 54 Director
William E. Ford(1)(2)......... 34 Director
George Hayter(1).............. 57 Director
Keith Petty(2)................ Director
Lewis E. Randall(3)........... 54 Director
Lester C. Thurow(1)........... 58 Director
Bernard A. Newcomb............ 52 Director Emeritus
</TABLE>
- --------
(1) Member of the Audit Committee
(2)Member of the Compensation Committee
(3)Member of the Nominating Committee
William A. Porter is the Chairman and Founder of E*TRADE Group, Inc. He
founded the Company in 1982 and served as President until October 1993 and
Chief Executive Officer, Chief Financial Officer, Treasurer and Secretary,
until April 1996. He created E*TRADE Securities, Inc. in 1992. Mr. Porter
received a BA in Mathematics from Adams State College, an MA in Physics from
Kansas State College, and an MBA in Management from the Massachusetts
Institute of Technology, and holds 14 patents in communications and industrial
electronics. In May 1996, Mr. Porter was named Silicon Valley's Emerging
Company Entrepreneur of the Year by the San Jose Business Journal.
Christos M. Cotsakos joined E*TRADE Group, Inc. in March 1996 as President,
Chief Executive Officer and a director. Prior to joining E*TRADE, he served as
Co-Chief Executive Officer, Chief Operating Officer and a director of A.C.
Nielsen, Inc. from March 1995 to January 1996, as President and Chief
Executive Officer of Nielsen International from September 1993 to March 1995,
and as President and Chief Operating Officer of Nielsen Europe, Middle East
and Africa from March 1992 to September 1993. Mr. Cotsakos went to Nielson
after 19 years with the Federal Express Corporation from 1973 to 1992, where
he held a number of senior executive positions both in the United States and
Europe, including vice president and general manager for Europe, Africa and
the Near East from 1988 to March 1992. A decorated Vietnam Veteran, he
received a BA, cum laude, from William Paterson College, an MBA, summa cum
laude, from Pepperdine University and is currently pursuing a PhD in the field
of corporate governance at the Management School, University of London.
52
<PAGE>
Wayne H. Heldt has been Managing Director, International Affairs and Vice
President, Corporate Investor Relations for E*TRADE Group, Inc. since April
1996. Mr. Heldt joined the Company in June 1993 as Vice President of
Operations of E*TRADE Group, Inc., served as President and Chief Operating
Officer from October 1993 to July 1995, and served on the Board of Directors
from November 1993 to April 1996. Mr. Heldt has also served in various
positions with E*TRADE Securities, Inc. and E*TRADE Execution Services, Inc.,
including Chairman of the Board and Chief Executive Officer, from May 1993 to
present. From 1986 to April 1993, Mr. Heldt served as Executive Vice President
and Chief Operating Officer of Reynolds, Kendrick, Stratton, Inc., a brokerage
firm specializing in clearing securities transactions. He also served as
President of PHASE3 Systems, Inc. from January 1983 to December 1984.
Previously, he was a founding Partner of Robertson, Colman & Siebel (now
Robertson, Stephens & Company) where he was Chief Financial Officer and Chief
Operating Officer. Mr. Heldt received a BA in Philosophy from Westminster
College.
Stephen C. Richards joined the Company in April 1996 as Chief Financial
Officer, Treasurer and Senior Vice President, Finance and Administration.
Prior to joining E*TRADE, Mr. Richards served in various positions at Bear
Stearns & Co., Inc., an investment bank, from 1984 to April 1996, including
Managing Director and Chief Financial Officer of Correspondence Clearing.
Prior to 1984, Mr. Richards served as Vice President/Deputy Controller of
Becker Paribas and First Vice President/Controller of Jefferies & Company,
Inc. . He received a BA in Statistics and Economics from the University of
California at Davis and an MBA in Finance from the University of California at
Los Angeles. Mr. Richards is a certified public accountant.
Kathy Levinson has served as Senior Vice President of the Company since May
1996 and President and Chief Operating Officer of E*TRADE Securities, Inc.,
since January 1996. From January 1995 to December 1995, Ms. Levinson worked as
a consultant for the Company. Prior to that, Ms. Levinson worked for Charles
Schwab from 1981 to October 1994, serving as Senior Vice President from 1988
to October 1994. She received a BA in Economics from Stanford University.
David M. Traversi joined E*TRADE Group, Inc., in May 1996 as Senior Vice
President of the Company and President and Chief Operating Officer of E*TRADE
Online Ventures. Before joining E*TRADE, Mr. Traversi served in various
positions at Montgomery Securities, an investment banking firm, from June 1989
to May 1996, most recently as Managing Director, Corporate Finance since
January 1995. He has a BS from California State University at Chico, a JD from
the University of California at Davis and an MBA from the University of
California at Berkeley. He has been admitted to the bar in California and
Alaska.
David R. Ewing has served as Vice President, Systems and Chief Information
Officer of E*TRADE Group, Inc., since September 1995. Previously, Mr. Ewing
served as President of Vital Business Solutions, Inc., a company which
provides information systems consulting services, from September 1994 to
September 1995. Prior to that, Mr. Ewing served as Information Systems
Director for Nellcor Incorporated Healthcare, a manufacturer of critical care
components, from September 1990 to September 1994. Mr. Ewing received a BS in
Computer Science from Southwest Missouri State University.
Rebecca L. Patton has served as Vice President, Marketing of E*TRADE Group,
Inc. since September 1995. From 1988 to September 1995, Ms. Patton served in a
variety of management positions at Apple Computer, including Worldwide
Marketing Manager of the Personal Interactive Electronics Division and Manager
of Apple's PowerBook marketing group. Ms. Patton received a BA in Economics,
summa cum laude, from Duke University and an MBA from Stanford University.
Rodney E. Paterson has been a Vice President of the Company since September
1995, most recently serving as Vice President of Corporate Development.
Previously, Mr. Paterson served as Chief Executive Officer for MAI Financial
Services Ltd., a financial information and software company from January 1992
to July 1995. Prior to that time, he served as Vice President of Marketing for
Shark Information Services, Inc., a trading information service company, from
1984 to December 1991. Mr. Paterson serves as a director of Audicom Corp., a
broadcasting technology company. He received a BA in Science from Open
University.
53
<PAGE>
Robin N. Rosenberg has been the Company's Vice President, Human Resources
since August 1995. Ms. Rosenberg served as President of Career Transitions, a
human resources consulting service, from August 1991 to August 1995. She
served as Vice President of Human Resources for Wells Fargo Bank for nine
years. Ms. Rosenberg received a bachelor's degree in music from Indiana
University.
Richard S. Braddock has been a director of the Company since April 1996.
From June 1994 to September 1995, he served as a partner in Clayton, Dubilier
& Rice, a leveraged buy-out firm. From January 1993 to July 1993, he served as
Chief Executive Officer of Medco Containment. From 1974 to October 1992, Mr.
Braddock served in various capacities with a division of Citibank, including
as President and Chief Executive Officer from 1990 to October 1992 and as a
director from 1985. Mr. Braddock serves on the board of directors of Eastman
Kodak Company, True North Communications, an advertising company, ION Laser
Technology and Excimer Vision Leasing. He received a BA in History from
Dartmouth and an MBA from Harvard University.
William E. Ford has been a director of the Company since September 1995. Mr.
Ford is a managing member of General Atlantic Partners, LLC ("GAP LLC") and
has been with GAP LLC since July 1991. From August 1987 to July 1991, Mr. Ford
was an associate with Morgan Stanley & Co., Incorporated. Mr. Ford is also a
director of Envoy Corporation, a publicly traded health insurance claims
processing company, GT Interactive Software, a publicly traded software
company, Marcam Corporation, a publicly traded software company, SS&C
Technologies, Inc., a publicly traded software company, and several private
software companies in which GAP LLC or one of its affiliates is an investor.
Mr. Ford received a BA in Economics from Amherst College and an MBA from the
Stanford Graduate School of Business.
George Hayter has been a director of the Company since December 1995 and
currently provides consulting services to the Company. Mr. Hayter has served
as a partner of George Hayter Associates, a consulting firm, from 1990 to the
present. From 1987 to October 1990, he served with the London Stock Exchange,
serving in his final position as the Managing Director of Trading Markets
Division. Mr. Hayter serves on the boards of directors of Critchley Group PLC,
a British publicly traded electronics company, Linea Directa Aseguradora SA, a
car insurance company in Spain, Pegasus Group PLC, an accounting software
company listed on the London Stock Exchange, and Active Imaging PLC, a digital
television manufacturer listed on the London Stock Exchange. He received an MA
in Natural Sciences from Queens' College, Cambridge, England.
Keith Petty has been a director of the Company since 1982. Mr. Petty is one
of the founding partners of Petty, Andrews, Tufts & Jackson, a San Francisco-
based law firm now operating under the name Jackson, Tufts, Cole & Black. He
received a BS in Business from the University of Idaho and a JD from Stanford
Law School, and is a certified public accountant. Mr. Petty currently provides
business and legal consulting to start-up companies.
Lewis E. Randall has been a director of the Company since 1993. Since June
1989, Mr. Randall has served as Vice President of Software Systems and
President of Finance for Lone Tree, Inc., a firm which buys and sells car
loans. He received an AB in Philosophy from Harvard College.
Lester C. Thurow has been a director of the Company since April 1996. Mr.
Thurow has been a Professor of Economics at Massachusetts Institute of
Technology ("MIT") since 1990. From 1987 to 1993, he served as Dean of MIT's
Sloan School of Management. He received a BA in economics from Williams
College, an MA from Oxford and a Ph.D. from Harvard.
Bernard A. Newcomb was a co-founder of the Company and has a been a director
emeritus of the Company since 1996.
Messrs. Braddock, Ford, Hayter, Petty, Randall and Thurow are independent
directors. Failure to maintain two independent directors could result in a
delisting of the Company's Common Stock from the Nasdaq National Market.
54
<PAGE>
The members of the Board of Directors of the Company are classified into
three classes, one of which is elected at each Annual Meeting of Stockholders
to hold office for a three-year term and until successors of such class have
been elected and qualified. See "Description of Capital Stock--Certain
Provisions Affecting Stockholders." There are no family relationships among any
of the directors or officers of the Company.
BOARD COMMITTEES
The Board of Directors has created an Audit Committee, a Compensation
Committee and a Nominating Committee of the Board. The Audit Committee is
composed of William E. Ford (Chair), Lester C. Thurow and George Hayter and is
charged with reviewing the Company's annual audit and meeting with the
Company's independent accountants to review the Company's internal controls and
financial management practices. The Compensation Committee, which is composed
of Richard S. Braddock (Chair), William E. Ford and Keith Petty, recommends to
the Board of Directors compensation for the Company's key associates and will
administer the 1996 Stock Incentive Plan, the 1993 Stock Option Plan, the 1983
Employee Incentive Stock Option Plan and the 1996 Stock Purchase Plan. See "--
Associate Benefit Plans." The Nominating Committee, which is comprised of
Christos M. Cotsakos (Chair), William A. Porter and Lewis E. Randall, nominates
for stockholder approval persons to membership on the Board of Directors.
DIRECTOR COMPENSATION
Non-employee directors will receive $5,000 per year, in addition to $800 for
each meeting of the Board attended (and $400 for committee meetings). In
addition, each non-employee director will receive stock options pursuant to the
automatic option grant provisions of the Company's 1996 Stock Incentive Plan.
See "--Associate Benefit Plans." All directors will receive reimbursement of
reasonable out-of-pocket expenses incurred in connection with meetings of the
Board. No director who is an employee of the Company will receive compensation
for services rendered as a director.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company anticipates reincorporating in Delaware in July 1996, in part to
take advantage of certain provisions in Delaware's corporate law relating to
limitations on liability of corporate officers and directors. The Company
believes that the reincorporation into Delaware, the provisions of its Restated
Certificate of Incorporation and Restated Bylaws and the separate
indemnification agreements outlined below are necessary to attract and retain
qualified persons as directors and officers. The Company's Restated Certificate
of Incorporation limits the liability of directors to the maximum extent
permitted by Delaware law. This provision is intended to allow the Company's
directors the benefit of Delaware General Corporation Law which provides that
directors of Delaware corporations may be relieved of monetary liabilities for
breach of their fiduciary duties as directors, except under certain
circumstances, including breach of their duty of loyalty, acts or omissions not
in good faith or involving intentional misconduct or a knowing violation of
law, unlawful payments or dividends or unlawful stock repurchases or
redemptions or any transaction from which the director derived an improper
personal benefit. The Company's Restated Bylaws provide that the Company shall
indemnify its officers and directors to the fullest extent provided by Delaware
law. The Restated Bylaws authorize the use of indemnification agreements and
the Company intends to enter into such agreements with each of its directors
and executive officers.
The Company intends to obtain officer and director liability insurance with
respect to liabilities arising out of certain matters, including matters
arising under the Securities Act.
There is no pending litigation or proceeding involving a director, officer,
associate or other agent of the Company as to which indemnification is being
sought, nor is the Company aware of any threatened litigation that may result
in claims for indemnification by any director, officer, associate or other
agent.
55
<PAGE>
EXECUTIVE COMPENSATION
Summary of Cash and Other Compensation
The following table sets forth the aggregate cash compensation for services
rendered to the Company during the year ended September 30, 1995, awarded to
or earned by the three most highly compensated executive officers of the
Company whose combined salary and bonus were in excess of $100,000 (the "Named
Executive Officers").
SUMMARY COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
ANNUAL COMPENSATION AWARDS
------------------------------------- ------------
SECURITIES
NAME AND SALARY BONUS OTHER ANNUAL UNDERLYING
PRINCIPAL POSITION YEAR ($) ($) COMPENSATION OPTIONS (#)
------------------ ---- -------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
William A. Porter.......... 1995 $171,598(3) $30,678 $23,007(4) 0
Chief Executive Officer
and Chairman of the
Board(2)
Wayne H. Heldt............. 1995 $125,016(6) $21,764 $ 8,050(9) 1,080,000
President(5)
Bernard A. Newcomb(7)...... 1995 $112,709(8) $14,745 $ -- 0
Vice President of Research
and Development
</TABLE>
- --------
(1) In accordance with the rules of the SEC, the compensation described in
this table does not include medical, group life insurance, or other
benefits received by the Named Executive Officers which are available
generally to all salaried employees of the Company, and certain
perquisites and other personal benefits received by the Named Executive
Officers which do not exceed the lesser of $50,000 or 10% of any such
officer's salary and bonus disclosed in this table.
(2)Mr. Porter now serves as Chairman of the Board.
(3)Includes $5,000 paid to Mr. Porter in his capacity as a director.
(4) Includes the value of the lifetime health insurance for Mr. Porter and his
wife of $13,172 and the value of the use of a car equal to $9,835.
(5) Mr. Heldt now serves as Vice President, Corporate Investor Relations and
Managing Director, International Affairs.
(6) Includes $5,000 paid to Mr. Heldt in his capacity as a director.
(7) Mr. Newcomb now serves as a director emeritus of the Company.
(8) Includes $5,000 paid to Mr. Newcomb in his capacity as a director.
(9) Includes the value of the use of a car equal to $8,050.
Stock Option Grants to Named Executive Officers
No stock options were granted during the year ended September 30, 1995 to
the Named Executive Officers.
56
<PAGE>
Option Exercises and Holdings
The following table sets forth certain information with respect to exercises
of stock options during the year ended September 30, 1995 by the Named
Executive Officers and with respect to stock options held by each of the Named
Executive Officers as of September 30, 1995.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF SECURITIES UNDERLYING IN-THE-MONEY OPTIONS/SARS
NUMBER OF UNEXERCISED AT SEPTEMBER 30,
SHARES VALUE OPTIONS/SARS AT SEPTEMBER 30, 1995 1995($)(1)
ACQUIRED ON REALIZED ---------------------------------- -------------------------
NAME EXERCISE(#) ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------------- ------------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
William A. Porter....... -- -- -- -- -- --
Wayne H. Heldt.......... 30,000 618,000 432,000
Bernard A. Newcomb...... -- -- -- -- -- --
</TABLE>
- --------
(1) The amount set forth represents the difference between an assumed initial
public offering price of $ per share and the exercise price of the
option, multiplied by the applicable number of options.
ASSOCIATE BENEFIT PLANS
Stock Incentive Plan and Option Plans
The Company's 1996 Stock Incentive Plan (the "1996 Plan") is intended to
serve as the successor equity incentive program to the Company's existing 1993
Stock Option Plan (the "1993 Plan") which is the successor to the Company's
1983 Employee Incentive Stock Option Plan (the "1983 Plan"). The 1996 Plan
became effective on May 31, 1996 upon adoption by the Board of Directors.
4,000,000 shares of Common Stock have initially been authorized for issuance
under the 1996 Plan.
Outstanding options under the 1993 Plan and the 1983 Plan will be
incorporated into the 1996 Plan upon the date of this offering, and no further
option grants will be made under the 1993 Plan and the 1983 Plan. The
incorporated options will continue to be governed by their existing terms,
unless the Plan Administrator elects to extend one or more features of the
1996 Plan to those options. However, except as otherwise noted below, the
outstanding options under the 1993 Plan and the 1983 Plan contain
substantially the same terms and conditions summarized below for the
Discretionary Option Grant Program in effect under the 1996 Plan.
The 1996 Plan is divided into three separate components: (i) the
Discretionary Option Grant Program under which eligible individuals in the
Company's employ or service (including officers, non-employee Board members
and consultants) may, at the discretion of the Plan Administrator, be granted
options to purchase shares of Common Stock at an exercise price not less than
the fair market value of those shares on the grant date, (ii) the Stock
Issuance Program under which such individuals may, in the Plan Administrator's
discretion, be issued shares of Common Stock directly, through the purchase of
such shares at a price not less than the fair market value of those shares at
the time of issuance or as a bonus tied to the performance of services, and
(iii) the Automatic Option Grant Program under which option grants will
automatically be made at periodic intervals to eligible non-employee Board
members to purchase shares of Common Stock at an exercise price equal to the
fair market value of those shares on the grant date.
The Discretionary Option Grant Program and the Stock Issuance Program will
be administered by the Compensation Committee of the Board. The Compensation
Committee as Plan Administrator will have complete discretion to determine
which eligible individuals are to receive option grants or stock issuances,
the time or times when such option grants or stock issuances are to be made,
the number of shares subject to each such grant or issuance, the status of any
granted option as either an incentive stock option or a non-statutory stock
option under the Federal tax laws, the vesting schedule to be in effect for
the option grant or
57
<PAGE>
stock issuance and the maximum term for which any granted option is to remain
outstanding. The administration of the Automatic Option Grant Program will be
self-executing in accordance with the express provisions of each such program.
The exercise price for the shares of Common Stock subject to option grants
made under the 1996 Plan may be paid in cash or in shares of Common Stock
valued at fair market value on the exercise date. The option may also be
exercised through a same-day sale program without any cash outlay by the
optionee. In addition, the Plan Administrator may provide financial assistance
to one or more optionees in the exercise of their outstanding options by
allowing such individuals to deliver a full-recourse, interest-bearing
promissory note in payment of the exercise price and any associated
withholding taxes incurred in connection with such exercise.
In the event that the Company is acquired by merger or asset sale, each
outstanding option under the Discretionary Option Grant Program which is not
to be assumed by the successor corporation will automatically accelerate in
full, and all unvested shares under the Stock Issuance Program will
immediately vest, except to the extent the Company's repurchase rights with
respect to those shares are to be assigned to the successor corporation. The
Plan Administrator will have the authority under the Discretionary Option
Grant and Stock Issuance Programs to grant options and to structure repurchase
rights so that the shares subject to those options or repurchase rights will
automatically vest in the event the individual's service is terminated,
whether involuntarily or through a resignation for good reason, within twelve
(12) months following (i) a merger or asset sale in which those options are
assumed or those repurchase rights are assigned or (ii) a hostile change in
control of the Company effected by a successful tender offer for more than 50%
of the outstanding voting stock or by proxy contest for the election of Board
members. Options outstanding under the 1993 Plan upon merger or asset sale
will be assumed by the acquiring entity. In the event the acquiring entity
refuses to assume or substitute the options or in the event of a dissolution
or liquidation of the Company, the options expire on a date at least twenty
days after the plan administrator gives written notice to the optionees
specifying the terms and conditions of such termination.
Stock appreciation rights are authorized for issuance under the
Discretionary Option Grant Program which provide the holders with the election
to surrender their outstanding options for an appreciation distribution from
the Company equal to the excess of (i) the fair market value of the vested
shares of Common Stock subject to the surrendered option over (ii) the
aggregate exercise price payable for such shares. Such appreciation
distribution may be made in cash or in shares of Common Stock. There are
currently no outstanding stock appreciation rights under the 1993 Plan or the
1983 Plan.
The Plan Administrator has the authority to effect the cancellation of
outstanding options under the Discretionary Option Grant Program (including
options incorporated from the 1993 Plan and the 1983 Plan) in return for the
grant of new options for the same or different number of option shares with an
exercise price per share not less than the fair market value of the Common
Stock on the new grant date.
Under the Automatic Option Grant Program, each individual who is serving as
a non-employee member of the Board on the date the underwriting agreement for
this offering is executed and who has not previously received a stock option
grant from the Company will receive at that time an option grant for 20,000
shares of Common Stock with an exercise price equal to the price per share at
which the Common Stock is to be sold in this offering. Each individual who
first joins the Board after the effective date of this offering as a non-
employee Board member will also receive an option grant for 20,000 shares of
Common Stock at the time of his or her commencement of Board service, provided
such individual has not otherwise been in the prior employ of the Company. In
addition, at each Annual Stockholders Meeting, beginning with the 1997 Annual
Meeting, each individual who is to continue to serve as a non-employee Board
will receive an option grant to purchase 5,000 shares of Common Stock, whether
or not such individual has been in the prior employ of the Company.
Each automatic grant will have an exercise price equal to the fair market
value per share of Common Stock on the grant date and will have a maximum term
of 10 years, subject to earlier termination following
58
<PAGE>
the optionee's cessation of Board service. Each automatic option will be
immediately exercisable; however, any shares purchased upon exercise of the
option will be subject to repurchase, at the option exercise price paid per
share, should the optionee's service as a non-employee Board member cease
prior to vesting in the shares. The 20,000-share grant will vest in four equal
and successive annual installments over the optionee's period of Board
service. Each additional 5,000-share grant will vest upon the optionee's
completion of two years of Board service measured from the grant date.
However, each outstanding option will immediately vest upon (i) certain
changes in the ownership or control of the Company or (ii) the death or
disability of the optionee while serving as a Board member.
The Board may amend or modify the 1996 Plan at any time. The 1996 Plan will
terminate on May 30, 2006, unless sooner terminated by the Board.
No options have been granted under the 1996 Plan. Options to purchase
5,928,120 shares were outstanding under the 1993 Plan, the 1983 Plan and
pursuant to nonqualified stock option agreements outside of the plans as of
May 31, 1996.
1996 Stock Purchase Plan
The Company's 1996 Stock Purchase Plan (the "Purchase Plan") was adopted by
the Board of Directors on May 31, 1996. The Purchase Plan is designed to allow
eligible associates of the Company and participating subsidiaries to purchase
shares of Common Stock, at semi-annual intervals, through their periodic
payroll deductions under the Purchase Plan, and a reserve of 650,000 shares of
Common Stock has been established for this purpose.
The Purchase Plan will be implemented in a series of successive offering
periods, each with a maximum duration of 24 months. However, the initial
offering period will begin on the day the Underwriting Agreement is executed
in connection with this offering and will end on the last business day in July
1998.
Individuals who are eligible associates on the start date of any offering
period may enter the Purchase Plan on that start date or on any subsequent
semi-annual entry date (February 1 or July 1 each year). Individuals who
become eligible associates after the start date of the offering period may
join the Purchase Plan on any subsequent semi-annual entry date within that
period.
Payroll deductions may not exceed 10% of the participant's base salary for
each semi-annual period of participation, and the accumulated payroll
deductions will be applied to the purchase of shares on the participant's
behalf on each semi-annual purchase date (the last business day in January and
July each year, with the first such purchase date to occur on January 30,
1997) at a purchase price per share not less than eighty-five percent (85%) of
the lower of (i) the fair market value of the Common Stock on the
participant's entry date into the offering period or (ii) the fair market
value on the semi-annual purchase date. Should the fair market value of the
Common Stock on any semi-annual purchase date be less than the fair market
value of the Common Stock on the first day of the offering period, then the
current offering period will automatically end and a new twenty-four (24)-
month offering period will begin, based on the lower fair market value.
The Board may amend or modify the Purchase Plan following any semi-annual
purchase date. The Purchase Plan will terminate on the last business day in
July 2006, unless sooner terminated by the Board.
401(k) Plan
Effective January 1, 1995, the Company adopted a 401(k) (the "401(k) Plan")
that covers all eligible employees of the Company. An eligible associate may
elect to defer, in the form of contributions to the 401(k) Plan, up to the
limitation imposed by Internal Revenue Code Section 402(g). Employees'
contributions are invested in specific assets, specific funds or other
investments permitted under the 401(k) Plan and the
59
<PAGE>
directed investment procedure according to the directions of the associates.
The contributions are fully vested and nonforfeitable at all times. The 401(k)
Plan provides for employer contributions to the 401(k) Plan of an amount equal
to the total amount contributed by all eligible employees, plus a matching
contribution up to 2% for individual employees equal to 25% of each such
employee's deferred compensation. The Company has made contributions of $5,994
and $22,485 for the year ended September 30, 1995 and the six months ended
March 31, 1996, respectively.
Bonus Plan
Effective October 1, 1994, the Company adopted an Employee Bonus Plan (the
"Bonus Plan") to allow all eligible employees to share a portion of the
Company's profits. Thirty days after the end of each fiscal quarter, the
Company will pay 20% of any operating profit that is in excess of 10% of gross
revenue into the Bonus Plan. Each eligible associate will be allocated a
percent of the total Bonus Plan pool based on gross earnings for the quarter
and designation by group. Bonus payments are distributed over time to
associates, who receive one-half of the bonus payment at the end of the month
following the end of the quarter, and the rest over the succeeding three-year
time period in increments of one-sixth. If an associate leaves the Company for
any reason other than disability, death or retirement, that associate's
accumulation of earnings in the bonus pool remains in the pool as additional
earnings for the remaining associates.
EMPLOYMENT CONTRACT
Christos M. Cotsakos entered into an employment agreement with the Company
in March 1996. The agreement provides for annual base salary compensation of
$250,000. Mr. Cotsakos' base salary is adjusted as follows: If, at the end of
any fiscal quarter during the term of the agreement, the Company's annualized
revenues equal or exceed $75 million and there is a positive net income at the
end of such quarter, the base salary increases to an annualized basis of
$320,000; and if at the end of any fiscal quarter during the term of the
agreement, the Company's annualized revenues equal or exceed $100 million and
there is a positive net income at the end of such quarter, the base salary
increases to an annualized basis of $390,000. Mr. Cotsakos is also eligible to
participate in the Company's bonus plan and other benefit plans.
Pursuant to the agreement, on March 29, 1996, Mr. Cotsakos was granted
options to purchase 600,000 shares at the Company's Common Stock at an
exercise price of $2.33 per share under the Company's 1993 Stock Option Plan.
In addition, on May 15, 1996, Mr. Cotsakos was granted additional options to
purchase 480,000 shares of Common Stock at the then current fair market value.
The options vest for 20% of the shares on September 1, 1996 and 80% of the
shares in equal monthly installments of employment over a period of four
years. These options are exercisable until March 28, 2006, subject to certain
exceptions.
The agreement terminates on December 31, 2001, but is renewable for
successive one-year periods, unless either party gives 180 days' notice. Upon
termination of Mr. Cotsakos' employment, he is entitled to severance payments
as follows: (i) payment equal to five full years of current total annual
compensation if termination within three years after a change in control of
the Company or if he elects to terminate his employment for good reason (as
defined) within three years after any change in control, and (ii) payment
equal to four full years of (A) current total annual compensation if he is
terminated by the Company other than for cause (as defined) and such
termination is not described in (i) above and (B) he elects to terminate his
employment for good reason and such termination is not described in (i) above.
In addition, Mr. Cotsakos' options become immediately exercisable upon a
change in control.
60
<PAGE>
CERTAIN TRANSACTIONS
PREFERRED STOCK FINANCING TRANSACTIONS
On September 28, 1995, the Company sold 100,000 shares of Series A Preferred
Stock for $123 per share. On April 10, 1996, the Company sold 20,336 shares of
Series B Preferred Stock for $140 per share. On June 6, 1996, the Company sold
11,180 shares of Series C Preferred Stock for $805 per share. All Preferred
Stock was sold in private financings, pursuant to preferred stock purchase
agreements and investors' rights agreements. The terms of those agreements
(with the exception of amount and price) are substantially similar for the
Series A, Series B and Series C, under which the Company made the standard
representations, warranties and covenants, and which provided the purchasers
thereunder with rights of first offer, tag-along rights, preemptive rights,
and demand and piggyback registration rights. All of the material terms of the
Series A and Series B agreements, with the exception of the Registration
Rights, will terminate upon the effective date of the Registration Statement
of which this Prospectus is a part. All shares of Preferred Stock are
convertible into Common Stock on a 60-for-1 basis automatically upon
completion of this offering. See "Shares Eligible for Future Sale--
Registration Rights." The purchasers of the Preferred Stock included, among
others, the following directors, entities associated with directors, and
holders of 5% or more of the Company's Common Stock:
<TABLE>
<CAPTION>
SHARES OF PREFERRED
STOCK PURCHASED
--------------------
SERIES SERIES SERIES
INVESTOR A B C
-------- ------ ------ ------
<S> <C> <C> <C>
General Atlantic Partners II, L.P.(1)................... 87,742 6,267 --
GAP Coinvestment Partners, L.P.(1)...................... 12,258 876 --
Christos M. Cotsakos(2)................................. -- 6,050 --
Richard S. Braddock..................................... -- 7,143 --
SOFTBANK Holdings Inc................................... -- -- 11,180
</TABLE>
- --------
(1) The general partner of General Atlantic Partners II, L.P. ("GAP II") is
General Atlantic Partners, LLC ("GAP LLC"), a Delaware limited liability
company. The managing members of GAP LLC are Steven A. Denning, David C.
Hodgson, Stephen P. Reynolds, J. Michael Cline, William O. Grabe and
William E. Ford. The same individuals are the general partners of GAP
Coinvestment Partners, L.P. ("GAP Coinvestors"). Mr. Ford is a director of
the Company. Mr. Ford disclaims beneficial ownership of shares owned by
GAP II and GAP Coinvestment except to the extent of his pecuniary
interest.
(2)Includes shares held by Cotsakos Revocable Trust and shares held as a
custodian.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the year ended September 30, 1995, the Company had a compensation
committee of the Board of Directors composed of William A. Porter, Keith Petty
and Lewis E. Randall. Mr. Porter was an executive officer of the Company
during the year ended September 30, 1995.
In September 1990, the Company entered into a restructuring agreement with
all of its long-term creditors whereby certain obligations of the Company,
totaling $999,508, were converted to subordinated and unsecured promissory
notes bearing interest at a rate of seven percent per annum (the "7% Notes").
At that time, William Porter, the Chairman of the Board and a founder of the
Company, and Bernard Newcomb, then a director and Vice President of Research
and Development, received 7% Notes in principal amounts of $230,316 and
$152,490, respectively. The Company's indebtedness to Messrs. Porter and
Newcomb resulted primarily from accrued but unpaid salaries owed to them. In
September 1995, all outstanding principal and accrued interest on the 7% Notes
was repaid. Messrs. Porter and Newcomb received $318,276 and $210,741,
respectively, pursuant to the 7% Notes.
61
<PAGE>
OTHER TRANSACTIONS
The Company entered into a consulting arrangement with George Hayter, a
director of the Company, in December 1995 to provide international business
consulting at a base rate of $1,500 for each day of consulting plus expenses,
with the exception of attendance at Board meetings. Mr. Hayter's fees were
payable in the form of $750 in cash and $750 in Common Stock (issued at fair
market value on the dates of services rendered). During the six months ended
March 31, 1996, Mr. Hayter was paid $23,520 and accrued 6,096 shares of Common
Stock pursuant to this arrangement. The Common Stock component of Mr. Hayter's
consulting arrangement terminated as of June 6, 1996.
From January 1995 to December 1995, Kathy Levinson, the President and Chief
Operating Officer of E*TRADE Securities was self-employed as a contractor.
During this period, Ms. Levinson, worked under contract with the Company,
under which she provided consulting services to help E*TRADE transition to
self-clearing operations. During the term of this agreement, Ms. Levinson was
paid $166,000 by the Company, and received a warrant to purchase 300,000
shares of Common Stock, which warrant was fully exercised in January 1996, and
options to purchase 300,000 shares which vest at a rate of 20% per year over a
period of five years and will terminate on January 2, 2005.
Christos M. Cotsakos entered into an employment agreement with the Company
in March 1996. See "Management--Employment Contracts."
The Company believes that each of these transactions were on terms no less
favorable to the Company than could be obtained from unaffiliated third
parties and were in connection with bona fide business purposes. As a matter
of policy, all future transactions between the Company and any of its
officers, directors or principal stockholders will be approved by a majority
of the independent and disinterested members of the Board of Directors, will
be on terms no less favorable to the Company than could be obtained from
unaffiliated third parties and will be in connection with bona fide business
purposes.
62
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of the Company's Common Stock as of May 31, 1996 and as adjusted to
reflect the sale of shares of Common Stock offered hereby by (i) each person
who is known to the Company to own beneficially more than 5% of the
outstanding shares of the Common Stock of the Company, (ii) each Named
Executive Officer, (iii) each director, (iv) each of the Selling Stockholders
and (v) all directors and executive officers as a group. Unless otherwise
indicated below, to the knowledge of the Company, all persons listed below
have sole voting and investment power with respect to their shares of Common
Stock, except to the extent authority is shared by spouses under applicable
law.
<TABLE>
<CAPTION>
SHARES TO BE
SHARES BENEFICIALLY BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
NAME OFFERING NUMBER OF OFFERING(2)
---- ------------------- SHARES TO BE -----------------
MANAGEMENT AND OTHER SOLD IN
SIGNIFICANT STOCKHOLDERS NUMBER PERCENT(1) THE OFFERING NUMBER PERCENT
------------------------ --------- --------- ------------ --------- -------
<S> <C> <C> <C> <C> <C>
William A. Porter(3)(4)...... 3,086,940 12.9% -- 3,086,940 10.2%
Bernard A. Newcomb(4)........ 2,420,820 10.1% -- 2,420,820 8.0%
Christos M. Cotsakos(4)(5)... 1,443,000 5.8% -- 1,443,000 4.6%
Wayne H. Heldt(4)(6)......... 700,020 2.8% -- 700,020 2.3%
Richard S. Braddock.......... 428,580 1.8% -- 428,580 1.4%
William E. Ford(7)........... -- * -- -- *
George Hayter................ 6,096 * -- 6,096 *
Keith Petty.................. 364,620 1.5% -- 364,620 1.2%
Lewis E. Randall............. 399,000 1.7% -- 399,000 1.3%
Lester C. Thurow............. -- * -- -- *
General Atlantic Partners,
LLC(8)....................... 6,872,580 28.7% -- 6,872,580 22.8%
All directors and executive
officers as a group
(15 persons)(9)............. 7,511,196 30.5% -- 7,511,196 24.3%
<CAPTION>
OTHER SELLING STOCKHOLDERS
- --------------------------
Other selling stockholders
as a group................ 550,000
-------
Total...................... 550,000
=======
</TABLE>
- --------
* Less than 1%.
(1) Based on 23,962,896 shares outstanding on May 31, 1996.
(2)Assumes no exercise of the Underwriters' over-allotment option.
(3) If the Underwriters exercise their over-allotment option to purchase up to
an additional 1,020,000 shares of Common Stock, then William A. Porter
will sell up to 240,000 shares of Common Stock.
(4) The address of Mr. Porter, Mr. Newcomb, Mr. Cotsakos and Mr. Heldt is c/o
E*TRADE Group, Inc., Four Embarcadero Place, 2400 Geng Road, Palo Alto,
California 94303.
(5) Includes 198,000 shares held by the Cotsakos Revocable Trust, and 88,980
shares held as a custodian.
(6) Includes 420,000 shares of Common Stock issuable upon exercise of stock
options that are exercisable within 60 days.
(7) Excludes 6,030,120 shares held by General Atlantic Partners II, L.P. and
842,460 shares held by GAP Coinvestment Partners, L.P. See footnote 9
below.
(8) Includes 6,030,120 shares held by General Atlantic Partners II, L.P. ("GAP
II") and 842,460 shares held by GAP Coinvestment Partners, L.P. ("GAP
Coinvestment"). The general partner of GAP II is General Atlantic
Partners, LLC ("GAP LLC"), a Delaware limited liability company. The
managing members of GAP LLC are Steven A. Denning, David C. Hodgson,
Stephen P. Reynolds, J. Michael Cline, William O. Grabe and William E.
Ford. The same individuals are the general partners of GAP Coinvestment.
Mr. Ford is a director of the Company. Mr. Ford disclaims beneficial
ownership of shares owned by GAP II and GAP Coinvestment except to the
extent of his pecuniary interest therein. The address for GAP II, GAP
Coinvestment, GAP LLC and Mr. Ford is: c/o General Atlantic Service
Corporation, Three Pickwick Plaza, Greenwich, CT 06830.
(9) Includes the information in the notes above, as applicable. Also includes
an additional 668,820 shares of Common Stock issuable upon exercise of
stock options that are exercisable within 60 days.
63
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the completion of this offering, the authorized capital stock of the
Company will consist of 50,000,000 shares of Common Stock, $.01 par value per
share ("Common Stock"), and 1,000,000 shares of Preferred Stock, $.01 par
value per share ("Preferred Stock").
COMMON STOCK
Subject to the rights of holders of Preferred Stock, the holders of
outstanding shares of Common Stock are entitled to share ratably in dividends
declared out of assets legally available therefor at such time and in such
amounts as the Board of Directors may from time to time lawfully determine.
Each holder of Common Stock is entitled to one vote for each share held. The
Common Stock is not entitled to conversion or preemptive rights and is not
subject to redemption or assessment. Subject to the rights of holders of any
outstanding Preferred Stock, upon liquidation, dissolution or winding up of
the Company, any assets legally available for distribution to stockholders as
such are to be distributed ratably among the holders of the Common Stock at
that time outstanding. As of May 31, 1996, giving effect to the conversion of
all outstanding shares of Preferred Stock into Common Stock automatically upon
completion of this offering, there were 23,962,896 shares of Common Stock
outstanding held of record by approximately 150 stockholders. The Common Stock
presently outstanding is, and the Common Stock issued in this offering will
be, fully paid and nonassessable. The Company has applied to have its Common
Stock quoted on the Nasdaq National Market under the trading symbol "EGRP."
PREFERRED STOCK
Preferred Stock may be issued in series from time to time with such
designations, relative rights, priorities, preferences, qualifications,
limitations and restrictions thereof, to the extent that such are not fixed in
the Company's Restated Certificate of Incorporation, as the Board of Directors
determines. The rights, preferences, limitations and restrictions of different
series of Preferred Stock may differ with respect to dividend rates, amounts
payable on liquidation, voting rights, conversion rights, redemption
provisions, sinking fund provisions and other matters. The Board of Directors
may authorize the issuance of Preferred Stock which ranks senior to the Common
Stock with respect to the payment of dividends and the distribution of assets
on liquidation. In addition, the Board of Directors is authorized to fix the
limitations and restrictions, if any, upon the payment of dividends on Common
Stock to be effective while any shares of Preferred Stock are outstanding. The
Board of Directors, without stockholder approval, can issue Preferred Stock
with voting and conversion rights which could adversely affect the voting
power of the holders of Common Stock. The issuance of Preferred Stock may have
the effect of delaying, deferring or preventing a change in control of the
Company. Upon the completion of the offering, there will be no shares of
Preferred Stock outstanding and the Company has no present intention to issue
any shares of Preferred Stock. See "Risk Factors--Effects of Certain Charter
and Bylaw Provisions."
CERTAIN PROVISIONS AFFECTING STOCKHOLDERS
Delaware, like many other states, permits a corporation to adopt a number of
measures through amendment of the corporate charter or bylaws or otherwise,
which may have the effect of delaying or deterring any unsolicited takeover
attempts. The right of stockholders to cumulate votes in the election of
directors is eliminated. In addition, Section 203 of the Delaware General
Corporation Law, which will apply to the Company if its Common Stock is
authorized for quotation on the Nasdaq National Market, restricts certain
"business combinations" with "interested stockholders" for three years
following the date that person becomes an interested stockholder, unless the
Board of Directors approves the business combination. By delaying or deterring
unsolicited takeover attempts, these provisions could adversely affect
prevailing market prices for the Company's Common Stock. See "Risk Factors--
Effects of Certain Charter and Bylaw Provisions."
64
<PAGE>
The Company's Restated Certificate of Incorporation and Restated Bylaws
contain certain provisions that could discourage potential takeover attempts
and make more difficult attempts by stockholders to change management. The
Restated Certificate of Incorporation and the Restated Bylaws provide for a
classified Board of Directors and permit the Board to create new directorships
and to elect new directors to serve for the full term of the class of
directors in which the new directorship was created. The terms of the
directors are staggered to provide for the election of approximately one-third
of the Board members each year, with each director serving a three-year term.
The Board (or its remaining members, even though less than a quorum) is also
empowered to fill vacancies on the Board occurring for any reason for the
remainder of the term of the class of directors in which the vacancy occurred.
Stockholders may remove a director or the entire Board only for cause, and
such removal requires the affirmative vote of 66 2/3% of the outstanding
voting stock. The Company's Restated Certificate of Incorporation provides
that stockholders may not take action by written consent but only at a
stockholders' meeting and that special meetings of the stockholders of the
Company may only be called by the Chairman of the Board, the President, a
majority of the directors or the holders of not less than 10% of the
outstanding voting stock. The Restated Bylaws also establish procedures,
including advance notice procedures with regard to the nomination of
candidates for election as directors, and stockholder proposals.
The Company's Restated Certificate of Incorporation provides that, in
addition to the requirements of the Delaware General Corporation Law, any
"Business Combination" (as defined in the Certificate of Incorporation)
requires the affirmative vote of 66 2/3% of the votes entitled to be cast by
the holders of the Company's then outstanding capital stock, voting together
as a class, unless two-thirds of the directors (excluding certain directors
affiliated with persons interested in the Business Combination) approve the
proposed transaction.
A "Business Combination" includes (i) a merger or consolidation of the
Company or any of its subsidiaries with an "Interested Stockholder" (as
defined in the Restated Certificate of Incorporation) or any other corporation
which is, or after such transaction would be, an "Affiliate" or "Associate"
(as such terms are defined in the Securities Exchange Act of 1934, as amended)
of an Interested Stockholder, (ii) any sale, lease, exchange, mortgage,
pledge, transfer or other disposition to or with, or proposed by or on behalf
of, any Interested Stockholder or any Affiliate or Associate of any Interested
Stockholder involving any assets of the Company or any subsidiary that
constitute 5% or more of the total assets of the Company, (iii) the issuance
or transfer by the Company or any subsidiary of any securities of the Company
or any subsidiary to, or proposed by or on behalf of, an Interested
Stockholder or any Affiliate or Associate of an Interested Stockholder in
exchange for cash, securities or other property that constitute 5% or more of
the total assets of the Company, (iv) the adoption of any plan or proposal for
the liquidation or dissolution of the Company or any spin-off or split-up of
any kind of the Company or any subsidiary, proposed by or on behalf of an
Interested Stockholder or an Affiliate or Associate of an Interested
Stockholder, or (v) any reclassification, recapitalization, or merger or
consolidation of the Company with any of its subsidiaries or any other
transaction that has the effect, directly or indirectly, of increasing the
proportionate share of any class or series of capital stock of the Company or
any of its subsidiaries that is beneficially owned by any Interested
Stockholder or an Affiliate or Associate of any Interested Stockholder.
An "Interested Stockholder" generally is defined as (i) an individual,
corporation or other entity which is or was at any time within the two-year
period preceding the date of the transaction in question, the beneficial owner
of 10% or more of the outstanding voting securities of the Company, (ii) an
Associate or Affiliate of the Company who within the two-year period preceding
the date of the transaction in question was the beneficial owner of 10% or
more of the outstanding voting securities of the Company, or (iii) under
certain circumstances, an assignee of any of the foregoing persons. A person
is a "beneficial owner" of any capital stock of the Company (a) which such
person or any of its Affiliates or Associates beneficially owns, directly or
indirectly, (b) which such person or any of its Affiliates or Associates has,
directly or indirectly, (i) the right to acquire (whether such right is
exercisable immediately or subject only to the passage of time), pursuant to
any agreement, arrangement or understanding or upon the exercise of conversion
rights, exchange rights, warrants
65
<PAGE>
or options, or otherwise, or (ii) the right to vote pursuant to any agreement,
arrangement or understanding, or (c) which are beneficially owned, directly or
indirectly, by any other person with which such person or any of its
Affiliates or Associates has any agreement, arrangement or understanding for
the purpose of acquiring, holding, voting or disposing of any shares of
capital stock.
The foregoing provisions of the Restated Certificate of Incorporation and
Restated Bylaws of the Company may deter any potential unfriendly offers or
other efforts to obtain control of the Company that are not approved by the
Board of Directors and could thereby deprive the stockholders of opportunities
to realize a premium on their Common Stock and could make removal of incumbent
directors more difficult. At the same time, these provisions may have the
effect of inducing any persons seeking control of the Company or a business
combination with the Company to negotiate terms acceptable to the Board of
Directors. Such provisions of the Company's Restated Certificate of
Incorporation and Restated Bylaws can be changed or amended only by the
affirmative vote of the holders of at least 66 2/3% of the Company's then
outstanding voting stock.
Following the completion of the offering (assuming no exercise of the
Underwriters' over-allotment option), the Company's present directors and
executive officers and their respective affiliates will beneficially own
approximately 48% of the outstanding Common Stock, giving them veto power with
respect to any stockholder action or approval requiring a majority vote.
TRANSFER AGENT AND REGISTRAR
The Company has appointed as its transfer agent and registrar of the
Common Stock.
66
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
GENERAL
Upon completion of this offering, the Company will have outstanding an
aggregate of 30,212,896 shares of Common Stock, based upon the number of
shares outstanding as of May 31, 1996. Of these shares, all of the shares sold
in this offering will be freely tradeable without restriction or further
registration under the Securities Act, unless such shares are purchased by
"affiliates" of the Company, as that term is defined in Rule 144 under the
Securities Act ("Affiliates"). The remaining 23,962,896 shares of Common Stock
held by existing stockholders (the "Restricted Shares") are "restricted
securities" as that term is defined in Rule 144 under the Securities Act.
Restricted Shares may be sold in the public market only if registered or if
they qualify for an exemption from registration under Rule 144 or Rule 701
promulgated under the Securities Act. As a result of contractual restrictions
and the provisions of Rule 144 and Rule 701, additional shares will be
available for sale in the public market as follows: (i) 933,060 Restricted
Shares will be eligible for immediate sale on the date of this Prospectus;
(ii) approximately 630,540 Restricted Shares will be eligible for sale 90 days
after the date of this Prospectus; (iii) approximately 12,147,420 Restricted
Shares will be eligible for sale upon expiration of the lock-up agreements 180
days after the date of this Prospectus; and (iv) the remainder of the
Restricted Shares will be eligible for sale from time to time thereafter upon
expiration of their respective two-year holding periods.
The Company, its officers and directors, all of the Selling Stockholders and
certain other stockholders, representing in the aggregate approximately
21,152,496 shares of Common Stock and options to purchase approximately
shares of Common Stock, have agreed pursuant to lock-up agreements, subject to
certain limited exceptions, not to sell or offer to sell or otherwise dispose
of any of such shares and options for a period of 180 days after the date of
this Prospectus (the "Lock-Up Period") without the prior consent of Robertson,
Stephens & Company.
The Company has reserved 4,000,000 shares of Common Stock for issuance under
the Company's 1996 Stock Incentive Plan, none of which are outstanding and
options to purchase 120,000 of which will be granted under the non-employee
director automatic grant program at the time of the offering. In addition, the
Company has outstanding options to purchase 5,928,120 shares, which options
were granted under the Company's 1993 Stock Option Plan and 1983 Employee
Incentive Stock Option Plan and other nonqualified stock option agreements.
Following the offering, the Company intends to file a registration statement
under the Securities Act to register 4,000,000 shares of Common Stock issuable
upon the exercise of stock options granted under the Company's 1996 Stock
Incentive Plan and 5,928,120 shares issuable upon exercise of stock options
granted under the 1993 Stock Option Plan and 1983 Employee Incentive Stock
Option Plan. Shares issued upon the exercise of stock options after the
effective date of such registration statement or previously issued on
exercise, generally will be available for sale in the open market subject to
Rule 144 volume limitations applicable to affiliates and the lock-up
agreements with Robertson, Stephens & Company described above. The Company
also intends to file a registration statement under the Securities Act to
register 650,000 shares of Common Stock for issuance under the Company's 1996
Stock Purchase Plan.
In general, under Rule 144 as currently in effect, beginning 90 days after
the consummation of the offering, a person (or persons whose shares are
aggregated) who, together with any previous holder who is not an affiliate of
the Company, has beneficially owned restricted shares of at least two years,
including persons who may be deemed "affiliates" of the Company, will be
entitled to sell in any three-month period a number of shares that does not
exceed the greater of (i) 1% of the then outstanding shares of Common Stock
(approximately 302,000 shares immediately after this offering) or (ii) the
average weekly trading volume of the Common Stock during the four calendar
weeks immediately preceding the date on which notice of the sale is filed with
the SEC. Sales pursuant to Rule 144 are also subject to certain other
requirements relating to manner of sale, notice and availability of current
public information about the Company. A person (or persons whose shares are
aggregated) who is not deemed to have been an affiliate of the Company at any
time during the three months immediately preceding the sale, and who, together
with any previous holder
67
<PAGE>
who is not an affiliate of the Company, has beneficially owned restricted
shares for at least three years, would be entitled to sell such shares
pursuant to Rule 144(k) without regard to the limitations described above.
An employee, officer or director of or consultant to the Company who
purchased or was awarded shares or options to purchase shares pursuant to a
written compensatory plan or contract is entitled to rely on the resale
provisions of Rule 701 under the Securities Act, which permits Affiliates and
non-Affiliates to sell their Rule 701 shares without having to comply with
Rule 144's holding period restrictions, in each case commencing 90 days after
the date of this Prospectus. In addition, non-Affiliates may sell Rule 701
shares without complying with the public information, volume and notice
provisions of Rule 144.
Prior to this offering, there has been no public market for the Company's
Common Stock, and there can be no assurance that an active public market for
the Common Stock will develop or will continue after this offering or that the
market price of the Common Stock will not decline below the initial public
offering price. Future sales of substantial amounts of Common Stock in the
public market could adversely affect market prices prevailing from time to
time. As described herein, only a limited number of shares will be available
for sale shortly after this offering because of certain contractual and legal
restrictions on resale. Sales of substantial amounts of Common Stock of the
Company in the public market after the restrictions lapse could adversely
affect the prevailing market price and the ability of the Company to raise
equity capital in the future. See "Risk Factors--Shares Eligible for Future
Sale."
REGISTRATION RIGHTS
Pursuant to an agreement between the Company and the holders (or their
permitted transferees) of approximately 12,992,760 shares of Common Stock and
Preferred Stock ("Holders") (which Preferred Stock will automatically be
converted into Common Stock upon the completion of this offering), the Holders
are entitled to certain rights with respect to the registration of such shares
under the Securities Act. If the Company proposes to register its Common Stock
in any public offering subsequent to this offering, subject to certain
exceptions, under the Securities Act, the Holders are entitled to notice of
the registration and are entitled at the Company's expense, subject to certain
limitations, to include such shares therein, provided that the managing
underwriters have the right to limit the number of such shares included in the
registration. In addition, certain of the Holders may require the Company, at
its expense, subject to certain limitations, on no more than two occasions, to
file a registration statement under the Securities Act with respect to their
shares of Common Stock. Such rights may not be exercised until 90 days after
the completion of a subsequent offering.
68
<PAGE>
UNDERWRITING
The Underwriters named below, acting through their representatives,
Robertson, Stephens & Company LLC, Hambrecht & Quist LLC and Deutsche Morgan
Grenfell (the "Representatives"), have severally agreed with the Company and
the Selling Stockholders, subject to the terms and conditions of the
Underwriting Agreement, to purchase the numbers of shares of Common Stock set
forth opposite their respective names below. The Underwriters are committed to
purchase and pay for all such shares if any are purchased.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
Robertson, Stephens & Company LLC..................................
Hambrecht & Quist LLC..............................................
Deutsche Morgan Grenfell...........................................
---------
Total............................................................ 6,250,000
=========
</TABLE>
The Representatives have advised the Company and the Selling Stockholders
that the Underwriters initially propose to offer shares of the Common Stock to
the public at the initial public offering price set forth on the cover page of
this Prospectus and to certain dealers at such price less a concession of not
more than $ per share, of which $ may be reallowed to other dealers.
After the initial public offering, the public offering price, concession and
reallowance to dealers may be reduced by the Representatives. No such
reduction shall change the amount of proceeds to be received by the Company as
set forth on the cover page of this Prospectus.
The Company and a Selling Stockholder have granted to the Underwriters an
option, exercisable during the 30-day period after the date of this
Prospectus, to purchase up to 1,020,000 additional shares of Common Stock at
the same price per share as will be paid for the 6,250,000 shares that the
Underwriters have agreed to purchase. To the extent that the Underwriters
exercise such option, each of the Underwriters will have a firm commitment to
purchase approximately the same percentage of such additional shares that the
number of shares of Common Stock to be purchased by it shown in the above
table represents as a percentage of the 6,250,000 shares offered hereby. If
purchased, such additional shares will be sold by the Underwriters on the same
terms as those on which the 6,250,000 shares are being sold.
The Underwriting Agreement contains covenants of indemnity among the
Underwriters, the Company and the Selling Stockholders against certain civil
liabilities, including liabilities under the Securities Act and liabilities
arising from breaches of representations and warranties contained in the
Underwriting Agreement.
Each officer and director who hold shares of the Company and holders of
21,152,496 shares of Common Stock (including such officers and directors) have
agreed with the Representatives, for the Lock-Up Period, subject to certain
exceptions, not to offer to sell, contract to sell, or otherwise sell, dispose
of, or grant any rights with respect to any shares of Common Stock, any
options or warrants to purchase any shares of Common Stock, or any securities
convertible into or exchangeable for shares of Common Stock owned as of the
date of this Prospectus or thereafter acquired directly by such holders or
with respect to which they have or hereafter acquire the power of disposition,
without the prior written consent of Robertson, Stephens & Company LLC.
However, Robertson, Stephens & Company LLC may, in its sole discretion and at
any time without notice, release all or any portion of the securities subject
to lock-up agreements. There are no agreements between the Representatives and
any of the Company's stockholders providing consent by the Representatives to
the sale of shares prior to the expiration of the Lock-Up Period. In addition,
the Company has agreed that during the Lock-Up Period, the Company will not,
without the prior written consent of
69
<PAGE>
Robertson, Stephens & Company LLC, subject to certain exceptions, issue, sell,
contract to sell, or otherwise dispose of, any shares of Common Stock, any
options or warrants to purchase any shares of Common Stock or any securities
convertible into, exercisable for or exchangeable for shares of Common Stock
other than the Company's sale of shares in this offering, the issuance of
Common Stock upon the exercise of outstanding options, and the Company's
issuance of options and shares under existing stock option and stock purchase
plans. See "Shares Eligible for Future Sale."
The Representatives have advised the Company and the Selling Stockholders
that they do not intend to confirm sales to any accounts over which they
exercise discretionary authority.
Prior to this offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price for the Common
Stock offered hereby will be determined through negotiations among the
Company, representatives of the Selling Stockholders and the Representatives.
Among the factors to be considered in such negotiations are prevailing market
conditions, certain financial information of the Company, market valuations of
other companies that the Company and the Representatives believe to be
comparable to the Company, estimates of the business potential of the Company,
the present state of the Company's development and other factors deemed
relevant. Under Schedule E of the bylaws of the NASD, when a member of the
NASD, such as E*TRADE Securities, participates in the distribution of its
parent company's securities, the public offering price can be no higher than
that recommended by a "qualified independent underwriter" meeting certain
standards. In accordance with this requirement, Robertson, Stephens & Company
LLC has assumed the responsibilities of serving in such a role by recommending
a price that is not less than the initial public offering price and conducting
due diligence.
SUBSEQUENT RESTRICTIONS
Securities industry regulations prohibit a NASD corporation, after the
completion of a distribution of securities of its parent to the public, from
effecting any transaction (except on an unsolicited basis) for the account of
any customer in, or making any recommendation with respect to, any such
security. Thus, following the offering of shares offered hereby, E*TRADE
Securities and the Company's other subsidiaries will not be permitted to make
recommendations regarding the purchase or sale of the Company's Common Stock.
Pursuant to the bylaws of the NASD, if any employee of E*TRADE Securities,
any person associated (as defined in such bylaws) with E*TRADE Securities or
any of the Company's other subsidiaries, or any immediate family member of any
such employee or associated person purchases any of the shares offered hereby,
such person may not sell, transfer, assign, pledge or hypothecate such shares
for a period of five months following the effective date of the offering.
70
<PAGE>
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Brobeck, Phleger & Harrison LLP, San Francisco, California. Certain
legal matters in connection with this offering will be passed upon for the
Underwriters by Cooley Godward Castro Huddleson & Tatum, San Francisco,
California.
EXPERTS
The consolidated financial statements as of September 30, 1995 and 1994 and
for each of the three years in the period ended September 30, 1995, included
in this Prospectus, have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing herein. Such consolidated
financial statements have been included herein in reliance upon the report of
such firm given upon their authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the SEC a registration statement (together with
all amendments and exhibits thereto, the "Registration Statement") under the
Act with respect to the Common Stock offered hereby. 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 SEC. For further information with respect to the Company
and the Common Stock offered hereby, reference is made to the Registration
Statement and to the exhibits and schedules filed therewith. Statements
contained in this Prospectus as to the contents of any contract or other
document are not necessarily complete, and in each instance reference is made
to the copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference. Copies of the Registration Statement and the exhibits and
schedules thereto may be inspected, without charge, at the offices of the SEC,
or obtained at prescribed rates from the Public Reference Section of the SEC
at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the SEC's regional offices located at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and at Seven World Trade Center
(13th Floor), New York, New York 10019.
71
<PAGE>
E*TRADE GROUP, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report............................................. F-2
Consolidated Balance Sheets as of September 30, 1994 and 1995 and March
31, 1996 (Unaudited) and Pro forma March 31, 1996 (Unaudited)........... F-3
Consolidated Statements of Operations for the Years Ended September 30,
1993, 1994 and 1995 and for the Six Months Ended March 31, 1995 and 1996
(Unaudited)............................................................. F-4
Consolidated Statements of Stockholders' Equity (Deficiency) for the
Years Ended September 30, 1993, 1994 and 1995 and for the Six Months
Ended March 31, 1995 and 1996 (Unaudited)............................... F-5
Consolidated Statements of Cash Flows for the Years Ended September 30,
1993, 1994 and 1995 and for the Six Months Ended March 31, 1995 and 1996
(Unaudited)............................................................. F-6
Notes to Consolidated Financial Statements............................... F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of E*TRADE Group, Inc.:
We have audited the accompanying consolidated balance sheets of E*TRADE
Group, Inc. and subsidiaries (the "Company") as of September 30, 1995 and
1994, and the related consolidated statements of income, stockholders' equity
(deficiency) and cash flows for each of the three years in the period ended
September 30, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of E*TRADE Group, Inc. and
subsidiaries at September 30, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period
ended September 30, 1995 in conformity with generally accepted accounting
principles.
San Francisco, California
November 20, 1995
( as to Note 10)
----------------
The accompanying consolidated financial statements give effect to the
anticipated reincorporation of the Company in Delaware, an increase in the
number of authorized shares to 50,000,000 in July 1996 and the related
exchange of each share of common stock of the Company for 60 shares of common
stock of the Delaware Corporation. The above opinion is in the form which will
be signed by Deloitte & Touche LLP upon completion of such exchange of the
Company's outstanding common stock described in Note 10 to the consolidated
financial statements and assuming that from June 7, 1996 to the date of such
completion, no other material events have occurred that would affect the
accompanying consolidated financial statements or required disclosure therein.
DELOITTE & TOUCHE LLP
San Francisco, California
June 7, 1996
F-2
<PAGE>
E*TRADE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
SEPTEMBER 30, MARCH 31,
------------------------ MARCH 31, 1996
1994 1995 1996 (NOTE 1)
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and equivalents........ $ 691,897 $ 9,624,219 $ 8,693,651 $20,480,991
Brokerage receivables....... 498,728 1,935,513 2,411,088 2,411,088
Accounts receivable......... 36,500 115,700 129,992 129,992
Deferred tax asset.......... 588,821 285,863 285,863 285,863
Other assets................ 34,211 68,391 372,653 372,653
----------- ----------- ----------- -----------
Total current assets....... 1,850,157 12,029,686 11,893,247 23,680,587
Property and equipment--net.. 313,189 1,458,152 5,593,767 5,593,767
Investment................... -- 675,726 838,410 838,410
----------- ----------- ----------- -----------
TOTAL........................ $ 2,163,346 $14,163,564 $18,325,424 $30,112,764
=========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued
liabilities................ $ 429,777 $ 1,428,353 $ 2,008,737 $ 2,008,737
Accrued compensation and
benefits................... -- 557,804 591,735 591,735
Litigation settlement
payable.................... 350,000 -- -- --
Provision for claims........ 64,928 360,744 486,444 486,444
Income taxes payable........ 8,944 602,275 122,224 122,224
Current portion of notes
payable.................... 1,314,268 -- 500,000 500,000
Current portion of capital
lease...................... 23,199 21,870 21,348 21,348
----------- ----------- ----------- -----------
Total current liabilities.. 2,191,116 2,971,046 3,730,488 3,730,488
Long-term portion of capital
lease....................... 64,439 44,551 33,896 33,896
Long-term notes payable...... -- -- 1,958,333 1,958,333
----------- ----------- ----------- -----------
Total liabilities.......... 2,255,555 3,015,597 5,722,717 5,722,717
----------- ----------- ----------- -----------
COMMITMENTS AND CONTINGENCIES
(NOTES 7 AND 8)
STOCKHOLDERS' EQUITY (DEFI-
CIENCY):
Preferred stock, $.01 par:
shares authorized,
1,000,000; Series A: 800,000
shares designated; shares
issued and outstanding:
1994, none; 1995, 100,000;
1996, 100,000 (pro forma
1996, none)................. -- 1,000 1,000 --
Common stock, $.01 par:
shares authorized,
50,000,000; shares issued
and outstanding: 1994,
14,954,400; 1995,
14,890,980;
1996, 15,636,276 (pro forma
1996, 23,527,236)........... 149,544 148,910 156,363 235,273
Additional paid-in capital... 1,240,560 9,899,373 10,283,388 21,992,818
Retained earnings (deficit).. (1,482,313) 1,098,684 2,161,956 2,161,956
----------- ----------- ----------- -----------
Total stockholders' equity
(deficiency).............. (92,209) 11,147,967 12,602,707 24,390,047
----------- ----------- ----------- -----------
TOTAL........................ $ 2,163,346 $14,163,564 $18,325,424 $30,112,764
=========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
E*TRADE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
SEPTEMBER 30, MARCH 31,
----------------------------------- ----------------------
1993 1994 1995 1995 1996
---------- ----------- ----------- ---------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
REVENUES:
Transaction revenues... $2,158,064 $ 9,547,688 $20,834,586 $7,478,194 $16,488,842
Computer services...... 709,226 953,228 1,425,536 546,679 1,078,547
Interest and other..... 106,668 404,098 1,080,416 365,843 1,310,209
---------- ----------- ----------- ---------- -----------
Total revenues...... 2,973,958 10,905,014 23,340,538 8,390,716 18,877,598
---------- ----------- ----------- ---------- -----------
COST OF SERVICES:
Cost of services....... 1,972,627 6,795,808 12,678,339 4,529,322 10,227,867
Self-clearing start-up
costs................. -- -- 141,185 40,739 634,770
---------- ----------- ----------- ---------- -----------
Total cost of serv-
ices............... 1,972,627 6,795,808 12,819,524 4,570,061 10,862,637
---------- ----------- ----------- ---------- -----------
OPERATING EXPENSES:
Selling and marketing.. 282,324 997,703 2,466,429 1,036,752 3,518,651
Technology development. 215,737 335,371 942,500 127,964 611,841
General and
administrative........ 400,573 2,532,361 2,802,724 853,027 2,099,160
---------- ----------- ----------- ---------- -----------
Total operating ex-
penses............. 898,634 3,865,435 6,211,653 2,017,743 6,229,652
---------- ----------- ----------- ---------- -----------
Total cost of
services and
operating expenses. 2,871,261 10,661,243 19,031,177 6,587,804 17,092,289
---------- ----------- ----------- ---------- -----------
PRE-TAX INCOME.......... 102,697 243,771 4,309,361 1,802,912 1,785,309
INCOME TAX EXPENSE
(BENEFIT).............. 3,607 (541,474) 1,728,364 723,098 722,037
---------- ----------- ----------- ---------- -----------
NET INCOME.............. $ 99,090 $ 785,245 $ 2,580,997 $1,079,814 $ 1,063,272
========== =========== =========== ========== ===========
Net income per share.... $ -- $ .03 $ .10 $ .04 $ .04
========== =========== =========== ========== ===========
Shares used to compute
per share data......... 27,024,000 26,533,000 26,828,000 25,719,000 27,325,000
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
E*TRADE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
TOTAL
PREFERRED STOCK COMMON STOCK ADDITIONAL RETAINED STOCKHOLDERS'
---------------- -------------------- PAID-IN EARNINGS EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) (DEFICIENCY)
-------- ------- ---------- -------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, OCTOBER 1,
1992................... 14,700,180 $147,002 $ 1,112,321 $(2,366,648) $ (1,107,325)
Net income............. 99,090 99,090
Issuance of common
stock................. 798,000 7,980 212,680 220,660
---------- -------- ----------- ----------- ------------
BALANCE, SEPTEMBER 30,
1993................... 15,498,180 154,982 1,325,001 (2,267,558) (787,575)
Net income............. 785,245 785,245
Issuance of common
stock................. 380,520 3,805 159,018 162,823
Exercise of stock
warrants.............. 1,235,940 12,359 (12,153) 206
Repurchase of common
stock................. (2,160,240) (21,602) (231,306) (252,908)
---------- -------- ----------- ----------- ------------
BALANCE, SEPTEMBER 30,
1994................... 14,954,400 149,544 1,240,560 (1,482,313) (92,209)
Net income............. 2,580,997 2,580,997
Issuance of Series A
preferred stock....... 100,000 $1,000 12,299,000 12,300,000
Exercise of stock
warrants.............. 1,293,120 12,931 (271) 12,660
Exercise of stock
options............... 497,100 4,971 141,510 146,481
Repurchase of common
stock................. (1,853,640) (18,536) (3,781,426) (3,799,962)
-------- ------- ---------- -------- ----------- ----------- ------------
BALANCE, SEPTEMBER 30,
1995................... 100,000 1,000 14,890,980 148,910 9,899,373 1,098,684 11,147,967
Net income*............ 1,063,272 1,063,272
Exercise of stock
warrants, including
tax benefit*.......... 270,120 2,701 286,936 289,637
Exercise of stock
options*.............. 469,080 4,691 83,640 88,331
Issuance of common
stock for services*... 6,096 61 13,439 13,500
-------- ------- ---------- -------- ----------- ----------- ------------
BALANCE, MARCH 31,
1996*.................. 100,000 $1,000 15,636,276 $156,363 $10,283,388 $ 2,161,956 $12,602,707
======== ======= ========== ======== =========== =========== ============
</TABLE>
* Unaudited
See notes to consolidated financial statements.
F-5
<PAGE>
E*TRADE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
SEPTEMBER 30, MARCH 31,
--------------------------------- ----------------------
1993 1994 1995 1995 1996
--------- --------- ----------- ---------- ----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERAT-
ING ACTIVITIES:
Net income............. $ 99,090 $ 785,245 $ 2,580,997 $1,079,814 $1,063,272
Adjustments to recon-
cile net income to net
cash provided by (used
in) operating activi-
ties:
Deferred income taxes.. (588,821) 302,958
Issuance of common
stock for services.... 13,500
Depreciation and amor-
tization.............. 15,077 64,991 229,807 49,700 219,181
Equity income from in-
vestment.............. (352,817) (340,746)
Interest converted to
long-term notes pay-
able.................. 81,070 87,217 67,047 38,639
Net effect of changes
in:
Brokerage receiv-
ables................ (243,544) (203,222) (1,436,785) (535,628) (475,575)
Accounts receivable... (73,249) 86,555 (79,200) (51,500) (14,292)
Other assets.......... (27,262) 10,369 (34,180) 419,101 (304,262)
Accounts payable and
accrued expenses..... 36,463 639,784 1,502,196 384,296 740,015
Income taxes payable.. 8,944 593,331 (8,944) (302,964)
--------- --------- ----------- ---------- ----------
Net cash provided by
(used in) operating
activities.......... (112,355) 891,062 3,373,354 1,375,478 598,129
--------- --------- ----------- ---------- ----------
CASH FLOWS FROM INVEST-
ING ACTIVITIES:
Purchase of office
facilities, equipment,
and leasehold
improvements.......... (114,376) (123,956) (1,374,770) (410,326) (1,854,796)
Purchase of investment. (504,000) (504,000)
Distributions received
from investment....... 181,091 178,062
--------- --------- ----------- ---------- ----------
Net cash used in in-
vesting activities.. (114,376) (123,956) (1,697,679) (914,326) (1,676,734)
--------- --------- ----------- ---------- ----------
CASH FLOWS FROM FINANC-
ING ACTIVITIES:
Proceeds from issuance
of preferred stock.... 12,300,000
Proceeds from issuance
of common stock....... 220,660 162,823
Proceeds from exercise
of stock options...... 146,481 62,140 88,331
Proceeds from exercise
of stock warrants..... 206 12,660 122 112,550
Repurchase of common
stock................. (252,908) (3,799,962)
Repayment of long-term
notes payable......... (1,381,315) (350,000) (41,667)
Repayment of capital
leases................ (5,813) (21,592) (21,217) (9,976) (11,177)
--------- --------- ----------- ---------- ----------
Net cash provided by
(used in) financing
activities.......... 214,847 (111,471) 7,256,647 (297,714) 148,037
--------- --------- ----------- ---------- ----------
INCREASE (DECREASE) IN
CASH AND EQUIVALENTS... (11,884) 655,635 8,932,322 163,438 (930,568)
CASH AND EQUIVALENTS--
Beginning of period.... 48,146 36,262 691,897 691,897 9,624,219
--------- --------- ----------- ---------- ----------
CASH AND EQUIVALENTS--
End of period.......... $ 36,262 $ 691,897 $ 9,624,219 $ 855,335 $8,693,651
========= ========= =========== ========== ==========
SUPPLEMENTAL DISCLO-
SURES:
Cash paid for interest. $ 13,158 $ 18,347 $ 398,601 $ 355,162 $ 8,802
========= ========= =========== ========== ==========
Cash paid for income
taxes................. $ 3,607 $ 41,000 $ 830,000 $ 10,000 $1,025,000
========= ========= =========== ========== ==========
Noncash investing and
financing activities:
Capital expenditures
financed with capital
leases................ $ 70,215 $ 26,070
Tax benefit on exer-
cise of non-qualified
stock warrants........ $ 177,087
Capital expenditures
financed with note
payable............... $2,500,000
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
E*TRADE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AT MARCH 31, 1996 AND FOR THE SIX MONTHS ENDED MARCH 31, 1995 AND
1996 IS UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation--The consolidated financial statements include E*TRADE
Group, Inc. and its subsidiaries (collectively, the "Company") E*Trade
Securities, Inc. ("E*TRADE Securities"), and ET*Execution Services, Inc.,
securities broker-dealers. All intercompany balances and transactions have
been eliminated.
As discussed in Notes 5 and 10, the convertible Preferred Stock will be
automatically converted upon the closing of the public offering contemplated
herein. The accompanying pro forma balance sheet gives effect to this
conversion and to certain issuances of Preferred Stock in April and June 1996,
described in Note 10, as if such events had occurred on March 31, 1996.
Transaction Revenues--The Company derives revenues on a discount brokerage
basis from commissions and payments from other broker-dealers for order flow
related to customer transactions in equity and debt securities, options, and
mutual funds. Securities transactions are recorded on a trade date basis and
are executed and carried by independent broker-dealers on a fully disclosed
basis. Through March 31, 1996, the Company did not receive or hold customers'
securities or funds. The Company is in the process of implementing self-
clearing operations and expects to complete the transition in July 1996.
Computer services revenues represent connect time charges for interactive
online computer services provided to networks for distribution to customers.
Interest revenues represent the Company's participation in the interest
differential on its customer debit and credit balances through a contractual
agreement with its principal clearing broker, and fees on its customer assets
invested in money market accounts.
Depreciation and Amortization--Office facilities and equipment generally are
depreciated on a straight-line basis over their estimated useful lives of
three to seven years. Leasehold improvements are amortized over the lesser of
their useful lives or the life of the lease.
Technology Development Costs--Technology development costs are charged to
operations as incurred. Technology development costs include costs incurred in
the development and enhancement of software used in the Company's product
offerings. The costs to develop such software have not been capitalized as the
Company believes its current software development process is essentially
completed concurrent with the establishment of technological feasibility of
the software.
Cash and Equivalents--For purposes of reporting cash flows, the Company
considers all highly liquid investments with original maturities of three
months or less to be cash equivalents.
Investment represents the Company's March 1995 investment in a limited
liability company, Roundtable Partners LLC ("Roundtable"), which is accounted
for using the equity method. The Company's return on its investment in
Roundtable is included in other revenues. Roundtable is a consortium of
broker-dealers.
Estimated Fair-Value of Financial Instruments--The Company believes the
amounts presented for financial instruments on the balance sheet consisting of
cash equivalents and long term notes payable to be reasonable estimates of
fair value.
Use of Estimates--The preparation of the Company's consolidated financial
statements in conformity with generally accepted accounting principles
necessarily requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the consolidated balance sheet dates and the
reported amounts of revenues and expenses for the periods presented.
Income Taxes--The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 109--Accounting for
Income Taxes. SFAS 109 requires the recognition of deferred tax liabilities
and assets at tax rates expected to be in effect when these balances reverse.
Future
F-7
<PAGE>
E*TRADE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT MARCH 31, 1996 AND FOR THE SIX MONTHS ENDED MARCH 31, 1995 AND
1996 IS UNAUDITED)
tax benefits attributable to temporary differences are recognized currently to
the extent that realization of such benefits is more likely than not.
Earnings Per Share--Earnings per share is based on the weighted average
number of common and common equivalent shares outstanding during the period.
Pursuant to rules of the Securities and Exchange Commission, all common and
common equivalent shares issued and options, warrants and other rights to
acquire shares of common stock at a price less than the initial public
offering price granted by the Company during the 12 months preceding the
offering date (using the treasury stock method until shares are issued) have
been included in the computation of common and equivalent shares outstanding
for all periods presented.
Recently Issued Accounting Standards--The Company is required to adopt SFAS
No. 123, Accounting for Stock-Based Compensation, in fiscal 1997. SFAS No. 123
establishes accounting and disclosure requirements using a fair value based
method of accounting for stock based employee compensation plans. Under SFAS
No. 123, the Company may either adopt the new fair value based accounting
method or continue the intrinsic value based method and provide pro forma
disclosures of net income and earnings per share as if the accounting
provisions of SFAS No. 123 had been adopted. The Company plans to adopt only
the disclosure requirements of SFAS No. 123; therefore, such adoption will
have no effect on the Company's consolidated net income or cash flows.
The Company is also required to adopt SFAS No. 121, Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
in fiscal 1997. SFAS No. 121 establishes the accounting and reporting
requirements for recognizing and measuring impairment of long-lived assets to
be either held and used or held for disposal. The Company does not expect SFAS
No. 121 to have a material effect on its consolidated financial statements.
Unaudited Interim Information--The consolidated financial information as of
March 31, 1996 and for the six months ended March 31, 1995 and 1996 is
unaudited. In the opinion of management, such information contains all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the results of such period. The results of operations for
the six months ended March 31, 1996 are not necessarily indicative of the
results to be expected for the full year.
Reclassifications--Certain items in prior years' financial statements have
been reclassified to conform to the fiscal 1995 presentation.
2. PROPERTY AND EQUIPMENT--NET
Property and equipment--net consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------- MARCH 31,
1994 1995 1996
---------- ---------- -----------
(Unaudited)
<S> <C> <C> <C>
Furniture and fixtures..................... $ 96,066 $ 206,385 $ 496,371
Equipment.................................. 947,991 2,199,193 4,367,927
Leasehold improvements..................... 38,327 51,576 52,941
Construction-in-progress................... -- -- 1,894,711
---------- ---------- ----------
1,082,384 2,457,154 6,811,950
Less: Accumulated depreciation............. 769,195 999,002 1,218,183
---------- ---------- ----------
Total...................................... $ 313,189 $1,458,152 $5,593,767
========== ========== ==========
</TABLE>
F-8
<PAGE>
E*TRADE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT MARCH 31, 1996 AND FOR THE SIX MONTHS ENDED MARCH 31, 1995 AND
1996 IS UNAUDITED)
3. LONG-TERM NOTES PAYABLE
In September 1990, the Company entered into a restructuring agreement with
its long-term creditors. In connection with the restructuring agreement, all
royalty obligations due and long-term debt were converted to promissory notes
of $999,508 bearing interest at 7% per annum as well as warrants to purchase
2,626,140 shares of the Company's common stock for an aggregate exercise price
of $438 ("the Restructuring Warrants"). The promissory notes were
uncollateralized and subordinated to all other debt, and principal and
interest was to be paid at the sole discretion of the Board of Directors of
the Company. No principal or interest had been paid on the notes prior to
1995, when the notes, including accrued interest, were paid in full.
In February 1996, the Company obtained $2.5 million in equipment financing
through a term loan agreement with Merrill Lynch Business Financial Services,
Inc. This term loan was used to finance the purchase of equipment and
leasehold improvements. Interest is accrued at the per annum rate equal to the
sum of 2.70% plus the 30-Day Commercial Paper Rate as defined. The terms of
such financing provide for the repayment of the term loan in 60 consecutive
monthly installments. The term loan is collateralized by a first lien on all
business assets of the parent company.
4. INCOME TAXES
The components of income tax expense (benefit) for the years ended September
30 are as follows:
<TABLE>
<CAPTION>
1993 1994 1995
------ --------- ----------
<S> <C> <C> <C>
Current:
Federal....................................... $ -- $ 10,752 $1,030,253
State......................................... 3,607 36,595 395,153
------ --------- ----------
Total current............................... 3,607 47,347 1,425,406
------ --------- ----------
Deferred:
Federal....................................... -- (562,594) 301,574
State......................................... -- (26,227) 1,384
------ --------- ----------
Total deferred.............................. -- (588,821) 302,958
------ --------- ----------
Total tax expense (benefit)..................... $3,607 $(541,474) $1,728,364
====== ========= ==========
</TABLE>
Deferred income taxes are recorded when revenues and expenses are recognized
in different periods for financial statement and tax return purposes. The
temporary differences and tax carryforwards which created deferred tax assets
at September 30 are detailed below:
<TABLE>
<CAPTION>
1993 1994 1995
--------- -------- --------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards............. $ 645,176 $558,279 $ --
Reserves and allowances...................... 6,823 26,061 144,795
Other........................................ 544 4,481 141,068
--------- -------- --------
Total deferred tax assets.................. 652,543 588,821 285,863
Valuation allowance............................ (652,543) -- --
--------- -------- --------
Net deferred tax asset......................... $ -- $588,821 $285,863
========= ======== ========
</TABLE>
F-9
<PAGE>
E*TRADE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT MARCH 31, 1996 AND FOR THE SIX MONTHS ENDED MARCH 31, 1995 AND
1996 IS UNAUDITED)
The effective tax rate differs from the federal statutory rate as follows:
<TABLE>
<CAPTION>
1993 1994 1995
----- ------ ----
<S> <C> <C> <C>
Tax expense at federal statutory rate............ 34.0 % 34.0 % 35.0%
State income taxes, net of federal tax benefit... 2.3 2.8 6.1
Decrease in federal income tax asset valuation
allowance....................................... (34.1) (260.4) --
Other............................................ 1.3 1.5 (1.0)
----- ------ ----
Effective tax rate............................... 3.5 % (222.1)% 40.1%
===== ====== ====
</TABLE>
5. STOCKHOLDERS' EQUITY
On September 28, 1995, the Company sold 100,000 shares of Series A Preferred
Stock ("Series A") to General Atlantic Partners for $12,300,000. The Company
used approximately $3,800,000 of the proceeds to repurchase and retire
outstanding common stock from existing stockholders.
Each share of Series A Preferred Stock is convertible, at the option of the
stockholder, into 60 shares of common stock (subject to adjustment for events
of dilution). Conversion of the Preferred Stock into common stock is automatic
upon the closing of an underwritten public offering under the Securities Act
of 1933, the proceeds of which exceed $7,500,000. The Preferred stockholders
have voting rights equal to the common shares they would have upon conversion.
Upon liquidation, holders of the Preferred Stock are entitled to receive a
preferential amount equal to their original per share purchase price plus any
declared and unpaid dividends before any distributions to common stockholders.
F-10
<PAGE>
E*TRADE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT MARCH 31, 1996 AND FOR THE SIX MONTHS ENDED MARCH 31, 1995 AND
1996 IS UNAUDITED)
The Company's stock option plans provide for granting of nonqualified or
incentive stock options to officers, directors, key employees and consultants
for the purchase of shares of common stock at the prevailing price of the
Company's stock as determined by the Board of Directors at the date the option
is granted. The options are generally exercisable ratably over a five-year
period from the date the option is granted and expire within ten years from
the date of grant. A summary of stock option activity follows:
<TABLE>
<CAPTION>
NUMBER OPTION PRICE
OF SHARES PER SHARE
--------- ------------
<S> <C> <C>
Outstanding at October 1, 1992....................... 840,000 $.13
Granted............................................ 2,370,000 $.13-$.28
--------- -----------
Outstanding at September 30, 1993.................... 3,210,000 $.13-$.28
Granted............................................ 90,000 $.28
--------- -----------
Outstanding at September 30, 1994.................... 3,300,000 $.13-$.28
Granted............................................ 1,776,000 $.28-$.50
Cancelled.......................................... (876,000) $.28-$.42
Exercised.......................................... (497,100) $.13-$.50
--------- -----------
Outstanding at September 30, 1995.................... 3,702,900 $.13-$.50
Granted............................................ 1,737,000 $2.05-$2.33
Cancelled.......................................... (75,000) $.28-$.50
Exercised.......................................... (469,080) $.13-$.50
--------- -----------
Outstanding at March 31, 1996........................ 4,895,820 $.13-$2.33
========= ===========
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------------
1993 1994 1995
------- --------- ---------
<S> <C> <C> <C>
Options available for grant...................... 690,000 1,800,000 900,000
Options exercisable.............................. 588,000 1,230,000 1,490,000
</TABLE>
In April 1993, the Company's shareholders approved the 1993 Stock Option
Plan (the "1993 Plan") which authorized 1,800,000 shares of the Company's
common stock as available for the granting of options. The 1993 Plan was the
successor plan to the 1983 Employee Incentive Stock Option Plan which expired
in March 1993. In 1994, the number of authorized shares under the 1993 Plan
was increased to 3,000,000.
During 1994 and 1995, Restructuring Warrants (see Note 3) to purchase
1,235,940 and 1,263,240 shares of comon stock, respectively, were exercised
for $210 and $206, respectively. The remaining Restructuring Warrants expired
in September 1995. In 1995, a consultant was granted a warrant to purchase
300,000 shares of the Company's common stock at $.42 per share, of which
29,880 were exercised in fiscal 1995 and the remainder in the six months ended
March 31, 1996.
6. REGULATORY REQUIREMENTS
E*TRADE Securities is subject to the Uniform Net Capital Rule (the "Rule")
under the Securities Exchange Act of 1934. E*TRADE Securities computes net
capital under the aggregate indebtedness method of the Rule, which, at
September 30, 1995, requires the maintenance of minimum net capital of the
greater
F-11
<PAGE>
E*TRADE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT MARCH 31, 1996 AND FOR THE SIX MONTHS ENDED MARCH 31, 1995 AND
1996 IS UNAUDITED)
of six and two-thirds percent (6 2/3%) of aggregate indebtedness or $100,000
and requires that the ratio of aggregate indebtedness to net capital, both as
defined, shall not exceed 15 to 1. E*TRADE Securities may not repay
subordinated borrowings, pay cash dividends, or make any unsecured advances or
loans to its parent or employees if such payment would result in aggregate
indebtedness exceeding 1000% of net capital or in net capital of less than
120% of the minimum net capital requirement. At September 30, 1995, E*TRADE
Securities had net capital of $7,062,000, which was $6,951,000 in excess of
its required net capital of $111,000. E*TRADE Securities' ratio of aggregate
indebtedness to net capital was .24 to 1 at September 30, 1995. At March 31,
1996, E*TRADE Securities had net capital of $7,726,000, which was $7,514,000
in excess of its required net capital of $212,000. E*TRADE Securities' ratio
of aggregate indebtedness to net capital was .41 to 1 at March 31, 1996.
7. LEASE ARRANGEMENTS
The Company leases equipment under capital leases expiring through fiscal
1999. Future minimum lease payments under capital leases as of September 30,
1995 are as follows:
<TABLE>
<S> <C>
Year ending September 30:
1996............................................................. $ 30,249
1997............................................................. 26,826
1998............................................................. 20,137
1999............................................................. 2,473
--------
Total minimum lease payments....................................... 79,685
Less: Amount representing interest ................................ 13,264
--------
Present value of minimum lease payments............................ $ 66,421
========
</TABLE>
The Company also has two noncancelable operating leases for office
facilities through 2002. Future minimum rental commitments under these leases
at September 30, 1995 are as follows:
<TABLE>
<S> <C>
Year ending September 30:
1996........................................................... $ 790,900
1997........................................................... 1,123,700
1998........................................................... 1,191,100
1999........................................................... 1,258,800
2000........................................................... 1,281,100
Thereafter..................................................... 1,634,600
</TABLE>
Rent expense for the years ended September 30, 1993, 1994 and 1995 was
approximately $100,500, $168,800 and $344,100, respectively.
8. COMMITMENTS, CONTINGENT LIABILITIES AND OTHER
The Company is a defendant in civil actions arising from the normal course
of business. In the opinion of management, these actions are expected to be
resolved with no material effect on the Company's financial position or
results of operations. During the year ended September 30, 1994, the Company
settled claims made by its former clearing broker. The total amount of this
settlement was $850,000 and is included in general and administrative
expenses. In connection with the settlement agreement, the Company repurchased
all shares of its common stock owned by its former clearing broker at the date
of the settlement for $252,908, which represented their estimated fair market
value.
In March 1996, the Company entered into a five-year employment agreement
with a key executive officer. The employment agreement provides for, among
other things, an annual base salary which is subject
F-12
<PAGE>
E*TRADE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT MARCH 31, 1996 AND FOR THE SIX MONTHS ENDED MARCH 31, 1995 AND
1996 IS UNAUDITED)
to adjustment based on the Company's performance and a severance payment up to
$1,250,000 in the event of termination of employment under certain defined
circumstances.v
9. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET CREDIT RISK AND CONCENTRATIONS
OF CREDIT RISK
As a securities broker, E*TRADE Securities' transactions are executed with
and on behalf of customers. E*TRADE Securities introduces these transactions
for clearance to its clearing brokers on a fully disclosed basis.
In the normal course of business, E*TRADE Securities' customer activities
involve the execution of securities transactions and settlement by its
clearing brokers. As the agreements between E*TRADE Securities and its
clearing brokers provide that E*TRADE Securities is obligated to assume any
exposure related to nonperformance by its customers, these activities may
expose E*TRADE Securities to off-balance-sheet credit risk in the event a
customer is unable to fulfill its contracted obligations. In the event a
customer fails to satisfy its obligations, E*TRADE Securities may be required
to purchase or sell financial instruments at prevailing market prices in order
to fulfill such customer's obligations.
The Company seeks to control off-balance-sheet credit risk by monitoring its
customer transactions and reviewing information it receives from its clearing
brokers on a daily basis and reserving for doubtful accounts when necessary.
10. SUBSEQUENT EVENTS
Effective January 18, 1996, the stockholders of the Company approved a
change in its name from Trade*Plus, Inc. to E*TRADE Group, Inc.
On April 10, 1996, the Company sold 20,336 shares of Series B Preferred
Stock ("Series B") for $2,847,040 and incurred issuance costs of $9,600. On
June 6, 1996, the Company sold 11,180 shares of Series C Preferred Stock
("Series C") to SOFTBANK Holdings Inc. for $8,999,900 and incurred issuance
costs of $50,000. Each share of Series B and Series C Preferred Stock is
convertible, at the option of the stockholder, into 60 shares of common stock.
Conversion of the Preferred Stock into common stock is automatic upon the
closing of an underwritten public offering under the Securities Act of 1933,
the proceeds of which exceed $7,500,000. The Series B and Series C Preferred
Stock have rights and privileges comparable to the Series A Preferred Stock
(see Note 5), except that Series B and C have no anti-dilution provisions.
In May 1996, the Company obtained $100 million in committed lines of
financing to provide collateral financing of customer securities upon the
conversion to self-clearing.
On May 31, 1996, the Board of Directors adopted the following, subject to
stockholder approval:
. The 1996 Stock Incentive Plan (the "1996 Plan"), and reserved 5,000,000
shares of common stock for future grants. The 1996 Plan is divided into
three components: the Discretionary Option Grant Program, the Stock
Issuance Program and the Automatic Option Grant Program. Under the
Discretionary Option Grant Program, options may be granted to purchase
shares of common stock at an exercise price not less than the fair
market value of those shares on the grant date to eligible employees.
The Stock Issuance Program allows for individuals to be issued shares of
common stock
F-13
<PAGE>
E*TRADE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT MARCH 31, 1996 AND FOR THE SIX MONTHS ENDED MARCH 31, 1995 AND
1996 IS UNAUDITED)
directly through the purchase of such shares at a price not less than
the fair market value of those shares at the time of issuance or as a
bonus tied to the performance of services. Under the Automatic Option
Grant Program, options are automatically granted at periodic intervals
to eligible non-employee members of the Board of Directors to purchase
shares of common stock at an exercise price equal to the fair market
value of those shares on the grant date.
. The 1996 Stock Purchase Plan, and reserved 1,500,000 shares of common
stock for sale to employees at a price no less than 85% of the lower of
the fair market value at the beginning of the two-year offering period
or the end of each of the six-month purchase periods.
. The reincorporation of the Company in Delaware, an increase in the
number of authorized shares of common stock to 50,000,000 and the
related exchange of each share of common stock of the Company into 60
shares of common stock of the Delaware corporation. Such reincorporation
and share exchange are anticipated to be approved by the stockholders in
June 1996. All references in the consolidated financial statements to
numbers of shares, per share amounts and prices of the Company's common
stock have been retroactively restated to reflect the increased number
of common shares outstanding.
F-14
<PAGE>
E*TRADE: EMPOWERING CUSTOMERS THROUGH TECHNOLOGY.
Founded in 1982, E*TRADE uses information technology to provide value-added
commercial transaction processing services. In 1992, the Company formed E*TRADE
Securities and began offering consumers online brokerage services available 24
hours a day, seven days a week. E*TRADE empowers its customers to take control
of their own financial transactions.
By offering highly secure services through encrypted transmissions, E*TRADE has
achieved industry recognition for its leadership in the secure provision of
online brokerage services.
User-friendly Web Trading Interface.
E*TRADE has made online trading simple, fast and fun.
Cost-effective Services.
Services are offered unbundled, so that customers can choose just the services
they want.
Personalized Environments.
Customers can customize their user interface to enhance their personal trading
experience.
Customers are able to trade through a broad range of electronic access points,
including the Internet, direct modem link, America Online, CompuServe and
touch-tone telephone.
SECURE OPERATIONS
[E*TRADE ORDER SCREEN]
[E*TRADE WEB PAGE]
ACCESS
ANYWHERE
ANY TIME
<PAGE>
JOIN THE
ELECTRONIC
TRADING
REVOLUTION
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses payable by the
Registrant in connection with the sale of Common Stock being registered. All
amounts are estimates except the registration fee, the NASD fee and the Nasdaq
National Market.
<TABLE>
<CAPTION>
AMOUNT
TO
BE PAID
-------
<S> <C>
Registration fee....................................................... $35,056
NASD fee............................................................... 10,666
Nasdaq National Market fee............................................. *
Printing and engraving................................................. *
Legal fees and expenses................................................ *
Accounting fees and expenses........................................... *
Blue sky fees and expenses............................................. 15,000
Transfer agent fees.................................................... *
Director and officer insurance premiums................................ *
Miscellaneous.......................................................... *
-------
Total................................................................ $ *
=======
</TABLE>
- --------
*To be filed by amendment.
The Selling Stockholders will bear their pro rata portion of underwriting
discounts and commissions, based on the number of shares offered by such
holders. All of the other costs and expenses of the Selling Stockholders will
be borne by the Registrant.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of the state of Delaware (the
"Delaware Law") empowers a Delaware corporation to indemnify any persons who
are, or are threatened to be made, parties to any threatened, pending or
completed legal action, suit or proceedings, whether civil, criminal,
administrative or investigative (other than action by or in the right of such
corporation), by reason of the fact that such person was an officer or
director of such corporation, or is or was serving at the request of such
corporation as a director, officer, employee or agent of another corporation
or enterprise. The indemnity may include expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding,
provided that such officer or director acted in good faith and in a manner he
reasonably believed to be in or not opposed to the corporation's best
interests, and, for criminal proceedings, had no reasonable cause to believe
his conduct was illegal. A Delaware corporation may indemnify officers and
directors in an action by or in the right of the corporation under the same
conditions, except that no indemnification is permitted without judicial
approval if the officer or director is adjudged to be liable to the
corporation in the performance of his duty. Where an officer or director is
successful on the merits or otherwise in the defense of any action referred to
above, the corporation must indemnify him against the expenses which such
officer or director actually and reasonably incurred.
In accordance with the Delaware Law, the Restated Certificate of
Incorporation of the Company contains a provision to limit the personal
liability of the directors of the Registrant for violations of their fiduciary
duty. This provision eliminates each director's liability to the Registrant or
its stockholders for monetary damages except (i) for any breach of the
director's duty of loyalty to the Registrant 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
II-1
<PAGE>
Section 174 of the Delaware Law providing for liability of directors for
unlawful payment of dividends or unlawful stock purchases or redemptions, or
(iv) for any transaction from which a director derived an improper personal
benefit. The effect of this provision is to eliminate the personal liability
of directors for monetary damages for actions involving a breach of their
fiduciary duty of care, including any such actions involving gross negligence.
Article 5 of the Restated Bylaws of the Registrant provide for
indemnification of the officers and directors of the Registrant to the fullest
extent permitted by applicable law.
In connection with the incorporation of the Registrant into the State of
Delaware, the Registrant entered into indemnification agreements with each
director and certain officers, a form of which is attached as Exhibit 10.1
hereto and incorporated herein by reference. The Indemnification Agreements
provide indemnification to such directors and officers under certain
circumstances for acts or omissions which may not be covered by directors' and
officers' liability insurance. Reference is also made to Section 8 of the
Underwriting Agreement contained in Exhibit 1.1 hereto, indemnifying officers
and directors of the Registrant against certain liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since May 31, 1993, the Registrant has sold and issued the following
unregistered securities:
(1) During the period May 31, 1993 through May 31, 1996 the Registrant
granted stock options to employees, directors and consultants under its 1993
Stock Option Plan (the "1993 Plan"), as well as certain other nonqualified
options, covering an aggregate of 6,129,000 shares of the Company's Common
Stock at an average exercise price of $ per share. Of these, options
covering an aggregate of 1,032,000 were cancelled without being exercised.
During the same period, the Registrant sold an aggregate of 1,032,000 shares
of its Common Stock to employees, directors and consultants for cash
consideration in the aggregate amount of $381,837 upon the exercise of
outstanding stock options.
(2) On September 28, 1995, the Registrant sold 100,000 shares of Series A
Preferred Stock to certain investors for $12,300,000 in cash.
(3) On January 31, 1996, the Registrant sold 300,000 shares of its Common
Stock to an employee in the aggregate amount of $125,000 upon the exercise of
a Warrant.
(4) On April 10, 1996, the Registrant sold 20,336 shares of Series B
Preferred Stock to certain investors for $2,847,040 in cash.
(5) On June 6, 1996, the Registrant sold 11,180 shares of Series C Preferred
Stock to an investor for $9.0 million in cash.
The sales and issuances of securities in the transactions described in
paragraph (1) above were deemed to be exempt from registration under the
Securities Act by virtue of Rule 701 promulgated thereunder in that they were
offered and sold either pursuant to written compensatory or pursuant to a
written contract relating to compensation, as provided by Rule 701.
The sale and issuance of securities in the transaction described in
paragraphs (2) through (5) were deemed to be exempt from registration under
the Securities Act by virtue of Section 4(2) and/or Regulation D promulgated
thereunder as transactions not involving any public offering. The purchasers
in each case represented their intention to acquire the securities for
investment only and not with a view to the distribution thereof. Appropriate
legends are affixed to the stock certificates issued in such transactions. All
recipients either received adequate information about the Registrant or had
access, through employment or other relationships, to such information.
II-2
<PAGE>
In May 1996, E*TRADE Group, Inc., a Delaware corporation ("E*TRADE
Delaware") was formed and 100 shares of Common Stock were issued to E*TRADE
Group, Inc., a California corporation ("E*TRADE California") for a de minimis
dollar amount. The sale and issuance was deemed to be exempt from registration
under the Securities Act by virtue of Section 4(2) as a transaction not
involving any public offering.
In July 1996, E*TRADE California will merge with and into E*TRADE Delaware.
In connection with the merger, E*TRADE Delaware will issue an aggregate of
16,065,840 shares of Common Stock to the holders of common stock of E*TRADE
California (assuming shares outstanding at May 31, 1996), such that holders of
common stock of E*TRADE California will receive a proportionate interest in
E*TRADE Delaware Common Stock, without giving effect to the offering.
Likewise, E*TRADE Delaware will issue Series A Preferred Stock and Series B
Preferred Stock to the holders of Series A Preferred Stock and Series B
Preferred Stock. The issues of securities will not be registered under the
Securities Act due to the exemption from registration thereunder provided by
Section 3(a)(9) thereof.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------- --------------------
<C> <S>
*1.1 Form of Underwriting Agreement.
3.1 Certificate of Incorporation of the Registrant.
3.2 Bylaws of the Registrant.
*3.3 Restated Certificate of Incorporation of the Registrant to be
effective prior to the offering.
*3.4 Restated Bylaws of the Registrant to be effective prior to the
offering.
*4.1 Specimen of Common Stock Certificate.
*4.2 Reference is hereby made to Exhibits 3.1 to 3.4.
*5.1 Opinion of Brobeck, Phleger & Harrison LLP.
10.1 Form of Indemnification Agreement to be entered into between the
Registrant and its directors and certain officers.
10.2 1983 Employee Incentive Stock Option Plan.
10.3 1993 Stock Option Plan.
*10.4 1996 Stock Incentive Plan.
*10.5 Form of Automatic Stock Option Agreement.
*10.6 Form of Stock Option Agreement.
*10.7 Form of Stock Issuance Agreement.
10.8 401(k) Plan.
*10.9 1996 Stock Purchase Plan.
10.10 Employee Bonus Plan.
10.11 Lease of premises at Four Embarcadero Place, 2400 Geng Road, Palo
Alto, California.
*10.12 Lease of premises at , Rancho Cordova, California.
*10.13 Employment Agreement dated March 15, 1996, by and between Christos M.
Cotsakos and the Registrant.
10.14 Clearing Agreement between E*TRADE Securities, Inc. and Herzog,
Heine, Geduld, Inc. dated May 11, 1994.
10.15 Guarantee by the Registrant to Herzog, Heine, Geduld, Inc.
11.1 Statement regarding computation of per share earnings.
21.1 Subsidiaries of the Registrant.
*23.1 Consent of Independent Auditors.
*23.2 Consent of Counsel (included in Exhibit 5.1).
24.1 Power of Attorney (see page II-5).
27.1 Financial Data Schedule.
</TABLE>
- --------
*To be filed by amendment
II-3
<PAGE>
(B) FINANCIAL STATEMENT SCHEDULES
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
financial statements or notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the Delaware General Corporation Law, the Restated
Certificate of Incorporation or the Restated Bylaws of Registrant,
Indemnification Agreements entered into between the Registrant and its
directors and certain of its officers, Underwriting Agreement, 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 hereunder, the
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.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus 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 he
deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Palo Alto, State of
California on this 7th day of June 1996.
E*TRADE Group, Inc.
/s/ Christos M. Cotsakos
By___________________________________
Christos M. Cotsakos
President
and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints jointly and severally, Christos M. Cotsakos,
Wayne H. Heldt and Stephen C. Richards and each one of them, his attorneys-in-
fact, each with the power of substitution, for him in any and all capacities,
to sign any and all amendments to this Registration Statement (including post-
effective amendments), or any Registration Statement for the same offering
that is to be effective upon filing pursuant to Rule 462(b) under the
Securities Act of 1933, as amended, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his substitutes, may do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
SIGNATURE TITLE DATE
/s/ William A. Porter Chairman of the June 7, 1996
- ------------------------------------- Board
William A. Porter
/s/ Christos M. Cotsakos President and Chief June 7, 1996
- ------------------------------------- Executive Officer
Christos M. Cotsakos (principal
executive officer)
/s/ Stephen C. Richards Chief Financial June 7, 1996
- ------------------------------------- Officer (principal
Stephen C. Richards financial and
accounting officer)
/s/ Richard S. Braddock Director June 7, 1996
- -------------------------------------
Richard S. Braddock
/s/ William E. Ford Director June 7, 1996
- -------------------------------------
William E. Ford
/s/ George Hayter Director June 7, 1996
- -------------------------------------
George Hayter
II-5
<PAGE>
SIGNATURE TITLE DATE
/s/ Keith Petty Director June 7, 1996
- -------------------------------------
Keith Petty
/s/ Lewis E. Randall Director June 7, 1996
- -------------------------------------
Lewis E. Randall
/s/ Lester C. Thurow Director June 7, 1996
- -------------------------------------
Lester C. Thurow
II-6
<PAGE>
Exhibit 3.1
CERTIFICATE OF INCORPORATION
OF
E*TRADE GROUP, INC.
ARTICLE I
The name of this corporation is E*TRADE Group, Inc. (the
"Corporation").
ARTICLE II
The address of the registered office of the Corporation in the State
of Delaware is 1013 Centre Road, in the City of Wilmington, County of New
Castle. The name of its registered agent at such address is The Prentice-Hall
Corporation System, Inc.
ARTICLE III
The nature of the business or purposes to be conducted or promoted is
to engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of Delaware.
ARTICLE IV
(A) Classes of Stock. This corporation is authorized to issue two
----------------
classes of stock to be designated, respectively, "Common Stock" and "Preferred
Stock." The total number of shares which the corporation is authorized to issue
is One Thousand One Hundred (1,100) shares. One Thousand (1,000) shares shall
be Common Stock, par value $.01 per share and One Hundred (100) shares shall be
Preferred Stock, par value $.01 per share.
(B) The Preferred Stock may be issued from time to time in one or more
series. The Board of Directors is hereby authorized, within the limitations and
restrictions stated in this Certificate of Incorporation, to fix or alter the
divided rights, dividend rate, conversion rights, voting rights, rights and
terms of redemption (including sinking fund provisions), the redemption price or
prices, and the liquidation preferences of any wholly unissued series of
Preferred Stock, and the number of shares constituting any such series and the
designation thereof, or any of them, and to increase or decrease the number of
shares of any series subsequent to the issue of shares of that series, but not
below the number of shares of such series then outstanding. In case the number
of shares of any series shall be so decreased, the shares constituting such
decrease shall resume the status which they had prior to the adoption of the
resolution originally fixing the number of shares of such series.
ARTICLE V
The name and mailing address of the incorporator is Shari Sacks,
Brobeck, Phleger & Harrison LLP, One Market, Spear Street Tower, San Francisco,
California 94105.
ARTICLE VI
Except as otherwise provided in this Certificate of Incorporation, in
furtherance and not in limitation of the powers conferred by statute, the Board
of Directors is expressly authorized to make, repeal, alter, amend and rescind
any or all of the Bylaws of the corporation.
1.
<PAGE>
ARTICLE VII
The number of directors of the corporation shall be fixed from time to
time by, or in the manner provided in, the bylaws or amendment thereof duly
adopted by the Board of Directors or by the stockholders.
ARTICLE VIII
Elections of directors need not be by written ballot unless the
Bylaws of the corporation shall so provide.
ARTICLE IX
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the corporation may be kept
(subject to any provision contained in the statutes) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of the corporation.
ARTICLE X
A director of the corporation shall not be personally liable to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (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 Delaware General Corporation
Law, or (iv) for any transaction from which the director derived any improper
personal benefit. If the Delaware General Corporation Law is amended after
approval by the sole stockholder of this Article to authorize corporation action
further eliminating or limiting the personal liability of directors then the
liability of a director of the corporation shall be eliminated or limited to the
fullest extent permitted by the Delaware General Corporation Law as so amended.
Any repeal or modification of the foregoing provisions of this Article
X by the stockholders of the corporation shall not adversely affect any right or
protection of a director of the corporation existing at the time of such repeal
or modification.
ARTICLE XI
The corporation reserves the right to amend, alter, change or repeal
any provision contained in this Certificate of Incorporation, in the manner now
or hereafter prescribed by statute, and all rights conferred upon stockholders
herein are granted subject to this reservation.
2.
<PAGE>
IN WITNESS WHEREOF, the undersigned has signed this Certificate
this 30 day of May, 1996.
/s/ Shari Sacks
------------------------------------
Shari Sacks
Incorporator
3.
<PAGE>
Exhibit 3.2
BYLAWS
OF
E*TRADE GROUP, INC.
(a Delaware corporation)
ARTICLE I
OFFICES
Section 1. The registered office shall be in the City of Wilmington,
County of New Castle, State of Delaware.
Section 2. The corporation may also have offices at such other places
both within and without the State of Delaware as the Board of Directors may from
time to time determine or the business of the corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. All meetings of the stockholders for the election of
directors shall be held at such place within or without the State of Delaware as
may be designated from time to time by the Board of Directors and stated in the
notice of the meeting. Meetings of stockholders for any other purpose may be
held at such time and place, within or without the State of Delaware, as shall
be stated in the notice of the meeting or in a duly executed waiver of notice
thereof.
Section 2. Annual meetings of stockholders, commencing with the year
1997, shall be held at such date and time as shall be designated from time to
time by the Board of Directors and stated in the notice of the meeting, at which
they shall elect by a plurality vote a board of directors, and transact such
other business as may properly be brought before the meeting.
Section 3. Written notice of the annual meeting stating the place,
date and hour of the meeting shall be given to each stockholder entitled to vote
at such meeting not fewer than ten (10) nor more than sixty (60) days before the
date of the meeting.
Section 4. The officer who has charge of the stock ledger of the
corporation shall prepare and make, at least ten days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof, and may be inspected by any stockholder who is
present.
Section 5. Special meetings of the stockholders, for any purpose or
purposes, unless otherwise prescribed by statute or by the certificate of
incorporation, may be called by the president and shall be called by the
president or secretary at the request in writing of a majority of the Board of
Directors, or at the request in
1.
<PAGE>
writing of stockholders owning a majority in amount of the entire capital stock
of the corporation issued and outstanding and entitled to vote. Such request
shall state the purpose or purposes of the proposed meeting.
Section 6. Written notice of a special meeting stating the place,
date and hour of the meeting and the purpose or purposes for which the meeting
is called, shall be given not fewer than ten (10) nor more than sixty (60) days
before the date of the meeting, to each stockholder entitled to vote at such
meeting.
Section 7. Business transacted at any special meeting of stockholders
shall be limited to the purposes stated in the notice.
Section 8. The holders of fifty percent (50%) of the stock issued and
outstanding and entitled to vote thereat, present in person or represented by
proxy, shall constitute a quorum at all meetings of the stockholders for the
transaction of business except as otherwise provided by statute or by the
certificate of incorporation. If, however, such quorum shall not be present or
represented at any meeting of the stockholders, the stockholders entitled to
vote thereat, present in person or represented by proxy, shall have power to
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum shall be present or represented. At such adjourned
meeting at which a quorum shall be present or represented any business may be
transacted which might have been transacted at the meeting as originally
notified. If the adjournment is for more than thirty days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each stockholder of record entitled to
vote at the meeting.
Section 9. When a quorum is present at any meeting, the vote of the
holders of a majority of the stock having voting power present in person or
represented by proxy shall decide any question brought before such meeting,
unless the question is one upon which by express provision of the statutes or of
the certificate of incorporation, a different vote is required, in which case
such express provision shall govern and control the decision of such question.
Section 10. Unless otherwise provided in the certificate of
incorporation each stockholder shall at every meeting of the stockholders be
entitled to one vote in person or by proxy for each share of the capital stock
having voting power held by such stockholder, but no proxy shall be voted on
after three years from its date, unless the proxy provides for a longer period.
Section 11. Unless otherwise provided in the certificate of
incorporation, any action required to be taken at any annual or special meeting
of stockholders of the corporation, or any action which may be taken at any
annual or special meeting of such stockholders, may be taken without a meeting,
without prior notice and without a vote, if a consent in writing, setting forth
the action so taken, shall be signed by the holders of outstanding stock having
not less than the minimum number of votes that would be necessary to authorize
or take such action at a meeting at which all shares entitled to vote thereon
were present and voted. Prompt notice of the taking of the corporate action
without a meeting by less than unanimous written consent shall be given to those
stockholders who have not consented in writing.
ARTICLE III
DIRECTORS
Section 1. The number of directors which shall constitute the whole
board shall be determined by resolution of the Board of Directors or by the
stockholders at the annual meeting of the stockholders, except as provided in
Section 2 of this Article, and each director elected shall hold office until his
successor is elected and qualified. Directors need not be stockholders.
2.
<PAGE>
Section 2. Vacancies and new created directorships resulting from any
increase in the authorized number of directors may be filled by a majority of
the directors then in office, though less than a quorum, or by a sole remaining
director, and the directors so chosen shall hold office until the next annual
election and until their successors are duly elected and shall qualify, unless
sooner displaced. If there are no directors in office, then an election of
directors may be held in the manner provided by statute. If, at the time of
filling any vacancy or any newly created directorship, the directors then in
office shall constitute less than a majority of the whole board (as constituted
immediately prior to any such increase), the Court of Chancery may, upon
application of any stockholder or stockholders holding at least ten percent of
the total number of the shares at the time outstanding having the right to vote
for such directors, summarily order an election to be held to fill any such
vacancies or newly created directorships, or to replace the directors chosen by
the directors then in office.
Section 3. The business of the corporation shall be managed by or
under the direction of its board of directors which may exercise all such powers
of the corporation and do all such lawful acts and things as are not by statute
or by the certificate of incorporation or by these bylaws directed or required
to be exercised or done by the stockholders.
MEETINGS OF THE BOARD OF DIRECTORS
Section 4. The Board of Directors of the corporation may hold
meetings, both regular and special, either within or without the State of
Delaware.
Section 5. The first meeting of each newly elected Board of Directors
shall be held at such time and place as shall be fixed by the vote of the
stockholders at the annual meeting and no notice of such meeting shall be
necessary to the newly elected directors in order legally to constitute the
meeting, provided a quorum shall be present. In the event of the failure of the
stockholders to fix the time or place of such first meeting of the newly elected
Board of Directors, or in the event such meeting is not held at the time and
place so fixed by the stockholders, the meeting may be held at such time and
place as shall be specified in a notice given as hereinafter provided for
special meetings of the Board of Directors, or as shall be specified in a
written waiver signed by all of the directors.
Section 6. Regular meetings of the Board of Directors may be held
without notice at such time and at such place as shall from time to time be
determined by the board.
Section 7. Special meetings of the board may be called by the
president on two (2) days' notice to each director by mail or forty-eight (48)
hours notice to each director either personally or by telegram; special meetings
shall be called by the president or secretary in like manner and on like notice
on the written request of two directors unless the board consists of only one
director, in which case special meetings shall be called by the president or
secretary in like manner and on like notice on the written request of the sole
director.
Section 8. At all meetings of the board a majority of the directors
shall constitute a quorum for the transaction of business and the act of a
majority of the directors present at any meeting at which there is a quorum
shall be the act of the Board of Directors, except as may be otherwise
specifically provided by statute or by the certificate of incorporation. If a
quorum shall not be present at any meeting of the Board of Directors, the
directors present thereat may adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum shall be present.
Section 9. Unless otherwise restricted by the certificate of
incorporation of these bylaws, any action required or permitted to be taken at
any meeting of the Board of Directors or of any committee thereof may be taken
without a meeting, if all members of the board or committee, as the case may be,
consent thereto in writing, and the writing or writings are filed with the
minutes of proceedings of the board or committee.
3.
<PAGE>
Section 10. Unless otherwise restricted by the certificate of
incorporation or these bylaws, members of the Board of Directors, or any
committee designated by the Board of Directors, may participate in a meeting of
the Board of Directors, or any committee, by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other, and such participation in a meeting shall
constitute presence in person at the meeting.
COMMITTEES OF DIRECTORS
Section 11. The Board of Directors may, by resolution passed by a
majority of the whole board, designate one or more committees, each committee to
consist of one or more of the directors of the corporation. The board may
designate one or more directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting of the committee.
In the absence of disqualification of a member of a committee, the
member or members thereof present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint
another member of the Board of Directors to act at the meeting in the place of
any such absent or disqualified member.
Any such committee, to the extent provided in the resolution of the
Board of Directors, shall have and may exercise all the powers and authority of
the Board of Directors in the management of the business and affairs of the
corporation, and may authorize the seal of the corporation to be affixed to all
papers which may require it; but no such committee shall have the power or
authority in reference to amending the certificate of incorporation, adopting an
agreement of merger or consolidation, recommending to the stockholders the sale,
lease or exchange of all or substantially all of the corporation's property and
assets, recommending to the stockholders a dissolution of the corporation or a
revocation of a dissolution, or amending the bylaws of the corporation; and,
unless the resolution or the certificate of incorporation expressly so provide,
no such committee shall have the power or authority to declare a dividend or to
authorize the issuance of stock. Such committee or committees shall have such
name or names as may be determined from time to time by resolution adopted by
the Board of Directors.
Section 12. Each committee shall keep regular minutes of its meetings
and report the same to the Board of Directors when required.
COMPENSATION OF DIRECTORS
Section 13. Unless otherwise restricted by the certificate of
incorporation or these bylaws, the Board of Directors shall have the authority
to fix the compensation of directors. The directors may be paid their expenses,
if any, of attendance at each meeting of the Board of Directors and may be paid
a fixed sum for attendance at each meeting of the Board of Directors or a stated
salary as director. No such payment shall preclude any director from serving
the corporation in any other capacity and receiving compensation therefor.
Members of special or standing committees may be allowed like compensation for
attending committee meetings.
REMOVAL OF DIRECTORS
Section 14. Unless otherwise restricted by the certificate of
incorporation or bylaw, any director or the entire Board of Directors may be
removed, with or without cause, by the holders of a majority of shares entitled
to vote at an election of directors.
ARTICLE IV
NOTICES
4.
<PAGE>
Section 1. Whenever, under the provisions of the statutes or of the
certificate of incorporation or of these bylaws, notice is required to be given
to any director or stockholder, it shall not be construed to mean personal
notice, but such notice may be given in writing, by mail, addressed to such
director or stockholder, at his address as it appears on the records of the
corporation, with postage thereon prepaid, and such notice shall be deemed to be
given at the time when the same shall be deposited in the United States mail.
Notice to directors may also be given by telegram.
Section 2. Whenever any notice is required to be given under the
provisions of the statutes or of the certificate of incorporation or of these
bylaws, a waiver thereof in writing, signed by the person or persons entitled to
said notice, whether before or after the time stated therein, shall be deemed
equivalent thereto.
ARTICLE V
OFFICERS
Section 1. The officers of the corporation shall be chosen by the
Board of Directors and shall be a president, treasurer and a secretary. The
Board of Directors may elect from among its members a Chairman of the Board and
a Vice Chairman of the Board. The Board of Directors may also choose one or
more vice-presidents, assistant secretaries and assistant treasurers. Any
number of offices may be held by the same person, unless the certificate of
incorporation or these bylaws otherwise provide.
Section 2. The Board of Directors at its first meeting after each
annual meeting of stockholders shall choose a president, a treasurer, and a
secretary and may choose vice presidents.
Section 3. The Board of Directors may appoint such other officers and
agents as it shall deem necessary who shall hold their offices for such terms
and shall exercise such powers and perform such duties as shall be determined
from time to time by the board.
Section 4. The salaries of all officers and agents of the
corporation shall be fixed by the Board of Directors.
Section 5. The officers of the corporation shall hold office until
their successors are chosen and qualify. Any officer elected or appointed by
the Board of Directors may be removed at any time by the affirmative vote of a
majority of the Board of Directors. Any vacancy occurring in any office of the
corporation shall be filled by the Board of Directors.
THE CHAIRMAN OF THE BOARD
Section 6. The Chairman of the Board, if any, shall preside at all
meetings of the Board of Directors and of the stockholders at which he shall be
present. He shall have and may exercise such powers as are, from time to time,
assigned to him by the Board and as may be provided by law.
Section 7. In the absence of the Chairman of the Board, the Vice
Chairman of the Board, if any, shall preside at all meetings of the Board of
Directors and of the stockholders at which he shall be present. He shall have
and may exercise such powers as are, from time to time, assigned to him by the
Board and as may be provided by law.
THE PRESIDENT AND VICE-PRESIDENTS
Section 8. The president shall be the chief executive officer of the
corporation; and in the absence of the Chairman and Vice Chairman of the Board
he shall preside at all meetings of the stockholders and
5.
<PAGE>
the Board of Directors; he shall have general and active management of the
business of the corporation and shall see that all orders and resolutions of the
Board of Directors are carried into effect.
Section 9. He shall execute bonds, mortgages and other contracts
requiring a seal, under the seal of the corporation, except where required or
permitted by law to be otherwise signed and executed and except where the
signing and execution thereof shall be expressly delegated by the Board of
Directors to some other officer or agent of the corporation.
Section 10. In the absence of the president or in the event of his
inability or refusal to act, the vice-president, if any, (or in the event there
be more than one vice-president, the vice-presidents in the order designated by
the directors, or in the absence of any designation, then in the order of their
election) shall perform the duties of the president, and when so acting, shall
have all the powers of and be subject to all the restrictions upon the
president. The vice-presidents shall perform such other duties and have such
other powers as the Board of Directors may from time to time prescribe.
THE SECRETARY AND ASSISTANT SECRETARY
Section 11. The secretary shall attend all meetings of the Board of
Directors and all meetings of the stockholders and record all the proceedings of
the meetings of the corporation and of the Board of Directors in a book to be
kept for that purpose and shall perform like duties for the standing committees
when required. He shall give, or cause to be given, notice of all meetings of
the stockholders and special meetings of the Board of Directors, and shall
perform such other duties as may be prescribed by the Board of Directors or
president, under whose supervision he shall be. He shall have custody of the
corporate seal of the corporation and he, or an assistant secretary, shall have
authority to affix the same to any instrument requiring it and when so affixed,
it may be attested by his signature or by the signature of such assistant
secretary. The Board of Directors may give general authority to any other
officer to affix the seal of the corporation and to attest the affixing by his
signature.
Section 12. The assistant secretary, or if there be more than one,
the assistant secretaries in the order determined by the Board of Directors (or
if there be no such determination, then in the order of their election) shall,
in the absence of the secretary or in the event of his inability or refusal to
act, perform the duties and exercise the powers of the secretary and shall
perform such other duties and have such other powers as the board of directors
may from time to time prescribe.
THE TREASURER AND ASSISTANT TREASURERS
Section 13. The treasurer shall have the custody of the corporate
funds and securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the corporation and shall deposit all moneys
and other valuable effects in the name and to the credit of the corporation in
such depositories as may be designated by the Board of Directors.
Section 14. He shall disburse the funds of the corporation as may be
ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the president and the Board of Directors, at
its regular meetings, or when the Board of Directors so requires, an account of
all his transactions as treasurer and of the financial condition of the
corporation.
Section 15. If required by the Board of Directors, he shall give the
corporation a bond (which shall be renewed every six years) in such sum and with
such surety or sureties as shall be satisfactory to the Board of Directors for
the faithful performance of the duties of his office and for the restoration to
the corporation, in case of his death, resignation, retirement or removal from
office, of all books, papers, vouchers, money and other property of whatever
kind in his possession or under his control belonging to the corporation.
6.
<PAGE>
Section 16. The assistant treasurer, or if there shall be more than
one, the assistant treasurers in the order determined by the Board of Directors
(or if there be no such determination, then in the order of their election)
shall, in the absence of the treasurer or in the event of his inability or
refusal to act, perform the duties and exercise the powers of the treasurer and
shall perform such other duties and have such other powers as the Board of
Directors may from time to time prescribe.
ARTICLE VI
CERTIFICATE OF STOCK
Section 1. Every holder of stock in the corporation shall be entitled
to have a certificate, signed by, or in the name of the corporation by, the
chairman or vice-chairman of the Board of Directors, or the president or a
vice-president and the treasurer or an assistant treasurer, or the secretary or
an assistant secretary of the corporation, certifying the number of shares owned
by him in the corporation.
Certificates may be issued for partly paid shares and in such case
upon the face or back of the certificates issued to represent any such partly
paid shares, the total amount of the consideration to be paid therefor, and the
amount paid thereon shall be specified.
If the corporation shall be authorized to issue more than one class of
stock or more than one series of any class, the powers, designations,
preferences and relative, participating, optional or other special rights of
each class of stock or series thereof and the qualification, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate which the corporation shall
issue to represent such class or series of stock, provided that, except as
otherwise provided in section 202 of the General Corporation Law of Delaware, in
lieu of the foregoing requirements, there may be set forth on the face or back
of the certificate which the corporation shall issue to represent such class or
series of stock, a statement that the corporation will furnish without charge to
each stockholder who so requests the powers, designations, preferences and
relative, participating, optional or other special rights of each class of stock
or series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights.
Section 2. Any of or all the signatures on the certificate may be
facsimile. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent or registrar before such certificate is
issued, it may be issued by the corporation with the same effect as if he were
such officer, transfer agent or registrar at the date of issue.
LOST CERTIFICATES
Section 3. The Board of Directors may direct a new certificate or
certificates to be issued in place of any certificate or certificates
theretofore issued by the corporation alleged to have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
the certificate of stock to be lost, stolen or destroyed. When authorizing such
issue of a new certificate or certificates, the Board of Directors may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed certificate or certificates, or his
legal representative, to advertise the same in such manner as it shall require
and/or to give the corporation a bond in such sum as it may direct as indemnity
against any claim that may be made against the corporation with respect to the
certificate alleged to have been lost, stolen or destroyed.
TRANSFER OF STOCK
Section 4. Upon surrender to the corporation or the transfer agent of
the corporation of a certificate for shares duly endorsed or accompanied by
proper evidence of succession, assignation or authority to
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transfer, it shall be the duty of the corporation to issue a new certificate to
the person entitled thereto, cancel the old certificate and record the
transaction upon its books.
FIXING RECORD DATE
Section 5. In order that the corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholder or
any adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board of Directors may fix, in advance, a record date,
which shall not be more than sixty nor less than ten days before the date of
such meeting, nor more than sixty days prior to any other action. A
determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the Board of Directors may fix a new record date for the adjourned
meeting.
REGISTERED STOCKHOLDERS
Section 6. The corporation shall be entitled to recognize the
exclusive right of a person registered on its books as the owner of shares to
receive dividends, and to vote as such owner, and to hold liable for calls and
assessments a person registered on its books as the owner of shares and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of any other person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
ARTICLE VII
GENERAL PROVISIONS
DIVIDENDS
Section 1. Dividends upon the capital stock of the corporation,
subject to the provisions of the certificate of incorporation, if any, may be
declared by the Board of Directors at any regular or special meeting, pursuant
to law. Dividends may be paid in cash, in property, or in shares of the capital
stock, subject to the provisions of the certificate of incorporation.
Section 2. Before payment of any dividend, there may be set aside out
of any funds of the corporation available for dividends such sum or sums as the
directors from time to time, in their absolute discretion, think proper as a
reserve or reserves to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the corporation, or for such other
purposes as the directors shall think conducive to the interest of the
corporation, and the directors may modify or abolish any such reserve in the
manner in which it was created.
CHECKS
Section 3. All checks or demands for money and notes of the
corporation shall be signed by such officer or officers or such other person or
persons as the Board of Directors may from time to time designate.
FISCAL YEAR
Section 4. The fiscal year of the corporation shall be fixed by
resolution of the Board of Directors.
8.
<PAGE>
SEAL
Section 5. The Board of Directors may adopt a corporate seal having
inscribed thereon the name of the corporation, the year of its organization and
the words "Corporate Seal, Delaware". The seal may be used by causing it or a
facsimile thereof to be impressed or affixed or reproduced or otherwise.
INDEMNIFICATION
Section 6. The corporation shall, to the fullest extent authorized
under the laws of the State of Delaware, as those laws may be amended and
supplemented from time to time, indemnify any director made, or threatened to be
made, a party to an action or proceeding, whether criminal, civil,
administrative or investigative, by reason of being a director of the
corporation or a predecessor corporation or, at the corporation's request, a
director or officer of another corporation, provided, however, that the
corporation shall indemnify any such agent in connection with a proceeding
initiated by such agent only if such proceeding was authorized by the Board of
Directors of the corporation. The indemnification provided for in this Section
6 shall: (i) not be deemed exclusive of any other rights to which those
indemnified may be entitled under any bylaw, agreement or vote of stockholders
or disinterested directors or otherwise, both as to action in their official
capacities and as to action in another capacity while holding such office, (ii)
continue as to a person who has ceased to be a director, and (iii) inure to the
benefit of the heirs, executors and administrators of such a person. The
corporation's obligation to provide indemnification under this Section 6 shall
be offset to the extent of any other source of indemnification or any otherwise
applicable insurance coverage under a policy maintained by the corporation or
any other person.
Expenses incurred by a director of the corporation in defending a
civil or criminal action, suit or proceeding by reason of the fact that he is or
was a director of the corporation (or was serving at the corporation's request
as a director or officer of another corporation) shall be paid by the
corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such director to
repay such amount if it shall ultimately be determined that he is not entitled
to be indemnified by the corporation as authorized by relevant sections of the
General Corporation Law of Delaware. Notwithstanding the foregoing, the
corporation shall not be required to advance such expenses to an agent who is a
party to an action, suit or proceeding brought by the corporation and approved
by a majority of the Board of Directors of the corporation which alleges willful
misappropriation of corporate assets by such agent, disclosure of confidential
information in violation of such agent's fiduciary or contractual obligations to
the corporation or any other willful and deliberate breach in bad faith of such
agent's duty to the corporation or its stockholders.
The foregoing provisions of this Section 6 shall be deemed to be a
contract between the corporation and each director who serves in such capacity
at any time while this bylaw is in effect, and any repeal or modification
thereof shall not affect any rights or obligations then existing with respect to
any state of facts then or theretofore existing or any action, suit or
proceeding theretofore or thereafter brought based in whole or in part upon any
such state of facts.
The Board of Directors in its discretion shall have power on behalf of
the corporation to indemnify any person, other than a director, made a party to
any action, suit or proceeding by reason of the fact that he, his testator or
intestate, is or was an officer or employee of the corporation.
To assure indemnification under this Section 6 of all directors,
officers and employees who are determined by the corporation or otherwise to be
or to have been "fiduciaries" of any employee benefit plan of the corporation
which may exist from time to time, Section 145 of the General Corporation Law of
Delaware shall, for the purposes of this Section 6, be interpreted as follows:
an "other enterprise" shall be deemed to include such an employee benefit plan,
including without limitation, any plan of the corporation which is governed by
the Act of Congress entitled "Employee Retirement Income Security Act of 1974,"
as amended from time to time; the corporation shall be deemed to have requested
a person to serve an employee benefit plan where the performance
9.
<PAGE>
by such person of his duties to the corporation also imposes duties on, or
otherwise involves services by, such person to the plan or participants or
beneficiaries of the plan; excise taxes assessed on a person with respect to an
employee benefit plan pursuant to such Act of Congress shall be deemed "fines."
ARTICLE VIII
AMENDMENTS
Section 1. These bylaws may be altered, amended or repealed or new
bylaws may be adopted by the stockholders or by the Board of Directors, when
such power is conferred upon the Board of Directors by the certificate of
incorporation at any regular meeting of the stockholders or of the Board of
Directors or at any special meeting of the stockholders or of the Board of
Directors if notice of such alteration, amendment, repeal or adoption of new
bylaws be contained in the notice of such special meeting. If the power to
adopt, amend or repeal bylaws is conferred upon the Board of Directors by the
certificate or incorporation it shall not divest or limit the power of the
stockholders to adopt, amend or repeal bylaws.
10.
<PAGE>
Exhibit 10.1
E*TRADE GROUP, INC.
DIRECTORS AND OFFICERS
FORM OF INDEMNIFICATION AGREEMENT
THIS AGREEMENT (the "Agreement") is made and entered into this ____ day of June,
1996 between E*TRADE Group, Inc., a Delaware corporation ("the Company") and
____________________ ("Indemnitee").
WITNESSETH THAT:
WHEREAS, Indemnitee performs a valuable service for the Company; and
WHEREAS, the Board of Directors of the Company has adopted Bylaws (the
"Bylaws") providing for the indemnification of the directors and executive
officers of the Company to the maximum extent authorized by Section 145 of the
Delaware General Corporation Law, as amended (the "DGCL"); and
WHEREAS, the Bylaws and the DGCL by their nonexclusive nature, permit
contracts between the Company and the directors and executive officers of the
Company with respect to indemnification of such directors; and
WHEREAS, in accordance with the authorization as provided by the DGCL,
the Company may purchase and maintain a policy or policies of director's and
officer's liability insurance ("D & O Insurance"), covering certain liabilities
which may be incurred by its directors\officers in the performance of their
obligations as directors\officers of the Company; and
WHEREAS, as a result of recent developments affecting the terms, scope
and availability of D & O Insurance there exists general uncertainty as to the
extent of protection afforded Company directors by such D & O Insurance and said
uncertainty also exists under statutory and bylaw indemnification provisions;
and
WHEREAS, in recognition of past services and in order to induce
Indemnitee to continue to serve as a director\officer of the Company, the
Company has determined and agreed to enter into this contract with Indemnitee;
1.
<PAGE>
NOW, THEREFORE, in consideration of Indemnitee's continued service as
a [director\officer] after the date hereof, the parties hereto agree as follows:
I. Indemnity of Indemnitee. The Company hereby agrees to hold
harmless and indemnify Indemnitee to the full extent authorized or permitted by
the provisions of the DGCL, as such may be amended from time to time, and
Article 5 of the Bylaws, as such may be amended. In furtherance of the foregoing
indemnification, and without limiting the generality thereof:
(a) Proceedings Other Than Proceedings by or in the Right of
--------------------------------------------------------
the Company. Indemnitee shall be entitled to the rights of indemnification
- -----------
provided in this Section 1(a) if, by reason of his Corporate Status (as
hereinafter defined), he is, or is threatened to be made, a party to or
participant in any Proceeding (as hereinafter defined) other than a Proceeding
by or in the right of the Company. Pursuant to this Section 1(a), Indemnitee
shall be indemnified against all Expenses (as hereinafter defined), judgments,
penalties, fines and amounts paid in settlement actually and reasonably incurred
by him or on his behalf in connection with such Proceeding or any claim, issue
or matter therein, 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 Company and, with
respect to any criminal Proceeding, had no reasonable cause to believe his
conduct was unlawful.
(b) Proceedings by or in the Right of the Company. Indemnitee
---------------------------------------------
shall be entitled to the rights of indemnification provided in this Section 1(b)
if, by reason of his Corporate Status, he is, or is threatened to be made, a
party to or participant in any Proceeding brought by or in the right of the
Company to procure a judgment in its favor. Pursuant to this Section 1(b),
Indemnitee shall be indemnified against all Expenses actually and reasonably
incurred by him or on his behalf in connection with such 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 Company; provided, however, that, if applicable law so
provides, no indemnification against such Expenses shall be made in respect of
any claim, issue or matter in such Proceeding as to which Indemnitee shall have
been adjudged to be liable to the Company unless and to the extent that the
Court of Chancery of the State of Delaware, or the court in which such
Proceeding shall have been brought or is pending, shall determine that such
indemnification may be made.
(c) Indemnification for Expenses of a Party Who is Wholly or
--------------------------------------------------------
Partly Successful. Notwithstanding any other provision of this Agreement, to the
- -----------------
extent that Indemnitee is, by reason of his Corporate Status, a party to and is
successful, on the merits or otherwise, in any Proceeding, he shall be
indemnified to the maximum extent permitted by law against all Expenses actually
and reasonably incurred by him or on his behalf in connection therewith. If
Indemnitee is not wholly successful in such Proceeding but is successful, on the
merits or otherwise, as to one or more but less than all claims, issues or
matters in such Proceeding, the Company shall indemnify Indemnitee against all
Expenses actually and reasonably incurred by him or on his behalf in connection
with each successfully resolved claim, issue or matter. For
2.
<PAGE>
purposes of this Section and without limitation, the termination of any claim,
issue or matter in such a Proceeding by dismissal, with or without prejudice,
shall be deemed to be a successful result as to such claim, issue or matter.
II. Additional Indemnity.
--------------------
(a) Subject only to the exclusions set forth in Section 2(b)
hereof, the Company hereby further agrees to hold harmless and indemnify
Indemnitee against any and all Expenses, judgments, fines and amounts paid in
settlement actually and reasonably incurred by Indemnitee in connection with any
Proceeding (including an action by or on behalf of the Company) to which
Indemnitee is, was or at any time becomes a party, or is threatened to be made a
party, by reason of his Corporate Status; provided, however, that with respect
to actions by or on behalf of the Company, indemnification of Indemnitee against
any judgments shall be made by the Company only as authorized in the specific
case upon a determination that Indemnitee acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Company; and
(b) No indemnity pursuant to this Section 2 shall be paid by
the Company:
(1) In respect to remuneration paid to Indemnitee if it
shall be determined by a final judgment or other final adjudication that such
remuneration was in violation of law;
(2) On account of any suit in which judgment is rendered
against Indemnitee for an accounting of profits made from the purchase or sale
by Indemnitee of securities of the Company pursuant to the provisions of Section
16(b) of the Securities Exchange Act of 1934 and amendments thereto or similar
provisions of any federal, state or local statutory law;
(3) On account of Indemnitee's conduct which is finally
adjudged to have been knowingly fraudulent or deliberately dishonest, or to
constitute willful misconduct; or
(4) If a final decision by a court having jurisdiction in
the matter shall determine that such indemnification is not lawful.
III. Contribution. If the indemnification provided in Sections 1
------------
and 2 is unavailable and may not be paid to Indemnitee for any reason other than
those set forth in paragraphs (i), (ii), (iii) and (iv) of Section 2(b), then in
respect to any Proceeding in which the Company is jointly liable with Indemnitee
(or would be if joined in such Proceeding), the Company shall contribute to the
amount of Expenses, judgments, fines and amounts paid in settlement actually and
reasonably incurred and paid or payable by Indemnitee in such proportion
3.
<PAGE>
as is appropriate to reflect (i) the relative benefits received by the Company
on the one hand and by the Indemnitee on the other hand from the transaction
from which such Proceeding arose, and (ii) the relative fault of the Company on
the one hand and of the Indemnitee on the other hand in connection with the
events which resulted in such Expenses, judgments, fines or settlement amounts,
as well as any other relevant equitable considerations. The relative fault of
the Company on the one hand and of the Indemnitee on the other hand shall be
determined by reference to, among other things, the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent the
circumstances resulting in such Expenses, judgments, fines or settlement
amounts. The Company agrees that it would not be just and equitable if
contribution pursuant to this Section 3 were determined by pro rata allocation
or any other method of allocation which does not take account of the foregoing
equitable considerations.
IV. Indemnification for Expenses of a Witness. Notwithstanding any
-----------------------------------------
other provision of this Agreement, to the extent that Indemnitee is, by reason
of his Corporate Status, a witness in any Proceeding to which Indemnitee is not
a party, he shall be indemnified against all Expenses actually and reasonably
incurred by him or on his behalf in connection therewith.
V. Advancement of Expenses. The Company shall advance all reasonable
-----------------------
Expenses incurred by or on behalf of Indemnitee in connection with any
Proceeding by reason of Indemnitee's Corporate Status within 10 days after the
receipt by the Company of a statement or statements from Indemnitee requesting
such advance or advances from time to time, whether prior to or after final
disposition of such Proceeding. Such statement or statements shall reasonably
evidence the Expenses incurred by Indemnitee and shall include or be preceded or
accompanied by an undertaking by or on behalf of Indemnitee to repay any
Expenses advanced if it shall ultimately be determined that Indemnitee is not
entitled to be indemnified against such Expenses. Any advances and undertakings
to repay pursuant to this Section 5 shall be unsecured and interest free.
Notwithstanding the foregoing, the obligation of the Company to advance Expenses
pursuant to this Section 5 shall be subject to the condition that, if, when and
to the extent that the Company determines that Indemnitee would not be permitted
to be indemnified under applicable law, the Company shall be entitled to be
reimbursed, within 30 days of such determination, by Indemnitee (who hereby
agrees to reimburse the Company) for all such amounts theretofore paid;
provided, however, that if Indemnitee has commenced or thereafter commences
legal proceedings in a court of competent jurisdiction to secure a determination
that Indemnitee should be indemnified under applicable law, any determination
made by the Company that Indemnitee would not be permitted to be indemnified
under applicable law shall not be binding and Indemnitee shall not be required
to reimburse the Company for any advance of Expenses until a final judicial
determination is made with respect thereto (as to which all rights of appeal
therefrom have been exhausted or lapsed).
4.
<PAGE>
VI. Procedure for Determination of Entitlement to Indemnification.
-------------------------------------------------------------
(a) To obtain indemnification (including, but not limited to,
the advancement of Expenses and contribution by the Company) under this
Agreement, Indemnitee shall submit to the Company a written request, including
therein or therewith such documentation and information as is reasonably
available to Indemnitee and is reasonably necessary to determine whether and to
what extent Indemnitee is entitled to indemnification. The Secretary of the
Company shall, promptly upon receipt of such a request for indemnification,
advise the Board of Directors in writing that Indemnitee has requested
indemnification.
(b) Upon written request by Indemnitee for indemnification
pursuant to the first sentence of Section 6(a) hereof, a determination, if
required by applicable law, with respect to Indemnitee's entitlement thereto
shall be made in the specific case: (i) if a Change in Control (as hereinafter
defined) shall have occurred, by Independent Counsel (as hereinafter defined) in
a written opinion to the Board of Directors, a copy of which shall be delivered
to Indemnitee (unless Indemnitee shall request that such determination be made
by the Board of Directors or the stockholders, in which case the determination
shall be made in the manner provided in Clause (ii) below), or (ii) if a Change
in Control shall not have occurred, (A) by the Board of Directors by a majority
vote of a quorum consisting of Disinterested Directors (as hereinafter defined),
or (B) if a quorum of the Board of Directors consisting of Disinterested
Directors is not obtainable or, even if obtainable, said Disinterested Directors
so direct, by Independent Counsel in a written opinion to the Board of
Directors, a copy of which shall be delivered to Indemnitee, or (C) if so
directed by said Disinterested Directors, by the stockholders of the Company;
and, if it is determined that Indemnitee is entitled to indemnification, payment
to Indemnitee shall be made within 10 days after such determination. Indemnitee
shall cooperate with the person, persons or entity making such determination
with respect to Indemnitee's entitlement to indemnification, including providing
to such person, persons or entity upon reasonable advance request any
documentation or information which is not privileged or otherwise protected from
disclosure and which is reasonably available to Indemnitee and reasonably
necessary to such determination. Any Independent Counsel, member of the Board of
Directors, or stockholder of the Company shall act reasonably and in good faith
in making a determination under the Agreement of the Indemnitee's entitlement to
indemnification. Any costs or expenses (including attorneys' fees and
disbursements) incurred by Indemnitee in so cooperating with the person, persons
or entity making such determination shall be borne by the Company (irrespective
of the determination as to Indemnitee's entitlement to indemnification) and the
Company hereby indemnifies and agrees to hold Indemnitee harmless therefrom.
(c) If the determination of entitlement to indemnification is
to be made by Independent Counsel pursuant to Section 6(b) hereof, the
Independent Counsel shall be selected as provided in this Section 6(c). If a
Change in Control shall not have occurred, the Independent Counsel shall be
selected by the Board of Directors, and the Company shall give written notice to
Indemnitee advising him of the identity of the Independent Counsel so selected.
If a Change
5.
<PAGE>
in Control shall have occurred, the Independent Counsel shall be selected by
Indemnitee (unless Indemnitee shall request that such selection be made by the
Board of Directors, in which event the preceding sentence shall apply), and
Indemnitee shall give written notice to the Company advising it of the identity
of the Independent Counsel so selected. In either event, Indemnitee or the
Company, as the case may be, may, within 10 days after such written notice of
selection shall have been given, deliver to the Company or to Indemnitee, as the
case may be, a written objection to such selection; provided, however, that such
objection may be asserted only on the ground that the Independent Counsel so
selected does not meet the requirements of ``Independent Counsel'' as defined in
Section 14 of this Agreement, and the objection shall set forth with
particularity the factual basis of such assertion. Absent a proper and timely
objection, the person so selected shall act as Independent Counsel. If a written
objection is made and substantiated, the Independent Counsel selected may not
serve as Independent Counsel unless and until such objection is withdrawn or a
court has determined that such objection is without merit. If, within 20 days
after submission by Indemnitee of a written request for indemnification pursuant
to Section 6(a) hereof, no Independent Counsel shall have been selected and not
objected to, either the Company or Indemnitee may petition the Court of Chancery
of the State of Delaware or other court of competent jurisdiction for resolution
of any objection which shall have been made by the Company or Indemnitee to the
other's selection of Independent Counsel and/or for the appointment as
Independent Counsel of a person selected by the court or by such other person as
the court shall designate, and the person with respect to whom all objections
are so resolved or the person so appointed shall act as Independent Counsel
under Section 6(b) hereof. The Company shall pay any and all reasonable fees and
expenses of Independent Counsel incurred by such Independent Counsel in
connection with acting pursuant to Section 6(b) hereof, and the Company shall
pay all reasonable fees and expenses incident to the procedures of this Section
6(c), regardless of the manner in which such Independent Counsel was selected or
appointed. Upon the due commencement of any judicial proceeding or arbitration
pursuant to Section 8(a)(iii) of this Agreement, Independent Counsel shall be
discharged and relieved of any further responsibility in such capacity (subject
to the applicable standards of professional conduct then prevailing).
(d) The Company shall not be required to obtain the consent of
the Indemnitee to the settlement of any Proceeding which the Company has
undertaken to defend if the Company assumes full and sole responsibility for
such settlement and the settlement grants the Indemnitee a complete and
unqualified release in respect of the potential liability.
VII. Presumptions and Effect of Certain Proceedings.
----------------------------------------------
(a) In making a determination with respect to entitlement to
indemnification hereunder, the person or persons or entity making such
determination shall presume that Indemnitee is entitled to indemnification under
this Agreement if Indemnitee has submitted a request for indemnification in
accordance with Section 6(a) of this Agreement, and the Company shall have the
burden of proof to overcome that presumption in connection with the making by
any person, persons or entity of any determination contrary to that presumption.
6.
<PAGE>
(b) If the person, persons or entity empowered or selected
under Section 6 of this Agreement to determine whether Indemnitee is entitled to
indemnification shall not have made a determination within 30 days after receipt
by the Company of the request therefor, the requisite determination of
entitlement to indemnification shall be deemed to have been made and Indemnitee
shall be entitled to such indemnification, absent (i) a misstatement by
Indemnitee of a material fact, or an omission of a material fact necessary to
make Indemnitee's statement not materially misleading, in connection with the
request for indemnification, or (ii) a prohibition of such indemnification under
applicable law; provided, however, that such 30-day period may be extended for a
reasonable time, not to exceed an additional fifteen (15) days, if the person,
persons or entity making the determination with respect to entitlement to
indemnification in good faith requires such additional time for the obtaining or
evaluating documentation and/or information relating thereto; and provided,
further, that the foregoing provisions of this Section 7(b) shall not apply
(i) if the determination of entitlement to indemnification is to be made by the
stockholders pursuant to Section 6(b) of this Agreement and if (A) within
fifteen (15) days after receipt by the Company of the request for such
determination the Board of Directors or the Disinterested Directors, if
appropriate, resolve to submit such determination to the stockholders for their
consideration at an annual meeting thereof to be held within seventy five (75)
days after such receipt and such determination is made thereat, or (B) a special
meeting of stockholders is called within fifteen (15) days after such receipt
for the purpose of making such determination, such meeting is held for such
purpose within sixty (60) days after having been so called and such
determination is made thereat, or (ii) if the determination of entitlement to
indemnification is to be made by Independent Counsel pursuant to Section 6(b) of
this Agreement.
(c) The termination of any Proceeding or of any claim, issue or
matter therein, by judgment, order, settlement (with or without court approval),
conviction, or upon a plea of nolo contendere or its equivalent, shall not
(except as otherwise expressly provided in this Agreement) of itself adversely
affect the right of Indemnitee to indemnification or create a presumption that
Indemnitee did not act in good faith and in a manner which he reasonably
believed to be in or not opposed to the best interests of the Company or, with
respect to any criminal Proceeding, that Indemnitee had reasonable cause to
believe that his conduct was unlawful.
(d) For purposes of any determination of good faith, Indemnitee
shall be deemed to have acted in good faith if Indemnitee's action is based on
the records or books of account of the Enterprise, including financial
statements, or on information supplied to Indemnitee by the officers of the
Enterprise in the course of their duties, or on the advice of legal counsel for
the Enterprise or on information or records given or reports made to the
Enterprise by an independent certified public accountant or by an appraiser or
other expert selected with reasonable
7.
<PAGE>
care by the Enterprise. In addition, the knowledge and/or actions, or failure to
act, of any director, officer, agent or employee of the Enterprise shall not be
imputed to Indemnitee for purposes of determining the right to indemnification
under this Agreement. The provisions of this Section 7(d) shall not be deemed to
be exclusive or to limit in any way the other circumstances in which the
Indemnitee may be deemed to have met the applicable standard of conduct set
forth in this Agreement.
VIII. Remedies of Indemnitee.
----------------------
(a) In the event that (i) a determination is made pursuant to
Section 6 of this Agreement that Indemnitee is not entitled to indemnification
under this Agreement, (ii) advancement of Expenses is not timely made pursuant
to Section 5 of this Agreement, (iii) no determination of entitlement to
indemnification shall have been made pursuant to Section 6(b) of this Agreement
within 90 days after receipt by the Company of the request for indemnification,
(iv) payment of indemnification is not made pursuant to Section 3 or 4 of this
Agreement within 10 days after receipt by the Company of a written request
therefor, or (v) payment of indemnification is not made within 10 days after a
determination has been made that Indemnitee is entitled to indemnification or
such determination is deemed to have been made pursuant to Section 6 or 7 of
this Agreement, Indemnitee shall be entitled to an adjudication in an
appropriate court of the State of Delaware, or in any other court of competent
jurisdiction, of his entitlement to such indemnification. Alternatively,
Indemnitee, at his option, may seek an award in arbitration to be conducted by a
single arbitrator pursuant to the Commercial Arbitration Rules of the American
Arbitration Association. Indemnitee shall commence such proceeding seeking an
adjudication or an award in arbitration within 180 days following the date on
which Indemnitee first has the right to commence such proceeding pursuant to
this Section 8(a). The Company shall not oppose Indemnitee's right to seek any
such adjudication or award in arbitration.
(b) In the event that a determination shall have been made
pursuant to Section 6(b) of this Agreement that Indemnitee is not entitled to
indemnification, any judicial proceeding or arbitration commenced pursuant to
this Section 8 shall be conducted in all respects as a de novo trial, or
arbitration, on the merits and Indemnitee shall not be prejudiced by reason of
that adverse determination.
(c) If a determination shall have been made pursuant to Section
6(b) of this Agreement that Indemnitee is entitled to indemnification, the
Company shall be bound by such determination in any judicial proceeding or
arbitration commenced pursuant to this Section 8, absent (i) a misstatement by
Indemnitee of a material fact, or an omission of a material fact necessary to
make Indemnitee's statement not materially misleading, in connection with the
request for indemnification, or (ii) a prohibition of such indemnification under
applicable law.
(d) In the event that Indemnitee, pursuant to this Section 8,
seeks a judicial adjudication of or an award in arbitration to enforce his
rights under, or to recover
8.
<PAGE>
damages for breach of, this Agreement, Indemnitee shall be entitled to recover
from the Company, and shall be indemnified by the Company against, any and all
expenses (of the types described in the definition of Expenses in Section 16 of
this Agreement) actually and reasonably incurred by him in such judicial
adjudication or arbitration, but only if he prevails therein. If it shall be
determined in said judicial adjudication or arbitration that Indemnitee is
entitled to receive part but not all of the indemnification sought, the expenses
incurred by Indemnitee in connection with such judicial adjudication or
arbitration shall be appropriately prorated. The Company shall indemnify
Indemnitee against any and all expenses and, if requested by Indemnitee, shall
(within 10 days after receipt by the Company of a written request therefor)
advance such expenses to Indemnitee, which are incurred by Indemnitee in
connection with any action brought by Indemnitee to recover under any directors'
and officers' liability insurance policies maintained by the Company, regardless
of whether Indemnitee ultimately is determined to be entitled to such
indemnification, advancement of expenses or insurance recovery, as the case may
be.
(e) The Company shall be precluded from asserting in any
judicial proceeding or arbitration commenced pursuant to this Section 8 that the
procedures and presumptions of this Agreement are not valid, binding and
enforceable and shall stipulate in any such court or before any such arbitrator
that the Company is bound by all the provisions of this Agreement.
IX. Non-Exclusivity; Survival of Rights; Insurance; Subrogation.
-----------------------------------------------------------
(a) The rights of indemnification as provided by this Agreement
shall not be deemed exclusive of any other rights to which Indemnitee may at any
time be entitled under applicable law, the certificate of incorporation of the
Company, the Bylaws, any agreement, a vote of stockholders or a resolution of
directors, or otherwise. No amendment, alteration or repeal of this Agreement or
of any provision hereof shall limit or restrict any right of Indemnitee under
this Agreement in respect of any action taken or omitted by such Indemnitee in
his Corporate Status prior to such amendment, alteration or repeal. To the
extent that a change in the DGCL, whether by statute or judicial decision,
permits greater indemnification than would be afforded currently under the
Bylaws and this Agreement, it is the intent of the parties hereto that
Indemnitee shall enjoy by this Agreement the greater benefits so afforded by
such change. No right or remedy herein conferred is intended to be exclusive of
any other right or remedy, and every other right and remedy shall be cumulative
and in addition to every other right and remedy given hereunder or now or
hereafter existing at law or in equity or otherwise. The assertion or employment
of any right or remedy hereunder, or otherwise, shall not prevent the concurrent
assertion or employment of any other right or remedy.
(b) To the extent that the Company maintains an insurance
policy or policies providing liability insurance for directors, officers,
employees, or agents or fiduciaries of the Company or of any other corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise
which such person serves at the request of the Company, Indemnitee shall be
covered by such policy or policies in accordance with its or their terms to the
maximum extent
9.
<PAGE>
of the coverage available for any such director, officer, employee or agent
under such policy or policies.
(c) In the event of any payment under this Agreement, the
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all papers required and take all
action necessary to secure such rights, including execution of such documents as
are necessary to enable the Company to bring suit to enforce such rights.
(d) The Company shall not be liable under this Agreement to
make any payment of amounts otherwise indemnifiable hereunder if and to the
extent that Indemnitee has otherwise actually received such payment under any
insurance policy, contract, agreement or otherwise.
X. Exception to Right of Indemnification and Expense Advancement.
-------------------------------------------------------------
Notwithstanding any other provision of this Agreement, Indemnitee shall not be
entitled to indemnification or advancement of expenses under this Agreement with
respect to any Proceeding brought by Indemnitee, or any claim therein, unless
(a) the bringing of such Proceeding or making of such claim shall have been
approved by the Board of Directors or (b) such Proceeding is being brought by
the Indemnitee to assert his rights under this Agreement.
XI. Duration of Agreement. All agreements and obligations of the
---------------------
Company contained herein shall continue during the period Indemnitee is a
director or officer of the Company (or is or was serving at the request of the
Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise) and shall continue
thereafter so long as Indemnitee shall be subject to any Proceeding (or any
proceeding commenced under Section 8 hereof) by reason of his Corporate Status,
whether or not he is acting or serving in any such capacity at the time any
liability or expense is incurred for which indemnification can be provided under
this Agreement. This Agreement shall be binding upon and inure to the benefit of
and be enforceable by the parties hereto and their respective successors
(including any direct or indirect successor by purchase, merger, consolidation
or otherwise to all or substantially all of the business or assets of the
Company), assigns, spouses, heirs, executors and personal and legal
representatives. This Agreement shall continue in effect regardless of whether
Indemnitee continues to serve as a director or officer of the Company or any
other enterprise at the Company's request.
XII. Security. To the extent requested by the Indemnitee and approved
--------
by the Board of Directors, the Company may at any time and from time to time
provide security to the Indemnitee for the Company's obligations hereunder
through an irrevocable bank line of credit, funded trust or other collateral.
Any such security, once provided to the Indemnitee, may not be revoked or
released without the prior written consent of the Indemnitee.
10.
<PAGE>
XIII. Enforcement.
-----------
(a) The Company expressly confirms and agrees that it has
entered into this Agreement and assumed the obligations imposed on it hereby in
order to induce Indemnitee to serve as a director or officer of the Company, and
the Company acknowledges that Indemnitee is relying upon this Agreement in
serving as a director or officer of the Company.
(b) This Agreement constitutes the entire agreement between the
parties hereto with respect to the subject matter hereof and supersedes all
prior agreements and understandings, oral, written and implied, between the
parties hereto with respect to the subject matter hereof.
XIV. Definitions. For purposes of this Agreement:
-----------
(a) "Change in Control" means a change in control of the
Company occurring after the date of this Agreement of a nature that would be
required to be reported in response to Item 6(e) of Schedule 14A of Regulation
14A (or in response to any similar item on any similar schedule or form)
promulgated under the Securities Exchange Act of 1934 (the "Act"), whether or
not the Company is then subject to such reporting requirement; provided,
however, that, without limitation, such a Change in Control shall be deemed to
have occurred if after the date of this Agreement (i) any "person" (as such term
is used in Sections 13(d) and 14(d) of the Act, as amended) other than a trustee
or other fiduciary holding securities under an employee benefit plan of the
Company or a corporation owned directly or indirectly by the stockholders of the
Company in substantially the same proportions as their ownership of stock of the
Company, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under
the Act), directly or indirectly, of securities of the Company representing 20%
or more of the combined voting power of the Company's then outstanding
securities (other than any such person or any affiliate thereof that is such a
20% beneficial owner as of the date hereof) without the prior approval of at
least two-thirds of the members of the Board of Directors in office immediately
prior to such person attaining such percentage interest; (ii) there occurs a
proxy contest, or the Company is a party to a merger, consolidation, sale of
assets, plan of liquidation or other reorganization, as a consequence of which
members of the Board of Directors in office immediately prior to such
transaction or event constitute less than a majority of the Board of Directors
thereafter; or (iii) during any period of two consecutive years, other than as a
result of an event described in clause (a)(ii) of this Section 16, individuals
who at the beginning of such period constituted the Board of Directors
(including for this purpose any new director whose election or nomination for
election by the Company's stockholders was approved by a vote of at least two-
thirds of the directors then still in office who were directors at the beginning
of such period) cease for any reason to constitute at least a majority of the
Board of Directors. A Change in Control shall not be deemed to have occurred
under item (i) above if the "person" described under item (i) is entitled to
report its ownership on Schedule 13G promulgated under the Act and such person
is able to represent that it acquired such securities in the ordinary course of
its
11.
<PAGE>
business and not with the purpose nor with the effect of changing or influencing
the control of the Company, nor in connection with or as a participant in any
transaction having such purpose or effect. If the "person" referred to in the
previous sentence would at any time not be entitled to continue to report such
ownership on Schedule 13G pursuant to Rule 13d-1(b)(3)(i)(B) of the Act, then a
Change in Control shall be deemed to have occurred at such time.
(b) "Corporate Status" describes the status of a person who is
or was a director, officer, employee or agent or fiduciary of the Company or of
any other corporation, partnership, joint venture, trust, employee benefit plan
or other enterprise which such person is or was serving at the express written
request of the Company.
(c) "Disinterested Director" means a director of the Company
who is not and was not a party to the Proceeding in respect of which
indemnification is sought by Indemnitee.
(d) "Enterprise" shall mean the Company and any other corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise of
which Indemnitee is or was serving at the express written request of the Company
as a director, officer, employee, agent or fiduciary.
(e) "Expenses" shall include all reasonable attorneys' fees,
retainers, court costs, transcript costs, fees of experts, witness fees, travel
expenses, duplicating costs, printing and binding costs, telephone charges,
postage, delivery service fees, and all other disbursements or expenses of the
types customarily incurred in connection with prosecuting, defending, preparing
to prosecute or defend, investigating, participating, or being or preparing to
be a witness in a Proceeding.
(f) "Independent Counsel" means a law firm, or a member of a
law firm, that is experienced in matters of corporation law and neither
presently is, nor in the past five years has been, retained to represent:
(i) the Company or Indemnitee in any matter material to either such party (other
than with respect to matters concerning the Indemnitee under this Agreement, or
of other indemnitees under similar indemnification agreements), or (ii) any
other party to the Proceeding giving rise to a claim for indemnification
hereunder. Notwithstanding the foregoing, the term "Independent Counsel" shall
not include any person who, under the applicable standards of professional
conduct then prevailing, would have a conflict of interest in representing
either the Company or Indemnitee in an action to determine Indemnitee's rights
under this Agreement. The Company agrees to pay the reasonable fees of the
Independent Counsel referred to above and to fully indemnify such counsel
against any and all Expenses, claims, liabilities and damages arising out of or
relating to this Agreement or its engagement pursuant hereto.
12.
<PAGE>
(g) "Proceeding" includes any threatened, pending or completed
action, suit, arbitration, alternate dispute resolution mechanism,
investigation, inquiry, administrative hearing or any other actual, threatened
or completed proceeding, whether brought by or in the right of the Company or
otherwise and whether civil, criminal, administrative or investigative, in which
Indemnitee was, is or will be involved as a party or otherwise, by reason of the
fact that Indemnitee is or was a director or officer of the Company, by reason
of any action taken by him or of any inaction on his part while acting as a
director or officer of the Company, or by reason of the fact that he is or was
serving at the request of the Company as a director, officer, employee or agent
of another corporation, partnership, joint venture, trust or other enterprise,
in each case whether or not he is acting or serving in any such capacity at the
time any liability or expense is incurred for which indemnification can be
provided under this Agreement; including one pending on or before the date of
this Agreement and excluding one initiated by an Indemnitee pursuant to Section
8 of this Agreement to enforce his rights under this Agreement.
XV. Severability. If any provision or provisions of this Agreement
------------
shall be held by a court of competent jurisdiction to be invalid, void, illegal
or otherwise unenforceable for any reason whatsoever: (a) the validity, legality
and enforceability of the remaining provisions of this Agreement (including
without limitation, each portion of any section of this Agreement containing any
such provision held to be invalid, illegal or unenforceable, that is not itself
invalid, illegal or unenforceable) shall not in any way be affected or impaired
thereby and shall remain enforceable to the fullest extent permitted by law; and
(b) to the fullest extent possible, the provisions of this Agreement (including,
without limitation, each portion of any section of this Agreement containing any
such provision held to be invalid, illegal or unenforceable, that is not itself
invalid, illegal or unenforceable) shall be construed so as to give effect to
the intent manifested thereby.
XVI. Modification and Waiver. No supplement, modification, termination
-----------------------
or amendment of this Agreement shall be binding unless executed in writing by
both of the parties hereto. No waiver of any of the provisions of this Agreement
shall be deemed or shall constitute a waiver of any other provisions hereof
(whether or not similar) nor shall such waiver constitute a continuing waiver.
XVII. Notice by Indemnitee. Indemnitee agrees promptly to notify the
--------------------
Company in writing upon being served with any summons, citation, subpoena,
complaint, indictment, information or other document relating to any Proceeding
or matter which may be subject to indemnification covered hereunder. The failure
to so notify the Company shall not relieve the Company of any obligation which
it may have to the Indemnitee under this Agreement or otherwise.
XVIII. Notices. All notices, requests, demands and other communications
-------
hereunder shall be in writing and shall be deemed to have been duly given if
(i) delivered by hand and receipted for by the party to whom said notice or
other communication shall have been
13.
<PAGE>
directed, or (ii) mailed by certified or registered mail with postage prepaid,
on the third business day after the date on which it is so mailed:
(a) If to Indemnitee, to:
-----------------------------------------
-----------------------------------------
-----------------------------------------
-----------------------------------------
(b) If to the Company, to:
E*TRADE Group, Inc.
Four Embarcadero Place
2400 Geng Road
Palo Alto, California 94303
Attention: Christos M. Cotsakos
President and Chief Executive Officer
or to such other address as may have been furnished to Indemnitee by the Company
or to the Company by Indemnitee, as the case may be.
XIX. Identical Counterparts. This Agreement may be executed in one or
----------------------
more counterparts, each of which shall for all purposes be deemed to be an
original but all of which together shall constitute one and the same Agreement.
Only one such counterpart signed by the party against whom enforceability is
sought needs to be produced to evidence the existence of this Agreement.
XX. Headings. The headings of the paragraphs of this Agreement are
--------
inserted for convenience only and shall not be deemed to constitute part of this
Agreement or to affect the construction thereof.
XXI. Governing Law. The parties agree that this Agreement shall be
-------------
governed by, and construed and enforced in accordance with, the laws of the
State of Delaware, without application of the conflict of laws principles
thereof.
XXII. Gender. Use of the masculine pronoun shall be deemed to include
------
usage of the feminine pronoun where appropriate.
14.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement on and as of the day and year first above written.
E*TRADE GROUP, INC.,
a Delaware corporation
By:
---------------------------------
Christos M. Cotsakos
President and Chief Executive Officer
[NAME OF INDEMNITEE]
By:
---------------------------------
Name:
Indemnitee
15.
<PAGE>
EXHIBIT 10.2
STOCK OPTION AGREEMENT
OPTIONS GRANTED UNDER
1983 EMPLOYEE INCENTIVE STOCK OPTION PLAN
OF
TRADE*PLUS, INC.
-------------------------------------
THIS AGREEMENT is entered into by and between TRADE*PLUS, INC., a
California corporation (the "Company"), and the undersigned employee
of the Company or one of its affiliates (the "Employee").
RECITALS
--------
WHEREAS, the Company has adopted a stock option plan, designed as
the 1983 Employee Inventive Stock Option Plan (the "Plan"), pursuant
to which options that qualify as "incentive stock options" under
Section 422A of the Internal Revenue Code (the "Code"), as added by
the Economic Recovery Tax Act of 1981, and as it may be amended from
time to time ("Section 422A"), may be granted to selected employees of
the Company or any of its affiliates; and
WHEREAS, on the date hereof the Employee is a bona fide employee
of the company or one of its affiliates, as defined in the Plan; and
WHEREAS, the Board of Directors (or the Committee appointed to
administer the Plan) has determined that it would be to the advantage
and interest of the Company and its shareholders to grant to the
Employee the option rights provided for herein as an inducement to
continue to render services to the Company or one of its affiliates
and as an incentive for increased efforts in the rendering of such
services; and has advised the Company thereof and instructed the
undersigned officer to issue the option rights within as provided in
the Plan; and
<PAGE>
WHEREAS, the Board of Directors (or the Committee) has approved
of the granting to the Employee of the option rights evidenced by this
Agreement;
NOW, THEREFORE, it is mutually agreed as follows:
1. Grant of Option Rights. Subject to the terms and conditions
----------------------
contained herein, the Company hereby grants to the Employee the option
rights specified herein:
(a) the number and class of shares of the Company's currently
authorized but unissued stock subject to the options rights granted
hereunder are an aggregate of ______ shares of the Company's Common Stock:
(b) the option exercise price, which has been determined as specified
in the Plan, is $_____ per share;
(c) the option rights granted hereunder are exercisable during the
time period or periods, and as to the number of shares exercisable during
each time period, as follows (except as provided in paragraphs 3(a) and
3(b) below, in no event may any option rights granted hereunder
<PAGE>
be exercised later than five (5) years from the date hereof):
(1) _____ shares, or any part thereof, may be exercised at any time or
times, from and including ______________ to and including ______________.
(2) an additional ____________, or any part thereof, may be exercised,
at any time or times, from and including ______________ to and including
______________;
(3) an additional ____________, or any part thereof, may be exercised,
at any time or times; from the including ______________ to and including
______________; and
(4) an additional ____________, or any part thereof, may be exercised,
at any time or times; from the including ______________ to and including
______________; and
(5) the remaining ____________ may be exercised, at any time or times,
from and including ______________ to and including ______________.
Notwithstanding the above, the Board of Directors (or the Committee)
in its sole discretion may, upon written notice to the Employee, accelerate
the earliest date or dates on which any of the option rights granted
hereunder are exercisable.
<PAGE>
(d) Notwithstanding the provisions of subparagraphs 1(c) (1) through
(5) above, the minimum number of shares which may be purchased upon any
partial exercise of the option rights granted hereunder is 100 shares;
(e) The option rights granted hereunder shall not be exercisable while
there is outstanding any "incentive stock option" granted to the Employee
prior to the date hereof, which permits the Employee to purchase stock in
(i) the Company, (ii) any affiliate of the Company, or (iii) a predecessor
corporation of the Company or any affiliate of the Company; provided,
however, that the provisions of this paragraph 1(e) shall not restrict the
exercisability of any option rights granted hereunder except as is
necessary to allow such option rights to quality under Section 422A as
"incentive stock option" rights.
To exercise any of the option rights granted hereunder, the Employee must
have remained in the employ of the Company or one of its affiliates continuously
from the date of the Agreement through the date of each exercise, except as
otherwise provided in paragraph 3 hereof. The granting of option rights
hereunder shall impose no obligation on the Company or any of its affiliates to
continue the employment of the Employee, and shall not lessen or affect the
right of the Company or any affiliate which employees the Employee to terminate
such employment or to change the duties, compensation, or other terms of
employment of the Employee. The term "affiliate," wherever herein used, shall
<PAGE>
have the same meaning as in the Plan, and shall mean any parent or subsidiary
corporation as defined in the applicable provisions of the Code (currently set
forth in Section 425 of the Code).
2. Fractional Shares; Compliance with Laws. In no event shall
---------------------------------------
the Company be required to issue fractional shares upon the exercise
of any option rights granted hereunder.
No option rights granted hereunder may be exercised, and the
Company shall not be required to issue or deliver any certificate or
certificates for shares purchased upon the exercise of options rights
granted hereunder, until there has been compliance with all then
applicable requirements of law, including such registration or other
proceedings under federal and state securities laws as may in the
Company's opinion be necessary or appropriate.
3. Necessity of Employment When Option is Exercised. The option
------------------------------------------------
rights granted hereunder, to the extent such rights have not then
expired or been exercised, shall terminate and become null and void
three months after the date that the Employee ceases, for any reason,
to be an employee of the company or one of its affiliates, and shall
not be exercisable on or after the said date, except that:
(a) in the event of such a termination of employment due to the death
of the Employee, the personal representatives of the Employee or any person
or persons who acquired any such option rights from the Employee by Will or
applicable laws of descent and distribution may, at any time within a
period of twelve (12) months after the death of the
<PAGE>
Employee, exercise any or all of such option rights to the extent such
option rights were exercisable on the date of death of the Employee;
(b) in the event of such a termination of employment by reason of the
permanent and total disability of the Employee (as defined in Section
105(d)(4) of the Code), the Employee or, if the Employee dies within a
period of twelve (12) months after said termination, the personal
representatives of the Employee or any person or persons who acquired any
such option rights from the Employee by Will or the applicable laws of
descent and distribution may, at any time within a period of twelve (12)
months after said termination, exercise any or all of such option rights to
the extent such option rights were exercisable on the date of termination
of employment;
(c) provided, however, that, for the purposes of this Agreement, a
transfer of the Employee from the Company to an affiliate or vice versa, or
from one affiliate to another, or a leave of absence duly authorized by the
Company shall not be deemed a termination of employment or a break in
continuous employment to the extent such a transfer or leave of absence is
not deemed a termination or break in employment under applicable provisions
of the Code.
In no event may any option rights granted under this Agreement be exercised by
any person or entity after the expiration of ten (10) years from the date
hereof. References throughout this Agreement to the Employee shall be deemed,
where appropriate, to
<PAGE>
include any person entitled to exercise the option after the death of the
Employee under the terms of this paragraph 3.
4. Nonassignability of Option Rights. The option rights granted
---------------------------------
hereunder (i) shall, except as provided in paragraph 3 hereof, be
exercisable only by the Employee, (ii) shall not be transferred,
assigned, pledged or hypothecated in any manner whatsoever, whether
voluntarily, involuntarily or by operation of law, and (iii) shall not
be subject to execution, attachment or similar process. Upon any
attempt to transfer, assign, pledge, hypothecate, or otherwise dispose
of the said option rights contrary to the provisions hereof, the said
option rights shall immediately become null and void.
5. Adjustments. Appropriate proportionate adjustments shall be
-----------
made by the Company in the number and class of shares of stock subject
to the option rights granted hereunder and the exercise price of the
option rights granted hereunder in the event that (i) the Common Stock
of the Company is changed by reason of any stock split, reverse stock
split, recapitalization, or other change in the capital structure of
the Company, or converted into or exchanged for other securities as a
result of any merger, consolidation or reorganization, or (ii) the
outstanding number or shares of common stock of the Company is
increased through payment of a stock dividend; provided, however, that
the Company shall not be required to issue fractional shares as a
result of any such adjustment. Any such adjustment shall be made upon
approval by the Board of Directors, whose determination shall be
conclusive. If there is any other change in the number
<PAGE>
or kind of the outstanding shares of capital stock of the Company, or
of any other security into which such stock shall have been changed or
for which it shall have been exchanged, and if the Board of Directors,
in its sole discretion, determines that such change equitably requires
any adjustment in the option rights granted hereunder, such adjustment
shall be made in accordance with the determination of the Board of
Directors. No adjustments shall be required by reason of the issuance
or sale by the Company for cash or other consideration of additional
shares of its capital stock or securities convertible into or
exchangeable for shares of its capital stock. All adjustments shall be
made in such a manner that will allow the option rights granted
hereunder to continue to qualify under Section 422A as "incentive
stock option" rights.
New option rights may be substituted for the option rights
granted hereunder, or the Company's duties under this Agreement may be
assumed by an employer corporation other than the Company, or by an
affiliate of such employer corporation, in connection with any merger,
consolidation, acquisition, separation, reorganization, liquidation,
or like occurrence, in which the Company is involved, in such a manner
that will allow the option rights granted hereunder to continue to
qualify as "incentive stock option" rights under Section 422A and to
the full extent permitted thereby. Notwithstanding the foregoing
provisions of this paragraph 5, in the event such employer
corporation, or affiliate of such employer corporation, refuses to
substitute new option rights for, and substantially equivalent to, the
option
<PAGE>
rights granted hereunder, or to assume the option rights granted
hereunder, or if the Company's Board of Directors determines, in its
sole discretion, that option rights outstanding under the Plan should
not then continue to be outstanding, the option rights granted
hereunder shall terminate and thereupon become null and void (i) upon
the dissolution or liquidation of the Company, or similar occurrence,
or (ii) upon any merger, consolidation, acquisition, separation, or
similar occurrence, when the Company is not the surviving corporation;
provided, however, that the Employee shall have the right, at any time
prior to, but contingent upon the consummation of, such dissolution,
liquidation, merger, consolidation, acquisition, separation, or
similar occurrence, to exercise (i) any unexpired option rights
granted hereunder to the extent such rights are then exercisable, and
(ii) in the case of a merger, consolidation, acquisition, separation,
or similar occurrence when the Company is not the surviving
corporation, those option rights which are not then otherwise
exercisable, but in any event subject to (i) the condition of
paragraph 1(c) that no option rights granted hereunder may be
exercised after the expiration of ten (10) years from the date hereof,
and (ii) the provisions of paragraph 1(e) hereof; provided, further,
that such exercise right shall not in any event expire less than
thirty days after the date notice of such transaction is sent to the
Employee.
6. Method of Exercise; Rights of Optionee in Stock. The option
-----------------------------------------------
rights granted hereunder shall be exercisable upon written notice to
the Company accompanied by payment to the Company of
<PAGE>
the option exercise price as to the shares being purchased. Payment of
the option exercise price shall be in cash or, at the Employee's
election, by delivery of Common Stock of the Company for all or part
of the option price, provided the value of such Common Stock as
determined by the Board of Directors or the Committee in accordance
with any reasonable valuation method, is equal to the option price or
such portion thereof as the Employee is authorized to pay by delivery
of such stock. Neither the Employee nor his personal representatives,
heirs, or legatees shall have any rights or privileges of a
shareholder of the Company in respect to the shares issuable upon the
exercise of the option rights granted hereunder, unless and until
certificates representing such shares shall have been issued and
delivered in accordance with the terms hereof.
7. Notices. Any notice to be given under the terms of this
-------
Agreement shall be mailed, telegraphed, or delivered, and confirmed,
to the Company, in care of its Secretary, at the principal office of
the Company, and any notice to be given to the Employee shall be
mailed, telegraphed, or delivered, and confirmed, to him at the
address given beneath his signature hereto, or at such other address
as either party may hereafter designate in writing to the other. Any
such notice shall be deemed to have been duly given 48 hours after the
deposit thereof in the United States mail, addressed as aforesaid,
registered or certified and postage and registry or certification fee
prepaid.
<PAGE>
8. Date of Grant. The option rights granted hereunder shall be
-------------
deemed to have been granted on the date set forth below, which is the
date upon which the Board of Directors or the Committee approved the
granting of such option rights. The said date is within ten (10)
years from the date on which the Plan was adopted by the Board of
Directors, or the date on which the Plan was approved by the Company's
shareholders, whichever date is earlier.
9. Option Rights Governed by Plan and Internal Revenue Code.
--------------------------------------------------------
The provisions of the Plan shall be deemed to be incorporated in, and
to have been made part of, this Agreement, and shall be deemed to be
controlling in the event that any of the provisions of this Agreement
are inconsistent therewith. This Agreement shall be deemed to include
such other provisions not set forth in the Plan or herein, or not
inconsistent with any provisions set forth in the Plan or herein, as
may be necessary to qualify the option granted hereunder as an
"incentive stock option" under Section 422A.
10. Securities Law Compliance. Upon each issuance of shares of
-------------------------
stock in accordance herewith, the Employee, or his personal
representatives, heirs, or legatees receiving such shares, shall, if
requested by the Company in order to comply with federal or state
securities laws, represent in writing to the Company that such shares
are being acquired with no view to any distribution thereof or shall
make such other representations in writing to the Company, with
respect to the further transfer of such shares, as may be deemed by
the Company to be necessary
<PAGE>
or appropriate under the applicable federal and state securities laws.
The Company, at its sole discretion, may take all reasonable steps
(including the affixing of an appropriate legend on certificates
embodying such shares of stock) to assure itself against any resale or
distribution not in compliance with federal or state securities laws.
11. Persons Bound. Subject to the provisions against assignment
-------------
set forth in paragraph 4 hereof, and to the provisions of paragraph 5
hereof, this Agreement shall be binding upon and inure to the benefit
of any successor or successors of the Company, and the personal
representatives, heirs, and legatees of the Employee.
12. Disqualifying Disposition. The Employee understands that if
-------------------------
stock acquired upon exercise of this option is disposed of before the
expiration of two years from the date of grant of the option or one
year from the date such shares are transferred to the Employee upon
exercise of the option, the tax benefits applicable to incentive stock
options under Section 422A of the Code will be unavailable. The
result will be that the difference between the option exercise price
and the fair market value of the shares at the date of exercise (or
the amount realized upon the disposition, if less than the fair market
value at the date of exercise) will be taxable to the Employee at
ordinary income rates in the year of disposition. In such event the
Company would be entitled to a corresponding deduction for federal tax
purposes. Accordingly, the Employee agrees to notify the Company in
writing promptly upon any such disqualifying disposition.
<PAGE>
13. Information Rights. The Company shall furnish and/or make
------------------
available to each optionee all such reports, financial statements and
other information which Company is required to furnish and/or make
available to any of the shareholders of the Company.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed in its behalf by one of its officers as of the date set forth
below, and the Employee has hereunto set her or his hand on or as of
said date, which date is the date such option rights were approved for
grant, and by such execution represents that the address set forth
below is her or his bona fide place of residence and domicile.
Executed as of: TRADE*PLUS, INC.
__________________________
(Date)
By: _______________________
EMPLOYEE
___________________________
Name
___________________________
Address
<PAGE>
EXHIBIT 10.3
TRADE*PLUS, INC.
1993 STOCK OPTION PLAN
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1. PURPOSE. This 1993 Stock Option Plan/1/ ("Plan") is
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established as a compensatory plan to attract, retain and provide
equity incentives to selected persons to promote the financial success
of Trade*Plus, Inc., a California corporation (the ("Company").
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Capitalized terms not previously defined herein are defined in
Section 18 of this plan.
2. TYPES OF OPTIONS AND SHARES. Options granted under this Plan
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(the "Options") may be either (a) incentive stock options ("ISOs")
within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"), or (b) nonqualified stock options
("NOSOs"), as designated at the time of grant. The shares of stock
that may be purchased upon exercise of Options granted under this Plan
(the Shares") are shares of the common stock of the Company.
3. NUMBER OF SHARES. The aggregate number of Shares that may be
----------------
issued pursuant to Options granted under this Plan is 50,000 Shares,
subject to adjustment as provided in this Plan. If any Option expires
or is terminated without being exercised in whole or in part, the
unexercised or released Shares from such Option shall be available for
future grant and purchase under this plan. At all times during the
term of this Plan, the Company shall reserve and keep available such
number of Shares as shall be required to satisfy the requirements of
outstanding Options under this Plan.
4. ELIGIBILITY.
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(a) General Rules of Eligibility. Options may be granted
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to employees, officers, directors, consultants, independent
contractors and advisors (provided such consultants, contractors and
advisors render bona fide services not in connection with the offer
and sale of securities in a capital-raising transaction) of the
Company or any Parent, Subsidiary or Affiliate of the Company. ISOs
may be granted only to employees (including officers and directors who
are also employees) of the Company or a Parent or Subsidiary of the
Company. The Committee (as defined in Section 14) in its sole
discretion shall select the recipients of Options ("Optionees"). An
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Optionee may be granted more than one Option under this Plan.
(b) Company Assumption of Options. The Company may also,
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from time to time, assume outstanding options granted by another
company, whether in connection with an acquisition of such other
company or otherwise, by either (i) granting an Option under this Plan
in replacement of the option assumed by the Company, or (ii) treating
the assumed option as if it had been granted under this Plan if the
terms of such assumed option could be applied to an option granted
under this Plan. Such assumption shall be permissible if the holder
of the assumed option would have been eligible to be granted an option
hereunder if the other company had applied the rules of this Plan to
such grant.
5. TERMS AND CONDITIONS OF OPTIONS. The Committee shall
-------------------------------
determine whether each Option is to be an ISO or an NQSO, the number
of Shares subject to the Option, the exercise price of the Option, the
period during which the Option may be exercised, and all other terms
and conditions of the Option, subject to the following:
(a) Form of Option Grant. Each Option granted under this Plan
--------------------
shall be evidenced by a written Stock Option Grant (the "Grant") in
substantially
______________________
/1// Approved by the Board of Directors as of April 15, 1993; amended by
-
the Board of Directors as of April 20, 1994.
Approved by the Shareholders as of April 15, 1993.
<PAGE>
the form attached hereto as Exhibit A or such other form as shall be
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approved by the Committee.
(b) Date of Grant. The date of grant of an Option shall be
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the date on which the Committee makes the determination to grant such
Option unless otherwise specified by the Committee. The Grant
representing the Option will be delivered to the Optionee with a copy
of this Plan within a reasonable time after the date of grant;
provided, however that if, for any reason, including a unilateral
decision by the Company not to execute an agreement evidencing such
option, a written Grant is not executed within sixty (60) days after
the date of grant, such option shall be deemed null and void. No
option shall be exercisable until such Grant is executed by the
Company and the Optionee.
(c) Exercise Price. The exercise price of an NQSO shall be
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not less than eighty-five percent (85%) of the Fair Market Value of
the Shares on the date the Option is granted. The exercise price of
an ISO shall be not less than one hundred percent (100%) of the Fair
Market Value of the Shares on the date the Option is granted. The
exercise price of any option granted to a person owning more than ten
percent (10%) of the total combined voting power of all classes of
stock of the Company or any Parent or Subsidiary of the Company ("Ten
---
Percent Shareholders") shall not be less than one hundred ten percent
--------------------
(110%) of the Fair Market Value of the Shares on the date the Option
is granted.
(d) Exercise Period. Options shall be exercisable within
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the times or upon the events determined by the Committee as set forth
in the Grant; provided, however that each Option must become
exercisable at a rate of at least twenty percent (20%) per year over
five (5) years from the date the Option is granted; and provided,
however, that no Option shall be exercisable after the expiration of
ten (10) years from the date the Option is granted, and provided
further that no ISO granted to a Ten Percent Shareholder shall be
exercisable after the expiration of five (5) years from the date the
Option is granted.
(e) Limitations on ISOs. The aggregate Fair Market Value
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(determined as of the time an Option is granted) of stock with respect
to which ISOs are exercisable for the first time by an Optionee during
any calendar year (under this Plan or under any other incentive stock
option plan of the Company or any Parent or subsidiary of the Company)
shall not exceed one hundred thousand dollars ($100,000). If the Fair
Market Value of stock with respect to which ISOs are exercisable for
the first time by an Optionee during any calendar year exceeds
$100,000, the Options for the first $100,000 worth of stock to become
exercisable in such year shall be ISOs and the Options for the amount
in excess of $100,000 that becomes exercisable in that year shall be
NQSOs. In the event that the Code or the regulations promulgated
thereunder are amended after the effective date of this Plan to
provide for a different limit on the Fair Market Value of Shares
permitted to be subject to ISOs such different limit shall be
incorporated herein and shall apply to any Options granted after the
effective date of such amendment.
2
<PAGE>
(f) Options Non-transferable. Options granted under this
------------------------
Plan, and any interest therein, shall not be transferable or
assignable by the Optionee, and may not be made subject to execution,
attachment or similar process, otherwise than by will or by the laws
of descent and distribution and shall be exercisable during the
lifetime of the Optionee only by the Optionee or any permitted
transferee.
(g) Assumed Options. In the event the Company assumes an
---------------
option granted by another company in accordance with 4 (b) above, the
terms and conditions of such option shall remain unchanged (except the
exercise price and the number and nature of shares issuable upon
exercise, which will be adjusted appropriately pursuant to Section 424
of the Code and the Treasury Regulations applicable thereto). In the
event the Company elects to grant a new option rather than assuming an
existing option (as specified in Section 4), such new option need not
be granted at Fair Market Value on the date of grant and may instead
be granted with a similarly adjusted exercise price.
6. EXERCISE OF OPTIONS.
(a) Notices. Options may be exercised only by delivery to
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the Company of a written exercise agreement in a form approved by the
Committee (which need not be the same for each Optionee) , stating the
number of Shares being purchased, the restrictions imposed on the
Shares, if any, and such representations and agreements regarding the
Optionee's investment intent and access to information, if any, as may
be required by the Company to comply with applicable securities laws,
together with payment in full of the exercise price for the number of
Shares being purchased.
(b) Payment. Payment for the Shares may be made in cash (by
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check) or, where approved by the Committee in its sole discretion at
the time of grant and where permitted by law: (i) by cancellation of
indebtedness of the Company to the Optionee; (ii) by surrender of
shares of Common Stock of the Company already owned by the Optionee,
having a Fair Market Value equal to the exercise price of the Option;
(iii) by waiver of compensation due or accrued to Optionee for
services rendered; (iv) through a guaranty by the Company of a loan to
the Optionee by a third party of all or part of the option price (but
not more than the option price) , and such guaranty may be on an
unsecured or secured basis as the Committee shall approve (including,
without limitation, by a security interest in the shares of the
Company); (v) provided that a public market for the Company's stock
exists, through a "same day sale" commitment from the Optionee and a
broker-dealer that is a member of the National Association of
Securities Dealers, Inc. (an "NASD Dealer") whereby the Optionee
------------
irrevocably elects to exercise the Option and to sell a portion of the
Shares so purchased to pay for the exercise price and whereby the NASD
Dealer irrevocably commits upon receipt of such Shares to forward the
exercise price directly to the Company; (vi) provided that a public
market for the Company's stock exists, through a "margin" commitment
from the Optionee and an NASD Dealer whereby the Optionee irrevocably
elects to exercise the Option and to pledge the Shares so purchased to
the NASD Dealer in a margin account as security for a loan from the
NASD Dealer in the amount of the exercise price, and whereby the NASD
Dealer irrevocably commits upon receipt of such Shares to forward the
exercise price directly to the Company; or (vii) by any combination of
the foregoing.
3
<PAGE>
(c) Withholding Taxes. Prior to issuance of the Shares upon
-----------------
exercise of an Option, the Optionee shall pay or make adequate
provision for any federal or state withholding obligations of the
Company, if applicable. Where approved by the Committee in its sole
discretion, the Optionee may provide for payment of withholding taxes
upon exercise of the Option by requesting that the Company retain
Shares with a Fair Market Value equal to the minimum amount of taxes
required to be withheld. In such case, the Company shall issue the
net number of Shares to the Optionee by deducting the Shares retained
from the Shares exercised. The Fair Market Value of the Shares to be
withheld shall be determined on the date that the amount of tax to be
withheld is to be determined in accordance with Section 83 of the Code
(the "Tax Date"). All elections by Optionees to have Shares withheld
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for this purpose shall be made in writing in a form acceptable to the
Committee and shall be subject to the following restrictions:
(i) the election must be made on or prior to the applicable
Tax Date;
(ii) once made, the election shall be irrevocable as to the
particular Shares as to which the election is made;
(iii) all elections shall be subject to the consent or
disapproval of the Committee;
(iv) if the Optionee is an officer or director of the
Company or other person (in each case, an "Insider") whose
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transactions in the Company's Common Stock are subject to Section
16(b) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") and if the Company is subject to Section 16(b) of the
--------------
Exchange Act, the election must be made at least six (6) months prior
to the Tax Date and must otherwise comply with Rule 16b-3.
(D) LIMITATIONS ON EXERCISE. Notwithstanding anything else
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to the contrary in the Plan or any Grant, no Option may be exercisable
later than the expiration date of the Option.
7. RESTRICTIONS ON SHARES. At the discretion of the Committee,
the Company may reserve to itself and/or its assignee(s) in the Grant
(a) a right of first refusal to purchase all Shares that an Optionee
(or a subsequent transferee) may propose to transfer to a third party
and/or (b) for so long as the Company's stock is not publicly traded,
a right to repurchase a portion of or all Shares held by an Optionee
upon the Optionee's termination of employment or service with the
Company or its Parent, Subsidiary or Affiliate of the Company for any
reason within a specified time as determined by the Committee at the
time of grant at the higher of (i) the Optionee's original purchase
price, (ii) the Fair Market Value of such Shares or (iii) a price
determined by a formula or other provision set forth in the Grant.
The terms of such a right of repurchase shall conform to Section
260.140.41(k) of the California Corporations Commissioner's Rules, or
any successor rule.
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<PAGE>
8. MODIFICATIONS. EXTENSION AND RENEWAL OF OPTIONS. The
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Committee shall have the power to modify, extend or renew outstanding
Options and to authorize the grant of new Options in substitution
therefor, provided that any such action may not, without the written
consent of the Optionee, impair any rights under any Option previously
granted. Any outstanding ISO that is modified, extended, renewed or
otherwise altered shall be treated in accordance with Section 424 (h)
of the Code. The Committee shall have the power to reduce the
exercise price of outstanding options; provided, however, that the
exercise price per share may not be reduced below the minimum exercise
price that would be permitted under Section 5(c) of this Plan for
options granted on the date the action is taken to reduce the exercise
price.
9. PRIVILEGES OF STOCK OWNERSHIP. No Optionee shall have any of
-----------------------------
the rights of a shareholder with respect to any Shares subject to an
Option until such Option is properly exercised. No adjustment shall
be made for dividends or distributions or other rights for which the
record date is prior to such date, except as provided in this Plan.
The Company shall provide to each Optionee a copy of the annual
financial statements of the Company, at such time after the close of
each fiscal year of the Company as such statements are released by the
Company to its shareholders.
10. NO OBLIGATION TO EMPLOY; NO RIGHT TO FUTURE GRANTS. Nothing
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in this Plan or any Option granted under this Plan shall confer on any
Optionee any right (a) to continue in the employ of, or other
relationship with, the Company or any Parent or Subsidiary of the
Company or limit in any way the right of the Company or any Parent or
Subsidiary of the Company to terminate the Optionee's employment or
other relationship at any time, with or without cause or (b) to have
any Option(s) granted to such Optionee under this Plan, or any other
plan, or to acquire any other securities of the Company, in the
future.
11. ADJUSTMENT OF OPTION SHARES. In the event that the number
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of outstanding shares of Common Stock of the Company is changed by a
stock dividend, stock split, reverse stock split, combination,
reclassification or similar change in the capital structure of the
Company without consideration, or if a substantial portion of the
assets of the Company are distributed, without consideration in a
spin-off or similar transaction, to the
shareholders of the Company, the number of Shares available under this
Plan and the number of Shares subject to outstanding Options and the
exercise price per share of such Options shall be proportionately
adjusted, subject to any required action by the Board or shareholders
of the Company and compliance with applicable securities laws;
provided, however, that a fractional share shall not be issued upon
exercise of any Option and any fractions of a Share that would have
resulted shall either be cashed out at Fair Market Value or the number
of Shares issuable under the Option shall be rounded up to the nearest
whole number, as determined by the Committee; and provided further
that the exercise price may not be decreased to below the par value,
if any, for the Shares.
12. ASSUMPTION OF OPTIONS BY SUCCESSORS.
-----------------------------------
(a) In the event of (i) a merger or consolidation in which
the Company is not the surviving corporation (other than a merger or
consolidation with a wholly-owned subsidiary or where there is no
substantial change in the shareholders of the corporation and the
Options granted under this Plan are assumed by the successor
corporation) , or (ii) the sale of all or substantially all of the
assets of the Company, any or all outstanding Options shall be assumed
5
<PAGE>
by the successor corporation, which assumption shall be binding on all
Optionees, an equivalent option shall be substituted by such successor
corporation or the successor corporation shall provide substantially
similar consideration to Optionees as was provided to shareholders
(after taking into account the existing provisions of the Optionees'
options such as the exercise price and the vesting schedule) , and, in
the case of outstanding shares subject to a repurchase option, issue
substantially similar shares or other property subject to repurchase
restrictions no less favorable to the Optionee.
(b) In the event such successor corporation, if any, refuses
to assume or substitute, as provided above, pursuant to an event
described in (a) above, or in the event of a dissolution or
liquidation of the Company, the Options shall, notwithstanding any
contrary terms in the Grant, expire on a date at least twenty (20)
days after the Committee gives written notice to the Optionees
specifying the terms and conditions of such termination.
13. ADOPTION AND SHAREHOLDER APPROVAL. This Plan shall become
---------------------------------
effective on the date that it is adopted by the Board of the Company
(the "Board"). This Plan shall be approved by the shareholders of the
Company, in any manner permitted by applicable corporate law, within
twelve (12) months before or after the date this Plan is adopted by
the Board. Thereafter, no later than twelve (12) months after the
Company becomes subject to Section 16(b) of the Exchange Act, the
Company will comply with the requirements of Rule 16b-3 (or its
successor) with respect to shareholder approval.
14. ADMINISTRATION. This Plan may be administered by the Board
--------------
or a Committee appointed by the Board (the "Committee"). If, at any
----------
time after the Company registers under the Exchange Act, all of the
directors are not Disinterested Persons, the Board shall appoint a
Committee consisting of not less than two directors, each of whom is a
Disinterested Person and at all times during which the Company is
registered under the Exchange Act, the Committee shall be comprised of
Disinterested Persons. As used in this Plan, references to the
"Committee" shall mean either such Committee or the Board if no
committee has been established. The interpretation by the Committee
of any of the provisions of this Plan or any Option granted under this
Plan shall be final and binding upon the Company and all persons
having an interest in any Option or any Shares purchased pursuant to
an Option.
15. TERM OF PLAN. Options may be granted pursuant to this Plan
------------
from time to time on or prior to April 14, 2003.
16. AMENDMENT OR TERMINATION OF PLAN. The Board of Directors or
--------------------------------
Committee may, at any time, amend, alter, suspend or discontinue the
Plan, but no amendment, alteration, suspension or discontinuation
shall be made which would impair the rights of any Optionee under any
Option theretofore granted, without his or her consent, or which,
without the approval of a majority of the outstanding voting shares of
the Company would:
(a) except as provided in Section 11 of the Plan, increase
the total number of Shares reserved for the purposes of the Plan;
(b) extend the duration of the Plan;
(c) extend the period during and over which Options may be
exercised under the Plan; or
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<PAGE>
(d) change the class of persons eligible to receive Options
granted hereunder.
Without limiting the foregoing, the Board of Directors may at any time
or from time to time authorize the Company, with the consent of the
respective Optionees, to issue new options in exchange for the
surrender and cancellation of any or all outstanding Options.
17. INFORMATION RIGHTS. The Company shall furnish and/or make
------------------
available financial statements to each Optionee under the Plan on an
annual basis, unless such Optionee is a key employee whose duties in
connection with the Company assure him or her access to equivalent
information.
18. CERTAIN DEFINITIONS. As used in this Plan, the following
-------------------
terms shall have the following meanings:
(a) "Parent" means any corporation (other than the Company)
------
in an unbroken chain of corporations ending with the Company if, at
the time of the granting of the Option, each of the corporations other
than the Company owns stock possessing fifty percent (50%) or more of
the total combined voting power of all classes of stock in one of the
other corporations in such chain.
(b) "Subsidiary" means any corporation (other than the
----------
Company) in an unbroken chain of corporations beginning with the
Company if, at the time of the granting of the Option, each of the
corporations other than the last corporation in the unbroken chain
owns stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other
corporations in such chain.
(c) "Affiliate" means any corporation that directly, or
---------
indirectly through one or more intermediaries, controls or is
controlled by, or is under common control with, another corporation,
where "control" (including the terms "controlled by" and "under common
control with") means the possession, direct or indirect, of the power
to cause the direction of the management and policies of the
corporation, whether through the ownership of voting securities, by
contract or otherwise.
(d) "Disinterested Persons" shall have the meaning set forth
in Rule 16b-3(c) (2) as promulgated by the SEC under Section 16(b) of
the Exchange Act, as such rule is amended from time to time and as
interpreted by the SEC.
(e) "Fair Market Value" shall mean the fair market value of
the Shares as determined by the Committee from time to time in good
faith. If a public market exists for the Shares, the Fair Market
Value shall be the average of the last reported bid and asked prices
for Common Stock of the Company on the last trading day prior to the
date of determination or, in the event the Common Stock of the Company
is listed on a stock exchange or on the NASDAQ National Market System,
the Fair Market Value shall be the closing price on such exchange or
quotation system on the last trading day prior to the date of
determination.
7
<PAGE>
FORM OF STOCK OPTION GRANT
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Optionee:
------------------
Address:
------------------
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Total Shares Subject to Option:
---
Exercise Price Per Share:
------
Date of Grant:
-----------------
Expiration Date of Option:
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Type of Stock Option: Incentive: ___________
Nonqualified: _____________
1. Grant of Option. Trade*Plus, Inc., a California corporation (the
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"Company") , hereby grants to the optionee named above ("Optionee") an option
- --------- --------
(this "Option") to purchase the total number of shares of Common Stock of the
------
Company set forth above (the "Shares") at the exercise price per share set forth
------
above (the "Exercise Price") , subject to all of the terms and conditions of
--------------
this Grant and the Company's 1993 Stock Option Plan, as amended to the date
hereof (the "Plan"). If designated as an Incentive Stock Option above, this
----
Option is intended to qualify as an "incentive stock option" ("ISO") within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"). Unless otherwise defined herein, capitalized terms used herein shall
have the meanings ascribed to them in the Plan.
2. Exercise Period of Option. The option rights granted hereunder are
-------------------------
exercisable during the time period or periods, and as to the number of shares
exercisable during each time period, as follows:
(a) shares, or any part thereof, may be exercised at any time or
---
times, from and including to and including ;
----------------- -----------------
(b) an additional shares, or any part thereof, may be exercised at
---
any time or times, from and including to and including
-----------------
;
- -----------------
(c) an additional shares, or any part thereof, may be exercised at
---
any time or times, from and including to and including
-----------------
;
- -----------------
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<PAGE>
(d) an additional shares, or any part thereof, may be exercised at
---
any time or times, from and including to and including
-----------------
;
- -----------------
(e) and the remaining shares, or any part thereof, may be
---
exercised at any time or times, from and including to and
-----------------
including .
-----------------
Notwithstanding the above, (i) the minimum number of Shares that
may be purchased upon any partial exercise of the Option is one
hundred (100) shares, and (ii) this Option shall expire on the
Expiration Date set forth above and must be exercised, if at all, on
or before the Expiration Date. The portion of Shares as to which an
Option is exercisable in accordance with the above schedule as of the
applicable dates shall be deemed "Vested Options."
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3. Restriction on Exercise. This Option may not be exercised
-----------------------
unless such exercise is in compliance with the Securities Act of 1933,
as amended, and all applicable state securities laws, as they are in
effect on the date of exercise, and the requirements of any stock
exchange or over-the-counter market on which the Company's Common
Stock may be listed or quoted at the time of exercise. Optionee
understands that the Company is under no obligation to register,
qualify or list the Shares with the Securities and Exchange
Commission, any state securities commission or any stock exchange to
effect such compliance.
4. Termination of Option. Except as provided below in this
---------------------
Section 4, this Option shall terminate and may not be exercised if
Optionee ceases to be employed by the Company or by any Parent or
Subsidiary of the Company (or, in the case of a nonqualified stock
option, by any Affiliate of the Company). Optionee shall be considered
to be employed by the Company for all purposes under this Section 4 if
Optionee is an officer, director or full-time employee of the Company
or any Parent, Subsidiary or Affiliate of the Company or if the Board
of Directors determines that Optionee is rendering substantial
services as a part-time employee, consultant, contractor or advisor to
the Company or any Parent, Subsidiary or Affiliate of the Company. The
Board of Directors of the Company shall have discretion to determine
whether Optionee has ceased to be employed by the Company or any
Parent, Subsidiary or Affiliate of the Company and the effective date
on which such employment terminated (the "Termination Date").
----------------
(a) Termination Generally. If Optionee ceases to be
---------------------
employed by the Company and all Parents, Subsidiaries or Affiliates of
the Company for any reason except death or disability, this Option, to
the extent (and only to the extent) that it would have been
exercisable by Optionee on the Termination Date, may be exercised by
Optionee, but only within thirty (30) days after the Termination Date;
provided that this Option may not be exercised in any event after the
Expiration Date.
(b) Death or Disability. If Optionee's employment with the
-------------------
Company and all Parents, Subsidiaries and Affiliates of the Company is
terminated because of the death of Optionee or the permanent and total
disability of Optionee within the meaning of Section 22(e) (3) of the
Code, this Option, to the extent (and only to the extent) that it
would have been exercisable by Optionee on the Termination Date, may
be exercised by Optionee (or Optionee's legal representative) , but
only within twelve (12) months after the Termination Date, provided
that this Option may not be exercised in any event later than the
Expiration Date.
9
<PAGE>
If Optionee's employment with the Company and all Parents,
Subsidiaries and Affiliates of the Company is terminated because of
disability of Optionee which is not permanent and total disability
within the meaning of Section 22(e) (3) of the Code, this Option, to
the extent (and only to the extent) that it would have been
exercisable by Optionee on the Termination Date, may be exercised by
Optionee (or Optionee's legal representative) , but only within six
(6) months after the Termination Date, provided that this Option may
not be exercised in any event later than the Expiration Date. In such
case, if Optionee fails to exercise this Option within the first three
(3) months of such six (6) month period, this Option will no longer
qualify as an ISO (even if is designated an ISO on page 1 of this
Grant).
(c) No Right to Employment. Nothing in the Plan or this Grant
----------------------
shall confer on Optionee any right to continue in the employ of, or
other relationship with, the Company or any Parent, Subsidiary or
Affiliate of the Company or limit in any way the right of the Company
or any Parent, Subsidiary or Affiliate of the Company to terminate
Optionee's employment or other relationship at any time, with or
without cause.
5. Manner of Exercise.
------------------
(a) Exercise Agreement. This Option shall be exercisable by
------------------
delivery to the Company of an executed written Stock Option Exercise
Agreement in the form attached hereto as Exhibit A, or in such other
---------
form as may be approved by the Company, which shall set forth
Optionee's election to exercise some or all of this Option, the number
of Shares being purchased, any restrictions imposed on the Shares and
such other representations and agreements as may be required by the
Company to comply with applicable securities laws.
(b) Exercise Price. Such notice shall be accompanied by full
--------------
payment of the Exercise Price for the Shares being purchased. Payment
for the Shares may be made in cash (by check) , or, where permitted by
law, by any of the following methods approved by the Committee at the
date of grant of this Option, or any combinations thereof:
[ANY OR ALL OF THE FOLLOWING MAY BE SPECIFIED FOR ANY GIVEN OPTIONEE:]
[ ] (i) by cancellation of indebtedness of the Company to the
Optionee;
[ ] (ii) by surrender of shares of Common Stock of the Company
already owned by the Optionee, or which were obtained by
Optionee in the open public market, having a Fair Market
Value equal to the exercise price of the Option;
[ ] (iii) by waiver of compensation due or accrued to Optionee for
services rendered;
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<PAGE>
[ ] (iv) through a guaranty by the Company of a loan to the Optionee
by a third party of all or part of the option price (but
not more than the option price) , and such guaranty may be
on an unsecured or secured basis as the Committee shall
approve (including, without limitation, by a security
interest in the Shares of the Company).
[ ] (v) provided that a public market for the Company's stock
exists, through a "same day sale" commitment from the
Optionee and a broker-dealer that is a member of the
National Association of Securities Dealers, Inc. (an" NASD
----
Dealer") whereby the Optionee irrevocably elects to
------
exercise the Option and to sell a portion of the Shares so
purchased to pay for the exercise price and hereby the NASD
Dealer irrevocably commits upon receipt of such Shares to
forward the exercise price directly to the Company; or
[ ] (vi) provided that a public market for the Company's stock
exists, through a "margin" commitment from the Optionee and
an NASD Dealer whereby the Optionee irrevocably elects to
exercise this option and to pledge the Shares so purchased
to the NASD Dealer in
a margin account as security for a
loan from the NASD Dealer in the amount of the exercise
price, and whereby the NASD Dealer irrevocably commits upon
receipt of such Shares to forward the exercise price
directly to the Company.
(c) Withholding Taxes. Prior to the issuance of the Shares
-----------------
exercise of this Option, Optionee must pay or make adequate provision
for any applicable federal or state withholding obligations of the
Company. The Optionee may provide for payment of Optionee's minimum
statutory withholding taxes upon exercise of the Option by requesting
that the Company retain Shares with a Fair Market Value equal to the
minimum amount of taxes required to be withheld, all as set forth in
Section 6(c) of the Plan. In such case, the Company shall issue the
net number of Shares to the Optionee by deducting the Shares retained
from the Shares exercised.
(d) Issuance of Shares. Provided that such notice and payment
are in form and substance satisfactory to counsel for the Company, the
Company shall cause the Shares to be issued in the name of Optionee or
Optionee's legal representative.
6. Notice of Disqualifying Disposition of ISO Shares. If the
-------------------------------------------------
Option granted to Optionee herein is an ISO, and if Optionee sells or
otherwise disposes of any of the Shares acquired pursuant to the ISO
on or before the later of (1) the date two years after the Date of
Grant, or (2) the date one year after exercise of the ISO with respect
to the Shares to be sold or disposed of, the Optionee shall
immediately notify the Company in writing of such disposition.
11
<PAGE>
Optionee acknowledges and agrees that Optionee may be subject to
income tax withholding by the Company on the compensation income
recognized by the Optionee from any such early disposition by payment
in cash or out of the current wages or other earnings payable to the
Optionee.
7. Nontransferability of Option. This Option may not be
----------------------------
transferred in any manner other than by will or by the law of descent
and distribution and may be exercised during the lifetime of Optionee
only by Optionee or other permitted transferee. The terms of this
Option shall be binding upon the executors, administrators, successors
and assigns of the Optionee.
8. Federal Tax Consequences. Set forth below is a brief summary
------------------------
as of the date this form of Option Grant was adopted of some of the
federal tax consequences of exercise of this Option and disposition of
the Shares. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS
AND REGULATIONS ARE SUBJECT TO CHANGE. OPTIONEE SHOULD CONSULT A TAX
ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES.
(A) Exercise of ISO. If this Option qualifies as an ISO,
---------------
there will be no regular federal income tax liability upon the
exercise of this Option, although the excess, if any, of the Fair
Market Value of the Shares on the date of exercise over the Exercise
Price will be treated as an adjustment to alternative minimum taxable
income for federal income tax purposes and may subject the Optionee to
an alternative minimum tax liability in the year of exercise.
(B) Exercise of Nonqualified Stock Option. If this Option
-------------------------------------
does not qualify as an ISO, there may be a regular federal income tax
liability upon the exercise of the Option. The Optionee will be
treated as having received compensation income (taxable at ordinary
income tax rates) equal to the excess, if any, of the Fair Market
Value of the Shares on the date of exercise over the Exercise Price.
The Company will be required to withhold from Optionee's compensation
or collect from Optionee and pay to the applicable taxing authorities
an amount equal to a percentage of this compensation income at the
time of exercise.
(C) Disposition of Shares. In the case of a nonqualified
---------------------
option, if Shares are held for at least one year before disposition,
any gain on disposition of the Shares will be treated as long-term
capital gain for federal and California income tax purposes. In the
case of an ISO, if Shares are held for at least one year after the
date of exercise and at least two years after the Date of Grant, any
gain on disposition of the Shares will be treated as long-term capital
gain for federal and California income tax purposes. If Shares
acquired pursuant to an ISO are disposed of within such one-year or
two-year periods (a "disqualifying disposition") , gain on such
-------------------------
disqualifying disposition will be treated as compensation income
(taxable at ordinary income rates) to the extent of the excess, if
any, of the Fair Market Value of the Shares on the date of exercise
over the Exercise Price (the "Spread"). Any gain in excess of the
------
Spread shall be treated as capital gain.
12
<PAGE>
9. Interpretation. Any dispute regarding the interpretation of
--------------
this Grant shall be submitted by Optionee or the Company to the
Company's Board of Directors or the Committee, which shall review such
dispute at its next regular meeting. The resolution of such a dispute
by the Board or Committee shall be final and binding on the Company
and on Optionee.
10. Entire Agreement. The Plan and the Stock Option Exercise
----------------
Agreement attached hereto as Exhibit 1 are incorporated herein by this
---------
reference. This Grant, the Plan and the Stock Option Exercise
Agreement constitute the entire agreement of the parties hereto and
supersede all prior undertakings and agreements with respect to the
subject matter hereof.
TRADE*PLUS, INC.
By: ___________________________
Name:
-----------------------------
Title:
--------------------------
13
<PAGE>
ACCEPTANCE
----------
Optionee hereby acknowledges receipt of a copy of the Plan,
represents that Optionee has read and understands the terms and
provisions thereof, and accepts this Option subject to all the terms
and conditions of the Plan and this Stock Option Grant. Optionee
acknowledges that there may be adverse tax consequences upon exercise
of this Option or disposition of the Shares and that Optionee should
consult a tax adviser prior to such exercise or disposition.
OPTIONEE
____________________________
Signature
____________________________
Print Name
14
<PAGE>
EXHIBIT 1
TO STOCK OPTION GRANT
STOCK OPTION EXERCISE AGREEMENT
-------------------------------
This Agreement is made this ______ day of _______________, 19 ___
between Trade*Plus, Inc. (the "Company") , and the optionee named
-------
below ("Optionee").
--------
Optionee:
Social Security Number: __________________________________________
Address: _________________________________________________________
__________________________________________________________________
Number of Shares Purchased: ______________________________________
Price Per Share: _________________________________________________
Aggregate Purchase Price: ________________________________________
Date of Option Grant: ____________________________________________
Type of Stock Option: Incentive: __________
Nonqualified: __________
Optionee hereby delivers to the Company the Aggregate Purchase
Price, to the extent permitted in the Option Grant, as follows [check
as applicable and complete] :
[NOTE: BEFORE GRANTING ANY OPTIONS, THE COMPANY SHOULD DELETE ANY
OF THE FOLLOWING METHODS OF PAYMENT THAT IT DOES NOT WISH TO MAKE
AVAILABLE TO THE OPTIONEES]
[ ] cash (check) in the amount of $ , receipt of which is
acknowledged by the Company;
[ ] by delivery of ________ fully-paid, nonassessable and vested shares of the
Common Stock of the Company owned by Optionee and owned free and clear of
all liens, claims, encumbrances or security interests, valued at the
current fair market value of $__________ per share (as determined by the
Board of Directors of the Company in good faith) ;
[ ] by the waiver hereby of compensation due or accrued for services rendered
in the amount of $___________;
[ ] by delivery of all of the proceeds of a loan from a third party in the
amount of $___________ , which loan is guaranteed by the Company
[ ] by delivery of a "same day sale" commitment from the Optionee and a
broker-dealer that is a member of the National Association of Securities
Dealers, Inc. (an "NASD Dealer") whereby the Optionee irrevocably elects
-----------
15
<PAGE>
to exercise the Option and to sell a portion of the Shares so purchased to
pay for the exercise price of $________ and whereby the NASD Dealer
irrevocably commits upon receipt of such Shares to forward the exercise
price directly to the Company (this payment method may be used only if a
public market for the Company's stock exists) ; or
[ ] by delivery of a "margin" commitment from the Optionee and an NASD Dealer
whereby the Optionee irrevocably elects to exercise this option and to
pledge the Shares so purchased to the NASD Dealer in a margin account as
security for a loan from the NASD Dealer in the amount of the exercise
price, and whereby the NASD Dealer irrevocably commits upon receipt of such
Shares to forward the exercise price of $__________ directly to the Company
(this payment method may be used only if a public market for the Company's
stock exists).
The Company and Optionee hereby agree as follows:
1. Purchase of Shares. On this date and subject to the terms
------------------
and conditions of this Agreement, Optionee hereby exercises the Stock
Option Grant between the Company and Optionee dated as of the Date of
Option Grant set forth above (the "Grant") , with respect to the
-----
Number of Shares Purchased set forth above of the Company's Common
Stock (the "Shares") at an aggregate purchase price equal to the
------
Aggregate Purchase Price set forth above (the "Purchase Price") and
--------------
the Price per Share set forth above (the "Purchase Price Per Share").
------------------------
The term "Shares" refers to the Shares purchased under this Agreement
and includes all securities received (a) in replacement of the Shares,
and (b) as a result of stock dividends or stock splits in respect of
the Shares. Capitalized terms used herein that are not defined herein
have the definitions ascribed to them in the Plan or the Grant.
2. Representations of Purchaser. Optionee represents and
----------------------------
warrants to the Company that:
(a) Optionee has received, read and understood the Plan and
the Grant and agrees to abide by and be bound by their terms and
conditions.
[the following representations should be included to the extent
required under applicable securities laws:]
(b) Optionee is capable of evaluating the merits and risks
of this investment, has the ability to protect Optionee's own
interests in this transaction and is financially capable of bearing a
total loss of this investment.
(c) Optionee is fully aware of (i) the highly speculative
nature of the investment in the Shares; (ii) the financial hazards
involved; and (iii) the lack of liquidity of the Shares and the
restrictions on transferability of the Shares (e.g. , that Optionee
may not be able to sell or dispose of the Shares or use them as
collateral for loans).
(d) Optionee is purchasing the Shares for Optionee's own
account for investment purposes only and not with a view to, or for
sale in connection with, a distribution of the Shares within the
meaning of the Securities Act of 1933, as amended (the "1933 Act")
---------
3
<PAGE>
(e) Optionee has no present intention of selling or
otherwise disposing of all or any portion of the Shares.
[the following section need not be included after the filing of a
REGISTRATION STATEMENT on FORM S-8 covering the options granted and
shares issued under the PLAN.]
3. Compliance with Securities Laws. Optionee understands and
-------------------------------
acknowledges that the Shares have not been registered under the 1933
Act and that, notwithstanding any other provision of the Grant to the
contrary, the exercise of any rights to purchase any Shares is
expressly conditioned upon compliance with the 1933 Act and all
applicable state securities laws. Optionee agrees to cooperate with
the Company to ensure compliance with such laws. The Shares are being
issued under the 1933 Act pursuant to [the Company will check the
applicable box] :
[ ] the exemption provided by Rule 701;
[ ] the exemption provided by Rule 504;
[ ] Section 4(2) of the 1933 Act;
[ ] other:
[the following section need not be included after the filing of a
REGISTRATION STATEMENT on FORM S-8 covering the options granted and
shares issued under the PLAN.]
4. Federal Restrictions on Transfer. Optionee understands that
--------------------------------
the Shares must be held indefinitely unless they are registered under
the 1933 Act or unless an exemption from such registration is
available and that the certificate(s) representing the Shares will
bear a legend to that effect. Optionee understands that the Company
is under no obligation to register the Shares, and that an exemption
may not be available or may not permit Optionee to transfer Shares in
the amounts or at the times proposed by Optionee.
(a) Rule 144. Optionee has been advised that Rule 144
--------
promulgated under the 1933 Act, which permits certain resales or
unregistered securities, is not presently available with respect to
the Shares and, in any event, requires that a minimum of two (2) years
elapse between the date of acquisition of Shares from the Company or
an affiliate of the Company and any resale under Rule 144. Prior to
an initial public offering of the Company's stock, "nonaffiliates"
(i.e. persons other than officers, directors and major shareholders
of the Company) may resell only under Rule 144 (k) , which requires
that a minimum of three (3) years elapse between the date of
acquisition of Shares from the Company or an affiliate of the Company
and any resale under Rule 144(k). Rule 144(k) is not available to
affiliates.
(b) Rule 701. If the exemption relied upon for exercise of
--------
the Shares is Rule 701, the Shares will become freely transferable,
subject to limited conditions regarding the method of sale, by
nonaffiliates ninety (90) days after the first sale of common stock of
the Company to the general public pursuant to a registration statement
filed with and declared effective by the Securities and Exchange
Commission (the "SEC") , subject to any lengthier market standoff
agreement contained in this Agreement or entered into by
17
<PAGE>
Optionee. Affiliates must comply with the provisions (other than the
holding period requirements) of Rule 144.
5. State Law Restrictions on Transfer. Optionee understands
----------------------------------
that transfer of the Shares may be restricted by applicable state
securities laws,
and that the certificate(s) representing the Shares may bear a legend
or legends to that effect.
[The following section should be deleted from public company plans]
6. Market Standoff Agreement. Optionee agrees in connection
-------------------------
with any registration of the Company's securities that, upon the
request of the Company or the underwriters managing any public
offering of the Company's securities, Optionee will not sell or
otherwise dispose of any Shares without the prior written consent of
the Company or such underwriters, as the case may be, for a period of
time (not to exceed one hundred eighty (180) days) from the effective
date of such registration as the Company or the underwriters may
specify for employee shareholders generally.
[the following section need not be included after the filing of a
REGISTRATION STATEMENT on FORM S-8 covering the options granted and
shares issued under the PLAN.]
7. Legends. Optionee understands and agrees that the
-------
certificate(s) representing the Shares will bear a legend in
substantially the following forms, in addition to any other legends
required by applicable law:
"THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933 (THE 'SECURITIES ACT'), AND MAY NOT BE
OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED
UNLESS AND UNTIL REGISTERED UNDER THE SECURITIES ACT OR, IN THE
OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE
ISSUER OF THESE SECURITIES, SUCH OFFER, SALE OR TRANSFER, PLEDGE
OR HYPOTHECATION IS IN COMPLIANCE THEREWITH."
[The following section may be deleted if no restrictions are in
effect with respect to the shares:]
8. Stop-Transfer Notices. Optionee understands and agrees that,
---------------------
in order or ensure compliance with the restrictions referred to
herein, the Company may issue appropriate "stop-transfer" instructions
to its transfer agent, if any, and that, if the Company transfers its
own securities, it may make appropriate notations to the same effect
in its own records.
9. TAX CONSEQUENCES. OPTIONEE UNDERSTANDS THAT OPTIONEE MAY
----------------
SUFFER ADVERSE TAX CONSEQUENCES AS A RESULT OF OPTIONEE'S PURCHASE OR
DISPOSITION OF THE SHARES. OPTIONEE REPRESENTS THAT OPTIONEE HAS
CONSULTED WITH ANY TAX CONSULTANT(S) OPTIONEE DEEMS ADVISABLE IN
CONNECTION WITH THE PURCHASE OR DISPOSITION OF THE SHARES AND THAT
OPTIONEE IS NOT RELYING ON THE COMPANY FOR ANY TAX ADVICE. IN
PARTICULAR, IF OPTIONEE IS AN INSIDER SUBJECT TO SECTION 16(b) OF THE
SECURITIES EXCHANGE ACT OF 1934, AND IF THE OPTION BEING EXERCISED WAS
GRANTED WITHIN THE PRECEDING SIX MONTHS, OPTIONEE REPRESENTS THAT
OPTIONEE HAS CONSULTED WITH OPTIONEE'S TAX ADVISERS CONCERNING THE
18
<PAGE>
ADVISABILITY OF FILING A SECTION 83(b) ELECTION (the "ELECTION") WITH
THE INTERNAL REVENUE SERVICE. IN THE EVENT THAT OPTIONEE MAKES AN
ELECTION, OPTIONEE AGREES TO IMMEDIATELY SO NOTIFY COMPANY.
10. Entire Agreement. The Plan and Grant are incorporated
----------------
herein by reference. This Agreement, the Plan and the Grant
constitute the entire agreement of the parties and supersede in their
entirety all prior undertakings and agreements of the Company and
Optionee with respect to the subject matter hereof, and are governed
by California law except for that body of law pertaining to conflict
of laws.
Submitted By:
OPTIONEE ________________________
[print name]
_________________________________
[signature]
Dated: ___________________________
Address: _________________________
_________________________
_________________________
Accepted By:
TRADE*PLUS, INC.
By: ______________________________
Its: _____________________________
Dated: ___________________________
19
<PAGE>
EXHIBIT 10.8
- --------------------------------------------------------------------------------
TRADE*PLUS/E*TRADE SECURITIES
401(K) PLAN
ESTABLISHED EFFECTIVE JANUARY 1, 1995
<PAGE>
TABLE OF CONTENTS
ARTICLE I
DEFINITIONS
ARTICLE II
TOP HEAVY AND ADMINISTRATION
<TABLE>
<C> <S> <C>
2.1 TOP HEAVY PLAN REQUIREMENTS.................... 10
2.2 DETERMINATION OF TOP HEAVY STATUS.............. 10
2.3 POWERS AND RESPONSIBILITIES OF THE EMPLOYER.... 12
2.4 DESIGNATION OF ADMINISTRATIVE AUTHORITY........ 13
2.5 ALLOCATION AND DELEGATION OF RESPONSIBILITIES.. 13
2.6 POWERS AND DUTIES OF THE ADMINISTRATOR......... 13
2.7 RECORDS AND REPORTS............................ 14
2.8 APPOINTMENT OF ADVISERS........................ 14
2.9 INFORMATION FROM EMPLOYER...................... 14
2.10 PAYMENT OF EXPENSES............................ 14
2.11 MAJORITY ACTIONS............................... 14
2.12 CLAIMS PROCEDURE............................... 15
2.13 CLAIMS REVIEW PROCEDURE........................ 15
</TABLE>
ARTICLE III
ELIGIBILITY
<TABLE>
<C> <S> <C>
3.1 CONDITIONS OF ELIGIBILITY....................... 15
3.2 APPLICATION FOR PARTICIPATION................... 15
3.3 EFFECTIVE DATE OF PARTICIPATION................. 15
3.4 DETERMINATION OF ELIGIBILITY.................... 16
3.5 TERMINATION OF ELIGIBILITY...................... 16
3.6 OMISSION OF ELIGIBLE EMPLOYEE................... 16
3.7 INCLUSION OF INELIGIBLE EMPLOYEE................ 16
3.8 ELECTION NOT TO PARTICIPATE..................... 16
</TABLE>
<PAGE>
ARTICLE IV
CONTRIBUTION AND ALLOCATION
<TABLE>
<C> <S> <C>
4.1 FORMULA FOR DETERMINING EMPLOYER'S CONTRIBUTION.. 16
4.2 PARTICIPANT'S SALARY REDUCTION ELECTION.......... 17
4.3 TIME OF PAYMENT OF EMPLOYER'S CONTRIBUTION....... 19
4.4 ALLOCATION OF CONTRIBUTION AND EARNINGS.......... 19
4.5 ACTUAL DEFERRAL PERCENTAGE TESTS................. 22
4.6 ADJUSTMENT TO ACTUAL DEFERRAL PERCENTAGE TESTS... 23
4.7 MAXIMUM ANNUAL ADDITIONS......................... 24
4.8 ADJUSTMENT FOR EXCESSIVE ANNUAL ADDITIONS........ 26
4.9 TRANSFERS FROM QUALIFIED PLANS................... 27
4.10 DIRECTED INVESTMENT ACCOUNT...................... 28
</TABLE>
ARTICLE V
VALUATIONS
5.1 VALUATION OF THE TRUST FUND 28
5.2 METHOD OF VALUATION 28
ARTICLE VI
DETERMINATION AND DISTRIBUTION OF BENEFITS
<TABLE>
<C> <S> <C>
6.1 DETERMINATION OF BENEFITS UPON RETIREMENT......... 29
6.2 DETERMINATION OF BENEFITS UPON DEATH.............. 29
6.3 DETERMINATION OF BENEFITS IN EVENT OF DISABILITY.. 30
6.4 DETERMINATION OF BENEFITS UPON TERMINATION........ 30
6.5 DISTRIBUTION OF BENEFITS.......................... 31
6.6 DISTRIBUTION OF BENEFITS UPON DEATH............... 32
6.7 TIME OF SEGREGATION OR DISTRIBUTION............... 32
6.8 DISTRIBUTION FOR MINOR BENEFICIARY................ 32
6.9 LOCATION OF PARTICIPANT OR BENEFICIARY UNKNOWN.... 32
6.10 QUALIFIED DOMESTIC RELATIONS ORDER DISTRIBUTION... 33
6.11 DIRECT ROLLOVER................................... 33
</TABLE>
<PAGE>
ARTICLE VII
AMENDMENT, TERMINATION, MERGERS AND LOANS
<TABLE>
<C> <S> <C>
7.1 AMENDMENT............................................ 33
7.2 TERMINATION.......................................... 34
7.3 MERGER OR CONSOLIDATION.............................. 34
7.4 LOANS TO PARTICIPANTS................................ 34
</TABLE>
ARTICLE VIII
MISCELLANEOUS
<TABLE>
<C> <S> <C>
8.1 PARTICIPANT'S RIGHTS................................ 35
8.2 ALIENATION.......................................... 35
8.3 CONSTRUCTION OF PLAN................................ 36
8.4 GENDER AND NUMBER................................... 36
8.5 LEGAL ACTION........................................ 36
8.6 PROHIBITION AGAINST DIVERSION OF FUNDS.............. 36
8.7 BONDING............................................. 36
8.8 EMPLOYER'S AND TRUSTEE'S PROTECTIVE CLAUSE.......... 37
8.9 INSURER'S PROTECTIVE CLAUSE......................... 37
8.10 RECEIPT AND RELEASE FOR PAYMENTS.................... 37
8.11 ACTION BY THE EMPLOYER.............................. 37
8.12 NAMED FIDUCIARIES AND ALLOCATION OF RESPONSIBILITY.. 37
8.13 HEADINGS............................................ 37
8.14 APPROVAL BY INTERNAL REVENUE SERVICE................ 37
8.15 UNIFORMITY.......................................... 38
</TABLE>
<PAGE>
TRADE*PLUS/E*TRADE SECURITIES
401(K) PLAN
THIS PLAN, hereby adopted this 7 day of July, 19 95, by Trade*Plus, Inc.,
- ---- --
E*TRADE Securities, Inc. and ET*Execution Services, Inc., (herein collectively
referred to as the "Employer").
W I T N E S S E T H:
WHEREAS, the Employer desires to recognize the contribution
made to its successful operation by its employees and to reward such
contribution by means of a 401(k) Profit Sharing Plan for those
employees who shall qualify as Participants hereunder;
NOW, THEREFORE, effective January 1, 1995, (hereinafter
called the "Effective Date"), the Employer hereby establishes a Profit
Sharing Plan (the "Plan") for the exclusive benefit of the
Participants and their Beneficiaries, on the following terms:
ARTICLE I
DEFINITIONS
1.1 "Act" means the Employee Retirement Income Security Act of
1974, as it may be amended from time to time.
1.2 "Administrator" means the person or entity designated by the
Employer pursuant to Section 2.4 to administer the Plan on behalf of
the Employer.
1.3 "Affiliated Employer" means any corporation which is a
member of a controlled group of corporations (as defined in Code
Section 414(b)) which includes the Employer; any trade or business
(whether or not incorporated) which is under common control (as
defined in Code Section 414(c)) with the Employer; any organization
(whether or not incorporated) which is a member of an affiliated
service group (as defined in Code Section 414(m)) which includes the
Employer; and any other entity required to be aggregated with the
Employer pursuant to Regulations under Code Section 414(o).
1.4 "Aggregate Account" means, with respect to each Participant,
the value of all accounts maintained on behalf of a Participant,
whether attributable to Employer or Employee contributions, subject to
the provisions of Section 2.2.
1.5 "Anniversary Date" means December 31st.
1.6 "Beneficiary" means the person to whom the share of a
deceased Participant's total account is payable, subject to the
restrictions of Sections 6.2 and 6.6.
1.7 "Code" means the Internal Revenue Code of 1986, as amended
or replaced from time to time.
1.8 "Compensation" with respect to any Participant means such
Participant's wages, salaries, fees for professional services and
other amounts received (without regard to whether or not an amount is
paid in cash) for personal services actually rendered in the course of
employment with the Employer maintaining the Plan to the extent that
the amounts are includible in gross income (including, but not limited
to, commissions paid salesmen, compensation for services on the basis
of a percentage of profits, commissions on insurance premiums, tips,
bonuses, fringe benefits, and reimbursements or other expense
allowances under a nonaccountable plan (as described in Regulation
1.62-2(c)) for a Plan Year.
Compensation shall exclude (a)(1) contributions made by the
Employer to a plan of deferred compensation to the extent that, the
contributions are not includible in the gross income of the
Participant for the taxable year in which contributed, (2) Employer
contributions made on behalf of an Employee to a simplified employee
pension plan described in Code Section 408(k) to the extent such
contributions are excludable from the Employee's gross income, (3) any
distributions from a plan of deferred compensation; (b) amounts
realized from the exercise of a non-qualified stock option, or when
restricted stock (or property) held by an Employee either becomes
freely transferable or is no longer subject to a substantial risk of
forfeiture; (c) amounts realized from the sale, exchange or other
disposition of stock acquired under a qualified stock option; and (d)
other amounts which receive special tax benefits, or contributions
made by the Employer (whether or not under a salary reduction
agreement) towards the purchase of any annuity contract described in
Code Section 403(b) (whether or not the contributions are actually
excludable from the gross income of the Employee).
1
<PAGE>
For purposes of this Section. the determination of
Compensation shall be made by:
(a) including amounts which are contributed by the Employer
pursuant to a salary reduction agreement and which are not includible
in the gross income of the Participant under Code Sections 125,
402(e)(3), 402(h)(1)(B), 403(b) or 457, and Employee contributions
described in Code Section 414(b)(2) that are treated as Employer
contributions.
For a Participant's initial year of participation,
Compensation shall be recognized as of such Employee's effective date
of participation pursuant to Section 3.3.
Compensation in excess of $200,000 shall be disregarded.
Such amount shall be adjusted at the same time and in such manner as
permitted under Code Section 415(d), except that the dollar increase
in effect on January I of any calendar year shall be effective for the
Plan Year beginning with or within such calendar year and the first
adjustment to the $200,000 limitation shall be effective on January 1,
1990. For any short Plan Year the Compensation limit shall be an
amount equal to the Compensation limit for the calendar year in which
the Plan Year begins multiplied by the ratio obtained by dividing the
number of full months in the short Plan Year by twelve (12). In
applying this limitation, the family group of a Highly Compensated
Participant who is subject to the Family Member aggregation rules of
Code Section 4 l4(q)(6) because such Participant is either a "five
percent owner" of the Employer or one of the ten (10) Highly
Compensated Employees paid the greatest "415 Compensation" during the
year, shall be treated as a single Participant, except that for this
purpose Family Members shall include only the affected Participant's
spouse and any lineal descendants who have not attained age nineteen
(19) before the close of the year. If, as a result of the application
of such rules the adjusted $200,000 limitation is exceeded, then the
limitation shall be prorated among the affected Family Members in
proportion to each such Family Member's Compensation prior to the
application of this limitation, or the limitation shall be adjusted in
accordance with any other method permitted by Regulation.
In addition to other applicable limitations set forth in the
Plan, and notwithstanding any other provision of the Plan to the
contrary, for Plan Years beginning on or after January 1, 1994, the
annual Compensation of each Employee taken into account under the Plan
shall not exceed the OBRA '93 annual compensation limit. The OBRA '93
annual compensation limit is $150,000, as adjusted by the Commissioner
for increases in the cost of living in accordance with Code Section
401(a)(17)(B). The cost of living adjustment in effect for a calendar
year applies to any period, not exceeding 12 months, over which
Compensation is determined (determination period) beginning in such
calendar year. If a determination period consists of fewer than 12
months, the OBRA '93 annual compensation limit will be multiplied by a
fraction, the numerator of which is the number of months in the
determination period' and the denominator of which is 12.
For Plan Years beginning on or alter January 1, 1994, any
reference in this Plan to the limitation under Code Section 401(a)(17)
shall mean the OBRA '93 annual compensation limit set forth in this
provision.
If Compensation for any prior determination period is taken
into account in determining an Employee's benefits accruing in the
current Plan Year, the Compensation for that prior determination
period is subject to the OBRA '93 annual compensation limit in effect
for that prior determination period. For this purpose, for
determination periods beginning before the first day of the first Plan
Year beginning on or after January 1, 1994, the OBRA '93 annual
compensation limit is $150,000.
If, as a result of such rules, the maximum "annual addition"
limit of Section 4.7(a) would be exceeded for one or more of the
affected Family Members, the prorated Compensation of all affected
Family Members shall be adjusted to avoid or reduce any excess. The
prorated Compensation of any affected Family Member whose allocation
would exceed the limit shall be adjusted downward to the level needed
to provide an allocation equal to such limit. The prorated
Compensation of affected Family Members not affected by such limit
shall then be adjusted upward on a pro rata basis not to exceed each
such affected Family Member's Compensation as determined prior to
application of the Family Member rule. The resulting allocation shall
not exceed such individual's maximum "annual addition" limit If, alter
these adjustments, an "excess amount" still results, such "excess
amount" shall be disposed of in the manner described in Section 4.8(a)
pro rata among all affected Family Members.
1.9 "Contract" or "Policy" means any life insurance policy,
retirement income or annuity policy, or annuity contract (group or
individual) issued pursuant to the terms of the Plan.
1.10 "Deferred Compensation" with respect to any Participant
means the amount of the Participant's total Compensation which has
been contributed to the Plan in accordance with the Participant's
deferral election pursuant to Section 4.2 excluding any such amounts
distributed as excess "annual additions" pursuant to Section 4.8(a).
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1.11 "Early Retirement Date." This Plan does not provide for a
retirement date prior to Normal Retirement Date.
1.12 "Elective Contribution" means the Employer's contributions
to the Plan of Deferred Compensation excluding any such amounts
distributed as excess "annual additions" pursuant to Section 4.8(a).
In addition, the Employer's matching contribution made pursuant to
Section 4.1(b) and any Employer Qualified Non-Elective Contribution
made pursuant to Section 4.1(c) and Section 4.6 shall be considered an
Elective Contribution for purposes of the Plan. Any such contributions
deemed to be Elective Contributions shall be subject to the
requirements of Sections 4.2(b) and 4.2(c) and shall further be
required to satisfy the discrimination requirements of Regulation 1.40
1(k)-1 (b)(5), the provisions of which are specifically incorporated
herein by reference.
1.13 "Eligible Employee" means any Employee.
Employees of Northport shall not be eligible to participate
in this Plan.
Employees who are nonresident aliens (within the meaning of
Code Section 7701(b)(1)(B)) and who receive no earned income (within
the meaning of Code Section 91 l(d)(2)) from the Employer which
constitutes income from sources within the United States (within the
meaning of Code Section 861(a)(3)) shall not be eligible to
participate in this Plan.
Employees of Affiliated Employers shall not be eligible to
participate in this Plan unless such Affiliated Employers have
specifically adopted this Plan in writing.
1.14 "Employee" means any person who is employed by the Employer
or Affiliated Employer, but excludes any person who is an independent
contractor. Employee shall include Leased Employees within the meaning
of Code Sections 414(n)(2) and 414(o)(2) unless such Leased Employees
are covered by a plan described in Code Section 414(n)(5) and such
Leased Employees do not constitute more than /2/0% of the recipient's
non-highly compensated work force.
1.15 "Employer" means Trade*Plus, Inc., E*TRADE Securities, Inc.
and ET*Execution Services, Inc. and any successor which shall maintain
this Plan; and any predecessor which has maintained this Plan. The
Employers are corporations with principal offices in the State of
California.
1.16 "Excess Contributions" means, with respect to a Plan Year,
the excess of Elective Contributions made on behalf of Highly
Compensated Participants for the Plan Year over the maximum amount of
such contributions permitted under Section 4.5(a). Excess
Contributions shall be treated as an "annual addition" pursuant to
Section 4.7(b).
1.17 "Excess Deferred Compensation" means, with respect to any
taxable year of a Participant, the excess of the aggregate amount of
such Participant's Deferred Compensation and the elective deferrals
pursuant to Section 42(f) actually made on behalf of such Participant
for such taxable year, over the dollar limitation provided for in Code
Section 402(g), which is incorporated herein by reference. Excess
Deferred Compensation shall be treated as an "annual addition"
pursuant to Section 4.7(b) when contributed to the Plan unless
distributed to the affected Participant not later than the first April
15th following the close of the Participant's taxable year.
Additionally, for purposes of Sections 2.2 and 4.4(f), Excess Deferred
Compensation shall continue to be treated as Employer contributions
even if distributed pursuant to Section 4.2(f). However, Excess
Deferred Compensation of Non-Highly Compensated Participants is not
taken into account for purposes of Section 4.5(a) to the extent such
Excess Deferred Compensation occurs pursuant to Section 4.2(d).
1.18 "Family Member" means, with respect to an affected
Participant, such Participant's spouse and such Participant's lineal
descendants and ascendants and their spouses, all as described in Code
Section 414(q)(6)(B).
1.19 "Fiduciary" means any person who (a) exercises any
discretionary authority or discretionary control respecting management
of the Plan or exercises any authority or control respecting
management or disposition of its assets, (b) renders investment advice
for a fee or other compensation, direct or indirect, with respect to
any monies or other property of the Plan or has any authority or
responsibility to do so, or (c) has any discretionary authority or
discretionary responsibility in the administration of the Plan,
including, but not limited to, the Trustee, the Employer and its
representative body, and the Administrator.
1.20 "Fiscal Year" means the Employer's accounting year of 12
months commencing on October 1st of each year and ending the following
September 30th.
1.21 "Forfeiture." Under this Plan, Participant accounts are
l00'/o Vested at all times. Any amounts that may otherwise be
forfeited under the Plan pursuant to Section 3.7, 4.2(f) or 6.9 shall
be used to reduce the contribution of the Employer.
3
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1.22 "Former Participant" means a person who has been a
Participant, but who has ceased to be a Participant for any reason.
1.23 "415 Compensation" with respect to any Participant means
such Participant's wages, salaries, fees for professional services and
other amounts received (without regard to whether or not an amount is
paid in cash) for personal services actually rendered in the course of
employment with the Employer maintaining the Plan to the extent that
the amounts are includible in gross income (including, but not limited
to, commissions paid salesmen, compensation for services on the basis
of a percentage of profits, commissions on insurance premiums, tips,
bonuses, fringe benefits, and reimbursements or other expense
allowances under a nonaccountable plan (as described in Regulation
1.62-2(c)) for a Plan Year.
"415 Compensation" shall exclude (a)(1) contributions made
by the Employer to a plan of deferred compensation to the extent that,
the contributions are not includible in the gross income of the
Participant for the taxable year in which contributed, (2) Employer
contributions made on behalf of an Employee to a simplified employee
pension plan described in Code Section 408(k) to the extent such
contributions are excludable from the Employee's gross income, (3) any
distributions from a plan of deferred compensation; (b) amounts
realized from the exercise of a non-qualified stock option, or when
restricted stock (or property) held by an Employee either becomes
freely transferable or is no longer subject to a substantial risk of
forfeiture; (c) amounts realized from the sale, exchange or other
disposition of stock acquired under a qualified stock option; and (d)
other amounts which receive special tax benefits, or contributions
made by the Employer (whether or not under a salary reduction
agreement) towards the purchase of any annuity contract described in
Code Section 403(b) (whether or not the contributions are actually
excludable from the gross income of the Employee).
1.24 "414(s) Compensation" with respect to any Participant means
such Participant's "415 Compensation" paid during a Plan Year. The
amount of "414(s) Compensation" with respect to any Participant shall
include "414(s) Compensation" for the entire twelve (12) month period
ending on the last day of such Plan Year, except that "414(s)
Compensation" shall only be recognized for that portion of the Plan
Year during which an Employee was a Participant in the Plan.
For purposes of this Section, the determination of "414(s)
Compensation" shall be made by including amounts which are contributed
by the Employer pursuant to a salary reduction agreement and which are
not includible in the gross income of the Participant under Code
Sections 125, 402(e)(3), 402(h)(1)(B), 403(b) or 457, and Employee
contributions described in Code Section 414(h)(2) that are treated as
Employer contributions.
"414(s) Compensation" in excess of $200,000 shall be
disregarded. Such amount shall be adjusted at the same time and in
such manner as permitted under Code Section 415(d), except that the
dollar increase in effect on January 1 of any calendar year shall be
effective for the Plan Year beginning with or within such calendar
year and the first adjustment to the $200,000 limitation shall be
effective on January 1, 1990. For any short Plan Year the "414(s)
Compensation" limit shall be an amount equal to the "414(s)
Compensation" limit for the calendar year in which the Plan Year
begins multiplied by the ratio obtained by dividing the number of full
months in the short Plan Year by twelve (12). In applying this
limitation, the family group of a Highly Compensated Participant who
is subject to the Family Member aggregation rules of Code Section
414(q)(6) because such Participant is either a "five percent owner" of
the Employer or one of the ten (10) Highly Compensated Employees paid
the greatest "415 Compensation" during the year, shall be treated as a
single Participant, except that for this purpose Family Members shall
include only the affected Participant's spouse and any lineal
descendants who have not attained age nineteen (19) before the close
of the year.
In addition to other applicable limitations set forth in the
Plan, and notwithstanding any other provision of the Plan to the
contrary, for Plan Years beginning on or after January 1, 1994, the
annual Compensation of each Employee taken into account under the Plan
shall not exceed the OBRA '93 annual compensation limit. The OBRA '93
annual compensation limit is $150,000, as adjusted by the Commissioner
for increases in the cost of living in accordance with Code Section
401(a)(17)(B). The cost of living adjustment in effect for a calendar
year applies to any period, not exceeding 12 months, over which
Compensation is determined (determination period) beginning in such
calendar year. If a determination period consists of fewer than 12
months, the OBRA '93 annual compensation limit will be multiplied by a
fraction, the numerator of which is the number of months in the
determination period, and the denominator of which is 12.
For Plan Years beginning on or after January 1, 1994, any
reference in this Plan to the limitation under Code Section 401(a)(17)
shall mean the OBRA '93 annual compensation limit set forth in this
provision.
If Compensation for any prior determination period is taken
into account in determining an Employee's benefits accruing in the
current Plan Year, the Compensation for that prior determination
period is subject to the OBRA '93 annual compensation limit in effect
for that prior determination period. For this purpose, for
determination periods beginning
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<PAGE>
before the first day of the first Plan Year beginning on or alter
January 1, 1994, the OBRA '93 annual compensation limit is $150,000.
1.25 "Highly Compensated Employee" means an Employee described
in Code Section 414(q) and the Regulations thereunder, and generally
means an Employee who performed services for the Employer during the
"determination year" and is in one or more of the following groups:
(a) Employees who at any time during the "determination year" or
"look-back year" were "five percent owners" as defined in Section
1.31(c).
(b) Employees who received "415 Compensation" during the "look-
back year" from the Employer in excess of $75,000.
(c) Employees who received "415 Compensation" during the "look-
back year" from the Employer in excess of $50,000 and were in the Top
Paid Group of Employees for the Plan Year.
(d) Employees who during the "look-back year" were officers of
the Employer (as that term is defined within the meaning of the
Regulations under Code Section 416) and received "415 Compensation"
during the "look-back year" from the Employer greater than 50 percent
of the limit in effect under Code Section 41 5(b)(1)(A) for any such
Plan Year. The number of officers shall be limited to the lesser of
(i) 50 employees; or (ii) the greater of 3 employees or 10 percent of
all employees. For the purpose of determining the number of officers,
Employees described in Section 1.51(a), (b), (c) and (d) shall be
excluded, but such Employees shall still be considered for the purpose
of identifying the particular Employees who are officers. If the
Employer does not have at least one officer whose annual "415
Compensation" is in excess of 50 percent of the Code Section 41
5(b)(l)(A) limit, then the highest paid officer of the Employer will
be treated as a Highly Compensated Employee.
(e) Employees who are in the group consisting of the 100
Employees paid the greatest "415 Compensation" during the
"determination yea"' and are also described in (b), (c) or (d) above
when these paragraphs are modified to substitute "determination year"
for "look-back year."
The "look-back year" shall be the calendar year ending with
or within the Plan Year for which testing is being performed, and the
"determination year' (if applicable) shall be the period of time, if
any, which extends beyond the "look-back year" and ends on the last
day of the Plan Year for which testing is being performed (the "lag
period"). If the "lag period" is less than twelve months long, the
dollar threshold amounts specified in (b), (c) and (d) above shall be
prorated based upon the number of months in the "lag period."
For purposes of this Section, the determination of "415
Compensation" shall be made by including amounts which are contributed
by the Employer pursuant to a salary reduction agreement and which are
not includible in the gross income of the Participant under Code
Sections 125, 402(e)(3), 402(h)(l)(B), 403(b) or 457, and Employee
contributions described in Code Section 414(b)(2) that are treated as
Employer contributions. Additionally, the dollar threshold amounts
specified in (b) and (c) above shall be adjusted at such time and in
such manner as is provided in Regulations. In the case of such an
adjustment, the dollar limits which shall be applied are those for the
calendar year in which the "determination year" or "look-back year"
begins.
In determining who is a Highly Compensated Employee,
Employees who are non-resident aliens and who received no earned
income (within the meaning of Code Section 91 l(d)(2)) from the
Employer constituting United States source income within the meaning
of Code Section 861(a)(3) shall not be treated as Employees.
Additionally, all Affiliated Employers shall be taken into account as
a single employer and Leased Employees within the meaning of Code
Sections 414(n)(2) and 414(o)(2) shall be considered Employees unless
such Leased Employees are covered by a plan described in Code Section
414(n)(5) and are not covered in any qualified plan maintained by the
Employer. The exclusion of Leased Employees for this purpose shall be
applied on a uniform and consistent basis for all of the Employer's
retirement plans. Highly Compensated Former Employees shall be treated
as Highly Compensated Employees without regard to whether they
performed services during the "determination year."
1.26 "Highly Compensated Former Employee" means a former
Employee who had a separation year prior to the "determination year"
and was a Highly Compensated Employee in the year of separation from
service or in any "determination year" after attaining age 55.
Notwithstanding the foregoing, an Employee who separated from service
prior to 1987 will be treated as a Highly Compensated Former Employee
only if during the separation year (or year preceding the separation
year) or any year after the Employee attains age 55 (or the last year
ending before the Employee's 55th birthday), the Employee either
5
<PAGE>
received "415 Compensation in excess of $50,000 or was a "five percent
owner." For purposes of this Section, "determination year," "415
Compensation" and "five percent owner" shall be determined in
accordance with Section 1.25. Highly Compensated Former Employees
shall be treated as Highly Compensated Employees. The method set forth
in this Section for determining who is a "Highly Compensated Former
Employee" shall be applied on a uniform and consistent basis for all
purposes for which the Code Section 414(q) definition is applicable.
1.27 "Highly Compensated Participant" means any Highly
Compensated Employee who is eligible to participate in the Plan.
1.28 "Hour of Service" means (1) each hour for which an Employee
is directly or indirectly compensated or entitled to compensation by
the Employer for the performance of duties during the applicable
computation period; (2) each hour for which an Employee is directly or
indirectly compensated or entitled to compensation by the Employer
(irrespective of whether the employment relationship has terminated)
for reasons other than performance of duties (such as vacation,
holidays, sickness, jury duty, disability, lay-off, military duty or
leave of absence) during the applicable computation period; (3) each
hour for which back pay is awarded or agreed to by the Employer
without regard to mitigation of damages. These hours will be credited
to the Employee for the computation period or periods to which the
award or agreement pertains rather than the computation period in
which the award, agreement or payment is made. The same Hours of
Service shall not be credited both under (1) or (2), as the case may
be, and under (3).
Notwithstanding the above, (i) no more than 501 Hours of
Service are required to be credited to an Employee on account of any
single continuous period during which the Employee performs no duties
(whether or not such period occurs in a single computation period);
(ii) an hour for which an Employee is directly or indirectly paid' or
entitled to payment, on account of a period during which no duties are
performed is not required to be credited to the Employee if such
payment is made or due under a plan maintained solely for the purpose
of complying with applicable worker's compensation, or unemployment
compensation or disability insurance laws; and (iii) Hours of Service
are not required to be credited for a payment which solely reimburses
an Employee for medical or medically related expenses incurred by the
Employee.
For purposes of this Section, a payment shall be deemed to
be made by or due from the Employer regardless of whether such payment
is made by or due from the Employer directly, or indirectly through,
among others, a trust fund, or insurer, to which the Employer
contributes or pays premiums and regardless of whether contributions
made or due to the trust fund, insurer, or other entity are for the
benefit of particular Employees or are on behalf of a group of
Employees in the aggregate.
An Hour of Service must be counted for the purpose of
determining a Year of Service, a year of participation for purposes of
accrued benefits, a 1-Year Break in Service, and employment
commencement date (or reemployment commencement date). In addition,
Hours of Service will be credited for employment with other Affiliated
Employers. The provisions of Department of Labor regulations
2530.200b-2(b) and (c) are incorporated herein by reference.
1.29 "Income" means the income or losses allocable to "excess
amounts" which shall equal the allocable gain or loss for the
"applicable computation period". The income allocable to "excess
amounts" for the "applicable computation period" is determined by
multiplying the income for the "applicable computation period" by a
fraction. The numerator of the fraction is the "excess amount" for the
"applicable computation period." The denominator of the fraction is
the total "account balance" attributable to "Employer contributions"
as of the end of the "applicable computation period", reduced by the
gain allocable to such total amount for the "applicable computation
period" and increased by the loss allocable to such total amount for
the "applicable computation period". The provisions of this Section
shall be applied:
(a) For purposes of Section 4.2(f), by substituting:
(1) "Excess Deferred Compensation" for "excess amounts";
(2) "taxable year of the Participant" for "applicable
computation period";
(3) "Deferred Compensation" for "Employer contributions"; and
(4) "Participant's Elective Account" for "account balance."
(b) For purposes of Section 4.6(a), by substituting:
(1) "Excess Contributions" for "excess amounts";
6
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(2) "Plan Year" for "applicable computation period";
(3) "Elective Contributions" for "Employer contributions"; and
(4) "Participant's Elective Account" for "account balance."
Income allocable to any distribution of Excess Deferred
Compensation on or before the last day of the taxable year of the
Participant shall be calculated from the first day of the taxable year
of the Participant to the date on which the distribution is made
pursuant to either the "fractional method" or the "safe harbor
method." Under such "safe harbor method," allocable Income for such
period shall be deemed to equal ten percent (10%) of the Income
allocable to such Excess Deferred Compensation multiplied by the
number of calendar months in such period. For purposes of determining
the number of calendar months in such period, a distribution occurring
on or before the fifteenth day of the month shall be treated as having
been made on the last day of the preceding month and a distribution
occurring after such fifteenth day shall be treated as having been
made on the first day of the next subsequent month.
1.30 "Investment Manager" means an entity that (a) has the power
to manage, acquire, or dispose of Plan assets and (b) acknowledges
fiduciary responsibility to the Plan in writing. Such entity must be a
person, firm, or corporation registered as an investment adviser under
the Investment Advisers Act of 1940, a bank, or an insurance company.
1.31 "Key Employee" means an Employee as defined in Code Section
416(i) and the Regulations thereunder. Generally, any Employee or
former Employee (as well as each of his Beneficiaries) is considered a
Key Employee if he, at any time during the Plan Year that contains the
"Determination Date" or any of the preceding four (4) Plan Years, has
been included in one of the following categories:
(a) an officer of the Employer (as that term is defined within
the meaning of the Regulations under Code Section 416) having annual
"415 Compensation" greater than 50 percent of the amount in effect
under Code Section 415(b)(l)(A) for any such Plan Year.
(b) one of the ten employees having annual "415 Compensation"
from the Employer for a Plan Year greater than the dollar limitation
in effect under Code Section 415(c)(l)(A) for the calendar year in
which such Plan Year ends and owning (or considered as owning within
the meaning of Code Section 318) both more than one-half percent
interest and the largest interests in the Employer.
(c) a "five percent owner" of the Employer. "Five percent owner"
means any person who owns (or is considered as owning within the
meaning of Code Section 318) more than five percent (5%) of the
outstanding stock of the Employer or stock possessing more than five
percent (5%) of the total combined voting power of all stock of the
Employer or, in the case of an unincorporated business, any person who
owns more than five percent (5%) of the capital or profits interest in
the Employer. In determining percentage ownership hereunder, employers
that would otherwise be aggregated under Code Sections 414(b), (c),
(m) and (o) shall be treated as separate employers.
(d) a "one percent owner" of the Employer having an annual "415
Compensation" from the Employer of more than $150,000. "One percent
owner" means any person who owns (or is considered as owning within
the meaning of Code Section 318) more than one percent (1%) of the
outstanding stock of the Employer or stock possessing more than one
percent (1%) of the total combined voting power of all stock of the
Employer or, in the case of an unincorporated business, any person who
owns more than one percent (1%) of the capital or profits interest in
the Employer. In determining percentage ownership hereunder, employers
that would otherwise be aggregated under Code Sections 414(b), (c),
(m) and (o) shall be treated as separate employers. However, in
determining whether an individual has "415 Compensation" of more than
$150,000, "415 Compensation" from each employer required to be
aggregated under Code Sections 414(b), (c), (m) and (o) shall be taken
into account.
For purposes of this Section, the determination of "415
Compensation" shall be made by including amounts which are contributed
by the Employer pursuant to a salary reduction agreement and which are
not includible in the gross income of the Participant under Code
Sections 125, 402(e)(3), 402(h)(1)(B), 403(b) or 457, and Employee
contributions described in Code Section 41 4(h)(2) that are treated as
Employer contributions.
1.32 "Late Retirement Date" means the first day of the month
coinciding with or next following a Participant's actual Retirement
Date after having reached his Normal Retirement Date.
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1.33 "Leased Employee" means any person (other than an Employee
of the recipient) who pursuant to an agreement between the recipient
and any other person ("leasing organization") has performed services
for the recipient (or for the recipient and related persons determined
in accordance with Code Section 4 14(n)(6)) on a substantially full
time basis for a period of at least one year, and such services are of
a type historically performed by employees in the business field of
the recipient employer. Contributions or benefits provided a Leased
Employee by the leasing organization which are attributable to
services performed for the recipient employer shall be treated as
provided by the recipient employer. A Leased Employee shall not be
considered an Employee of the recipient:
(a) if such employee is covered by a money purchase pension plan
providing:
(1) a non-integrated employer contribution rate of at least 10%
of compensation, as defined in Code Section 415(c)(3), but
including amounts which are contributed by the Employer pursuant
to a salary reduction agreement and which are not includible in
the gross income of the Participant under Code Sections 125,
402(e)(3), 402(h)(l)(B), 403(b) or 457, and Employee
contributions described in Code Section 414(h)(2) that are
treated as Employer contributions.
(2) immediate participation; and
(3) full and immediate vesting; and
(b) if Leased Employees do not constitute more than 20% of the
recipient's non-highly compensated work force.
1.34 "Non-Highly Compensated Participant" means any Participant
who is neither a Highly Compensated Employee nor a Family Member.
1.35 "Non-Key Employee" means any Employee or former Employee
(and his Beneficiaries) who is not a Key Employee.
1.36 "Normal Retirement Age" means the Participant's 65th
birthday. A Participant shall become fully Vested in his Participant's
Account upon attaining his Normal Retirement Age.
1.37 "Normal Retirement Date" means the first day of the month
coinciding with or next following the Participant's Normal Retirement
Age.
1.38 "1-Year Break in Service" means the applicable computation
period during which an Employee has not completed more than 500 Hours
of Service with the Employer. Further, solely for the purpose of
determining whether a Participant has incurred a I-Year Break in
Service, Hours of Service shall be recognized for "authorized leaves
of absence" and "maternity and paternity leaves of absence." Years of
Service and I-Year Breaks in Service shall be measured on the same
computation period.
"Authorized leave of absence" means an unpaid, temporary
cessation from active employment with the Employer pursuant to an
established nondiscriminatory policy, whether occasioned by illness,
military service, or any other reason.
A "maternity or paternity leave of absence" means, for Plan
Years beginning after December 31, 1984, an absence from work for any
period by reason of the Employee's pregnancy, birth of the Employee's
child, placement of a child with the Employee in connection with the
adoption of such child, or any absence for the purpose of caring for
such child for a period immediately following such birth or placement.
For this purpose, Hours of Service shall be credited for the
computation period in which the absence from work begins, only if
credit therefore is necessary to prevent the Employee from incurring a
I-Year Break in Service, or, in any other case, in the immediately
following computation period. The Hours of Service credited for a
"maternity or paternity leave of absence" shall be those which would
normally have been credited but for such absence, or, in any case in
which the Administrator is unable to determine such hours normally
credited, eight (8) Hours of Service per day. The total Hours of
Service required to be credited for a "maternity or paternity leave of
absence" shall not exceed 501.
1.39 "Participant" means any Eligible Employee who participates
in the Plan as provided in Sections 3.2 and 3.3, and has not for any
reason become ineligible to participate further in the Plan.
1.40 "Participant's Elective Account" means the account
established and maintained by the Administrator for each Participant
with respect to his total interest in the Plan and Trust resulting
from the Employer's Elective Contributions. A
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separate accounting shall be maintained with respect to that portion
of the Participant's Elective Account attributable to Elective
Contributions pursuant to Section 4.2, Employer matching contributions
pursuant to Section 4. l(b) and any Employer Qualified Non-Elective
Contributions.
1.41 "Plan" means this instrument, including all amendments
thereto.
1.42 -Plan Year" means the Plan's accounting year of twelve (12)
months commencing on January 1st of each year and ending the following
December 31st.
1.43 "Qualified Non-Elective Contribution" means the Employer's
contributions to the Plan that are made pursuant to Section 4.1(c) and
Section 4.6. Such contributions shall be considered an Elective
Contribution for the purposes of the Plan and used to satisfy the
"Actual Deferral Percentage" tests.
1.44 "Regulation" means the Income Tax Regulations as
promulgated by the Secretary of the Treasury or his delegate, and as
amended from time to time.
1.45 "Retired Participant" means a person who has been a
Participant, but who has become entitled to retirement benefits under
the Plan.
1.46 "Retirement Date" means the date as of which a Participant
retires for reasons other than Total and Permanent Disability, whether
such retirement occurs on a Participant's Normal Retirement Date or
Late Retirement Date (see Section 6.1).
1.47 "Super Top Heavy Plan" means a plan described in Section
2.2(b).
1.48 "Terminated Participant" means a person who has been a
Participant, but whose employment has been terminated other than by
death, Total and Permanent Disability or retirement
1.49 "Top Heavy Plan" means a plan described in Section 2.2(a).
1.50 "Top Heavy Plan Year" means a Plan Year during which the
Plan is a Top Heavy Plan.
1.51 "Top Paid Group" means the top 20 percent of Employees who
performed services for the Employer during the applicable year, ranked
according to the amount of "415 Compensation" (determined for this
purpose in accordance with Section 1.25) received from the Employer
during such year. All Affiliated Employers shall be taken into account
as a single employer, and Leased Employees within the meaning of Code
Sections 414(n)(2) and 414(o)(2) shall be considered Employees unless
such Leased Employees are covered by a plan described in Code Section
414(n)(5) and are not covered in any qualified plan maintained by the
Employer. Employees who are non-resident aliens and who received no
earned income (within the meaning of Code Section 911 (d)(2)) from the
Employer constituting United States source income within the meaning
of Code Section 861(a)(3) shall not be treated as Employees.
Additionally, for the purpose of determining the number of active
Employees in any year, the following additional Employees shall also
be excluded; however, such Employees shall still be considered for the
purpose of identifying the particular Employees in the Top Paid Group:
(a) Employees with less than six (6) months of service;
(b) Employees who normally work less than 17 1/2 hours per week;
(c) Employees who normally work less than six (6) months during
a year; and
(d) Employees who have not yet attained age 21.
In addition, if 90 percent or more of the Employees of the Employer
are covered under agreements the Secretary of Labor finds to be collective
bargaining agreements between Employee representatives and the Employer, and the
Plan covers only Employees who are not covered under such agreements, then
Employees covered by such agreements shall be excluded from both the total
number of active Employees as well as from the identification of particular
Employees in the Top Paid Group.
The foregoing exclusions set forth in this Section shall be applied on
a uniform and consistent basis for all purposes for which the Code Section
414(q) definition is applicable.
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1.52 "Total and Permanent Disability" means a physical or mental
condition of a Participant resulting from bodily injury, disease, or
mental disorder which renders him incapable of continuing his usual
and customary employment with the Employer. The disability of a
Participant shall be determined by a licensed physician chosen by the
Administrator. The determination shall be applied uniformly to all
Participants.
1.53 "Trustee" means the person or entity named as trustee
herein or in any separate trust forming a part of this Plan, and any
successors.
1.54 "Trust Fund" means the assets of the Plan and Trust as the
same shall exist from time to time.
1.55 "Vested" means the nonforfeitable portion of any account
maintained on behalf of a Participant.
1.56 "Year Service" means the computation period of twelve (12)
consecutive months, herein set forth, during which an Employee has at
least 1000 Hours of Service.
For purposes of eligibility for participation, the initial
computation period shall begin with the date on which the Employee
first performs an Hour of Service. The participation computation
period beginning after a 1 -Year Break in Service shall be measured
from the date on which an Employee again performs an Hour of Service.
The participation computation period shall shift to the Plan Year
which includes the anniversary of the date on which the Employee first
performed an Hour of Service. An Employee who is credited with the
required Hours of Service in both the initial computation period (or
the computation period beginning after a 1-Year Break in Service) and
the Plan Year which includes the anniversary of the date on which the
Employee first performed an Hour of Service, shall be credited with
two (2) Years of Service for purposes of eligibility to participate.
For all other purposes, the computation period shall be the
Plan Year.
Notwithstanding the foregoing, for any short Plan Year, the
determination of whether an Employee has completed a Year of Service
shall be made in accordance with Department of Labor regulation
2530.203-2(c).
Years of Service with any Affiliated Employer shall be
recognized.
ARTICLE II
TOP HEAVY AND ADMINISTRATION
2.1 TOP HEAVY PLAN REQUIREMENTS
For any Top Heavy Plan Year, the Plan shall provide the
special vesting requirements of Code Section 416(b) pursuant to
Section 6.4 of the Plan and the special minimum allocation
requirements of Code Section 416(c) pursuant to Section 4.4 of the
Plan.
2.2 DETERMINATION OF TOP HEAVY STATUS
(a) This Plan shall be a Top Heavy Plan for any Plan Year in
which, as of the Determination Date, (1) the Present Value of Accrued
Benefits of Key Employees and (2) the sum of the Aggregate Accounts of
Key Employees under this Plan and all plans of an Aggregation Group,
exceeds sixty percent (60%) of the Present Value of Accrued Benefits
and the Aggregate Accounts of all Key and Non-Key Employees under this
Plan and all plans of an Aggregation Group.
If any Participant is a Non-Key Employee for any Plan Year, but
such Participant was a Key Employee for any prior Plan Year, such
Participant's Present Value of Accrued Benefit and/or Aggregate
Account balance shall not be taken into account for purposes of
determining whether this Plan is a Top Heavy or Super Top Heavy Plan
(or whether any Aggregation Group which includes this Plan is a Top
Heavy Group). In addition, if a Participant or Former Participant has
not performed any services for any Employer maintaining the Plan at
any time during the five year period ending on the Determination Date,
any accrued benefit for such Participant or Former Participant shall
not be taken into account for the purposes of determining whether this
Plan is a Top Heavy or Super Top Heavy Plan.
(b) This Plan shall be a Super Top Heavy Plan for any Plan Year
in which, as of the Determination Date, (1) the Present Value of
Accrued Benefits of Key Employees and (2) the sum of the Aggregate
Accounts of Key Employees under this Plan and all plans of an
Aggregation Group, exceeds
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ninety percent (90%) of the Present Value of Accrued Benefits and the
Aggregate Accounts of all Key and Non-Key Employees under this Plan
and all plans of an Aggregation Group.
(c) Aggregate Account: A Participant's Aggregate Account as of
the Determination Date is the sum of:
(1) his Participant's Elective Account balance as of the most
recent valuation occurring within a twelve (12) month period
ending on the Determination Date;
(2) an adjustment for any contributions due as of the
Determination Date. Such adjustment shall be the amount of any
contributions actually made after the valuation date but due on
or before the Determination Date, except for the first Plan Year
when such adjustment shall also reflect the amount of any
contributions made after the Determination Date that are
allocated as of a date in that first Plan Year.
(3) any Plan distributions made within the Plan Year that
includes the Determination Date or within the four (4) preceding
Plan Years. However, in the case of distributions made after the
valuation date and prior to the Determination Date, such
distributions are not included as distributions for top heavy
purposes to the extent that such distributions are already
included in the Participant's Aggregate Account balance as of
the valuation date. Notwithstanding anything herein to the
contrary, all distributions, including distributions made prior
to January 1, 1984, and distributions under a terminated plan
which if it had not been terminated would have been required to
be included in an Aggregation Group, will be counted. Further,
distributions from the Plan (including the cash value of life
insurance policies) of a Participant's account balance because
of death shall be treated as a distribution for the purposes of
this paragraph.
(4) any Employee contributions, whether voluntary or mandatory.
However, amounts attributable to tax deductible qualified
voluntary employee contributions shall not be considered to be a
part of the Participant's Aggregate Account balance.
(5) with respect to unrelated rollovers and plan-to-plan
transfers (ones which are both initiated by the Employee and
made from a plan maintained by one employer to a plan maintained
by another employer), if this Plan provides the rollovers or
plan-to-plan transfers, it shall always consider such rollovers
or plan-to-plan transfers as a distribution for the purposes of
this Section. If this Plan is the plan accepting such rollovers
or plan-to-plan transfers, it shall not consider such rollovers
or plan-to-plan transfers as part of the Participant's Aggregate
Account balance.
(6) with respect to related rollovers and plan-to-plan transfers
(ones either not initiated by the Employee or made to a plan
maintained by the same employer), if this Plan provides the
rollover or plan-to-plan transfer, it shall not be counted as a
distribution for purposes of this Section. If this Plan is the
plan accepting such rollover or plan-to-plan transfer, it shall
consider such rollover or plan-to-plan transfer as part of the
Participant's Aggregate Account balance, irrespective of the
date on which such rollover or plan-to-plan transfer is
accepted.
(7) For the purposes of determining whether two employers are to
be treated as the same employer in (5) and (6) above, all
employers aggregated under Code Section 414(b), (c), (m) and (o)
are treated as the same employer.
(d) "Aggregation Group" means either a Required Aggregation
Group or a Permissive Aggregation Group as hereinafter determined.
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(1) Required Aggregation Group: In determining a Required
Aggregation Group hereunder, each plan of the Employer in which
a Key Employee is a participant in the Plan Year containing the
Determination Date or any of the four preceding Plan Years, and
each other plan of the Employer which enables any plan in which
a Key Employee participates to meet the requirements of Code
Sections 401(a)(4) or 410, will be required to be aggregated.
Such group shall be known as a Required Aggregation Group.
In the case of a Required Aggregation Group, each plan in the
group will be considered a Top Heavy Plan if the Required
Aggregation Group is a Top Heavy Group. No plan in the Required
Aggregation Group will be considered a Top Heavy Plan if the
Required Aggregation Group is not a Top Heavy Group.
(2) Permissive Aggregation Group: The Employer may also include
any other plan not required to be included in the Required
Aggregation Group, provided the resulting group, taken as a
whole, would continue to satisfy the provisions of Code Sections
40l(a)(4) and 410. Such group shall be known as a Permissive
Aggregation Group.
In the case of a Permissive Aggregation Group, only a plan that
is part of the Required Aggregation Group will be considered a
Top Heavy Plan if the Permissive Aggregation Group is a Top
Heavy Group. No plan in the Permissive Aggregation Group will be
considered a Top Heavy Plan if the Permissive Aggregation Group
is not a Top Heavy Group.
(3) Only those plans of the Employer in which the Determination
Dates fall within the same calendar year shall be aggregated in
order to determine whether such plans are Top Heavy Plans.
(4) An Aggregation Group shall include any terminated plan of
the Employer if it was maintained within the last five (5) years
ending on the Determination Date.
(e) "Determination Date" means (a) the last day of the preceding
Plan Year, or (b) in the case of the first Plan Year, the last day of
such Plan Year.
(f) Present Value of Accrued Benefit: In the case of a defined
benefit plan, the Present Value of Accrued Benefit for a Participant
other than a Key Employee, shall be as determined using the single
accrual method used for all plans of the Employer and Affiliated
Employers, or if no such single method exists, using a method which
results in benefits accruing not more rapidly than the slowest accrual
rate permitted under Code Section 41 l(b)(l)(C). The determination of
the Present Value of Accrued Benefit shall be determined as of the
most recent valuation date that falls within or ends with the 12-month
period ending on the Determination Date except as provided in Code
Section 416 and the Regulations thereunder for the first and second
plan years of a defined benefit plan.
(g) "Top Heavy Group" means an Aggregation Group in which, as of
the Determination Date, the sum of:
(1) the Present Value of Accrued Benefits of Key Employees under
all defined benefit plans included in the group, and
(2) the Aggregate Accounts of Key Employees under all defined
contribution plans included in the group,
exceeds sixty percent (60%) of a similar sum determined for all
Participants.
2.3 POWERS AND RESPONSIBILITIES OF THE EMPLOYER
(a) The Employer shall be empowered to appoint and remove the
Trustee and the Administrator from time to time as it deems necessary
for the proper administration of the Plan to assure that the Plan is
being operated for the exclusive benefit of the Participants and their
Beneficiaries in accordance with the terms of the Plan, the Code, and
the Act.
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(b) The Employer shall establish a "funding policy and method,"
i.e., it shall determine whether the Plan has a short run need for
liquidity (e.g., to pay benefits) or whether liquidity is a long run
goal and investment growth (and stability of same) is a more current
need, or shall appoint a qualified person to do so. The Employer or
its delegate shall communicate such needs and goals to the Trustee,
who shall coordinate such Plan needs with its investment policy. The
communication of such a "funding policy and method" shall not,
however, constitute a directive to the Trustee as to investment of the
Trust Funds. Such "funding policy and method" shall be consistent with
the objectives of this Plan and with the requirements of Title I of
the Act.
(c) The Employer shall periodically review the performance of
any Fiduciary or other person to whom duties have been delegated or
allocated by it under the provisions of this Plan or pursuant to
procedures established hereunder. This requirement may be satisfied by
formal periodic review by the Employer or by a qualified person
specifically designated by the Employer, through day-to-day conduct
and evaluation, or through other appropriate ways.
2.4 DESIGNATION OF ADMINISTRATIVE AUTHORITY
The Employer shall appoint one or more Administrators. Any
person, including, but not limited to, the Employees of the Employer,
shall be eligible to serve as an Administrator. Any person so
appointed shall signify his acceptance by filing written acceptance
with the Employer. An Administrator may resign by delivering his
written resignation to the Employer or be removed by the Employer by
delivery of written notice of removal, to take effect at a date
specified therein, or upon delivery to the Administrator if no date is
specified.
The Employer, upon the resignation or removal of an
Administrator, shall promptly designate in writing a successor to this
position. If the Employer does not appoint an Administrator, the
Employer will function as the Administrator.
2.5 ALLOCATION AND DELEGATION OF RESPONSIBILITIES
If more than one person is appointed as Administrator, the
responsibilities of each Administrator may be specified by the
Employer and accepted in writing by each Administrator. In the event
that no such delegation is made by the Employer, the Administrators
may allocate the responsibilities among themselves, in which event the
Administrators shall notify the Employer and the Trustee in writing of
such action and specify the responsibilities of each Administrator.
The Trustee thereafter shall accept and rely upon any documents
executed by the appropriate Administrator until such time as the
Employer or the Administrators file with the Trustee a written
revocation of such designation.
2.6 POWERS AND DUTIES OF THE ADMINISTRATOR
The primary responsibility of the Administrator is to
administer the Plan for the exclusive benefit of the Participants and
their Beneficiaries, subject to the specific terms of the Plan. The
Administrator shall administer the Plan in accordance with its terms
and shall have the power and discretion to construe the terms of the
Plan and to determine all questions arising in connection with the
administration, interpretation, and application of the Plan. Any such
determination by the Administrator shall be conclusive and binding
upon all persons. The Administrator may establish procedures, correct
any defect, supply any information, or reconcile any inconsistency in
such manner and to such extent as shall be deemed necessary or
advisable to carry out the purpose of the Plan; provided, however,
that any procedure, discretionary act, interpretation or construction
shall be done in a nondiscriminatory manner based upon uniform
principles consistently applied and shall be consistent with the
intent that the Plan shall continue to be deemed a qualified plan
under the terms of Code Section 401(a), and shall comply with the
terms of the Act and all regulations issued pursuant thereto. The
Administrator shall have all powers necessary or appropriate to
accomplish his duties under this Plan.
The Administrator shall be charged with the duties of the
general administration of the Plan, including, but not limited to, the
following:
(a) the discretion to determine all questions relating
to the eligibility of Employees to participate or remain a
Participant hereunder and to receive benefits under the
Plan;
(b) to compute, certify, and direct the Trustee with
respect to the amount and the kind of benefits to which any
Participant shall be entitled hereunder;
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(c) to authorize and direct the Trustee with respect to
all nondiscretionary or otherwise directed disbursements
from the Trust;
(d) to maintain all necessary records for the
administration of the Plan;
(e) to interpret the provisions of the Plan and to make
and publish such rules for regulation of the Plan as are
consistent with the terms hereof;
(f) to determine the size and type of any Contract to be
purchased from any insurer, and to designate the insurer
from which such Contract shall be purchased;
(g) to compute and certify to the Employer and to the
Trustee from time to time the sums of money necessary or
desirable to be contributed to the Plan;
(h) to consult with the Employer and the Trustee
regarding the short and long-term liquidity needs of the
Plan in order that the Trustee can exercise any investment
discretion in a manner designed to accomplish specific
objectives;
(i) to prepare and implement a procedure to notify
Eligible Employees that they may elect to have a portion of
their Compensation deferred or paid to them in cash;
(j) to assist any Participant regarding his rights,
benefits, or elections available under the Plan.
2.7 RECORDS AND REPORTS
The Administrator shall keep a record of all actions taken and shall
keep all other books of account, records, and other data that may be necessary
for proper administration of the Plan and shall be responsible for supplying all
information and reports to the Internal Revenue Service, Department of Labor,
Participants, Beneficiaries and others as required by law.
2.8 APPOINTMENT OF ADVISERS
The Administrator, or the Trustee with the consent of the
Administrator, may appoint counsel, specialists, advisers, and other persons as
the Administrator or the Trustee deems necessary or desirable in connection with
the administration of this Plan.
2.9 INFORMATION FROM EMPLOYER
To enable the Administrator to perform his functions, the Employer
shall supply full and timely information to the Administrator on all matters
relating to the Compensation of all Participants, their Hours of Service, their
Years of Service, their retirement, death, disability, or termination of
employment, and such other pertinent facts as the Administrator may require; and
the Administrator shall advise the Trustee of such of the foregoing facts as may
be pertinent to the Trustee's duties under the Plan. The Administrator may rely
upon such information as is supplied by the Employer and shall have no duty or
responsibility to verify such information.
2.10 PAYMENT OF EXPENSES
All expenses of administration may be paid out of the Trust Fund
unless paid by the Employer. Such expenses shall include any expenses incident
to the functioning of the Administrator, including, but not limited to, fees of
accountants, counsel, and other specialists and their agents, and other costs of
administering the Plan. Until paid, the expenses shall constitute a liability of
the Trust Fund. However, the Employer may reimburse the Trust Fund for any
administration expense incurred.
2.11 MAJORITY ACTIONS
Except where there has been an allocation and delegation of
administrative authority pursuant to Section 2.5, if there shall be more than
one Administrator, they shall act by a majority of their number, but may
authorize one or more of them to sign all papers on their behalf.
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2.12 CLAIMS PROCEDURE
Claims for benefits under the Plan may be filed in writing with the
Administrator. Written notice of the disposition of a claim shall be furnished
to the claimant within 90 days after the application is filed. In the event the
claim is denied, the reasons for the denial shall be specifically set forth in
the notice in language calculated to be understood by the claimant, pertinent
provisions of the Plan shall be cited, and, where appropriate, an explanation as
to how the claimant can perfect the claim will be provided. In addition, the
claimant shall be furnished with an explanation of the Plan's claims review
procedure.
2.13 CLAIMS REVIEW PROCEDURE
Any Employee, former Employee, or Beneficiary of either, who has been
denied a benefit by a decision of the Administrator pursuant to Section 2.12
shall be entitled to request the Administrator to give further consideration to
his claim by filing with the Administrator (on a form which may be obtained from
the Administrator) a request for a hearing. Such request, together with a
written statement of the reasons why the claimant believes his claim should be
allowed, shall be filed with the Administrator no later than 60 days after
receipt of the written notification provided for in Section 2.12. The
Administrator shall then conduct a hearing within the next 60 days, at which the
claimant may be represented by an attorney or any other representative of his
choosing and at which the claimant shall have an opportunity to submit written
and oral evidence and arguments in support of his claim. At the hearing (or
prior thereto upon 5 business days written notice to the Administrator) the
claimant or his representative shall have an opportunity to review all documents
in the possession of the Administrator which are pertinent to the claim at issue
and its disallowance. Either the claimant or the Administrator may cause a court
reporter to attend the hearing and record the proceedings. In such event, a
complete written transcript of the proceedings shall be furnished to both
parties by the court reporter. The full expense of any such court reporter and
such transcripts shall be borne by the party causing the court reporter to
attend the hearing. A final decision as to the allowance of the claim shall be
made by the Administrator within 60 days of receipt of the appeal (unless there
has been an extension of 60 days due to special circumstances, provided the
delay and the special circumstances occasioning it are communicated to the
claimant within the 60 day period). Such communication shall be written in a
manner calculated to be understood by the claimant and shall include specific
reasons for the decision and specific references to the pertinent Plan
provisions on which the decision is based.
ARTICLE III
ELIGIBILITY
3.1 CONDITIONS OF ELIGIBILITY
Any Eligible Employee who has completed one (1) Year of Service shall
be eligible to participate hereunder as of the date he has satisfied such
requirements. The Employer shall give each prospective Eligible Employee written
notice of his eligibility to participate in the Plan prior to the close of the
Plan Year in which he first becomes an Eligible Employee.
3.2 APPLICATION FOR PARTICIPATION
In order to become a Participant hereunder, each Eligible Employee
shall make application to the Employer for participation in the Plan and agree
to the terms hereof. Upon the acceptance of any benefits under this Plan, such
Employee shall automatically be deemed to have made application and shall be
bound by the terms and conditions of the Plan and all amendments hereto.
3.3 EFFECTIVE DATE OF PARTICIPATION
An Eligible Employee shall become a Participant effective as of the
first day of the quarter (April 1st, July 1st, October 1st or January 1st)
coinciding with or next following the date on which such Employee met the
eligibility requirements of Section 3.1, provided said Employee was still
employed as of such date (or if not employed on such date, as of the date of
rehire if a 1-Year Break in Service has not occurred).
In the event an Employee who is not a member of an eligible class of Employees
becomes a member of an eligible class, such Employee will participate
immediately if such Employee has satisfied the minimum age and service
requirements and would have otherwise previously become a Participant.
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3.4 DETERMINATION OF ELIGIBILITY
The Administrator shall determine the eligibility of each Employee for
participation in the Plan based upon information furnished by the Employer. Such
determination shall be conclusive and binding upon all persons, as long as the
same is made pursuant to the Plan and the Act Such determination shall be
subject to review per Section 2.13.
3.5 TERMINATION OF ELIGIBILITY
(a) In the event a Participant shall go from a classification of
an Eligible Employee to an ineligible Employee, such Former
Participant shall continue to vest in his interest in the Plan for
each Year of Service completed while a noneligible Employee, until
such time as his Participant's Account shall be forfeited or
distributed pursuant to the terms of the Plan. Additionally, his
interest in the Plan shall continue to share in the earnings of the
Trust Fund.
(b) In the event a Participant is no longer a member of an
eligible class of Employees and becomes ineligible to participate but
has not incurred a I-Year Break in Service, such Employee will
participate immediately upon returning to an eligible class of
Employees. If such Participant incurs a I-Year Break in Service,
eligibility will be determined under the break in service rules of the
Plan.
3.6 OMISSION OF ELIGIBLE EMPLOYEE
If, in any Plan Year, any Employee who should be included as a
Participant in the Plan is erroneously omitted and discovery of such omission is
not made until after a contribution by his Employer for the year has been made,
the Employer shall make a subsequent contribution with respect to the omitted
Employee in the amount which the said Employer would have contributed with
respect to him had he not been omitted. Such contribution shall be made
regardless of whether or not it is deductible in whole or in part in any taxable
year under applicable provisions of the Code.
3.7 INCLUSION OF INELIGIBLE EMPLOYEE
If, in any Plan Year, any person who should not have been included as
a Participant in the Plan is erroneously included and discovery of such
incorrect inclusion is not made until after a contribution for the year has been
made, the Employer shall not be entitled to recover the contribution made with
respect to the ineligible person regardless of whether or not a deduction is
allowable with respect to such contribution. In such event, the amount
contributed with respect to the ineligible person shall constitute a Forfeiture
(except for Deferred Compensation which shall be distributed to the ineligible
person) for the Plan Year in which the discovery is made.
3.8 ELECTION NOT TO PARTICIPATE
An Employee may, subject to the approval of the Employer, elect
voluntarily not to participate in the Plan. The election not to participate must
be communicated to the Employer, in writing, at least thirty (30) days before
the beginning of a Plan Year.
ARTICLE IV
CONTRIBUTION AND ALLOCATION
4.1 FORMULA FOR DETERMINING EMPLOYER'S CONTRIBUTION
For each Plan Year, the Employer shall contribute to the Plan:
(a) The amount of the total salary reduction elections of all
Participants made pursuant to Section 4.2(a), which amount shall be
deemed an Employer's Elective Contribution.
(b) On behalf of each Participant who is eligible to share in
matching contributions for the Plan Year, a matching contribution
equal to 25% of each such Participant's Deferred Compensation, which
amount shall be deemed an Employer's Elective Contribution.
Except, however, in applying the matching percentage
specified above, only salary reductions up to 8% of Compensation shall
be considered.
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(c) On behalf of each Non-Highly Compensated Participant who is
eligible to share in the Qualified Non-Elective Contribution for the
Plan Year, a discretionary Qualified Non-Elective Contribution equal
to a percentage of each eligible individual's Compensation, the exact
percentage to be determined each year by the Employer. The Employer's
Qualified Non-Elective Contribution shall be deemed an Employer's
Elective Contribution.
(d) Notwithstanding the foregoing, however, the Employer's
contributions for any Plan Year shall not exceed the maximum amount
allowable as a deduction to the Employer under the provisions of Code
Section 404. All contributions by the Employer shall be made in cash
or in such property as is acceptable to the Trustee.
(e) Except, however, to the extent necessary to provide the top
heavy minimum allocations, the Employer shall make a contribution even
if it exceeds the amount which is deductible under Code Section 404.
4.2 PARTICIPANT'S SALARY REDUCTION ELECTION
(a) Each Participant may elect to defer a portion of his
Compensation which would have been received in the Plan Year (except
for the deferral election) by up to the maximum amount which will not
cause the Plan to violate the provisions of Sections 4.5(a) and 4.7,
or cause the Plan to exceed the maximum amount allowable as a
deduction to the Employer under Code Section 404. A deferral election
(or modification of an earlier election) may not be made with respect
to Compensation which is currently available on or before the date the
Participant executed such election or, if later, the latest of the
date the Employer adopts this cash or deferred arrangement, or the
date such arrangement first became effective.
The amount by which Compensation is reduced shall be that
Participant's Deferred Compensation and be treated as an Employer
Elective Contribution and allocated to that Participant's Elective
Account.
(b) The balance in each Participant's Elective Account shall be
fully Vested at all times and shall not be subject to Forfeiture for
any reason except as provided for in Sections 42(f) and 4.6(a)(l).
(c) Amounts held in the Participant's Elective Account may not
be distributable earlier than:
(1) a Participant's termination of employment, Total and
Permanent Disability, or death;
(2) a Participant's attainment of age 59 1/2;
(3) the termination of the Plan without the establishment or
existence of a "successor plan," as that term is described in
Regulation l.401(k)-1(d)(3);
(4) the date of disposition by the Employer to an entity that is
not an Affiliated Employer of substantially all of the assets
(within the meaning of Code Section 409(d)(2)) used in a trade
or business of such corporation if such corporation continues to
maintain this Plan after the disposition with respect to a
Participant who continues employment with the corporation
acquiring such assets; or
(5) the date of disposition by the Employer or an Affiliated
Employer who maintains the Plan of its interest in a subsidiary
(within the meaning of Code Section 409(d)(3)) to an entity
which is not an Affiliated Employer but only with respect to a
Participant who continues employment with such subsidiary.
(d) For each Plan Year, a Participant's Deferred Compensation
made under this Plan and all other plans, contracts or arrangements of
the Employer maintaining this Plan shall not exceed, during any
taxable year of the Participant, the limitation imposed by Code
Section 402(g), as in effect at the beginning of such taxable year. If
such dollar limitation is exceeded, a Participant will be deemed to
have notified the Administrator of such excess amount which shall be
distributed in a manner consistent with Section 4.2(f). The dollar
limitation shall be adjusted annually pursuant to the method provided
in Code Section 415(d) in accordance with Regulations.
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(e) In the event a Participant has received a hardship
distribution pursuant to Regulation 1.40l(k)-1(d)(2)(iv)(B) from any
other plan maintained by the Employer, then such Participant shall not
be permitted to elect to have Deferred Compensation contributed to the
Plan on his behalf for a period of twelve (12) months following the
receipt of the distribution. Furthermore, the dollar limitation under
Code Section 402(g) shall be reduced, with respect to the
Participant's taxable year following the taxable year in which the
hardship distribution was made, by the amount of such Participant's
Deferred Compensation, if any, pursuant to this Plan (and any other
plan maintained by the Employer) for the taxable year of the hardship
distribution.
(f) If a Participant's Deferred Compensation under this Plan
together with any elective deferrals (as defined in Regulation 1
.402(g)-l(b)) under another qualified cash or deferred arrangement (as
defined in Code Section 401(k)), a simplified employee pension (as
defined in Code Section 408(k)), a salary reduction arrangement
(within the meaning of Code Section 312 l(a)(5)(D)), a deferred
compensation plan under Code Section 457, or a trust described in Code
Section 501(c)(18) cumulatively exceed the limitation imposed by Code
Section 402(g) (as adjusted annually in accordance with the method
provided in Code Section 415(d) pursuant to Regulations) for such
Participant's taxable year, the Participant may, not later than March
1 following the close of the Participant's taxable year, notify the
Administrator in writing of such excess and request that his Deferred
Compensation under this Plan be reduced by an amount specified by the
Participant. In such event, the Administrator may direct the Trustee
to distribute such excess amount (and any Income allocable to such
excess amount) to the Participant not later than the first April 15th
following the close of the Participant's taxable year. Any
distribution of less than the entire amount of Excess Deferred
Compensation and Income shall be treated as a pro rata distribution of
Excess Deferred Compensation and Income. The amount distributed shall
not exceed the Participant's Deferred Compensation under the Plan for
the taxable year. Any distribution on or before the last day of the
Participant's taxable year must satisfy each of the following
conditions:
(1) the distribution must be made alter the date on which the
Plan received the Excess Deferred Compensation;
(2) the Participant shall designate the distribution as Excess
Deferred Compensation; and
(3) the Plan must designate the distribution as a distribution
of Excess Deferred Compensation.
Any distribution made pursuant to this Section 4.2(f) shall
be made first from unmatched Deferred Compensation and,
thereafter, from Deferred Compensation which is matched.
Matching contributions which relate to such Deferred
Compensation shall be forfeited.
(g) Notwithstanding Section 4.2(f) above, a Participant's Excess
Deferred Compensation shall be reduced, but not below zero, by
any distribution of Excess Contributions pursuant to Section
4.6(a) for the Plan Year beginning with or within the taxable
year of the Participant.
(h) At Normal Retirement Date, or such other date when the
Participant shall be entitled to receive benefits, the fair
market value of the Participant's Elective Account shall be used
to provide additional benefits to the Participant or his
Beneficiary.
(i) All amounts allocated to a Participant's Elective Account
may be treated as a Directed Investment Account pursuant to
Section 4.10.
(j) Employer Elective Contributions made pursuant to this
Section may be segregated into a separate account for each
Participant in a federally insured savings account, certificate
of deposit in a bank or savings and loan association, money
market certificate, or other short-term debt security acceptable
to the Trustee until such time as the allocations pursuant to
Section 4.4 have been made.
(k) The Employer and the Administrator shall implement the
salary reduction elections provided for herein in accordance
with the following:
(1) A Participant may commence making elective deferrals to the
Plan only after first satisfying the eligibility and
participation requirements specified in Article III. However,
the
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Participant must make his initial salary deferral election
within a reasonable time, not to exceed thirty (30) days, after
entering the Plan pursuant to Section 3.3. If the Participant
fails to make an initial salary deferral election within such
time, then such Participant may thereafter make an election in
accordance with the rules governing modifications. The
Participant shall make such an election by entering into a
written salary reduction agreement with the Employer and filing
such agreement with the Administrator. Such election shall
initially be effective beginning with the pay period following
the acceptance of the salary reduction agreement by the
Administrator, shall not have retroactive effect and shall
remain in force until revoked.
(2) A Participant may modify a prior election during the Plan
Year and concurrently make a new election by filing a written
notice with the Administrator within a reasonable time before
the pay period for which such modification is to be effective.
However, modifications to a salary deferral election shall only
be permitted quarterly, during election periods established by
the Administrator prior to the first day of each Plan Year
quarter. Any modification shall not have retroactive effect and
shall remain in force until revoked.
(3) A Participant may elect to prospectively revoke his salary
reduction agreement in its entirety at any time during the Plan
Year by providing the Administrator with thirty (30) days
written notice of such revocation (or upon such shorter notice
period as may be acceptable to the Administrator). Such
revocation shall become effective as of the beginning of the
first pay period coincident with or next following the
expiration of the notice period. Furthermore, the termination of
the Participant's employment, or the cessation of participation
for any reason, shall be deemed to revoke any salary reduction
agreement then in effect, effective immediately following the
close of the pay period within which such termination or
cessation occurs.
4.3 TIME OF PAYMENT OF EMPLOYER'S CONTRIBUTION
The Employer shall generally pay to the Trustee its contribution
to the Plan for each Plan Year within the time prescribed by law, including
extensions of time, for the filing of the Employer's federal income tax return
for the Fiscal Year.
However, Employer Elective Contributions accumulated through
payroll deductions shall be paid to the Trustee as of the earliest date on which
such contributions can reasonably be segregated from the Employer's general
assets, but in any event within ninety (90) days from the date on which such
amounts would otherwise have been payable to the Participant in cash. The
provisions of Department of Labor regulations 2510.3-102 are incorporated herein
by reference. Furthermore, any additional Employer contributions which are
allocable to the Participant's Elective Account for a Plan Year shall be paid to
the Plan no later than the twelve-month period immediately following the close
of such Plan Year.
4.4 ALLOCATION OF CONTRIBUTION AND EARNINGS
(a) The Administrator shall establish and maintain an account in
the name of each Participant to which the Administrator shall credit as
of each Anniversary Date all amounts allocated to each such Participant
as set forth herein.
(b) The Employer shall provide the Administrator with all
information required by the Administrator to make a proper allocation of
the Employer's contributions for each Plan Year. Within a reasonable
period of time after the date of receipt by the Administrator of such
information, the Administrator shall allocate such contribution as
follows:
(1) With respect to the Employer's Elective Contribution made
pursuant to Section 4.1(a), to each Participant's Elective
Account in an amount equal to each such Participant's Deferred
Compensation for the year.
(2) With respect to the Employer's Elective Contribution made
pursuant to Section 4.1(b), to each Participant's Elective
Account in accordance with Section 4.1(b).
Any Participant actively employed during the Plan Year shall be
eligible to share in the matching contribution for the Plan
Year.
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<PAGE>
(3) With respect to the Employer's Qualified Non-Elective
Contribution made pursuant to Section 4.1(c), to each
Participant's Elective Account in accordance with Section
4.1(c).
Any Non-Highly Compensated Participant actively employed during
the Plan Year shall be eligible to share in the Qualified Non-
Elective Contribution for the Plan Year.
(c) For any Top Heavy Plan Year, Non-Key Employees not otherwise
eligible to share in the allocation of contributions as provided above,
shall receive the minimum allocation provided for in Section 4.4(f) if
eligible pursuant to the provisions of Section 4.4(h).
(d) Participants who are not actively employed on the last day
of the Plan Year due to Retirement (Normal or Late), Total and Permanent
Disability or death shall share in the allocation of contributions for
that Plan Year only if otherwise eligible in accordance with this
Section.
(e) As of each Anniversary Date or other valuation date, before
the current valuation period allocation of Employer contributions and
after allocation of Forfeitures, any earnings or losses (net
appreciation or net depreciation) of the Trust Fund shall be allocated
in the same proportion that each Participant's and Former Participant's
nonsegregated accounts bear to the total of all Participants' and Former
Participants' nonsegregated accounts as of such date.
Participants' transfers from other qualified plans
deposited in the general Trust Fund shall share in any earnings and
losses (net appreciation or net depreciation) of the Trust Fund in the
same manner provided above. Each segregated account maintained on behalf
of a Participant shall be credited or charged with its separate earnings
and losses.
(f) Minimum Allocations Required fur Top Heavy Plan Years:
Notwithstanding the foregoing, for any Top Heavy Plan Year, the sum of
the Employer's contributions allocated to the Participant's Elective
Account of each Non-Key Employee shall be equal to at least three
percent (3%) of such Non-Key Employee's "415 Compensation" (reduced by
contributions and forfeitures, if any, allocated to each Non-Key
Employee in any defined contribution plan included with this plan in a
Required Aggregation Group). However, if(l) the sum of the Employer's
contributions allocated to the Participant's Elective Account of each
Key Employee for such Top Heavy Plan Year is less than three percent
(3%) of each Key Employee's "415 Compensation" and (2) this Plan is not
required to be included in an Aggregation Group to enable a defined
benefit plan to meet the requirements of Code Section 401(a)(4) or 410,
the sum of the Employer's contributions allocated to the Participant's
Elective Account of each Non-Key Employee shall be equal to the largest
percentage allocated to the Participant's Elective Account of any Key
Employee. However, in determining whether a Non-Key Employee has
received the required minimum allocation, such Non-Key Employee's
Deferred Compensation and matching contributions needed to satisfy the
"Actual Deferral Percentage" tests pursuant to Section 4.5(a) shall not
be taken into account.
However, no such minimum allocation shall be required in
this Plan for any Non-Key Employee who participates in another defined
contribution plan subject to Code Section 412 providing such benefits
included with this Plan in a Required Aggregation Group.
(g) For purposes of the minimum allocations set forth above, the
percentage allocated to the Participant's Elective Account of any Key
Employee shall be equal to the ratio of the sum of the Employer's
contributions allocated on behalf of such Key Employee divided by the "4
15 Compensation" for such Key Employee.
(h) For any Top Heavy Plan Year, the minimum allocations set
forth above shall be allocated to the Participant's Elective Account of
all Non-Key Employees who are Participants and who are employed by the
Employer on the last day of the Plan Year, including Non-Key Employees
who have (1) failed to complete a Year of Service; and (2) declined to
make mandatory contributions (if required) or, in the case of a cash or
deferred arrangement, elective contributions to the Plan.
(i) For the purposes of this Section, "415 Compensation" shall
be limited to $200,000. Such amount shall be adjusted at the same time
and in the same manner as permitted under Code Section 415(d), except
that the dollar increase in effect on January 1 of any calendar year
shall be effective for the Plan Year beginning with or within such
calendar year and the first adjustment to the $200,000 limitation
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<PAGE>
shall be effective on January 1, 1990. For any short Plan Year the "415
Compensation" limit shall be an amount equal to the "415 Compensation"
limit for the calendar year in which the Plan Year begins multiplied by
the ratio obtained by dividing the number of full months in the short
Plan Year by twelve (12).
In addition to other applicable limitations set forth in
the Plan, and notwithstanding any other provision of the Plan to the
contrary, for Plan Years beginning on or after January 1, 1994, the
annual Compensation of each Employee taken into account under the Plan
shall not exceed the OBRA '93 annual compensation limit. The OBRA '93
annual compensation limit is $150,000, as adjusted by the Commissioner
for increases in the cost of living in accordance with Code Section
401(a)(17)(B). The cost of living adjustment in effect for a calendar
year applies to any period, not exceeding 12 months, over which
Compensation is determined (determination period) beginning in such
calendar year. If a determination period consists of fewer than 12
months, the OBRA '93 annual compensation limit will be multiplied by a
fraction, the numerator of which is the number of months in the
determination period, and the denominator of which is 12.
For Plan Years beginning on or after January 1, 1994, any
reference in this Plan to the limitation under Code Section 401(a)(17)
shall mean the OBRA '93 annual compensation limit set forth in this
provision.
If Compensation for any prior determination period is taken
into account in determining an Employee's benefits accruing in the
current Plan Year, the Compensation for that prior determination period
is subject to the OBRA '93 annual compensation limit in effect for that
prior determination period. For this purpose, for determination periods
beginning before the first day of the first Plan Year beginning on or
after January 1, 1994, the OBRA '93 annual compensation limit is
$150,000.
(j) Notwithstanding anything herein to the contrary,
Participants who terminated employment for any reason during the Plan
Year shall share in the salary reduction contributions made by the
Employer for the year of termination without regard to the Hours of
Service credited.
(k) If a Former Participant is reemployed after five (5)
consecutive 1-Year Breaks in Service, then separate accounts shall be
maintained as follows:
(1) one account for nonforfeitable benefits attributable to pre-
break service; and
(2) one account representing his status in the Plan attributable
to post-break service.
(1) Notwithstanding anything to the contrary, if this is a Plan
that would otherwise fail to meet the requirements of Code Sections
401(a)(26), 410(b)(l) or 410(b)(2)(A)(i) and the Regulations thereunder
because Employer contributions would not be allocated to a sufficient
number or percentage of Participants for a Plan Year, then the following
rules shall apply:
(1) The group of Participants eligible to share in the
Employer's contribution for the Plan Year shall be expanded to
include the minimum number of Participants who would not
otherwise be eligible as are necessary to satisfy the applicable
test specified above. The specific Participants who shall become
eligible under the terms of this paragraph shall be those who
are actively employed on the last day of the Plan Year and, when
compared to similarly situated Participants, have completed the
greatest number of Hours of Service in the Plan Year.
(2) If after application of paragraph (1) above, the applicable
test is still not satisfied, then the group of Participants
eligible to share in the Employer's contribution for the Plan
Year shall be further expanded to include the minimum number of
Participants who are not actively employed on the last day of
the Plan Year as are necessary to satisfy the applicable test.
The specific Participants who shall become eligible to share
shall be those Participants, when compared to similarly situated
Participants, who have completed the greatest number of Hours of
Service in the Plan Year before terminating employment.
(3) Nothing in this Section shall permit the reduction of a
Participant's accrued benefit. Therefore any amounts that have
previously been allocated to Participants may not be reallocated
to satisfy these requirements. In such event, the Employer shall
make an additional
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<PAGE>
contribution equal to the amount such affected Participants
would have received had they been included in the allocations,
even if it exceeds the amount which would be deductible under
Code Section 404. Any adjustment to the allocations pursuant to
this paragraph shall be considered a retroactive amendment
adopted by the last day of the Plan Year.
4.5 ACTUAL DEFERRAL PERCENTAGE TESTS
(a) Maximum Annual Allocation: For each Plan Year, the annual
allocation derived from Employer Elective Contributions to a
Participant's Elective Account shall satisfy one of the following tests:
(1) The "Actual Deferral Percentage" for the Highly Compensated
Participant group shall not be more than the "Actual Deferral
Percentage" of the Non-Highly Compensated Participant group
multiplied by 1.25, or
(2) The excess of the "Actual Deferral Percentage" for the
Highly Compensated Participant group over the "Actual Deferral
Percentage" for the Non-Highly Compensated Participant group
shall not be more than two percentage points. Additionally, the
"Actual Deferral Percentage" for the Highly Compensated
Participant group shall not exceed the "Actual Deferral
Percentage" for the Non-Highly Compensated Participant group
multiplied by 2. The provisions of Code Section 401(k)(3) and
Regulation l.401(k)-l(b) are incorporated herein by reference.
However, in order to prevent the multiple use of the alternative
method described in (2) above and in Code Section 401(m)(9)(A),
any Highly Compensated Participant eligible to make elective
deferrals pursuant to Section 4.2 and to make Employee
contributions or to receive matching contributions under any
other plan maintained by the Employer or an Affiliated Employer
shall have his actual contribution ratio reduced pursuant to
Regulation 1 401(m)-2, the provisions of which are incorporated
herein by reference.
(b) For the purposes of this Section "Actual Deferral
Percentage" means, with respect to the Highly Compensated Participant
group and Non-Highly Compensated Participant group fur a Plan Year, the
average of the ratios, calculated separately for each Participant in
such group, of the amount of Employer Elective Contributions allocated
to each Participant's Elective Account for such Plan Year, to such
Participant's "414(s) Compensation" for such Plan Year. The actual
deferral ratio for each Participant and the "Actual Deferral Percentage"
for each group shall be calculated to the nearest one-hundredth of one
percent. Employer Elective Contributions allocated to each Non-Highly
Compensated Participant's Elective Account shall be reduced by Excess
Deferred Compensation to the extent such excess amounts are made under
this Plan or any other plan maintained by the Employer and any matching
contributions which relate to such Excess Deferred Compensation.
(c) For the purpose of determining the actual deferral ratio of
a Highly Compensated Employee who is subject to the Family Member
aggregation rules of Code Section 414(q)(6) because such Participant is
either a "five percent owner" of the Employer or one of the ten (10)
Highly Compensated Employees paid the greatest "415 Compensation" during
the year, the following shall apply:
(1) The combined actual deferral ratio for the family group
(which shall be treated as one Highly Compensated Participant)
shall be determined by aggregating Employer Elective
Contributions and "414(s) Compensation" of all eligible Family
Members (including Highly Compensated Participants). However, in
applying the $200,000 limit to "414(s) Compensation," Family
Members shall include only the affected Employee's spouse and
any lineal descendants who have not attained age 19 before the
close of the Plan Year.
(2) The Employer Elective Contributions and "414(s)
Compensation" of all Family Members shall be disregarded for
purposes of determining the "Actual Deferral Percentage" of the
Non-Highly Compensated Participant group except to the extent
taken into account in paragraph (1) above.
(3) If a Participant is required to be aggregated as a member of
more than one family group in a plan, all Participants who are
members of those family groups that include the Participant are
aggregated as one family group in accordance with paragraphs (1)
and (2) above.
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<PAGE>
(d) For the purposes of Sections 4.5(a) and 4.6, a Highly
Compensated Participant and a Non-Highly Compensated Participant shall
include any Employee eligible to make a deferral election pursuant to
Section 4.2, whether or not such deferral election was made or suspended
pursuant to Section 4.2.
(e) For the purposes of this Section and Code Sections 40
l(a)(4), 410(b) and 401(k), if two or more plans which include cash or
deferred arrangements are considered one plan for the purposes of Code
Section 401(a)(4) or 410(b) (other than Code Section 410(b)(2)(A)(ii));
the cash or deferred arrangements included in such plans shall be
treated as one arrangement. In addition, two or more cash or deferred
arrangements may be considered as a single arrangement for purposes of
determining whether or not such arrangements satisfy Code Sections
401(a)(4), 410(b) and 401(k). In such a case, the cash or deferred
arrangements included in such plans and the plans including such
arrangements shall be treated as one arrangement and as one plan for
purposes of this Section and Code Sections 401(a)(4), 410(b) and 401(k).
Plans may be aggregated under this paragraph (e) only if they have the
same plan year.
Notwithstanding the above, an employee stock ownership plan
described in Code Section 4975(e)(7) or 409 may not be combined with
this Plan for purposes of determining whether the employee stock
ownership plan or this Plan satisfies this Section and Code Sections
401(a)(4), 410(b) and 401(k).
(f) For the purposes of this Section, if a Highly Compensated
Participant is a Participant under two or more cash or deferred
arrangements (other than a cash or deferred arrangement which is part of
an employee stock ownership plan as defined in Code Section 4975(e)(7)
or 409) of the Employer or an Affiliated Employer, all such cash or
deferred arrangements shall be treated as one cash or deferred
arrangement for the purpose of determining the actual deferral ratio
with respect to such Highly Compensated Participant. However, if the
cash or deferred arrangements have different plan years, this paragraph
shall be applied by treating all cash or deferred arrangements ending
with or within the same calendar year as a single arrangement.
4.6 ADJUSTMENT TO ACTUAL DEFERRAL PERCENTAGE TESTS
In the event that the initial allocations of the Employer's Elective
Contributions made pursuant to Section 4.4 do not satisfy one of the tests set
forth in Section 4.5(a), the Administrator shall adjust Excess Contributions
pursuant to the options set forth below:
(a) On or before the fifteenth day of the third month following
the end of each Plan Year, the Highly Compensated Participant having the
highest actual deferral ratio shall have his portion of Excess
Contributions distributed to him until one of the tests set forth in
Section 4.5(a) is satisfied, or until his actual deferral ratio equals
the actual deferral ratio of the Highly Compensated Participant having
the second highest actual deferral ratio. This process shall continue
until one of the tests set forth in Section 4.5(a) is satisfied. For
each Highly Compensated Participant, the amount of Excess Contributions
is equal to the Elective Contributions on behalf of such Highly
Compensated Participant (determined prior to the application of this
paragraph) minus the amount determined by multiplying the Highly
Compensated Participant's actual deferral ratio (determined after
application of this paragraph) by his "414(s) Compensation." However, in
determining the amount of Excess Contributions to be distributed with
respect to an affected Highly Compensated Participant as determined
herein, such amount shall be reduced by any Excess Deferred Compensation
previously distributed to such affected Highly Compensated Participant
for his taxable year ending with or within such Plan Year and any
matching contributions which relate to such Excess Deferred
Compensation.
(1) With respect to the distribution of Excess Contributions
pursuant to (a) above, such distribution:
(i) may be postponed but not later than the close of the
Plan Year following the Plan Year to which they are
allocable;
(ii) shall be made first from unmatched Deferred
Compensation and, thereafter, from Deferred Compensation
which is matched. Matching contributions which relate to
such Deferred Compensation shall be forfeited;
23
<PAGE>
(iii) shall be adjusted for Income; and
(iv) shall be designated by the Employer as a distribution
of Excess Contributions (and Income).
(2) Any distribution of less than the entire amount of Excess
Contributions shall be treated as a pro rata distribution of
Excess Contributions and Income.
(3) The determination and correction of Excess Contributions of
a Highly Compensated Participant whose actual deferral ratio is
determined under the family aggregation rules shall be
accomplished by reducing the actual deferral ratio as required
herein, and the Excess Contributions for the family unit shall
then be allocated among the Family Members in proportion to the
Elective Contributions of each Family Member that were combined
to determine the group actual deferral ratio.
(b) Within twelve (12) months after the end of the Plan Year,
the Employer may make a special Qualified Non-Elective Contribution on
behalf of Non-Highly Compensated Participants in an amount sufficient to
satisfy one of the tests set forth in Section 4.5(a). Such contribution
shall be allocated to the Participant's Elective Account of each Non-
Highly Compensated Participant in the same proportion that each Non-
Highly Compensated Participant's Compensation for the year bears to the
total Compensation of all Non-Highly Compensated Participants.
(c) If during a Plan Year the projected aggregate amount of
Elective Contributions to be allocated to all Highly Compensated
Participants under this Plan would, by virtue of the tests set forth in
Section 4.5(a), cause the Plan to fail such tests, then the
Administrator may automatically reduce proportionately or in the order
provided in Section 4.6(a) each affected Highly Compensated
Participant's deferral election made pursuant to Section 4.2 by an
amount necessary to satisfy one of the tests set forth in Section
4.5(a).
4.7 MAXIMUM ANNUAL ADDITIONS
(a) Notwithstanding the foregoing, the maximum "annual
additions" credited to a Participant's accounts for any "limitation
year" shall equal the lesser of: (1) $30,000 adjusted annually as
provided in Code Section 415(d) pursuant to the Regulations, or (2)
twenty-five percent (25%) of the Participant's "415 Compensation" for
such "limitation year." For any short "limitation year," the dollar
limitation in (1) above shall be reduced by a fraction, the numerator of
which is the number of full months in the short "limitation year" and
the denominator of which is twelve (12).
(b) For purposes of applying the limitations of Code Section
415, "annual additions" means the sum credited to a Participant's
accounts for any. "limitation year" of (1) Employer contributions, (2)
Employee contributions, (3) forfeitures, (4) amounts allocated, after
March 31, 1984, to an individual medical account, as defined in Code
Section 4 l5(l)(2) which is part of a pension or annuity plan maintained
by the Employer and (5) amounts derived from contributions paid or
accrued alter December 31, 1985, in taxable years ending after such
date, which arc attributable to post-retirement medical benefits
allocated to the separate account of a key employee (as defined in Code
Section 419A(d)(3)) under a welfare benefit plan (as defined in Code
Section 419(e)) maintained by the Employer. Except, however, the "415
Compensation" percentage limitation referred to in paragraph (a)(2)
above shall not apply to: (1) any contribution for medical benefits
(within the meaning of Code Section 419A(f)(2)) after separation from
service which is otherwise treated as an "annual addition," or (2) any
amount otherwise treated as an "annual addition" under Code Section
415(l)(l).
(c) For purposes of applying the limitations of Code Section
415, the transfer of funds from one qualified plan to another is not an
"annual addition." In addition, the following arc not Employee
contributions for the purposes of Section 4.7(b)(2): (1) rollover
contributions (as defined in Code Sections 402(a)(5), 403(a)(4),
403(b)(8) and 408(d)(3)); (2) repayments of loans made to a Participant
from the Plan; (3) repayments of distributions received by an Employee
pursuant to Code Section 411 (a)(7)(B) (cash-outs); (4) repayments of
distributions received by an Employee pursuant to Code Section 411
(a)(3)(D) (mandatory contributions); and (5) Employee contributions to a
simplified employee pension excludable from gross income under Code
Section 408(k)(6).
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<PAGE>
(d) For purposes of applying the limitations of Code Section
415, the "limitation year" shall be the Plan Year.
(e) For the purpose of this Section, all qualified defined
benefit plans (whether terminated or not) ever maintained by the
Employer shall be treated as one defined benefit plan, and all qualified
defined contribution plans (whether terminated or not) ever maintained
by the Employer shall be treated as one defined contribution plan.
(f) For the purpose of this Section, if the Employer is a member
of a controlled group of corporations, trades or businesses under common
control (as defined by Code Section 1563(a) or Code Section 414(b) and
(c) as modified by Code Section 415(h)), is a member of an affiliated
service group (as defined by Code Section 414(m)), or is a member of a
group of entities required to be aggregated pursuant to Regulations
under Code Section 414(0), all Employees of such Employers shall be
considered to be employed by a single Employer.
(g) For the purpose of this Section, if this Plan is a Code
Section 413(c) plan, all Employers of a Participant who maintain this
Plan will be considered to be a single Employer.
(h)(l) If a Participant participates in more than one defined
contribution plan maintained by the Employer which have different
Anniversary Dates, the maximum "annual additions" under this Plan shall
equal the maximum "annual additions" for the "limitation year" minus any
"annual additions" previously credited to such Participant's accounts
during the "limitation year."
(2) If a Participant participates in both a defined contribution
plan subject to Code Section 412 and a defined contribution plan
not subject to Code Section 412 maintained by the Employer which
have the same Anniversary Date, "annual additions" will be
credited to the Participant's accounts under the defined
contribution plan subject to Code Section 412 prior to crediting
"annual additions" to the Participant's accounts under the
defined contribution plan not subject to Code Section 412.
(3) If a Participant participates in more than one defined
contribution plan not subject to Code Section 412 maintained by
the Employer which have the same Anniversary Date, the maximum
"annual additions" under this Plan shall equal the product of(A)
the maximum "annual additions" for the "limitation year" minus
any "annual additions" previously credited under subparagraphs
(1) or (2) above, multiplied by (B) a fraction (i) the numerator
of which is the "annual additions" which would be credited to
such Participant's accounts under this Plan without regard to
the limitations of Code Section 415 and (ii) the denominator of
which is such "annual additions" for all plans described in this
subparagraph.
(i) If an Employee is (or has been) a Participant in one or more
defined benefit plans and one or more defined contribution plans
maintained by the Employer, the sum of the defined benefit plan fraction
and the defined contribution plan fraction for any "limitation year" may
not exceed 1.0.
(j) The defined benefit plan fraction for any "limitation year"
is a fraction, the numerator of which is the sum of the Participant's
projected annual benefits under all the defined benefit plans (whether
or not terminated) maintained by the Employer, and the denominator of
which is the lesser of 125 percent of the dollar limitation determined
for the "limitation year" under Code Sections 415(b) and (d) or 140
percent of the highest average compensation, including any adjustments
under Code Section 415(b).
Notwithstanding the above, if the Participant was a
Participant as of the first day of the first "limitation year" beginning
after December 31, 1986, in one or more defined benefit plans maintained
by the Employer which were in existence on May 6, 1986, the denominator
of this fraction will not be less than 125 percent of the sum of the
annual benefits under such plans which the Participant had accrued as of
the close of the last "limitation year" beginning before January 1,
1987, disregarding any changes in the terms and conditions of the plan
after May 5, 1986. The preceding sentence applies only if the defined
benefit plans individually and in the aggregate satisfied the
requirements of Code Section 415 for all "limitation years" beginning
before January 1, 1987.
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(k) The defined contribution plan fraction for any "limitation
year" is a fraction, the numerator of which is the sum of the annual
additions to the Participant's Account under all the defined
contribution plans (whether or not terminated) maintained by the
Employer for the current and all prior "limitation years" (including the
annual additions attributable to the Participant's nondeductible
Employee contributions to all defined benefit plans, whether or not
terminated, maintained by the Employer, and the annual additions
attributable to all welfare benefit funds, as defined in Code Section
419(e), and individual medical accounts, as defined in Code Section
415(1)(2), maintained by the Employer), and the denominator of which is
the sum of the maximum aggregate amounts for the current and all prior
"limitation years" of service with the Employer (regardless of whether a
defined contribution plan was maintained by the Employer). The maximum
aggregate amount in any "limitation year" is the lesser of 125 percent
of the dollar limitation determined under Code Sections 415(b) and (d)
in effect under Code Section 41 5(c)(l)(A) or 35 percent of the
Participant's Compensation for such year.
If the Employee was a Participant as of the end of the first
day of the first "limitation year" beginning after December 31, 1986, in
one or more defined contribution plans maintained by the Employer which
were in existence on May 6, 1986, the numerator of this fraction will be
adjusted if the sum of this fraction and the defined benefit fraction
would otherwise exceed 1.0 under the terms of this Plan. Under the
adjustment, an amount equal to the product of (1) the excess of the sum
of the fractions over 1.0 times (2) the denominator of this fraction,
will be permanently subtracted from the numerator of this fraction. The
adjustment is calculated using the fractions as they would be computed
as of the end of the last "limitation year" beginning before January 1,
1987, and disregarding any changes in the terms and conditions of the
Plan made after May 5, 1986, but using the Code Section 415 limitation
applicable to the first "limitation year" beginning on or after January
1, 1987. The annual addition for any "limitation year" beginning before
January 1, 1987 shall not be recomputed to treat all Employee
contributions as annual additions.
(l) Notwithstanding the foregoing, for any "limitation year" in
which the Plan is a Top Heavy Plan, 100 percent shall be substituted for
125 percent in Sections 4.7(k) and 4.7(1) unless the extra minimum
allocation is being provided pursuant to Section 4.4. However, for any
"limitation year" in which the Plan is a Super Top Heavy Plan, 100
percent shall be substituted for 125 percent in any event
(m) Notwithstanding anything contained in this Section to the
contrary, the limitations, adjustments and other requirements prescribed
in this Section shall at all times comply with the provisions of Code
Section 415 and the Regulations thereunder, the terms of which are
specifically incorporated herein by reference.
4.8 ADJUSTMENT FOR EXCESSIVE ANNUAL ADDITIONS
(a) If as a result of a reasonable error in estimating a
Participant's Compensation, a reasonable error in determining the amount
of elective deferrals (within the meaning of Code Section 402(g)(3))
that may be made with respect to any Participant under the limits of
Section 4.7 or other facts and circumstances to which Regulation l.415-
6(b)(6) shall be applicable, the "annual additions" under this Plan
would cause the maximum "annual additions" to be exceeded for any
Participant, the Administrator shall (1) distribute any elective
deferrals (within the meaning of Code Section 402(g)(3)) or return any
voluntary Employee contributions credited for the "limitation year" to
the extent that the return would reduce the "excess amount" in the
Participant's accounts (2) hold any "excess amount" remaining after the
return of any elective deferrals or voluntary Employee contributions in
a "Section 415 suspense account" (3) use the "Section 415 suspense
account" in the next "limitation year" (and succeeding "limitation
years" if necessary) to reduce Employer contributions for that
Participant if that Participant is covered by the Plan as of the end of
the "limitation year," or if the Participant is not so covered, allocate
and reallocate the "Section 415 suspense account" in the next
"limitation year" (and succeeding "limitation years" if necessary) to
all Participants in the Plan before any Employer or Employee
contributions which would constitute "annual additions" are made to the
Plan for such "limitation year" (4) reduce Employer contributions to the
Plan for such "limitation year" by the amount of the "Section 415
suspense account" allocated and reallocated during such "limitation
year."
(b) For purposes of this Article, "excess amount" for any
Participant for a "limitation year" shall mean the excess, if any, of(l)
the "annual additions" which would be credited to his account
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under the terms of the Plan without regard to the limitations of Code
Section 415 over (2) the maximum "annual additions" determined pursuant
to Section 4.7.
(c) For purposes of this Section. "Section 415 suspense account"
shall mean an unallocated account equal to the sum of "excess amounts"
for all Participants in the Plan during the "limitation year." The
"Section 415 suspense account" shall not share in any earnings or losses
of the Trust Fund.
4.9 TRANSFERS FROM QUALIFIED PLANS
(a) With the consent of the Administrator, amounts may be
transferred from other qualified plans by Employees, provided that the
trust from which such funds are transferred permits the transfer to be
made and the transfer will not jeopardize the tax exempt status of the
Plan or Trust or create adverse tax consequences for the Employer. The
amounts transferred shall be setup in a separate account herein referred
to as a "Participant's Rollover Account." Such account shall be fully
Vested at all times and shall not be subject to Forfeiture for any
reason.
(b) Amounts in a Participant's Rollover Account shall be held by
the Trustee pursuant to the provisions of this Plan and may not be
withdrawn by, or distributed to the Participant, in whole or in part,
except as provided in paragraphs (c) and (d) of this Section.
(c) Except as permitted by Regulations (including Regulation
1.41 l(d)-4), amounts attributable to elective contributions (as defined
in Regulation l.401(k)-1(g)(3)), including amounts treated as elective
contributions, which are transferred from another qualified plan in a
plan-to-plan transfer shall be subject to the distribution limitations
provided for in Regulation 1.401(k)-l(d).
(d) At Normal Retirement Date, or such other date when the
Participant or his Beneficiary shall be entitled to receive benefits,
the fair market value of the Participant's Rollover Account shall be
used to provide additional benefits to the Participant or his
Beneficiary. Any distributions of amounts held in a Participant's
Rollover Account shall be made in a manner which is consistent with and
satisfies the provisions of Section 6.5, including, but not limited to,
all notice and consent requirements of Code Section 411(a)(11) and the
Regulations thereunder. Furthermore, such amounts shall be considered as
part of a Participant's benefit in determining whether an involuntary
cash-out of benefits without Participant consent may be made.
(e) The Administrator may direct that employee transfers made
after a valuation date be segregated into a separate account for each
Participant in a federally insured savings account, certificate of
deposit in a bank or savings and loan association, money market
certificate, or other short term debt security acceptable to the Trustee
until such time as the allocations pursuant to this Plan have been made,
at which time they may remain segregated or be invested as part of the
general Trust Fund, to be determined by the Administrator.
(f) All amounts allocated to a Participant's Rollover Account
may be treated as a Directed Investment Account pursuant to Section
4.10.
(g) For purposes of this Section, the term "qualified plan"
shall mean any tax qualified plan under Code Section 401(a). The term
"amounts transferred from other qualified plans" shall mean: (i) amounts
transferred to this Plan directly from another qualified plan; (ii)
distributions from another qualified plan which are eligible rollover
distributions and which are either transferred by the Employee to this
Plan within sixty (60) days following his receipt thereof or are
transferred pursuant to a direct rollover; (iii) amounts transferred to
this Plan from a conduit individual retirement account provided that the
conduit individual retirement account has no assets other than assets
which (A) were previously distributed to the Employee by another
qualified plan as a lump-sum distribution (B) were eligible for tax-free
rollover to a qualified plan and (C) were deposited in such conduit
individual retirement account within sixty (60) days of receipt thereof
and other than earnings on said assets; and (iv) amounts distributed to
the Employee from a conduit individual retirement account meeting the
requirements of clause (iii) above, and transferred by the Employee to
this Plan within sixty (60) days of his receipt thereof from such
conduit individual retirement account.
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(h) Prior to accepting any transfers to which this Section
applies, the Administrator may require the Employee to establish that
the amounts to be transferred to this Plan meet the requirements of this
Section and may also require the Employee to provide an opinion of
counsel satisfactory to the Employer that the amounts to be transferred
meet the requirements of this Section.
(i) This Plan shall not accept any direct or indirect transfers
(as that term is defined and interpreted under Code Section 401(a)(l1)
and the Regulations thereunder) from a defined benefit plan, money
purchase plan (including a target benefit plan), stock bonus or profit
sharing plan which would otherwise have provided for a life annuity form
of payment to the Participant.
(j) Notwithstanding anything herein to the contrary, a transfer
directly to this Plan from another qualified plan (or a transaction
having the effect of such a transfer) shall only be permitted if it will
not result in the elimination or reduction of any "Section 411(d)(6)
protected benefit" as described in Section 7.1.
4.10 DIRECTED INVESTMENT ACCOUNT
(a) The Administrator, in his sole discretion, may determine
that all Participants be permitted to direct the Trustee as to the
investment of all or a portion of the interest in any one or more of
their individual account balances. If such authorization is given,
Participants may, subject to a procedure established by the
Administrator and applied in a uniform nondiscriminatory manner, direct
the Trustee in writing to invest any portion of their account in
specific assets, specific funds or other investments permitted under the
Plan and the directed investment procedure. That portion of the account
of any Participant so directing will thereupon be considered a Directed
Investment Account, which shall not share in Trust Fund earnings.
(b) A separate Directed Investment Account shall be established
for each Participant who has directed an investment. Transfers between
the Participant's regular account and his Directed Investment Account
shall be charged and credited as the case may be to each account. The
Directed Investment Account shall not share in Trust Fund earnings, but
it shall be charged or credited as appropriate with the net earnings,
gains, losses and expenses as well as any appreciation or depreciation
in market value during each Plan Year attributable to such account.
ARTICLE V
VALUATIONS
5.1 VALUATION OF THE TRUST FUND
The Administrator shall direct the Trustee, as of each Anniversary Date,
and at such other date or dates deemed necessary by the Administrator, herein
called "valuation date," to determine the net worth of the assets comprising the
Trust Fund as it exists on the "valuation date." In determining such net worth,
the Trustee shall value the assets comprising the Trust Fund at their fair
market value as of the "valuation date" and shall deduct all expenses for which
the Trustee has not yet obtained reimbursement from the Employer or the Trust
Fund.
5.2 METHOD OF VALUATION
In determining the fair market value of securities held in the Trust
Fund which are listed on a registered stock exchange, the Administrator shall
direct the Trustee to value the same at the prices they were last traded on such
exchange preceding the close of business on the "valuation date." If such
securities were not traded on the "valuation date," or if the exchange on which
they are traded was not open for business on the "valuation date," then the
securities shall be valued at the prices at which they were last traded prior to
the "valuation date." Any unlisted security held in the Trust Fund shall be
valued at its bid price next preceding the close of business on the "valuation
date," which bid price shall be obtained from a registered broker or an
investment banker. In determining the fair market value of assets other than
securities for which trading or bid prices can be obtained, the Trustee may
appraise such assets itself, or in its discretion, employ one or more appraisers
for that purpose and rely on the values established by such appraiser or
appraisers.
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ARTICLE VI
DETERMINATION AND DISTRIBUTION OF BENEFITS
6.1 DETERMINATION OF BENEFITS UPON RETIREMENT
Every Participant may terminate his employment with the Employer and
retire for the purposes hereof on his Normal Retirement Date. However, a
Participant may postpone the termination of his employment with the Employer to
a later date, in which event the participation of such Participant in the Plan,
including the right to receive allocations pursuant to Section 4.4, shall
continue until his Late Retirement Date. Upon a Participant's Retirement Date or
attainment of his Normal Retirement Date without termination of employment with
the Employer, or as soon thereafter as is practicable, the Trustee shall
distribute all amounts credited to such Participant's Elective Account in
accordance with Section 6.5.
6.2 DETERMINATION OF BENEFITS UPON DEATH
(a) Upon the death of a Participant before his Retirement Date
or other termination of his employment, all amounts credited to such
Participant's Elective Account shall become fully Vested. The
Administrator shall direct the Trustee, in accordance with the
provisions of Sections 6.6 and 6.7, to distribute the value of the
deceased Participant's accounts to the Participant's Beneficiary.
(b) Upon the death of a Former Participant, the Administrator
shall direct the Trustee, in accordance with the provisions of Sections
6.6 and 6.7, to distribute any remaining Vested amounts credited to the
accounts of a deceased Former Participant to such Former Participant's
Beneficiary.
(c) Any security interest held by the Plan by reason of an
outstanding loan to the Participant or Former Participant shall be taken
into account in determining the amount of the death benefit.
(d) The Administrator may require such proper proof of death and
such evidence of the right of any person to receive payment of the value
of the account of a deceased Participant or Former Participant as the
Administrator may deem desirable. The Administrator's determination of
death and of the right of any person to receive payment shall be
conclusive.
(e) The Beneficiary of the death benefit payable pursuant to
this Section shall be the Participant's spouse. Except, however, the
Participant may designate a Beneficiary other than his spouse if:
(1) the spouse has waived the right to be the Participant's
Beneficiary, or
(2) the Participant is legally separated or has been abandoned
(within the meaning of local law) and the Participant has a
court order to such effect (and there is no "qualified domestic
relations order" as defined in Code Section 414(p) which
provides otherwise), or
(3) the Participant has no spouse, or
(4) the spouse cannot be located.
In such event, the designation of a Beneficiary shall be
made on a form satisfactory to the Administrator. A Participant may at
any time revoke his designation of a Beneficiary or change his
Beneficiary by filing written notice of such revocation or change with
the Administrator. However, the Participant's spouse must again consent
in writing to any change in Beneficiary unless the original consent
acknowledged that the spouse had the right to limit consent only to a
specific Beneficiary and that the spouse voluntarily elected to
relinquish such right. In the event no valid designation of Beneficiary
exists at the time of the Participant's death, the death benefit shall
be payable to his estate.
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(f) Any consent by the Participant's spouse to waive any rights
to the death benefit must be in writing, must acknowledge the effect of
such waiver, and be witnessed by a Plan representative or a notary
public. Further, the spouse's consent must be irrevocable and must
acknowledge the specific nonspouse Beneficiary.
6.3 DETERMINATION OF BENEFITS IN EVENT OF DISABILITY
In the event of a Participant's Total and Permanent Disability prior to
his Retirement Date or other termination of his employment, all amounts credited
to such Participant's Elective Account shall become fully Vested. In the event
of a Participant's Total and Permanent Disability, the Trustee, in accordance
with the provisions of Sections 6.5 and 6.7, shall distribute to such
Participant all amounts credited to such Participant's Elective Account as
though he had retired.
6.4 DETERMINATION OF BENEFITS UPON TERMINATION
(a) On or before the Anniversary Date coinciding with or
subsequent to the termination of a Participant's employment for any
reason other than death, Total and Permanent Disability or retirement,
the Administrator may direct the Trustee to segregate the amount of the
Vested portion of such Terminated Participant's Elective Account and
invest the aggregate amount thereof in a separate, federally insured
savings account, certificate of deposit, common or collective trust fund
of a bank or a deferred annuity. In the event the Vested portion of a
Participant's Elective Account is not segregated, the amount shall
remain in a separate account for the Terminated Participant and share in
allocations pursuant to Section 4.4 until such time as a distribution is
made to the Terminated Participant.
Distribution of the funds due to a Terminated Participant
shall be made on the occurrence of an event which would result in the
distribution had the Terminated Participant remained in the employ of
the Employer (upon the Participant's death, Total and Permanent
Disability or Normal Retirement). However, at the election of the
Participant, the Administrator shall direct the Trustee to cause the
entire Vested portion of the Terminated Participant's Elective Account
to be payable to such Terminated Participant. Any distribution under
this paragraph shall be made in a manner which is consistent with and
satisfies the provisions of Section 6.5, including, but not limited to,
all notice and consent requirements of Code Section 411(a)(11) and the
Regulations thereunder.
If the value of a Terminated Participant's Vested benefit
derived from Employer and Employee contributions does not exceed $3,500
and has never exceeded $3,500 at the time of any prior distribution, the
Administrator shall direct the Trustee to cause the entire Vested
benefit to be paid to such Participant in a single lump sum.
(b) A Participant shall become fully Vested in his Participant's
Account immediately upon entry into the Plan.
(c) The computation of a Participant's nonforfeitable percentage
of his interest in the Plan shall not be reduced as the result of any
direct or indirect amendment to this Plan. For this purpose, the Plan
shall be treated as having been amended if the Plan provides for an
automatic change in vesting due to a change in top heavy status. In the
event that the Plan is amended to change or modify any vesting schedule,
a Participant with at least three (3) Years of Service as of the
expiration date of the election period may elect to have his
nonforfeitable percentage computed under the Plan without regard to such
amendment. If a Participant fails to make such election, then such
Participant shall be subject to the new vesting schedule. The
Participant's election period shall commence on the adoption date of the
amendment and shall end 60 days after the latest of:
(1) the adoption date of the amendment,
(2) the effective date of the amendment, or
(3) the date the Participant receives written notice of the
amendment from the Employer or Administrator.
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(d)(l) If any Former Participant shall be reemployed by the
Employer before a 1-Year Break in Service occurs, he shall continue to
participate in the Plan in the same manner as if such termination had
not occurred.
(2) If a Former Participant completes one (1) Year of Service
for eligibility purposes following his reemployment with the
Employer, he shall participate in the Plan retroactively from
his date of reemployment.
(3) If a Former Participant completes a Year of Service (a 1-
Year Break in Service previously occurred, but employment had
not terminated), he shall participate in the Plan retroactively
from the first day of the Plan Year during which he completes
one (1) Year of Service.
6.5 DISTRIBUTION OF BENEFITS
(a) The Administrator, pursuant to the election of the
Participant, shall direct the Trustee to distribute to a Participant or
his Beneficiary any amount to which he is entitled under the Plan in one
lump-sum payment in cash.
(b) Any distribution to a Participant who has a benefit which
exceeds, or has ever exceeded, $3,500 at the time of any prior
distribution shall require such Participant's consent if such
distribution occurs prior to the later of his Normal Retirement Age or
age 62. With regard to this required consent:
(1) The Participant must be informed of his right to defer
receipt of the distribution. If a Participant fails to consent,
it shall be deemed an election to defer the distribution of any
benefit. However, any election to defer the receipt of benefits
shall not apply with respect to distributions which are required
under Section 6.5(c).
(2) Notice of the rights specified under this paragraph shall be
provided no less than 30 days and no more than 90 days before
the first day on which all events have occurred which entitle
the Participant to such benefit.
(3) Written consent of the Participant to the distribution must
not be made before the Participant receives the notice and must
not be made more than 90 days before the first day on which all
events have occurred which entitle the Participant to such
benefit.
(4) No consent shall be valid if a significant detriment is
imposed under the Plan on any Participant who does not consent
to the distribution.
If a distribution is one to which Code Sections 401(a)(l1) and
417 do not apply, such distribution may commence less than 30
days after the notice required under Regulation 1.411(a)-11(c)
is given, provided that: (1) the Administrator clearly informs
the Participant that the Participant has a right to a period of
at least 30 days after receiving the notice to consider the
decision of whether or not to elect a distribution (and, if
applicable, a particular distribution option), and (2) the
Participant, after receiving the notice, affirmatively elects a
distribution.
(c) Notwithstanding any provision in the Plan to the contrary,
the distribution of a Participant's benefits shall be made in accordance
with the following requirements and shall otherwise comply with Code
Section 401(a)(9) and the Regulations thereunder (including Regulation
1.401(a)(9)-2), the provisions of which are incorporated herein by
reference:
(1) A Participant's benefits shall be distributed to him not
later than April 1st of the calendar year following the later of
(i) the calendar year in which the Participant attains age 70
1/2 or (ii) the calendar year in which the Participant retires,
provided, however, that this clause (ii) shall not apply in the
case of a Participant who is a "five (5) percent owner', at any
time during the five (5) Plan Year period ending in the calendar
year in which he attains age 70 1/2 or, in the case of a
Participant who becomes a "five (5) percent owner" during any
subsequent Plan Year, clause (ii) shall no longer apply and the
required beginning date shall be the April 1st of the calendar
year following the calendar year in which such subsequent Plan
Year ends.
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Notwithstanding the foregoing, clause (ii) above shall not apply
to any Participant unless the Participant had attained age 70
1/2 before January 1, 1988 and was not a "five (5) percent
owner" at any time during the Plan Year ending with or within
the calendar year in which the Participant attained age 66 1/2
or any subsequent Plan Year.
(2) Distributions to a Participant and his Beneficiaries shall
only be made in accordance with the incidental death benefit
requirements of Code Section 401(a)(9)(G) and the Regulations
thereunder.
(d) All annuity Contracts under this Plan shall be non-
transferable when distributed. Furthermore, the terms of any annuity
Contract purchased and distributed to a Participant or spouse shall
comply with all of the requirements of the Plan.
6.6 DISTRIBUTION OF BENEFITS UPON DEATH
(a) The death benefit payable pursuant to Section 6.2 shall be
paid to the Participant's Beneficiary in one lump-sum payment in cash
subject to the rules of Section 6.6(b).
(b) Notwithstanding any provision in the Plan to the contrary,
distributions upon the death of a Participant shall be made in
accordance with the following requirements and shall otherwise comply
with Code Section 401(a)(9) and the Regulations thereunder. If it is
determined pursuant to Regulations that the distribution of a
Participant's interest has begun and the Participant dies before his
entire interest has been distributed to him, the remaining portion of
such interest shall be distributed at least as rapidly as under the
method of distribution selected pursuant to Section 6.5 as of his date
of death. If a Participant dies before he has begun to receive any
distributions of his interest under the Plan or before distributions are
deemed to have begun pursuant to Regulations, then his death benefit
shall be distributed to his Beneficiaries by December 31st of the
calendar year in which the fifth anniversary of his date of death
occurs.
6.7 TIME OF SEGREGATION OR DISTRIBUTION
Except as limited by Sections 6.5 and 6.6, whenever the Trustee is to
make a distribution on or as of an Anniversary Date, the distribution may be
made on such date or as soon thereafter as is practicable. However, unless a
Former Participant elects in writing to defer the receipt of benefits (such
election may not result in a death benefit that is more than incidental), the
payment of benefits shall occur not later than the 60th day after the close of
the Plan Year in which the latest of the following events occurs: (a) the date
on which the Participant attains the earlier of age 65 or the Normal Retirement
Age specified herein; (b) the 10th anniversary of the year in which the
Participant commenced participation in the Plan; or (c) the date the Participant
terminates his service with the Employer.
6.8 DISTRIBUTION FOR MINOR BENEFICIARY
In the event a distribution is to be made to a minor, then the
Administrator may direct that such distribution be paid to the legal guardian,
or if none, to a parent of such Beneficiary or a responsible adult with whom the
Beneficiary maintains his residence, or to the custodian for such Beneficiary
under the Uniform Gift to Minors Act or Gift to Minors Act, if such is permitted
by the laws of the state in which said Beneficiary resides. Such a payment to
the legal guardian, custodian or parent of a minor Beneficiary shall fully
discharge the Trustee, Employer, and Plan from further liability on account
thereof.
6.9 LOCATION OF PARTICIPANT OR BENEFICIARY UNKNOWN
In the event that all, or any portion, of the distribution payable to a
Participant or his Beneficiary hereunder shall, at the later of the
Participant's attainment of age 62 or his Normal Retirement Age, remain unpaid
solely by reason of the inability of the Administrator, after sending a
registered letter, return receipt requested, to the last known address, and
after further diligent effort, to ascertain the whereabouts of such Participant
or his Beneficiary, the amount so distributable shall be treated as a Forfeiture
pursuant to the Plan. In the event a Participant or Beneficiary is located
subsequent to his benefit being reallocated, such benefit shall be restored.
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6.10 QUALIFIED DOMESTIC RELATIONS ORDER DISTRIBUTION
All rights and benefits, including elections, provided to a Participant
in this Plan shall be subject to the rights afforded to any "alternate payee"
under a "qualified domestic relations order." Furthermore, a distribution to an
"alternate payee" shall be permitted if such distribution is authorized by a
"qualified domestic relations order," even if the affected Participant has not
separated from service and has not reached the "earliest retirement age" under
the Plan. For the purposes of this Section, "alternate payee," "qualified
domestic relations order" and "earliest retirement age" shall have the meaning
set forth under Code Section 414(p).
6.11 DIRECT ROLLOVER
(a) Notwithstanding any provision of the Plan to the contrary
that would otherwise limit a distributee's election under this Section,
a distributee may elect, at the time and in the manner prescribed by the
Plan Administrator, to have any portion of an eligible rollover
distribution paid directly to an eligible retirement plan specified by
the distributee in a direct rollover.
(b) For purposes of this Section the following definitions shall
apply:
(1) An eligible rollover distribution is any distribution of all
or any portion of the balance to the credit of the distributee,
except that an eligible rollover distribution does not include:
any distribution that is one of a series of substantially equal
periodic payments (not less frequently than annually) made for
the life (or life expectancy) of the distributee or the joint
lives (or joint life expectancies) of the distributee and the
distributee's designated beneficiary, or for a specified period
often years or more; any distribution to the extent such
distribution is required under Code Section 401(a)(9); and the
portion of any distribution that is not includible in gross
income (determined without regard to the exclusion for net
unrealized appreciation with respect to employer securities).
(2) An eligible retirement plan is an individual retirement
account described in Code Section 408(a), an individual
retirement annuity described in Code Section 408(b), an annuity
plan described in Code Section 403(a), or a qualified trust
described in Code Section 401(a), that accepts the distributee's
eligible rollover distribution. However, in the case of an
eligible rollover distribution to the surviving spouse, an
eligible retirement plan is an individual retirement account or
individual retirement annuity.
(3) A distributee includes an Employee or former Employee. In
addition, the Employee's or former Employee's surviving spouse
and the Employee's or former Employee's spouse or former spouse
who is the alternate payee under a qualified domestic relations
order, as defined in Code Section 414(p), are distributees with
regard to the interest of the spouse or former spouse.
(4) A direct rollover is a payment by the plan to the eligible
retirement plan specified by the distributee.
ARTICLE VII
AMENDMENT, TERMINATION, MERGERS AND LOANS
7.1 AMENDMENT
(a) The Employer shall have the right at any time to amend the
Plan, subject to the limitations of this Section. Any such amendment
shall be adopted by formal action of the Employer's board of directors
and executed by an officer authorized to act on behalf of the Employer.
However, any amendment which affects the rights, duties or
responsibilities of the Trustee and Administrator may only be made with
the Trustee's and Administrator's written consent. Any such amendment
shall become effective as provided therein upon its execution. The
Trustee shall not be required to execute any such amendment unless the
Trust provisions contained herein are a part of the Plan and the
amendment affects the duties of the Trustee hereunder.
(b) No amendment to the Plan shall be effective if it authorizes
or permits any part of the Trust Fund (other than such part as is
required to pay taxes and administration expenses) to be used for or
33
<PAGE>
diverted to any purpose other than for the exclusive benefit of the
Participants or their Beneficiaries or estates; or causes any reduction
in the amount credited to the account of any Participant; or causes or
permits any portion of the Trust Fund to revert to or become property of
the Employer.
(c) Except as permitted by Regulations, no Plan amendment or
transaction having the effect of a Plan amendment (such as a merger,
plan transfer or similar transaction) shall be effective to the extent
it eliminates or reduces any "Section 411(d)(6) protected benefit" or
adds or modifies conditions relating to "Section 411(d)(6) protected
benefits" the result of which is a further restriction on such benefit
unless such protected benefits are preserved with respect to benefits
accrued as of the later of the adoption date or effective date of the
amendment. "Section 41l(d)(6) protected benefits" are benefits described
in Code Section 411 (d)(6)(A), early retirement benefits and retirement-
type subsidies, and optional forms of benefit
7.2 TERMINATION
(a) The Employer shall have the right at any time to terminate
the Plan by delivering to the Trustee and Administrator written notice
of such termination. Upon any full or partial termination, all amounts
credited to the affected Participants' Elective Accounts shall become
100% Vested as provided in Section 6.4 and shall not thereafter be
subject to forfeiture, and all unallocated amounts shall be allocated to
the accounts of all Participants in accordance with the provisions
hereof.
(b) Upon the full termination of the Plan, the Employer shall
direct the distribution of the assets of the Trust Fund to Participants
in a manner which is consistent with and satisfies the provisions of
Section 6.5. Distributions to a Participant shall be made in cash or
through the purchase of irrevocable nontransferable deferred commitments
from an insurer. Except as permitted by Regulations, the termination of
the Plan shall not result in the reduction of "Section 411(d)(6)
protected benefits" in accordance with Section 7.1(c).
7.3 MERGER OR CONSOLIDATION
This Plan may be merged or consolidated with, or its assets and/or
liabilities may be transferred to any other plan and trust only if the benefits
which would be received by a Participant of this Plan, in the event of a
termination of the plan immediately after such transfer, merger or
consolidation, are at least equal to the benefits the Participant would have
received if the Plan had terminated immediately before the transfer, merger or
consoildation, and such transfer, merger or consolidation does not otherwise
result in the elimination or reduction of any "Section 411(d)(6) protected
benefits" in accordance with Section 7.1(c).
7.4 LOANS TO PARTICIPANTS
(a) The Administrator may make loans to Participants and
Beneficiaries under the following circumstances: (1) loans shall be made
available to all Participants and Beneficiaries on a reasonably
equivalent basis; (2) loans shall not be made available to Highly
Compensated Employees in an amount greater than the amount made
available to other Participants and Beneficiaries; (3) loans shall bear
a reasonable rate of interest; (4) loans shall be adequately secured;
and (5) shall provide for repayment over a reasonable period of time.
(b) Loans made pursuant to this Section (when added to the
outstanding balance of all other loans made by the Plan to the
Participant) shall be limited to the lesser of:
(1) $50,000 reduced by the excess (if any) of the highest
outstanding balance of loans from the Plan to the Participant
during the one year period ending on the day before the date on
which such loan is made, over the outstanding balance of loans
from the Plan to the Participant on the date on which such loan
was made, or
(2) one-half (1/2) of the present value of the non-forfeitable
accrued benefit of the Participant under the Plan.
(c) Loans shall provide for level amortization with payments to
be made not less frequently than quarterly over a period not to exceed
five (5) years. However, loans used to acquire any dwelling unit which,
within a reasonable time, is to be used (determined at the time the loan
is made) as
34
<PAGE>
a principal residence of the Participant shall provide for periodic
repayment over a reasonable period of time that may exceed five (5)
years.
(d) Any loans granted or renewed shall be made pursuant to a
Participant loan program. Such loan program shall be established in
writing and must include, but need not be limited to, the following:
(1) the identity of the person or positions authorized to
administer the Participant loan program;
(2) a procedure for applying for loans;
(3) the basis on which loans will be approved or denied;
(4) limitations, if any, on the types and amounts of loans
offered;
(5) the procedure under the program for determining a reasonable
rate of interest;
(6) the types of collateral which may secure a Participant loan;
and
(7) the events constituting default and the steps that will be
taken to preserve Plan assets.
Such Participant loan program shall be contained in a
separate written document which, when properly executed, is hereby
incorporated by reference and made a part of the Plan. Furthermore, such
Participant loan program may be modified or amended in writing from time
to time without the necessity of amending this Section.
ARTICLE VIII
MISCELLANEOUS
8.1 PARTICIPANT'S RIGHTS
This Plan shall not be deemed to constitute a contract between the
Employer and any Participant or to be a consideration or an inducement for the
employment of any Participant or Employee. Nothing contained in this Plan shall
be deemed to give any Participant or Employee the right to be retained in the
service of the Employer or to interfere with the right of the Employer to
discharge any Participant or Employee at any time regardless of the effect which
such discharge shall have upon him as a Participant of this Plan.
8.2 ALIENATION
(a) Subject to the exceptions provided below, no benefit which
shall be payable out of the Trust Fund to any person (including a
Participant or his Beneficiary) shall be subject in any manner to
anticipation, alienation, sale, transfer, assignment, pledge,
encumbrance, or charge, and any attempt to anticipate, alienate, sell,
transfer, assign, pledge, encumber, or change the same shall be void;
and no such benefit shall in any manner be liable for, or subject to,
the debts, contracts, liabilities, engagements, or torts of any such
person, nor shall it be subject to attachment or legal process for or
against such person, and the same shall not be recognized by the
Trustee, except to such extent as may be required by law.
(b) This provision shall not apply to the extent a Participant
or Beneficiary is indebted to the Plan, as a result of a loan from the
Plan. At the time a distribution is to be made to or for a Participant's
or Beneficiary's benefit, such proportion of the amount distributed as
shall equal such loan indebtedness shall be paid by the Trustee to the
Trustee or the Administrator, at the direction of the Administrator, to
apply against or discharge such loan indebtedness. Prior to making a
payment, however, the Participant or Beneficiary must be given written
notice by the Administrator that such loan indebtedness is to be so paid
in whole or part from his Participant's Elective Account. If the
Participant or Beneficiary does not agree that the loan indebtedness is
a valid claim against his Vested Participant's Elective Account, he
shall be entitled to a review of the validity of the claim in accordance
with procedures provided in Sections 2.12 and 2.13.
35
<PAGE>
(c) This provision shall not apply to a "qualified domestic
relations order" defined in Code Section 414(p), and those other
domestic relations orders permitted to be so treated by the
Administrator under the provisions of the Retirement Equity Act of 1984.
The Administrator shall establish a written procedure to determine the
qualified status of domestic relations orders and to administer
distributions under such qualified orders. Further, to the extent
provided under a "qualified domestic relations order," a former spouse
of a Participant shall be treated as the spouse or surviving spouse for
all purposes under the Plan.
8.3 CONSTRUCTION OF PLAN
This Plan shall be construed and enforced according to the Act and the
laws of the State California, other than its laws respecting choice of law, to
the extent not preempted by the Act.
8.4 GENDER AND NUMBER
Wherever any words are used herein in the masculine, feminine or neuter
gender, they shall be construed as though they were also used in another gender
in all cases where they would so apply, and whenever any words are used herein
in the singular or plural form, they shall be construed as though they were also
used in the other form in all cases where they would so apply.
8.5 LEGAL ACTION
In the event any claim, suit, or proceeding is brought regarding the
Trust and/or Plan established hereunder to which the Trustee or the
Administrator may be a party, and such claim, suit, or proceeding is resolved in
favor of the Trustee or Administrator, they shall be entitled to be reimbursed
from the Trust Fund for any and all costs, attorney's fees, and other expenses
pertaining thereto incurred by them for which they shall have become liable.
8.6 PROHIBITION AGAINST DIVERSION OF FUNDS
(a) Except as provided below and otherwise specifically
permitted by law, it shall be impossible by operation of the Plan or of
the Trust, by termination of either, by power of revocation or
amendment, by the happening of any contingency, by collateral
arrangement or by any other means, for any pert of the corpus or income
of any trust fund maintained pursuant to the Plan or any funds
contributed thereto to be used for, or diverted to, purposes other than
the exclusive benefit of Participants, Retired Participants, or their
Beneficiaries.
(b) In the event the Employer shall make an excessive
contribution under a mistake of fact pursuant to Act Section
403(c)(2)(A), the Employer may demand repayment of such excessive
contribution at any time within one (1) year following the time of
payment and the Trustees shall return such amount to the Employer within
the one (1) year period. Earnings of the Plan attributable to the excess
contributions may not be returned to the Employer but any losses
attributable thereto must reduce the amount so returned.
8.7 BONDING
Every Fiduciary, except a bank or an insurance company, unless exempted
by the Act and regulations thereunder, shall be bonded in an amount not less
than 10% of the amount of the funds such Fiduciary handles; provided, however,
that the minimum bond shall be $1,000 and the maximum bond, $500,000. The amount
of funds handled shall be determined at the beginning of each Plan Year by the
amount of funds handled by such person, group, or class to be covered and their
predecessors, if any, during the preceding Plan Year, or if there is no
preceding Plan Year, then by the amount of the funds to be handled during the
then current year. The bond shall provide protection to the Plan against any
loss by reason of acts of fraud or dishonesty by the Fiduciary alone or in
connivance with others. The surety shall be a corporate surety company (as such
term is used in Act Section 41 2(a)(2)), and the bond shall be in a form
approved by the Secretary of Labor. Notwithstanding anything in the Plan to the
contrary, the cost of such bonds shall be an expense of and may, at the election
of the Administrator, be paid from the Trust Fund or by the Employer.
36
<PAGE>
8.8 EMPLOYER'S AND TRUSTEE'S PROTECTIVE CLAUSE
Neither the Employer nor the Trustee, nor their successors, shall be
responsible for the validity of any Contract issued hereunder or for the failure
on the part of the insurer to make payments provided by any such Contract, or
for the action of any person which may delay payment or render a Contract null
and void or unenforceable in whole or in part.
8.9 INSURER'S PROTECTIVE CLAUSE
Any insurer who shall issue Contracts hereunder shall not have any
responsibility for the validity of this Plan or for the tax or legal aspects of
this Plan. The insurer shall be protected and held harmless in acting in
accordance with any written direction of the Trustee, and shall have no duty to
see to the application of any funds paid to the Trustee, nor be required to
question any actions directed by the Trustee. Regardless of any provision of
this Plan, the insurer shall not be required to take or permit any action or
allow any benefit or privilege contrary to the terms of any Contract which it
issues hereunder, or the rules of the insurer.
8.10 RECEIPT AND RELEASE FOR PAYMENTS
Any payment to any Participant, his legal representative, Beneficiary,
or to any guardian or committee appointed for such Participant or Beneficiary in
accordance with the provisions of the Plan, shall, to the extent thereof, be in
full satisfaction of all claims hereunder against the Trustee and the Employer,
either of whom may require such Participant, legal representative, Beneficiary,
guardian or committee, as a condition precedent to such payment, to execute a
receipt and release thereof in such form as shall be determined by the Trustee
or Employer.
8.11 ACTION BY THE EMPLOYER
Whenever the Employer under the terms of the Plan is permitted or
required to do or perform any act or matter or thing, it shall be done and
performed by a person duly authorized by its legally constituted authority.
8.12 NAMED FIDUCIARIES AND ALLOCATION OF RESPONSIBILITY
The "named Fiduciaries" of this Plan are (1) the Employer, (2) the
Administrator and (3) the Trustee. The named Fiduciaries shall have only those
specific powers, duties, responsibilities, and obligations as are specifically
given them under the Plan. In general, the Employer shall have the sole
responsibility for making the contributions provided for under Section 4.1; and
shall have the sole authority to appoint and remove the Trustee and the
Administrator; to formulate the Plan's "funding policy and method"; and to amend
or terminate, in whole or in part, the Plan. The Administrator shall have the
sole responsibility for the administration of the Plan, which responsibility is
specifically described in the Plan. The Trustee shall have the sole
responsibility of management of the assets held under the Trust, except those
assets, the management of which has been assigned to an Investment Manager, who
shall be solely responsible for the management of the assets assigned to it, all
as specifically provided in the Plan. Each named Fiduciary warrants that any
directions given, information furnished, or action taken by it shall be in
accordance with the provisions of the Plan, authorizing or providing for such
direction, information or action. Furthermore, each named Fiduciary may rely
upon any such direction, information or action of another named Fiduciary as
being proper under the Plan, and is not required under the Plan to inquire into
the propriety of any such direction, information or action. It is intended under
the Plan that each named Fiduciary shall be responsible for the proper exercise
of its own powers, duties, responsibilities and obligations under the Plan. No
named Fiduciary shall guarantee the Trust Fund in any manner against investment
loss or depreciation in asset value. Any person or group may serve in more than
one Fiduciary capacity. In the furtherance of their responsibilities hereunder,
the "named Fiduciaries" shall be empowered to interpret the Plan and Trust and
to resolve ambiguities, inconsistencies and omissions, which findings shall be
binding, final and conclusive.
8.13 HEADINGS
The headings and subheadings of this Plan have been inserted for
convenience of reference and are to be ignored in any construction of the
provisions hereof.
8.14 APPROVAL BY INTERNAL REVENUE SERVICE
(a) Notwithstanding anything herein to the contrary,
contributions to this Plan are conditioned upon the initial
qualification of the Plan under Code Section 401. If the Plan receives
an adverse determination with respect to its initial qualification, then
the Plan may return such contributions to the Employer within one year
after such determination, provided the application for the determination
37
<PAGE>
is made by the time prescribed by law for filing the Employer's return
for the taxable year in which the Plan was adopted, or such later date
as the Secretary of the Treasury may prescribe.
(b) Notwithstanding any provisions to the contrary, except
Sections 3.6,3.7, and 4.1(e), any contribution by the Employer to the
Trust Fund is conditioned upon the deductibility of the contribution by
the Employer under the Code and, to the extent any such deduction is
disallowed, the Employer may, within one (1) year following the
disallowance of the deduction, demand repayment of such disallowed
contribution and the Trustee shall return such contribution within one
(1) year following the disallowance. Earnings of the Plan attributable
to the excess contribution may not be returned to the Employer, but any
losses attributable thereto must reduce the amount so returned.
8.15 UNIFORMITY
All provisions of this Plan shall be interpreted and applied in a
uniform, nondiscriminatory manner. In the event of any conflict between the
terms of this Plan and any Contract purchased hereunder, the Plan provisions
shall control.
38
<PAGE>
IN WITNESS WHEREOF, this Plan has been executed the day and year first above
written.
Trade*Plus, Inc.
By ______________________________________________
EMPLOYER
E*TRADE Securities, Inc.
By ______________________________________________
EMPLOYER
ET*Execution Services, Inc.
By ______________________________________________
EMPLOYER
39
<PAGE>
EXHIBIT 10.10
TRADE*PLUS/E*TRADE EMPLOYEE BONUS PLAN
Effective October 1, 1994
Purpose of Plan. This Employee Bonus Plan has been adopted to provide a program
- ---------------
for rewarding Trade*Plus and E*TRADE "Company" employees for the Company's
success. The Northport office and staff, and any union member employees, are
specifically excluded from this plan. The plan is designed to provide incentive
for employees to promote the Company with customers, to improve the Company's
financial operating results, and to remain employed with the Company.
Participants in the Plan. All regular employees (except those of the Northport
- ------------------------
office and any union member) of Trade*Plus and E*TRADE become eligible to
participate in the plan after six months employment with the Company.
EXAMPLE: If an employee joins the Company February 15th, then he/she becomes
eligible to be a participant in the plan on August 15th, and his/her gross
earnings during the remaining month and one half of the fiscal quarter, is used
as his/her earnings basis for Company's fourth fiscal quarter of July, August, &
September.
Each eligible employee is a participant in either Group A, B, C, D or E. The
employee must acknowledge understanding and receipt of the plan by signing
his/her letter of eligibility.
Company Contribution to the Plan. The Company's fiscal quarters end December 31,
- --------------------------------
March 31, June 30, and September 30. Thirty days after the end of each fiscal
quarter the Company will pay twenty percent of all Operating Profit in excess of
the first ten percent of Gross Revenues to the Company's bonus plan. Operating
Profit is defined here as the Company's consolidated profit before any capital
costs or profits, and before all Local, State and Federal taxes.
EXAMPLE: If the Company's quarterly Gross Revenues for March 31 was $1,000,000,
and if the Operating Profit before the bonus payment was $150,000, the Company's
quarterly bonus payment would be $10,000. This $10,000 is 20 percent of the
Operating Profit ($50,000) which remains after deducting the first 10 percent
($100,000) of Gross Revenues.
Employee Bonus. Each participating employee will be allocated a pro-rated
- --------------
percentage of the Company's quarterly bonus payment based upon the Company's
total salary base, upon his/her. gross earnings including overtime for the
quarter, and upon his/her Group designation.
Bonus Payment. Each participating employee will be paid one half of his/her
- -------------
current quarterly bonus, less payroll taxes, at the end of the month following
the Company's fiscal quarter. The remaining half of the bonus will be placed in
a funded Bonus Pool for future payment to the employee as described below.
Bonus Pool Payment. Each participating employee will vest, and will therefore be
- ------------------
paid, one-third of his/her current quarter's Bonus Pool annually over the
succeeding three year time period.
EXAMPLE: Assume that an employee's total bonus was $300 for the quarter ending
December 31, 1994. On January 31, 1995 the employee would be paid $150, less
payroll taxes, and $150 would be deposited in the Bonus Pool for the employee.
One year later. on January 31, 1996, based upon the December 31, 1994 quarter,
he/she will be paid $50, plus Bonus Pool Earnings on the $50 over the year, less
payroll taxes.
<PAGE>
Similar $50 payments, plus Bonus Pool Earnings, less payroll
taxes, for the December 31, 1994 quarter will be made on January 31, 1997, and
on January 31, 1998 thereby completing payment for the December 31, 1994 fiscal
quarter.
The results are cumulative. Thus, taking the above example, if the employee's
bonus remained the same every quarter, and if there were no Bonus Pool Earnings
or payroll taxes, then on January 31, 1998 the employee will be paid a total of
$300 representing the current bonus, plus the vested bonus carryover from the
preceding three years. In addition, this employee will have a non-vested
accumulation of $1,200 continuing to earn interest in the Bonus Pool, all to be
paid out in the future.
Bonus Pool Administration. Funds in the Bonus Pool will be administered by a
- -------------------------
Committee of the Company's Board of Directors. The Committee has selected a
Registered Investment Advisor to invest the funds for the benefit of the
employee participants.
Termination. If a participating employee leaves the Company's employment for any
- -----------
reason other than disability, death or retirement, or if the employee is
discharged for cause, then his/her non-vested accumulation in the Bonus Pool
remains in the pool as additional earnings for the remaining participants. In
this event, he/she will not be a participant for the current quarter in which
the employee terminates employment.
If a participating employee leaves the Company's employment for disability,
death or retirement, or if the employee is laid off by the Company for any
reason other than discharge for cause, then his/her non-vested accumulation in
the Bonus Pool will be paid in cash to the employee, plus earnings and less
payroll taxes, at the end of the month following the end of the fiscal quarter
in which the employee leaves the Company's employment. In this event, his/her
gross pay during that quarter will be included in the quarter's bonus
calculation.
Amendment The Company reserves the right to change or to discontinue this Bonus
- ---------
Plan at any time without warning. Any such change will not affect vested funds
already in the Bonus Pool, and such remaining funds will be managed and
distributed as described herein.
___________________________________
Wayne H. Heldt, President
___________________________________
William A. Porter, Chairman & CEO
<PAGE>
EXHIBIT 10.14
CLEARING AGREEMENT
------------------
This Agreement is to confirm the mutual understanding of
E*TRADE SECURITIES, INC. ("CORRESPONDENT")
480 California Ave.
Palo Alto, CA 94306
and
HERZOG, HEINE, GEDULD, INC. ("HERZOG")
26 Broadway
New York, NY 10004
and the respective rights and obligations of Correspondent and Herzog to each
other and to Correspondent's Customers.
From the date on which this Agreement becomes effective as
provided in Section 14(a) until termination of this Agreement as provided in
Section 14 and subject to all the terms and provisions of this Agreement, Herzog
will clear transactions on a fully disclosed basis for accounts which are
introduced by Correspondent and accepted by Herzog as provided in Section 2(c),
(all such accounts being referred to hereinafter as "Accounts"; Accounts carried
for customers of Correspondent ("Customers") are referred to herein as "Customer
Accounts." and Accounts carried for Correspondent in its proprietary capacity
are herein referred to as "Correspondent Accounts") and Herzog will perform such
other services as are provided for herein.
Herzog and Correspondent acknowledge familiarity with Rule 382 of
the Rules of the New York Stock Exchange, Inc. (the "NYSE"), including the
provision thereof which requires that this Agreement be submitted to and
approved by the NYSE prior to its becoming effective. Herzog and Correspondent
recognize their obligation to identify and allocate between them certain
functions or responsibilities pursuant to Rule 382(b) and agree further that
this Agreement is, among other things. intended to effect such allocation.
<PAGE>
1. REPRESENTATIONS AND WARRANTIES
------------------------------
Correspondent represents and warrants to Herzog that
(a) Correspondent is a Corporation.
(b) Correspondent is registered as a broker-dealer with the Securities
and Exchange Commission ("SEC"), is a member corporation in good
standing of the National Association of Securities Dealers, Inc.
("NASD"), and in compliance with the rules and regulations of those
national securities exchanges of which it is a member.
(c) Correspondent has fulfilled all registration and other
requirements of all states and the District of Columbia, to the extent
such registration or other requirements are applicable to
Correspondent.
(d) Correspondent has advised Herzog of any arrangements that have
been made or are expected to be made with any other firm for the
provision by such other firm of clearing services for any Customer
Accounts or Correspondent Accounts. Any expansion or change in the
types of Correspondent's business or business mix whether or not
cleared or otherwise serviced by Herzog, including but not limited to
making markets in any over-the-counter securities and large
transactions in government and municipal securities, shall be subject
to mutually acceptable terms and the prior written approval of Herzog.
Correspondent will not introduce Customers or securities transactions
or accounts of any other broker-dealer, bank or other entity without
the prior written approval of Herzog.
(e) Correspondent shall maintain throughout the term of this agreement
fidelity insurance coverage of at least $250,000. Correspondent shall
deliver to Herzog a copy of its policy or bond of fidelity insurance,
all endorsements thereto, and all changes to such policy or
endorsements thereto as they are made. Notwithstanding the foregoing,
Herzog reserves the right to require that Correspondent maintain
additional fidelity insurance coverage according to the reasonable
determination of Herzog. The policy or bond shall provide for the
insurer to notify Herzog in writing at least 15 days in advance of any
changes or the cancellation of the policy.
(f) There is no action, suit, investigation, inquiry or proceeding
(formal or informal) pending or threatened against or affecting
Correspondent, any of its affiliates or any officer, director or
general securities principal, Registered Representative or financial
and operations principal of Correspondent or such affiliates, or their
respective properties or assets, by or before any court or other
tribunal, any arbitrator, any governmental agency, instrumentality or
authority or any self-regulatory or clearing organization of which any
of them is a member or a member organization of which Herzog has not
been informed and copies of relevant documents have not been provided.
(g) Correspondent is now in compliance with each of the Requirements
set forth on Exhibit "A" hereto and Correspondent shall comply with
each of such Requirements as in effect from time to time so long as
this Agreement is in effect.
2
<PAGE>
Herzog represents and warrants to Correspondent that:
(i) Herzog is a corporation duly organized, validly existing and in
good standing under the laws of the state of its incorporation.
(ii) Herzog is registered as a broker-dealer with the SEC, is a member
corporation in good standing of the NASD, and is a member corporation in good
standing of each national securities exchange of which it is a member.
(iii) Herzog has fulfilled all registration and other requirements of
all states, the District of Columbia and Puerto Rico, to the extent such
registration or other requirements are applicable to Herzog.
2. CUSTOMER AND CORRESPONDENT ACCOUNTS
-----------------------------------
Responsibility for compliance with the provisions of NYSE rules
382(b)(1) and 405 and 721 shall be allocated between Herzog and Correspondent as
set forth in this Section
2.
(a) ACCOUNTS DOCUMENTATION
----------------------
Herzog will provide to Correspondent all forms for account
information or for instruction with regard to accounts. With the prior written
approval of Herzog, Correspondent may use new account forms which it has
designed and printed at its own expense. Correspondent will be responsible for
obtaining and verifying all information required to be entered on such forms and
for returning the completed forms to Herzog. Such information is necessary for
Herzog's maintenance of its accounting systems and books and records and must be
submitted on the provided or approved forms for utilization in Herzog's computer
programs. Correspondent will notify Herzog promptly of any changes in such
Customer information or instructions previously provided to Herzog. Herzog will
not be responsible for the accuracy of such documentation or for reviewing or
approving information provided by Correspondent.
(b) KNOWLEDGE OF CUSTOMER'S FINANCIAL
RESOURCES AND INVESTMENT OBJECTIVES
-----------------------------------
Correspondent will be responsible for learning and documenting
all the facts relative to every Customer necessary to ensure compliance by
Correspondent with applicable rules and regulations, including the information
and instructions submitted to Herzog pursuant to Section 2(a) hereof, any
additional facts relative to the Customer's financial resources and investment
objectives, and to the nature of every Customer Account, every order and every
person holding power of attorney or :trading authority over any Customer
Account. Customers shall be the beneficial owners of Customers Accounts
introduced to Herzog by Correspondent.
3
<PAGE>
(c) ACCEPTANCE OF ACCOUNTS
----------------------
Each Customer and Correspondent Account opened with Herzog shall
be subject to Herzog's acceptance; provided, however, that in connection with
the acceptance of any Customer or Customer Account Herzog may rely solely on
Correspondent's performance of Correspondent's obligations as set forth in this
Agreement and on the information provided in the accounts documentation
submitted to Herzog through Correspondent. Herzog reserves the right, for any
reason, at any time, to refuse or to cease carrying any Customer, Customer
Account, or Correspondent Account or to refuse to clear any transaction for any
such account. Correspondent shall not submit forms for account information with
respect to any Customer Account unless Correspondent has in its possession the
documentation required to be submitted pursuant to Section 2(b). Herzog shall be
under no obligation to clear any Accounts as to which any documentation required
to be submitted to Herzog or maintained by Correspondent pursuant to this
Section or Section 2(a) or 2(b) is incomplete. No action taken by Herzog or any
of its employees, including, without being limited to, clearing trades in any
Account, shall be deemed to be or shall constitute acceptance of such Account
for all purposes.
Herzog may in its discretion utilize at Correspondent's expense a
third party service company to screen Correspondent's Customers.
(d) SUPERVISION OF ORDERS AND ACCOUNTS
----------------------------------
Correspondent will review the investment objectives of, and the
suitability of investments made by every Customer and, as between Herzog and the
Correspondent, the Correspondent will provide investment advice to the Customer,
if any is provided. Correspondent shall be responsible for ensuring that all
transactions in and activities relating to all Accounts opened by it with
Herzog, including discretionary Accounts, will be in compliance with all
applicable laws, rules and regulations of the United States, the several states,
governmental agencies, securities exchanges, the NASD, and self-regulatory
organizations, including any laws relating to Correspondent's fiduciary
responsibilities to Customers, either under the Employee Retirement Income
Security Act of 1974 or otherwise, and in this connection, Correspondent shall
diligently supervise the activities of its officers, employees and
representatives with respect to such Accounts. Herzog will perform the clearing
services provided for in this Agreement for Accounts accepted by it in
accordance with the terms of this Agreement, as it may be amended from time to
time. With respect to all orders given by Correspondent to Herzog for execution,
Correspondent shall be responsible for informing Herzog whether the sale of
securities is "long" or "short" so that Herzog may comply with the provisions of
NYSE Rule 440B and other applicable short sale rules.
(e) ACCOUNTS OF EMPLOYEES OF MEMBER
ORGANIZATIONS, SELF-REGULATORY
ORGANIZATIONS AND FINANCIAL INSTITUTIONS
----------------------------------------
In each case in which a Customer is an employee of a member
organization, a self-regulatory organization or financial institution, the
approval or knowledge of
4
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which is necessary to the opening and maintenance or such Customer's Account,
Correspondent shall be responsible for giving notice or obtaining the approval
of such employer and shall submit evidence of such to Herzog with the Account
documentation.
3. EXTENSION OF CREDIT
-------------------
Responsibility for compliance with the provisions of
Regulation T, issued by the Board of Governors of the Federal Reserve System
pursuant to the Securities Exchange Act of 1934 ("Regulation T") and all other
applicable rules, regulations and requirements of any exchange or regulatory
agency affecting the extension of credit shall be allocated between Herzog and
Correspondent as set forth in this Section 3.
(a) CUSTOMER'S AGREEMENT
--------------------
At the time of the opening of each account, Correspondent
will furnish Herzog with a Customer's Agreement executed by the Customer, or in
the case of the Correspondent's account, executed by the Correspondent, on the
form furnished to Correspondent by Herzog or such other form or agreement
acceptable to Herzog. In all events, as to any Account, Herzog must receive an
executed Customer's Agreement on or before settlement date of the first
transaction in the account. Correspondent agrees that if the executed Customer's
Agreement has not been received by Herzog by settlement date, Herzog may cancel
any and all transactions and rebook them as cash transactions and all
transaction costs associated with each such cancellation and rebooking shall be
for the account of the Correspondent. Any hypothecation of Customer securities
shall be the sole responsibility of Herzog.
(b) MARGIN AND MARGIN MAINTENANCE
-----------------------------
Correspondent is responsible to Herzog for the collection of
initial margin and maintaining at all times margin in each margin Account
sufficient to ensure compliance with Regulation T, NYSE minimums and Herzog's
house margin rules, including the collection of all amounts necessary to meet
subsequent margin calls for each Customer or Correspondent Account to ensure
compliance with Regulation T, NYSE minimums and Herzog's house margin rules.
Herzog will produce, maintain and provide each business day to Correspondent by
oral, written or electronic communication, sufficient information to allow
Correspondent to determine which Correspondent and Customer Accounts are
undermargined, for purpose of compliance with both Regulation T, NYSE minimums
and Herzog's house margin rules. Correspondent shall be responsible for making
all margin calls orally to its customers, and Herzog will confirm each such
margin call by written notice to the Customer. If any Customer or Correspondent
fails to comply with any margin requirement, Correspondent will sell out (or buy
in, as appropriate) such Account in accordance with Herzog's instructions. If
Correspondent fails to comply with any such instruction for any reason, Herzog
may arrange for the transaction to be executed for the Correspondent or Customer
Account in respect of which such instruction was given. Correspondent agrees to
execute Herzog's Customer's Agreement for its proprietary accounts. The terms of
this Agreement and Correspondent's Customer's Agreement will govern all trading
in Correspondents proprietary account(s). Any inconsistencies between this
Agreement and
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Correspondent's Customer's Agreement shall be resolved so as to affirm all
liens, security interests and rights to charge set-offs in favor of Herzog. In
all other instances the terms of this Agreement shall control.
(c) EXTENSIONS - REGULATION T
-------------------------
Any of Correspondent's officers or employees may request, to the
extent permitted by Regulation T, Rule 15c3-3(m) and (n) or NYSE margin rules,
that Herzog withhold temporarily any contemplated action to "Sell-out" or "Buy-
in" Accounts which have failed to meet a margin call or to deliver securities.
Such Requests shall be made in writing and shall clearly set forth the period of
time during which the contemplated action is to be withheld and the reason
therefore. Should Herzog comply in whole or in part with such request,
Correspondent acknowledges that it shall be wholly responsible for any loss
incurred in the relevant account and the indemnities afforded to Herzog under
this Agreement shall apply irrespective of any fault or negligence of Herzog.
(d) MARGIN REQUIREMENTS
-------------------
Initial margin and margin maintenance requirements applicable to
any margin accounts shall be in accordance with the house rules of Herzog, as
determined from time to time, rather than in accordance with any lower
requirements of any law, any exchange or any regulatory agency. Herzog may
change the margin requirements applicable to any Account or class of accounts or
specific securities or class of securities, pursuant to its house rules, on
notice to Correspondent. Correspondent shall be responsible for advising its
Customers of the changed requirements and for promptly collecting any additional
margin necessary to ensure compliance with such increased requirements.
(e) INTEREST ON MARGIN ACCOUNTS
---------------------------
Herzog will charge interest to Customer and Correspondent
Accounts in accordance with Herzog's basic interest rate schedule. Correspondent
has the right to request a lower rate (an "exception rate") for a Customer or
Correspondent Account which Herzog may grant in its sole discretion.
4. ACCEPTANCE OF ORDERS AND
EXECUTION OF TRANSACTIONS
-------------------------
(a) Except as otherwise provided herein, correspondent will place for
execution with Herzog all orders for Correspondent and Customers. Correspondent
will be responsible for the transmission to Herzog, in accordance with Herzog
procedures, of all such orders and for any errors in the recording or
transmission of such orders.
(b) Upon receipt of orders transmitted by Correspondent to Herzog, and
the acceptance thereof by Herzog, for execution, Herzog will be responsible for
the further transmission and the execution of such orders. Subject to the
provisions of the Agreement,
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<PAGE>
Herzog will be responsible for the clearance of all transactions ordered by
Correspondent for its customers to be cleared by Herzog under this Agreement,
whether on an exchange or in the over-the-counter market, in accordance with
Herzog procedures and the terms and conditions of the order as transmitted by
Correspondent. Correspondent shall notify Herzog and obtain approval prior to
the entry of any trade, whether proprietary to Correspondent or for a customer
of Correspondent, which dollar amount exceeds the limits set by Herzog's Credit
Committee from time to time.
(c) Except as otherwise provided herein, correspondent agrees that
Herzog will execute and/or clear and/or settle all transactions and orders by
Correspondent for itself or its customers involving stock, bond and option
trades in accordance with applicable laws, rules and regulations.
(d) Correspondent shall at all times comply with the position and
credit limits approved for Correspondent by Herzog's Credit Committee. No trade
of Correspondent which after giving effect thereto would exceed such limits need
be accepted by Herzog.
5. MAINTENANCE OF BOOKS AND RECORDS
--------------------------------
Herzog will maintain stock records and other records on a basis
consistent with generally accepted practices in the securities industry and will
maintain copies of such records as are produced by Herzog, in accordance with
the NASD and SEC guidelines for records retention, in effect from time to time.
Herzog and Correspondent shall each be responsible for preparing and filing
reports required of them by the regulatory agencies and self-regulatory
organizations which have jurisdiction over them. Herzog and Correspondent will
each provide the other with such information, if any, which is in the control of
one parry but is required by the other to prepare any such report.
6. RECEIPT AND DELIVERY OF FUNDS AND SECURITIES
--------------------------------------------
(a) RECEIPT AND DELIVERY IN THE
ORDINARY COURSE OF BUSINESS
---------------------------
Herzog will receive and deliver all funds and securities in
connection with transactions for Correspondent's and Customer's Accounts in
accordance with the Correspondent's instructions to Herzog, provided that
Correspondent shall be responsible for advising its Customers of their
obligations to deliver funds or securities in connection with each such
transaction, including but not limited to Regulation T. SEC Rule 15c3-3(m) and
NYSE Rule 387 and as provided for in Section 6(e). Correspondent shall be
responsible for any failure of any Customer to fulfill such obligation. Herzog
shall be responsible for the safeguarding of all funds and securities received
by Herzog and accepted by it, subject to count and verification by Herzog.
However, Herzog will not be responsible for any funds or securities delivered by
a Customer to Correspondent, its agents or employees until such funds or
securities are physically received at Herzog's premises and accepted by Herzog
or deposited in bank accounts maintained in Herzog's name.
7
<PAGE>
(b) LOST, STOLEN AND FORGED SECURITIES
----------------------------------
Correspondent will be responsible for any defect in title to
securities which may have been forged, counterfeited or raised or otherwise
altered, or may have been lost or stolen, whether or not such securities shall
have been received from Correspondent by Herzog or deposited with Herzog by
Correspondent for any Customer Account, or whether or not such securities shall
have been received by Herzog directly from, or deposited with Herzog directly
by, any such Customer for any purpose whatsoever, and which securities shall
have been accepted by Herzog.
(c) CUSTODY SERVICE
---------------
Whenever Herzog has been instructed to act as a custodian of the
securities in any Correspondent or Customer Account, Herzog may hold the
securities in the Customer's name, the name of Herzog or its nominee or in the
names of nominees of any depository used by Herzog except where such securities
are held only in "safekeeping" in accordance with instructions provided to
Herzog. Herzog will perform the services required in connection with acting as
custodian for securities in Correspondent and Customer accounts, such as (i)
collection and payment of dividends, (ii) transmittal and handling (through
Correspondent) of tenders or exchanges pursuant to tender offers and exchange
offers, (iii) transmittal of all proxy materials and other shareholder
communications if Herzog is appropriately compensated; and (iv) handling of
exercises or expirations of rights, options and warrants and of redemptions.
Herzog's obligation with respect to any of the foregoing shall be applicable
only to the extent that Herzog is in timely receipt of relevant information and
documents.
(d) RECEIPT AND DELIVERY
PURSUANT TO SPECIAL INSTRUCTION
-------------------------------
Upon instruction from Correspondent or written instructions from
a Customer, Herzog will endeavor to make such transfers of securities or
Accounts as may be requested. Whenever practicable, Herzog will not act on
Customer instructions without first notifying Correspondent. Correspondent shall
be responsible for determining if any securities held in Correspondent or
Customer Accounts are "restricted securities" or "control stock" as defined by
the rules of the SEC and that orders executed for such securities are in
compliance with applicable laws, rules and regulations
(e) COD-ORDERS
----------
Responsibilities for compliance with NYSE Rule 387 shall be
allocated as follows:
(i) If Herzog has given its consent for Correspondent to transmit
confirmations as provided for in Section 7(a) below, Correspondent shall be
responsible for
8
<PAGE>
complying with the provisions of (a)(l) through (a)(5) of NYSE Rule 387 as such
provisions may be amended from time to time.
(ii) If Herzog has not given its consent for Correspondent
to transmit confirmations, Correspondent shall be responsible for complying with
the provisions of (a)(l),(a)(2), (a)(4) and (a)(5) of NYSE Rule 387 and Herzog
shall be responsible for complying with the provisions of (a) (3) of NYSE Rule
387 as such provisions may be amended from time to time.
7. CONFIRMATIONS AND STATEMENTS
(a) PREPARATION AND TRANSMISSION
----------------------------
Herzog will prepare and send to Customers and to
Correspondent for its Accounts purchase and sale confirmations and periodic
statements of account, as required, which confirmations and statements shall
meet Herzog's requirements as to format and quality and will indicate that
Correspondent introduced the Account. Correspondent may, with the written
approval of Herzog, assume responsibility for transmitting confirmations
provided, however, that Correspondent's right to transmit confirmations shall be
subject to the provisions of NYSE Rule 409. Correspondent shall be responsible
for prospectus delivery requirements to its Customers, unless special
arrangements are made on a case by case basis with Herzog. By written notice to
Correspondent, Herzog may in its discretion revoke the authority of
Correspondent to transmit confirmations. At no time shall Herzog permit any
Correspondent to prepare or transmit periodic statements of account to
Customers. Copies of all confirmations and periodic statements sent by Herzog to
Customers will be sent to Correspondent. Herzog shall establish and
Correspondent shall faithfully follow any written procedures for safeguarding
and using confirmation forms delivered to it.
(b) EXAMINATION AND NOTIFICATION OF ERRORS
--------------------------------------
Correspondent shall examine promptly all confirmations,
periodic statements of account, monthly statements of clearing services and
other reports provided to Correspondent by Herzog. Correspondent must notify
Herzog of any error claimed by Correspondent in any Account in connection with
(i) any transaction, prior to the settlement date of such transaction, (ii)
information appearing on daily reports, within seven calendar days of
Correspondent's receipt of such report, (iii) information appearing on periodic
statements or reports, within 30 calendar days of Correspondent's receipt of any
periodic statement or report, and (iv) information appearing on monthly
statements of clearing services, within 60 calendar days of Correspondent's
receipt of the monthly Statements of clearing services. Any notice of error
shall be accompanied by such documentation as may be necessary to substantiate
Correspondent's claim. Correspondent shall provide promptly upon Herzog's
request, any additional documentation which Herzog reasonably believes is
necessary or desirable to establish and correct any such error. Correspondent
acknowledges and agrees that if Correspondent does not notify Herzog of any
claimed error within the time periods set forth in this Section 7(b),
Correspondent
9
<PAGE>
shall be deemed to have waived its right to make such a claim against Herzog by
reason of such error.
8. OTHER FUNCTIONS AND RESPONSIBILITIES
------------------------------------
(a) Herzog will perform such other services, upon such terms
and at such prices, as Herzog and Correspondent may from time to time agree.
Correspondent acknowledges that Herzog is not obliged to accept for execution
any order placed directly by a Customer.
(b) Herzog may in its discretion use third party service companies
to perform selected services. Herzog is not responsible to Correspondent or
Correspondent's Customers for the errors, omissions, systems failures,
interruptions or delays caused by such service companies or for any reasons
beyond Herzog's control. Herzog's sole responsibility is, to the extent
practicable, to instruct such service companies to correct such errors,
omissions or system failures and to deliver overdue services or work as soon as
practicable. In any event, Herzog shall not be responsible for any direct,
special, indirect or consequential damages which Correspondent or its Customers
may incur or experience as a result of any of the events described in this
Section even if it has been advised of the possibility of such damages.
9. FEES AND SETTLEMENTS FOR SECURITIES TRANSACTIONS
------------------------------------------------
(a) COMMISSIONS; FEES FOR CLEARING SERVICES
---------------------------------------
(i) Correspondent has provided Herzog with a copy of its
basic commission schedule and Herzog will charge each Customer the
commission shown on such schedule or which Correspondent otherwise
directs Herzog to charge on each transaction.
Correspondent's basic commission schedule may be amended from time to time by
written instructions to Herzog from Correspondent provided, however, that Herzog
shall be required to implement such changes only to the extent that they are
within the usual capabilities of Herzog's data processing and operations systems
and only over such reasonable time as Herzog may deem necessary or desirable to
avoid disruption to Herzog's normal operations capabilities.
(ii) Herzog will charge Correspondent for clearing services,
including but not limited to transaction charges and third parry charges,
according to the fee schedule set forth in Exhibit "B" attached hereto.
Herzog may amend or add any item in such schedule from time to time on 30
Calendar days prior written notice to Correspondent.
(iii) Herzog will charge Correspondent or the accounts of its
Customers for any fees, charges or expenses incurred in connection with
regulatory, clearing organization, exchange, self-regulatory organization, tax
or other obligations arising from or connected with clearing and servicing
Correspondent's business.
(iv) Herzog may charge Customers for services including, but not
limited to, a safekeeping fee and postage, insurance, and miscellaneous fees.
10
<PAGE>
(b) SETTLEMENTS
-----------
Herzog will receive all commissions from Customers on behalf
of Correspondent. Herzog may in its sole discretion make payments to
Correspondent from such commissions in advance of the monthly settlement
contemplated by this Section 9(b). The amount of any such advance payments shall
be determined by Herzog. As soon as practicable alter the end of each month,
Herzog will credit the Settlement Account, as defined in Section 10(a), with the
amount of commissions and other amounts collected by Herzog on Correspondent's
behalf, net of all amounts due to Herzog from Correspondent (including, but not
limited to, Customer's unsecured debit items, or unsecured or partially secured
short positions), however arising. Herzog shall not be obligated to credit the
Settlement Account for any amounts due in connection with any transaction prior
to the time that transaction has settled. If the amount due to Herzog in any
month exceeds the amount available in Correspondent's Settlement Account,
Correspondent shall, in accordance with the provisions of Section 10(a),
immediately deposit with Herzog additional cash. If Correspondent fails to make
such additional deposit, Herzog shall have the right to charge any other Account
maintained by Herzog for Correspondent or any other assets of Correspondent held
by Herzog (including the deposit required pursuant to Section 10(b) and
positions and balances in Correspondent Accounts) for the net amount due Herzog.
If Herzog elects not to charge such other Accounts or assets, or such assets are
insufficient to discharge the net amount due to Herzog for any reason, any
amount due Herzog shall be paid to Herzog by Correspondent by check written
within 10 calendar days of Correspondent's receipt of a notice or statement
showing the amount due to Herzog. If Herzog does not receive payment within such
10 calendar days, Herzog will charge Correspondent interest at the Broker's Call
Rate on such amount until paid.
The provisions of this Section do not in any way supersede or limit the
requirements of Section 10 (a). Any failure by Herzog to charge the Settlement
Account or any other Account or assets of Correspondent held by Herzog shall not
act as a waiver of Herzog's right to demand payment of, or to charge
Correspondent's Accounts for, the full amount due at any time.
10. SETTLEMENT ACCOUNT AND DEPOSIT
------------------ -----------
(a) SETTLEMENT ACCOUNT
------------------
In connection with the clearing services performed by Herzog
hereunder, Herzog will establish on Herzog's books a Settlement Account (the
"Settlement Account") through which Herzog will make payments due to
Correspondent pursuant to this Agreement. In the event that Correspondent fails
to meet any of Correspondent's obligations under this Agreement, Correspondent
authorizes Herzog to charge the Settlement Account in the amount owing to Herzog
under this Agreement with respect to such obligation. Correspondent agrees that
if there is a net debit in the Settlement Account, Correspondent will
immediately deposit with Herzog additional cash so that the Settlement Account
will at all times have a credit or zero balance.
11
<PAGE>
(b) DEPOSIT
-------
Prior to any business being processed by Herzog,
Correspondent will deposit cash, securities or other collateral with Herzog
under the following terms and conditions: Correspondent shall deliver to Herzog,
for deposit in an account maintained by Herzog, that amount of cash, securities
or other collateral, mutually agreed upon by Herzog and Correspondent at the
time of the execution of this Agreement. The amount to be deposited by
Correspondent is set forth in Exhibit "A" hereto. The Deposit Account shall not
be deemed to be margin for any of Correspondent's or Customers' accounts and
shall not in any way constitute an ownership interest in Herzog. Correspondent
shall be paid interest on uninvested cash. If at any subsequent time Herzog
requires an additional deposit due to the volume of Correspondent's business or
due to the nature of the securities involved in Customer or Correspondent
transactions (the "business mix") or for any other reason in Herzog's sole
discretion, Correspondent will deposit within 5 business days additional cash,
securities or other collateral in the amount determined by Herzog. If
Correspondent does not make such additional deposit, Correspondent shall
immediately reduce Correspondent's business volume, modify Correspondent's
business mix or take other appropriate action as specified by Herzog. Any
failure by Herzog to demand compliance with the requirement that Correspondent
either deposit additional amounts or securities, reduce Correspondent's
business, modify Correspondent's business mix or take other action shall not act
as a waiver of Herzog's right to demand compliance with such requirement at any
time.
If Correspondent fails to comply with a request by Herzog for an additional
deposit or to take other appropriate action as specified by Herzog, and thereby
elects not to reduce its business volume or to modify its business mix,
Correspondent agrees that if Herzog in its sole discretion determines it to be
necessary, Herzog shall accept only liquidating transactions for Customer or
Correspondent Accounts. If such notice is not given by Correspondent, Herzog may
give notice of such fact to Customers. If such notice is not given by
Correspondent to Customers, Correspondent agrees that Herzog may give such
notice to Customers at Correspondent's expense.
At or prior to the end of the third full calendar month following the month in
which this Agreement is terminated, Herzog will pay and deliver to Correspondent
the funds and securities in the Deposit Account, less any amounts which it is
entitled to withdraw under this paragraph; provided, however, that Herzog may
retain in the Deposit Account such amount as it deems appropriate for its
protection from any claim or proceeding of any type, then pending or threatened,
until the final determination thereof is made. If a threatened claim or
proceeding is not resolved or if a legal action or proceeding is not instituted
within one year of the termination of this Agreement, any amount retained with
respect to such threatened claim or proceeding shall be paid or delivered to
Correspondent.
11. INDEMNITY
---------
(a) Correspondent agrees to indemnify and hold harmless Herzog,
and each person who controls Herzog within the meaning of the Securities
Exchange Act of 1934, from
12
<PAGE>
and against all claims, demands, proceedings, suits and actions and all
liabilities, losses, expenses and costs (including legal fees, expenses and
costs relating to Herzog's investigation or defense of any such claims whether
or not litigation or arbitration is commenced) resulting therefrom, in
connection with or arising out of the business conducted by Correspondent, or
failure, for any reason, fraudulent or otherwise, by Correspondent or
Correspondent's employees or Customers to comply with any obligation under this
Agreement, or any other agreement executed and delivered to Herzog in connection
with Herzog's performance of services. The participation of any employee of
Herzog in any such failure or other failure by Correspondent, its employees or
Customers shall not affect Correspondent's obligations hereunder, unless such
participation by Herzog's employee(s) was fraudulent or grossly negligent.
Without limiting the generality of the foregoing, such failure is explicitly
intended by the parties to include failure resulting from (i) suspension of
trading or bankruptcy or insolvency of any company, the securities of which are
held in a Customer's or Correspondent's Account, (ii) failure by any Customer or
Correspondent to deposit or maintain adequate margin; comply with the terms of
any Customer's and Margin Agreement or Consent to Loan of securities by Herzog;
comply with Regulation T, SEC Rule 15c3-3(m); or any loss caused by any
unsecured debit or unsecured short position, or failure to comply with Section 3
hereof; provided that such loss does not arise solely from Herzog's gross
negligence in failing to give notice or take an action required of it under
Section 3(b) hereof provided further, however, that if Herzog shall have
refrained from giving a notice or taking an action upon request of an officer or
employee of Correspondent in accordance with Section 3(c) of this Agreement,
this indemnity shall apply irrespective of Herzog's fault or gross negligence,
(iii) Herzog's rebooking of margin transactions as cash transactions pursuant to
Section 3(a) and Herzog's broker's execution of a transaction pursuant to
Section 4, (iv) failure by any Customer to pay for securities purchased in a
cash account or to deliver securities sold by settlement date or any extension
of time to comply with such requirements, (v) loss caused by the guarantee of
any signature with respect to transactions for the Account of Correspondent or
its Customers, (vi) loss caused by the breach of any of Correspondent's
representations or warranties, or (vii) the breach of any obligation existing
between Correspondent and a Customer of Correspondent or of any law, rule, or
justify regulation of the United States, a state or territory thereof, the SEC,
the Board of Governors of the Federal Reserve System, the NYSE, the NASD or
other authority, or self-regulatory organizations applicable to any transaction,
or (viii) loss caused by any dishonest, fraudulent, negligent, or criminal act
or omission on the part of Correspondent or any of its officers, directors,
shareholders, agents, employees, temporary employees, processors or attorneys.
(b) If a claim to be held harmless or for indemnification
hereunder shall involve any claim or demand by or against a third party by or
against an indemnified party, the indemnifying party shall be entitled (without
prejudice to the right of any indemnified party to be represented by its own
counsel and participate at its own expense) to defend or prosecute such claim at
its expense through counsel of its choice, after prompt notice to the
indemnified party unless the indemnified and indemnifying parties have
conflicting positions requiring separate counsel. If the indemnified party
determines there is a conflict of interest between the parties, the indemnifying
party shall be responsible for the counsel fees and expenses of both parties.
The indemnified party
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<PAGE>
shall cooperate in the defense or prosecution of any such claim, including the
execution of any assignments and releases as may be appropriate.
(c) If Correspondent self-clears prior to conversion to
Herzog and Herzog agrees to provide National Securities Clearing Corporation,
The Depository Trust Company or any other clearing, depository or self-
regulatory organization with any guarantee, indemnification or hold harmless
agreement in connection with Correspondent's business and Customers, then
Correspondent hereby indemnifies and holds harmless Herzog and each person who
controls Herzog in accordance with Section 11(a), above, from and against any
and all claims, demands, proceedings, suits and actions and all losses,
liabilities and expenses and costs including legal fees, expenses, and costs
relating to Herzog's investigation or defense of any such claims whether or not
litigation is commenced, arising from such guarantee, indemnification or hold
harmless agreement.
12. LIEN AND AUTHORIZATION TO CHARGE
--------------------------------
(a) Correspondent hereby grants to Herzog a continuing lien,
security interest and right of set-off in each of Correspondent's Accounts and
any cash, securities and other property held in such Correspondent Account to
secure any amounts owing Herzog or any obligations of Correspondent to Herzog.
Correspondent authorizes Herzog to charge any Correspondent Account maintained
by Herzog and any other assets of Correspondent held by Herzog with all amounts
owing to Herzog including, but not limited to, (i) any cost or expense resulting
from failures to deliver or failures to receive securities, (ii) any losses
resulting from unsecured debit balances or short positions in any Customer or
Correspondent Account, and (iii) any amounts to which Herzog is otherwise
entitled pursuant to the provisions of Section 11(a). Such charge, which may be
marked to the market from time to time, may be made against any Correspondent
Account or assets at any time and in such amounts as Herzog deems appropriate
provided, however, that Herzog's right to charge any Correspondent Account or
assets for unsecured debits or short positions of Customers shall accrue only
after Correspondent has had 30 calendar days to collect required amounts or
securities from the Customer directly provided further, however, that Herzog may
immediately charge Correspondent accounts if the reserve for unsecured debits
and shorts, plus the clearing deposit, are insufficient to cover the total of
unsecured debits and short positions. In lieu of any such charge, Correspondent
may at Correspondent's option deposit immediately with Herzog in a reserve or
other appropriate account an amount sufficient to cover the loss, unsecured
debit or value of the short position held in the Customer Account. Anything to
the contrary herein notwithstanding, Correspondent has sole responsibility and
liability for all of the matters referred to herein.
(b) Herzog's sole liability to Correspondent or any third
party for claims, notwithstanding the form of such claims (e.g., contract,
negligence or otherwise), arising out of (a) systems and/or communications
failures or (b) interruptions or delays in the services provided or to be
provided by Herzog under this Agreement, shall be to use its best efforts to
make such systems and services available as promptly as reasonably practicable.
14
<PAGE>
(c) Herzog shall not have any obligation or liability to or
through Correspondent in respect of displaying or furnishing of data bases
and/or securities information and related market and statistical information
based on such data bases, or securities information, or for errors or omissions
in collecting, processing, disseminating or displaying the same, or for the
accuracy of data bases or securities information and related market and
statistical information displayed, carried or furnished by or through its
equipment or systems, nor shall Herzog have any liability or obligation for the
accuracy or display of Correspondent's stored computer data.
(d) Herzog shall not be liable to Correspondent or any third
party for any loss, expense or damage suffered by reason of any delay or other
interruption in receiving securities or monies through the Federal Reserve Book
Entry System or wire system or from any clearing agent, issuer, broker, dealer
or other third party. Herzog shall not be liable for failures to execute or
"DKs" due to incorrect, incomplete or untimely instructions or any other failure
of Correspondent to provide proper instructions.
(e) Herzog shall not have any liability under this Agreement
for any money damages resulting from claims made by Correspondent or any third
party for any and all causes covered by Sections 12 (c) and 12 (d)
(f) Herzog shall not be liable or responsible for damages
suffered by Correspondent or any other party arising out of or caused by any
delay in or failure of performance (in whole or in part) arising out of or
caused, directly or indirectly, by circumstances beyond Herzog's direct
reasonable control including, without limitation, Acts of God, interruption, act
of civil or military authority, sabotage, natural emergency, epidemic, war or
other governmental action, civil disobedience, flood, earthquake, fire, other
catastrophe, strike or other labor disturbance, governmental, judicial or self-
regulatory organization order, rule or regulation, riot, energy or natural
resource difficulty or shortage. and inability to obtain or to timely obtain
materials, equipment or transportation.
(g) In no event will Herzog be responsible for special,
indirect, incidental or consequential damages which Correspondent or any third
party may incur or experience on account of entering into or relying on this
Agreement, even if Herzog has been advised of the possibility of such damages.
13. UNDERTAKINGS OF CORRESPONDENT
-----------------------------
(a) FINANCIAL STATEMENTS AND OTHER REPORTS
--------------------------------------
Correspondent will furnish to Herzog as soon as
possible a full and complete copy of Correspondent's financial statements for
the current fiscal year and for each of Correspondent's subsequent fiscal years.
Such financial statements shall be certified by an Independent Certified Public
Accountant. Correspondent will also furnish concurrently to Herzog copies of the
executed Forms X-17A-5 Part I and IIA filed with the SEC or self-regulatory
organization, or of such successor forms as may be applicable, on a monthly or
quarterly basis as
15
<PAGE>
required by regulatory authorities and any amendments to Correspondent's Form
BD, as well as any other regulatory or financial reports as Herzog may from time
to time request.
(b) OTHER CLEARING SERVICES
-----------------------
Correspondent will not make any arrangements with any other
organization to clear Correspondent's Customer or proprietary securities trades,
nor will Correspondent self-clear, without the prior written approval of Herzog,
except that Correspondent has and may continue its present clearing arrangement
with First Southwest Securities and/or Barre & Co., Incorporated.
(c) MARKET-MAKING PROHIBITED
------------------------
Correspondent will not engage in any market-making activity
without the prior written approval of Herzog.
(d) DISCIPLINARY ACTION,
SUSPENSION OR RESTRICTION
-------------------------
In the event that Correspondent or any officer, director,
shareholder, Registered Representative or other employee of Correspondent shall
become subject to disciplinary action, suspension or restriction by a state
agency, the NYSE or any other regulatory or self-regulatory organization having
jurisdiction over Correspondent or Correspondent's securities or commodities
business, Correspondent will notify Herzog immediately, orally and in writing,
and provide Herzog a copy of any decision with respect thereto and Correspondent
authorizes Herzog to take all such steps as may be necessary for Herzog to
maintain compliance with the rules and regulations to which Herzog is subject.
Correspondent further authorizes Herzog, in such event, to comply with requests,
directives or demands made upon Herzog by any such state agency, exchange, other
regulatory or self-regulatory organization.
(e) COMPLIANCE WITH LAW
-------------------
Correspondent shall comply with all applicable federal and state
laws and regulations and the rules and regulations of any regulatory, self-
regulatory, clearing or depository organization of which it is a member.
14. TERMINATION OF AGREEMENT; CHANGE IN CIRCUMSTANCES,
--------------------------------------------------
TRANSFER OF ACCOUNTS
--------------------
(a) EFFECTIVENESS
-------------
This Agreement shall remain in force for eighteen (18)
months from the later of the date on which it is approved by the NYSE or
clearing commences (eighteen months after the effective date being hereinafter
referred to as the "Expiration Date").
16
<PAGE>
(b) TERMINATION BY CORRESPONDENT
----------------------------
Correspondent may terminate this Agreement as of the
Expiration Date by giving at least 90 days written notice prior to the
Expiration Date to Herzog. In the event no such written notice is given, this
Agreement shall be deemed to have been extended for additional one-year periods
as of each anniversary of the Expiration Date.
(c) TERMINATION BY HERZOG
---------------------
Herzog may terminate this Agreement at any time whether
prior to or after the Expiration Date upon 90 calendar days prior written notice
to Correspondent. Further, Herzog may terminate this Agreement upon 30 days
prior written notice to Correspondent in the event that (i) Correspondent fails
to strictly comply with any provision of this Agreement or Correspondent's
Customer Agreement, or (ii) any director, executive officer, general securities
principal or financial and operations principal of Correspondent is enjoined,
prohibited, disciplined or suspended as a result of administrative or judicial
proceedings, or proceedings of a self-regulatory organization of which
Correspondent is a member, from engaging in securities business activities
constituting all or portions of Correspondent's securities business.
Herzog may terminate this Agreement forthwith upon notice to
Correspondent in the event that correspondent:
(i) has made any representation or warranty hereunder or in
connection with any amendment hereto or any collateral agreement or document
which was at the time made or becomes inaccurate or untrue; or
(ii) is enjoined, prohibited, censured, suspended or
otherwise disciplined as a result of an administrative or judicial proceeding,
or proceeding of a self-regulatory organization of which Correspondent is a
member from engaging in securities or commodities business activities
constituting all or portions of Correspondent's securities or commodities
business; or
(iii) undergoes a change in control, such phrase having the
same meaning as in Rule 14D of the SEC; or
(iv) net capital is less than the greater of $100,000 or 5%
of aggregate debit items computed in accordance with SEC Rule 15c3-3 if
Correspondent has elected to operate under paragraph (f) of Rule 15c3-1; or
(v) the occurrence of any condition or event which in
Herzog's reasonable judgment will have a material adverse effect on
Correspondent or Correspondent's ability to conduct its business, or Herzog
deems itself insecure with respect to Correspondent's ability to perform its
obligations under this Agreement or Correspondent's Customer Agreement.
Correspondent undertakes to advise Herzog promptly and in
writing of the occurrence of any of the events set forth in this Section 14(c).
17
<PAGE>
(d) AUTOMATIC TERMINATION
---------------------
Correspondent will notify Herzog immediately and in all events
this Agreement shall terminate automatically and without any action by Herzog in
the event that Correspondent:
(i) is no longer registered as a broker-dealer with the SEC
and a member in good standing of the NASD; or
(ii) ceases to conduct a securities business.
(e) CONVERSION OF ACCOUNTS
----------------------
In the event that this Agreement is terminated for any reason, it
shall be Correspondent's responsibility to arrange for the conversion of
Correspondent's and Customer Accounts' to another clearing broker or to
Correspondent if it becomes self-clearing. Correspondent will give Herzog notice
(the "Conversion Notice") of (i) the name of the broker which will assume
responsibility for clearing services for Customers and Correspondent, (ii) the
date on which such broker will commence providing such services, (iii)
Correspondent's undertaking, in form and substance satisfactory to Herzog, that
Correspondent's Agreement with such broker provides that such broker will accept
on conversion all Correspondent and Customer Accounts then maintained by Herzog
and (iv) the name of an individual(s) within that organization whom Herzog can
contact to coordinate the conversion. The Conversion Notice shall accompany
Correspondent's notice of termination given pursuant to Section 14(a), or shall
be furnished to Herzog within 30 calendar days of receipt of Herzog's notice of
termination pursuant to Section 14(a) or 14(b) or within 30 calendar days of the
occurrence of an event specified in Section 14(c). If Correspondent fails to
give the Conversion Notice to Herzog, Herzog may give to Correspondent's
Customers such notice as Herzog deems appropriate of the termination of this
Agreement and may make such arrangements as Herzog deems appropriate for
transfer or delivery of Customer and Correspondent Accounts. The expense of
providing such notice and making such arrangements shall be charged to
Correspondent.
(f) SURVIVAL
--------
Termination of this Agreement shall not affect Herzog's
rights or liabilities relating to business transacted prior to the effective
date of such termination. From the date of termination until transfer or
delivery of all Customer and Correspondent Accounts, Herzog's rights and
Correspondent's liabilities relating to business transacted after such
termination shall be governed by the same terms as those set forth in this
Agreement. All rights to indemnify and hold harmless shall survive this
Agreement.
18
<PAGE>
(g) NO OBLIGATION TO RELEASE
------------------------
Herzog shall not be required to release to Correspondent any
securities or cash held by Herzog for Correspondent in any of Correspondent's
Accounts or held in the Deposit Account until any amounts owing to Herzog
pursuant to the provisions of this Agreement, or otherwise are paid, and
Correspondent's outstanding obligations to Herzog are determined, including
determination of any disputed amounts are satisfied and any property of Herzog
in the possession of Correspondent is returned to Herzog.
15. CONFIDENTIAL NATURE OF DOCUMENTS
--------------------------------
All agreements, documents, papers and information supplied by Correspondent
concerning Correspondent's business or Customers shall be treated by Herzog as
confidential. To the extent such documents are retained by Herzog, they shall be
kept in a reasonably safe place and shall be made available to third parties
only as authorized by Correspondent in writing or pursuant to any order or
subpoena of a court, regulatory agency or self-regulatory organization having
appropriate jurisdiction. Such documents shall be made available by Herzog for
inspection and examination by Correspondent's and Herzog's auditors, by properly
authorized agents or employees of any regulatory or self-regulatory organization
or commission or by such persons as Correspondent may authorize in writing. The
restrictions contained in this Section 15 shall not apply to any records or
documents which Herzog is required by law or regulation to make available to any
regulatory or self-regulatory organization having appropriate authority.
Nothing herein contained shall act to restrict Herzog's authority to obtain
Customer and Correspondent credit reports and brokerage histories, to confirm
the information supplied or to otherwise conduct the business contemplated by
this Agreement. The terms of this Agreement shall be confidential and shall not
be disclosed by Correspondent without the written consent of Herzog.
16. NOTICE TO CUSTOMERS
-------------------
Herzog shall provide, or cause to be provided, to every Customer
upon the opening of a Customer Account, notice of the existence and general
terms of this Agreement, indicating the allocation of responsibility contained
herein in accordance with NYSE Rule 382, in substantially the form of Exhibit
"C" attached hereto.
17. CUSTOMER COMPLAINT PROCEDURES
-----------------------------
Correspondent will be responsible for the initial handling
of all Customer complaints. Any Customer who initiates a complaint to Herzog
relating to Correspondent will by referred by Herzog to Correspondent. If any
such complaint is based upon an alleged act or omission by Herzog, Correspondent
will notify Herzog promptly in writing of such complaint and the basis therefore
and will consult with Herzog and the parties will cooperate in determining the
validity of such complaint and the appropriate action to be taken. Correspondent
will orally advise and forward to Herzog a copy of all regulatory actions, self-
regulatory organization actions,
19
<PAGE>
arbitrations, lawsuits and/or criminal matters involving claims over $50,000.00
or alleging violations of Federal or State Securities Laws.
18. REGULATION T. AND SEC RULE 15C3-3(m)
-----------------------------------
In order to assure compliance with the provisions of Regulation T
of the Federal Reserve Board and rule 15c3-3(m) promulgated under the Securities
Exchange Act of 1934, Correspondent, if it is confirming by telephone, agrees as
follows:
(a) WHEN SECURITIES ARE PURCHASED:
-----------------------------
(i) Correspondent will not advise Herzog that it has
received payment for securities purchased by its Customers unless and until
Correspondent is in physical possession of said payment.
(ii) If payment is not received within the seven (7) business
day period, or extension thereof, as permitted by Regulation T, Correspondent
will request an extension of time to pay for the securities purchased or;
liquidate the transaction, or; otherwise remove the transaction from the
Customer's account. If an extension of the time to satisfy the requirements of
Regulation T is not granted, Correspondent shall promptly either; liquidate the
transaction or, otherwise remove the transaction from the Customer's Account.
(iii) Each business day, Correspondent will deposit in
Herzog's bank account or at Herzog's main office all checks received from its
Customers during banking hours. Checks received after banking hours or on a bank
holiday will be deposited on the next business day.
(iv) Each business day, Correspondent will forward to
Herzog's Margin Department a copy of the day's deposit slips and the cash
blotter showing the Correspondent's name, date, account number(s) and amount(s)
of check(s) or cash received.
(b) WHEN SECURITIES ARE SOLD:
------------------------
(i) Correspondent will not advise Herzog that it has
received securities sold by its Customers unless and until Correspondent is in
physical possession of the securities in good deliverable form.
(ii) If securities sold (other than for a short sale or in
conjunction with the Correspondent's market making activities for a security in
which it is an established market maker) are not received within ten (10)
business days after settlement date, Correspondent will either ask Herzog to
request an extension of time to deliver the securities sold or immediately close
the transaction by purchasing securities of a like kind and quantity.
(iii) Each business day, Correspondent will forward to
Herzog's Main Office all securities received from its Customer(s) along with a
dated copy(ies) of the receipt(s) given to the Customer(s). In addition, each
business day, Correspondent will forward to Herzog's
20
<PAGE>
Margin Department a copy of its securities blotter showing the Correspondent's
name, date, account number(s) of Customer(s) delivering securities and the
description of securities received.
Correspondent further agrees that for purposes of this Section securities
purchased and sold in its proprietary account(s) (other than when selling
securities as an established market) will be treated as if they were Customer
transactions.
Herzog may terminate provisions of this Section of the
Agreement upon one day's notice if Correspondent fails to comply with the terms
of this Section 18.
19. MISCELLANEOUS
-------------
(a) RULES AND REGULATIONS
---------------------
All transactions will be governed by the applicable rules
and regulations of the SEC, the Board of Governors of the Federal Reserve
System, other regulatory and self-regulatory organizations and securities
exchanges as well as by other applicable laws and Herzog's house rules, as from
time to time amended.
(b) ARBITRATION AND LITIGATION
--------------------------
It is hereby mutually understood and agreed that any
disputes hereunder shall be submitted to arbitration in New York, New York
pursuant to the constitution and rules of the NYSE or NASD.
In the event of an arbitration or court action in which a
Customer or Correspondent has asserted a claim against Herzog, Correspondent
agrees that (i) it will submit to the jurisdiction of any such forum in which
such claim is brought; and (ii) it will accept service of process for any such
claim. Service of process in any such action or arbitration shall be sufficient
if served on Correspondent by Certified Mail, return receipt requested, at
Corespondent's last address known to Herzog. In this connection, Correspondent
expressly waives any defense (iii) to personal jurisdiction of Correspondent by
such court, or arbitration tribunal; (iv) to service of process as above set
forth; and (v) to venue.
(c) PROVISIONAL RELIEF
------------------
Notwithstanding the provisions of Section 19(b), Herzog may,
at any time prior to the initial arbitration hearing pertaining to such dispute
or controversy, seek by application to the United States District Court for the
Southern District of New York or the Supreme Court of the State of New York for
the County of New York any such temporary or provisional relief or remedy
("provisional remedy") provided for by the Laws of the United States or the Laws
of the State of New York as would be available in an action based upon such
dispute or controversy in the absence of an agreement to arbitrate. The parties
acknowledge and agree that it is their intention to have any such application
for a provisional remedy decided by the court to which it is made and that such
application shall not be referred to or settled by arbitration. Process in any
such proceeding shall be sufficient if served on Correspondent by certified
mail,
21
<PAGE>
return receipt requested, at Correspondent's last address known to Herzog.
In this connection, Correspondent expressly waives any defense (i) to personal
jurisdiction of Correspondent by such court, or arbitration tribunal; (ii) to
service of process as above set forth; and (iii) to venue. No such application
to either said Court for a provisional remedy, nor any act or conduct by either
party in furtherance of or in opposition to such application, shall constitute a
relinquishment or waiver of any right to have the underlying dispute or
controversy with respect to which such application is made settled by
arbitration in accordance with Section 19(b).
(d) SUCCESSORS AND ASSIGNS
----------------------
This Agreement shall be binding on all successors and assigns of
Correspondent provided, however, Correspondent may not assign this Agreement
without the prior written approval of Herzog.
(e) ENTIRE AGREEMENT
----------------
This Agreement represents the entire agreement between the
parties hereto and supersedes all prior agreements, written or oral. This
Agreement may not be amended orally but only in writing and, except as set forth
herein, such writing must be signed by the parties hereto.
(f) COUNTERPARTS: NYSE APPROVAL
---------------------------
This Agreement may be executed in one or more counterparts, all
of which taken together shall constitute a single agreement. When each party
hereto has executed and delivered to the other a counterpart, this Agreement
shall become binding on both parties, subject only to approval by the NYSE.
Herzog will submit this Agreement to the NYSE following execution and Herzog
will notify Correspondent, or cause Correspondent to be notified, upon receipt
of such approval.
(g) NOTICES
-------
Any written notice or instruction required or permitted hereunder
shall be deemed to be given when deposited in the mail, postage prepaid first
class, addressed to the parties at their respective addresses appearing on the
first page of this Agreement, or such other address as one patty may have
notified the other party of in writing. If such notice is transmitted
electronically, such notice shall be given when acknowledgment is received or if
hand delivered upon receipt.
(h) CORRESPONDENT NOT AGENT OF
HERZOG; ADVERTISING RESTRICTIONS
--------------------------------
Correspondent shall not hold itself out as an agent of Herzog or
any subsidiary or company controlled directly or indirectly by or affiliated
with Herzog. Neither this Agreement nor any operation hereunder shall create a
general or limited partnership, association
22
<PAGE>
or joint venture or agency relationship between Correspondent and Herzog.
Correspondent shall not, without the prior written approval of Herzog, place any
advertisement in any newspaper, publication, periodical or any other media nor
circulate any brochure or other materials if such advertisement or materials in
any manner makes reference to Herzog, any owner of record or beneficial owner of
Herzog's capital stock, or any affiliate thereof or to the clearing arrangements
and the services embodied in this Agreement. Any breach of this Section 19(h)
shall constitute a material failure to comply with the terms of this Agreement
in accordance with Section 14(b) hereof.
(i) CAPTIONS
--------
Captions used in this Agreement are for convenience of reference
only and shall not be construed so as to affect the meaning of the text hereof.
(j) GOVERNING LAW
-------------
This Agreement and its enforcement shall be governed by the Laws
of the State of New York and shall inure to the benefit of Herzog, its assigns
and any successor organization (irrespective of any change or changes at any
time in the personnel thereof, for any cause whatsoever), and shall be binding
upon the undersigned and/or its successors and assigns. Without limiting the
generality of Herzog's right of Assignment contained in this Section,
Correspondent hereby consents and agrees to the assignment and transfer by
Herzog of its rights and obligations hereunder at any future time resulting from
a merger, sale of assets, liquidation, or otherwise of all accounts covered by
this Agreement (including all securities positions, credit and debit balances
contained therein) to any such successor organization or assignee including any
registered broker dealer which owns any of Herzog's capital stock and such
assignment shall be binding upon the undersigned, its successors and assigns.
(k) CITATIONS
---------
Any reference to the rules or regulations of any regulatory or
self-regulatory organization are by current citations. Any changes in the
citations (whether or not there are any changes in the text of such rules or
regulations) shall be automatically incorporated herein.
(1) BACKUP WITHHOLDING
------------------
Herzog hereby agrees to act as agent for Correspondent in
undertaking necessary measures to permit Correspondent to comply with the backup
withholding requirements of Section 3406 and the nonresident alien withholding
requirements of Section 1441 of the Internal Revenue Code of 1986, as amended,
with respect to its Correspondent Accounts. Correspondent agrees to furnish to
Herzog in writing or by electronic transmission any tax information in its
possession relating to each Correspondent Account transferred to Herzog and to
each future Customer (including the Customer's taxpayer identification number
and any certifications provided by the Customer on IRS Form W-9, W-8 or 1001 or
an authorized substitute) and agrees to indemnify Herzog with respect to any
liabilities incurred by Herzog in
23
<PAGE>
reliance on such information. Correspondent hereby authorizes Herzog to employ
any procedures permitted under applicable law or regulation to achieve
compliance by the Correspondent with its withholding obligations under the
federal income tax law, including procedures pertaining to backup withholding on
orders to purchase or sell securities which are received from new Customers by
telephone or electronic transmission.
Very truly yours,
HERZOG, HEINE, GEDULD, INC.
By: _______________________________
Anthony T. Geraci
Senior Vice President
AGREED AND ACCEPTED
E*TRADE SECURITIES, INC.
By: ___________________________________
Thomas C. Laris
President
Date: ________________________
Exhibit "A"--Requirements
Exhibit "B"--Fees and Conditions
Exhibit "C"--NYSE Rule 382 Notice
Exhibit "D"--Interest Income
Exhibit "E"--Miscellaneous Expenses
24
<PAGE>
EXHIBIT 10.15
GUARANTEE
---------
In consideration of and in order to induce Herzog, Heine,
Geduld, Inc. (hereinafter "Herzog") to enter into a Clearing Agreement
with E*Trade Securities, Inc. (hereinafter "Correspondent"), the
corporation who guarantees the obligations of Correspondent under this
Agreement, Trade Plus, Inc., by executing the signature line
designated for such purpose at the end of this Agreement (the
"Guarantor") does hereby guarantee the due and timely performance by
Correspondent of each and every of Correspondent's obligations under
the Agreement and shall immediately pay any amount that is not paid by
Correspondent when due to Herzog and its permitted successors and
assigns under the Agreement. This is an absolute, unconditional,
unlimited and irrevocable guarantee of payment and may be proceeded
upon by Herzog or a Herzog lndemnified Person without filing any
action against Correspondent or after any action against Correspondent
has been commenced. Guarantor grants to Herzog a first lien and
security interest in any and all money and securities of Guarantor
held by Herzog. Herzog shall have the unlimited right to set-off any
amounts owed to it by Guarantor against any obligation of Herzog to
Guarantor. Herzog also shall have the absolute and unlimited right to
sell, transfer, or liquidate any of the assets in any of Guarantor's
accounts with Herzog for any amounts owed to it by Correspondent or
Guarantor. The obligations of the Guarantor shall not be discharged or
impaired or otherwise affected by the failure of Herzog or a Herzog
Indemnified Person to assert, claim demand or enforce any remedy under
this Agreement, nor by waiver, modification or amendment of this
Agreement or any compromise, settlement or discharge of obligations of
Correspondent under this Agreement, or any release or impairment of
any collateral by Herzog or a Herzog Indemnified Person.
Guarantor hereby waives any provision of any statute or
judicial decision otherwise applicable hereto which restricts or in
any way limits the rights of any obligee against a guarantor or surety
following a default or failure of performance by an obligor with
respect to whose obligations the guarantee or surety is provided. This
Guarantee shall survive the termination of the Agreement and shall
also remain in full force and effect with respect to any claims for
indemnification which may be sought from Correspondent pursuant to
Section 11 of the Agreement.
The Guarantor hereby represents and warrants that: the
Guarantor has the power, authority and legal right to make, deliver
and perform this Guarantee; this Guarantee has been duly executed and
delivered on behalf of the Guarantor and constitutes the legal, valid
and binding obligation of the Guarantor enforceable in accordance with
its terms; the execution, delivery and performance of this Guarantee
will not violate any law, rule, regulation, judgment, order or decree
binding upon the Guarantor or any agreement, instrument or
understanding to which the Guarantor is a party or by which it is
bound; and no consent of any other person and no consent, license,
permit, approval or authorization of, exemption by, notice or report
to, or registration, filing or department or agency is required in
connection with the execution, delivery and performance by the
Guarantor, or the validity or enforceability against the Guarantor, of
this Guarantee.
Guarantor irrevocably submits to the exclusive jurisdiction
of (a) the Supreme Court of the State of New York, New York County,
and (b) the United States
<PAGE>
District Court for the Southern District of New York, for purposes of
any suit, action or other proceeding arising out of this Guarantee
(and agrees not to commence any action, suit or proceeding relating
hereto except in such courts). Guarantor further agrees that service
of any process, summons, notice or document shall be made to Herzog by
U.S. registered mail to 26 Broadway, New York, New York 10004, Attn:
General Counsel, shall be effective service of process for any action,
suit or proceeding in New York with respect to any matters to which it
has submitted to jurisdiction as set forth above in the immediately
preceding sentence. Guarantor irrevocably and unconditionally waives
any objection to the laying of venue of any action, suit or proceeding
arising out of this Guarantee or the transactions contemplated hereby
in (a) the Supreme Court of the State of New York, New York County, or
(b) the United States District Court for the Southern District of New
York, and hereby further irrevocably and unconditionally waives and
agrees not to plead or claim in any such court that any such action,
suit or proceeding brought in any such court has been brought in an
inconvenient forum.
This Guarantee shall be governed by and construed in
accordance with the internal laws of the State of New York applicable
to agreements made and to be performed entirely within such State
without regard to the conflicts of law principles of such State.
CORPORATE GUARANTOR: Trade Plus, Inc.
By ___________________________
William Asbury Porter
Chairman
480 California Avenue
Suite 301
Palo Alto, California 94306
<PAGE>
EXHIBIT 11.1
E*TRADE GROUP, INC.
STATEMENT RE: COMPUTATION OF PER-SHARE EARNINGS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30, SIX MONTHS ENDED MARCH 31,
-------------------------- ---------------------------
1993 1994 1995 1995 1996
-------- -------- -------- ------------- -------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Weighted average shares
outstanding............ 15,099 15,226 15,741 15,592 15,262
Series A convertible
preferred stock........ -- -- -- -- 6,000
Options and warrants
granted prior to June
7, 1995 (on a treasury
stock basis)........... 3,076 2,458 2,238 1,278 2,189
Securities issued after
June 7, 1995, in
accordance with Staff
Accounting Bulletin 83:
Series A convertible
preferred............ 4,975 4,975 4,975 4,975 --
Series B convertible
preferred............ 983 983 983 983 983
Stock options......... 2,891 2,891 2,891 2,891 2,891
-------- -------- -------- ------------- -------------
Shares used to compute
per share data......... 27,024 26,533 26,828 25,719 27,325
======== ======== ======== ============= =============
Net income.............. $ 99 $ 785 $ 2,581 $ 1,080 $ 1,063
======== ======== ======== ============= =============
Net income per share.... $ -- $ .03 $ .10 $ .04 $ .04
======== ======== ======== ============= =============
</TABLE>
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
1. E*TRADE Securities, Inc., incorporated in the State of California.
2. ET Execution Services, Inc., incorporated in the State of California.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 6-MOS YEAR
<FISCAL-YEAR-END> SEP-30-1996 SEP-30-1995
<PERIOD-START> OCT-01-1995 OCT-01-1994
<PERIOD-END> MAR-31-1996 SEP-30-1995
<CASH> 8,693,651 9,624,219
<SECURITIES> 0 0
<RECEIVABLES> 2,541,080 2,051,213
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 11,893,247 12,029,686
<PP&E> 5,593,767 1,458,152
<DEPRECIATION> 219,181 229,807
<TOTAL-ASSETS> 18,325,424 14,163,564
<CURRENT-LIABILITIES> 3,730,488 2,971,046
<BONDS> 0 0
0 0
1,000 1,000
<COMMON> 156,363 148,910
<OTHER-SE> 12,445,344 10,998,057
<TOTAL-LIABILITY-AND-EQUITY> 18,325,424 14,163,564
<SALES> 16,488,842 20,834,586
<TOTAL-REVENUES> 18,877,598 23,340,538
<CGS> 10,227,867 12,678,339
<TOTAL-COSTS> 10,862,637 12,819,524
<OTHER-EXPENSES> 6,229,652 6,211,653
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 8,802 398,601
<INCOME-PRETAX> 1,785,309 4,309,361
<INCOME-TAX> 722,037 1,728,364
<INCOME-CONTINUING> 1,063,272 2,580,997
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,063,272 2,580,997
<EPS-PRIMARY> .039 .096
<EPS-DILUTED> .039 .096
</TABLE>
