<PAGE>1
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-K
[X]Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934 [Fee Required]
For the Fiscal year ended September 30, 1996
or
[ ]Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934 [No Fee Required]
For the Transition period from_______ to _______
Commission file number 1-11921
E*TRADE GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-2844166
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
Four Embarcadero Place, 2400 Geng Rd. Palo Alto, CA 94303
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (415) 842-2500
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
- -------------------
Common Stock - $0.01 par value
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.[ ]
As of December 13, 1996, the aggregate market value of the voting stock held
by non-affiliates of the registrant was approximately $174,400,000.
The number of shares of Common Stock outstanding as of December 13, 1996 was
29,539,147 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Definitive Proxy Statement relating to the Company's 1997 Annual Meeting to
be filed hereafter (incorporated into Part III hereof).
<PAGE>2
E*TRADE GROUP, INC.
FORM 10-K ANNUAL REPORT
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996
TABLE OF CONTENTS
Part I
- ------
Item 1. Business-------------------------------------------------------- 3
Item 2. Properties------------------------------------------------------24
Item 3. Legal Proceedings-----------------------------------------------25
Item 4. Submission of Matters to a Vote of Security Holders-------------25
Part II
- -------
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters-------------------------------------------26
Item 6. Selected Financial Data---------------------------------------27
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations-----------------28
Item 8. Financial Statements and Supplementary Data-------------------36
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure------------------------52
Part III
- --------
Item 10. Directors and Executive Officers of the Registrant------------52
Item 11. Executive Compensation----------------------------------------52
Item 12. Security Ownership of Certain Beneficial Owners
and Management------------------------------------------------52
Item 13. Certain Relationships and Related Transactions----------------52
Part IV
- -------
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K---------------------------------------------------53
Exhibit Index--------------------------------------------53
Signatures-----------------------------------------------56
The page numbers in this Table of Contents reflect EDGAR page tag numbers.
UNLESS OTHERWISE INDICATED, REFERENCES TO "COMPANY" MEAN E*TRADE GROUP, INC.
AND ITS SUBSIDIARIES AND REFERENCES TO "FISCAL" MEAN THE COMPANY'S YEAR ENDED
SEPTEMBER 30 (E.G. FISCAL 1996 REPRESENTS THE PERIOD OCTOBER 1, 1995 TO
SEPTEMBER 30, 1996).
<PAGE>3
Item 1. BUSINESS
Except for historical information contained herein, the matters discussed in
this report contain certain forward-looking statements that involve risks and
uncertainties that could cause actual results to differ materially from those
anticipated in such forward looking statements.
E*TRADE Group, Inc. ("E*TRADE or the "Company") is a leading provider of
cost-effective, secure online investing 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 Internet, online service providers CompuServe, Inc. and America
Online, Inc., 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 customers to take control of their own
financial transactions.
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 transactions and
information services. This development provides individual investors with
direct access to information and transaction processing capabilities once
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 customers with the ability to place orders for stocks and
options 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.
<PAGE>4
The Company had over 91,000 accounts as of September 30, 1996, with an
average monthly growth in accounts of over 9% since October 1, 1995 and had
an average daily transaction volume of approximately 8,400 in September 1996,
as compared to approximately 3,600 transactions in September 1995,
representing an average monthly growth of over 7% during that period.
The Company began offering Internet investing services in February 1996 to
supplement its then existing online services.
The Company was incorporated in California in 1982 and was reincorporated in
Delaware in July 1996. 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 Form 10-K to "E*TRADE" or the "Company" refer to E*TRADE
Group, Inc., a Delaware corporation, E*TRADE Securities, Inc., its principal
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 website shall not be deemed to be part of this Form 10-K. In
August, 1996 the Company completed an initial public offering of 5,702,000
shares of its common stock, 5,026,550 shares of which were sold by the
Company generating net proceeds to the Company of $46.4 million.
The Company operates in a single industry segment: securities brokerage and
related investment services. No material part of the Company's consolidated
revenue is received from a single customer or group of customers, or from
foreign operations.
THE E*TRADE SOLUTION
E*TRADE uses its proprietary processing technology to provide consumers with
easy-to-use and cost-effective online securities investing services. The
Company offers equity and option 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 consumers
have the ultimate control over where and when they initiate securities
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, 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 full-commission
or discount brokerage firms. The Company's technology is based on a modular
architecture which is scaleable to handle increasing transaction volumes.
Modular architecture allows for application programs to be quickly modified
in response to changing business requirements. In addition, a modular
architecture which utilizes multiple components and tiers is designed to
scale quickly without requiring fundamental changes to the application
programs.
<PAGE>5
E*TRADE empowers customers to take control of their own financial
transactions through the following features:
User-Friendly Web Investing Interface. Through its easy-to-use graphical
interface, E*TRADE has made online investing simple, fast and fun. Consumers
accessing E*TRADE for the first time are able to understand quickly the wide
variety of services available and how to access those services. The barriers
to first-time trading online have been reduced, enabling new users to feel
just as comfortable trading online as technologically savvy early adopters.
The look and feel of the graphical user interface on the Web has been
replicated on CompuServe and is expected to be replicated on America Online.
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 them.
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 transactions processed. Customers
are able to trade securities through the Internet, direct modem access,
online service providers CompuServe and America Online, touch-tone telephone
and, to a lesser extent, interactive television.
Cost-effective Services. By unbundling the services that many full-commission
and discount brokerage firms include in their high transaction costs, the
Company is able to offer customers just the services they want at a lower
price, yet provide value-added products and services.
Secure Operations. The Company believes that customer confidence in account
security is one of the key factors for success in the online investing
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 investing services.
MARKETING
The Company's marketing strategy is based on an integrated marketing model
which employs a mix of communications media. 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 with various alliances. All
communications by E*TRADE Securities with the public are regulated by the
National Association of Securities Dealers, Inc. (the "NASD"). See
"Government Regulation; Net Capital Requirements."
<PAGE>6
Direct Response Advertising; Web Site Marketing
The Company's advertising focuses on building awareness of E*TRADE's products
and services and on marketing online investing as a better way of handling
their securities transactions, accessing financial and market data, and
managing portfolios. Advertising is increasingly directing interested
prospects to the Company's Web site for additional information, as opposed to
generating primarily telephone-based inquiries. Print advertisements are
placed in a broad range of business, technology and financial publications,
including the Wall Street Journal, Investor's Business Daily, Forbes, Forbes
ASAP, Barron's, Money, SmartMoney and Wired. E*TRADE also advertises
regularly on CNBC, CNN and on national business radio networks. At the Web
site, prospective customers 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. E*TRADE's increasing Internet focus is resulting in decreased
customer acquisition costs, since providing information through its Web
site can substitute for paper-based information packages.
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, Time, Money, the
Financial Times, Investor's Business Daily and the Wall Street Journal among
others. There are links to E*TRADE's home page from approximately 1,200 sites
on the Web, which the Company believes is a significant factor in increasing
brand awareness and generating leads, as consumers increasingly 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 in-box promotional offer for the Netscape Navigator browser
available through retail outlets, distribution of new account kits with
Window on Wallstreet's Investor software products, inclusion in 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.
E*TRADE is also developing a virtual shopping mall of software, services and
products that will help individuals make informed investment decisions.
Through E*TRADE's Web site, customers would be able to purchase or subscribe
to products available from this mall at special discount prices. Goods and
services offered would be reviewed and selected for inclusion by E*TRADE
based on overall perceived "best value" within specified product categories.
Companies selected for inclusion in return would promote E*TRADE's services
through their Web sites and/or marketing materials. There can be no assurance
that the Company will succeed in developing a virtual shopping mall or that,
if developed, it will be successful or profitable.
<PAGE>7
International Customer Base
The Company's customers are able to place trades 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, over 1,000 of its accounts are for
customers with addresses in over 60 countries. 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 using local languages and offering
services tailored to regional requirements and customs. The Company has been
discussing possible alliances with local institutions such as brokers and
banks to make the portfolio tracking, purchase and sale and funds transfer
processes easier for non-U.S. investors, to facilitate the handling of
foreign securities, and to ensure the Company is in compliance with local
laws and regulations.
To date, the Company has limited experience in providing investing services
internationally. There are certain risks inherent to doing business in
international markets, particularly in the heavily regulated brokerage
industry. There can be no assurance that the Company will be able to market
successfully its services and products in international markets.
BROKERAGE AND INFORMATION SERVICES AND PRODUCTS
The Company's 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, online service
providers CompuServe and America Online, touch-tone telephone and, to a
lesser extent, interactive television. All records are maintained on one
centralized system, so that customers have access to current account
information regardless of which gateways they are using.
The Company continually strives to increase the functionality of its
services, as well as to offer new services that enhance 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 and to financial information through a customized user interface. The
Company's existing services and product offerings are described below:
<PAGE>8
Stock and Option Trading
Customers can directly place orders to buy and sell Nasdaq and exchange-
listed securities, as well as equity and index options, through the E*TRADE
automated order processing system. E*TRADE supports a range of order types,
including market orders, limit orders (good-till-cancelled or day), stop
orders and short sales. System intelligence automatically checks the
parameters of an order, together with the customer's buying power and
positions held, prior to executing an order. All listed market orders
(subject to certain size limitations) are executed at the National Best
Bid/Offer ("NBBO") or better at the time of receipt by the third market firm
or exchange. The NBBO is a dynamically updated representation of the combined
highest bid and lowest offer quoted across all United States stock exchanges
and market makers registered in a specific stock. 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)
or better at the time of receipt by the market-maker. 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 market opening. Account holders receive
electronic notification of order executions, printed trade confirmations and
detailed monthly statements. The Company also arranges for the transmittal of
proxy, annual report and tender offer materials to customers.
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 free access 20-minute delayed
quotes, including stocks, options, major market indices, most active issues,
and largest gainers and losers for the major exchanges. Users are alerted
when there is current news on an identified stock or when a stock has reached
a user-defined price threshold.
Upon placing an order, the customer is provided with a real-time bid and ask
quote, at no extra charge. For $30 per month, individual investors can obtain
unlimited real-time quotes and market data. The Company's Web site provides
links to other business and financial Web sites, including the CNN Financial
Network and the EDGAR database of the Securities and Exchange Commission (the
"SEC"), which provides access to SEC filings of public companies. The Company
has expanded its existing services to include immediate access to breaking
news, charts, market analysis and company financial information.
Portfolio Tracking and Records Management
Customers have online access to a listing of all their portfolio assets held
at 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, assets held at another brokerage firm. These shadow
portfolios can include stocks, options, bonds and mutual funds.
<PAGE>9
Cash Management Services
Customer payments are received through the mail or federal wire system and
are credited to customer accounts upon receipt. The Company also provides
other 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 free checking
services through a commercial bank and is exploring the expansion of these
services. The Company plans to expand its cash management offerings to
include electronic funds transfer 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 account
numbers, 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
Data Security, Inc. ("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.
Personal Computer. Customers using personal computers can access the E*TRADE
system through the Internet, online service providers CompuServe and America
Online, or direct modem access. Accessing the E*TRADE Web site via the
Internet offers the customer platform independence. The Company's Web site
combines an easy-to-use graphical user interface with the trading
capabilities that 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 a
method for connecting to the trading system independent of either the
Internet or a proprietary online service.
Touch-tone Telephone. TELE*MASTER, E*TRADE's interactive voice response
system, provides a convenient way for customers to access quote information,
place stock and option orders, review account balances and check messages
from 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
investing services. GTE MainStreet has been on the air over certain cable
television franchises on a pilot basis for approximately four years and is
now operational in three test markets. Revenues and transaction volume through
GTE MainStreet represent an immaterial portion of the Company's business.
<PAGE>10
Substantially all of the Company's revenues in recent years have been from
online investing services, and the Company expects its online investing
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. Severe market
fluctuations 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.
The market for online investing 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.
Sales of many of the Company's services and products will depend upon the
adoption of the Internet by consumers 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. Moreover, the security and privacy concerns of existing and
potential users of the Company's services may inhibit the growth of online
commerce. If the necessary infrastructure is not developed, if security and
privacy concerns inhibit the growth of online commerce, or if the Internet
does not otherwise become a viable commercial marketplace, there would be a
material adverse effect on the Company's business, financial condition and
operating results.
CUSTOMER SERVICE
The Company believes that providing an effective customer service team to
handle customer needs 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 calls to verify the satisfaction of its
customers. The Company's customers have access to a toll-free number from
6:00 a.m. to 5:00 p.m. Pacific time, Monday through Friday. In January 1997
the Company plans to expand the toll free number's hours of operation so that
it operates from 5:00 a.m. to 9:00 p.m. Pacific time. The Company's current
policy specifies that customer service associates have or obtain a securities
broker's license.
The Company's customer service capacity has been and may continue to be
strained at times. The Company frequently has fallen short of its target
response time for customer service inquiries. The Company has been making
and is continuing to make significant investments in technology and
personnel to improve response times. The Company's continued focus on
customer independence and technology has successfully resulted in fewer
inquiries to E*TRADE personnel per transaction than in the past. The impact of
these efforts can already be seen in the service levels reached. Wait times
and average speed of answer have dropped significantly since the
implementation of the new investments in technology, people, training and
out-sourcing.
<PAGE>11
However, there can be no assurance that the Company will be able to
consistently provide enough service capacity, and the failure to do so could
have a material adverse effect on the Company's business, financial condition
and operating results.
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.
The E*TRADE Engine
The E*TRADE transaction processing engine includes a wide variety of
functions and services that allow customers to open and monitor brokerage
accounts and to place orders for equity and option transactions. The engine
also has been structured so that it can be adapted for use by other service
providers, enabling them to integrate E*TRADE's transaction processor into
their own front-end applications to create or expand their electronic
services.
E*TRADE's core technology, developed over a period of several years, is
comprised of three parts: the graphical user interface that the customer
sees; the interface server that connects the customer to the processor; and
the automated processor that processes the transactions.
Graphical User Interface ("GUI"). E*TRADE's GUI environment is based on
Netscape's Secure Commerce Server and today can be accessed by individuals
utilizing Netscape Navigator or Microsoft Internet Explorer. E*TRADE's GUI
connects to the interface server through a bank of Sun servers. These
"gateway servers" provide for load balancing and offer immediate scalability.
Access is restricted through the use of secured network servers and routers
and by requiring two applications of passwords--one for access to the secured
Web site, and a second before an order is placed.
The Interface Server. The interface server's primary function is to provide
access to an efficient, standard transaction processor from all gateways. The
server technology enables communications through multiple platforms and
allows different platforms to communicate with each other. Beyond these
features, the interface server also has been designed to be scalable and
portable and runs in an environment that is both redundant and secure.
<PAGE>12
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 designed to rapidly read
data, process transactions and transmit information to multiple locations.
Because of this, the Company is able to process over 80% 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 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
restricts access through the use of secured network servers and routers.
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 customer requests.
The Company established a secondary data center in Rancho Cordova,
California. This facility replaced the previous back-up facility in Palo
Alto, California, in July 1996. This new facility supports systems, network
and transaction redundancy between the Company's Palo Alto and Rancho Cordova
data centers, thereby providing an operational system in the event of a
service interruption at either 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.
The information and financial 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. There can be no assurance that the Company
will be able, for technical or other reasons, to develop and introduce new
services and products or enhance existing services and products in a timely
manner in response to changing market conditions or customer requirements, or
that new services and products will achieve market acceptance, the failure of
any of which could result in a material adverse effect on the Company's
business, financial condition and operating results.
A significant risk to online commerce and communication is the insecure
transmission of confidential information over public networks. 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 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.
<PAGE>13
STRATEGIC RELATIONSHIPS AND BUSINESS DEVELOPMENT
The Company pursues strategic relationships to increase its access to online
consumers, to build brand name recognition and to expand the products and
services the Company can provide to its online customers.
Core Business Expansion
E*TRADE has secured or is actively pursuing alliances with (i) Internet
access and service providers, (ii) Internet content providers, (iii)
providers of home and online banking services, and (iv) electronic commerce
companies. These alliances are intended to increase the Company's core
customer base, transaction 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 touch-tone
telephone, many use online service providers 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.
America Online. America Online and the Company have had a business
relationship for over nine years. In October 1996, the Company signed a non-
exclusive agreement with America Online to place E*TRADE in America Online's
new online Brokerage Area, where E*TRADE will receive a more prominent
presence, accessible through an icon to an upgraded graphical user interface.
Currently, E*TRADE's non-graphical, ASCII interface is accessible through the
America Online service only through a key word search.
CompuServe. CompuServe and the Company have had a non-exclusive contractual
relationship for over ten years. Initially, CompuServe served as an access
point for the Company's service bureau business. The Company's current
agreement with CompuServe permits CompuServe customers to open brokerage
accounts with E*TRADE and access those accounts either through CompuServe or
via the Company's TELE*MASTER service. 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 transactions. 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 who wish to
access E*TRADE using direct modem software.
Data Broadcasting Corporation. Data Broadcasting Corporation ("DBC"), a
provider of financial information to individual investors, has entered into
an agreement with the Company whereby DBC provides a direct link to E*TRADE's
services from its own Internet Web site and that of the brand labeled quote
sites it provides to others.
<PAGE>14
GTE Corporation. The Company entered into an agreement with GTE Corporation
("GTE") in 1989 to develop an online interactive television brokerage service
that would be made available through GTE MainStreet, an interactive
television system operated by GTE over certain cable television franchises.
GTE MainStreet has been on the air on a pilot basis for approximately four
years and is now operational in three test markets. The volume of transactions
through GTE MainStreet and associated revenues represent an immaterial
portion of the Company's business.
Intuit. The Company has signed a letter of intent for a strategic
relationship with Quicken Investment Services, Inc., 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 orders
via their E*TRADE accounts. There can be no assurance that the Company will
reach a definitive agreement with Intuit on terms favorable to the Company, or
at all.
USA Today. The Company has entered into an agreement with USA Today Online
to provide direct access to E*TRADE's services through USA Today Online's
Financial Marketplace, a commercial area that includes personal finance
services and products.
BASELINE Financial Services. BASELINE Financial Services ("BASELINE")
provides customers with access to a wide array of investment fundamentals,
First Call earnings estimates and historical prices on over 6,500 company
stocks. Available to customers free of charge from the "Information
Resources" area of the E*TRADE web site, BASELINE information can be used to
examine a company's statistics prior to making investment decisions.
Quote.com. Quote.com provides 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
were integrated into E*TRADE's Web site and are free to E*TRADE customers.
Quote.com also has entered into an agreement with the Company to provide a
direct link to E*TRADE's services from its trading menu on its own Internet
Web site.
Briefing.com. Briefing.com, a service of Charter Media, provides market
commentary and analysis free to E*TRADE customers. Updates are posted
throughout the day to keep investors informed of important developments
affecting the markets.
New Products and Services
E*TRADE is also pursuing opportunities to increase the number of products and
services offered electronically to E*TRADE customers. These include (i) other
investment products, including mutual funds, fixed income securities and non-
U.S. securities, (ii) electronic funds transfer, and, subject to regulatory
approval,(iii) equity offerings over the Internet. There can be no assurance
that the Company will be successful in its pursuit of these opportunities or
that such pursuit will not divert management attention or inefficiently
utilize Company resources.
<PAGE>15
Significant relationships formed to date are as follows:
CyberCash. The Company has signed a memorandum of understanding for a
strategic relationship with CyberCash, Inc. ("CyberCash"), 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 a definitive agreement with CyberCash on terms
favorable to the Company, or at all.
National Processing Company. The Company has signed a letter of intent with
National Processing Company ("NPC") to provide the ability for E*TRADE's
Internet customers to initiate, over the Web, funds transfers from checking
accounts at third-party institutions into their E*TRADE accounts. This
service would be made available to E*TRADE customers free of charge. There
can be no assurance that the Company will reach a definitive agreement with
NPC on terms favorable to the Company, or at all.
InterVoice. The Company has signed an agreement with InterVoice, Inc.
whereby the Company will purchase a number of intelligent software agent
platforms which will expand its TELE*MASTER telephone trading system through
advanced touchtone, fax-back, Internet and ADSI based applications, among
others. There can be no assurance that the Company will successfully
implement InterVoice software on terms favorable to the Company, or at all.
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.
While the Company has no current agreements or negotiations underway with
respect to any potential acquisitions, the Company may make acquisitions of
other companies or technologies in the future, and the Company regularly
evaluates such opportunities. Acquisitions entail numerous risks and 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.
<PAGE>16
OPERATIONS
Clearing
The Company implemented self-clearing operations in July 1996. Clearing
operations include the confirmation, receipt, settlement, custody and
delivery functions involved in securities transactions. Performing its own
clearing operations allows E*TRADE Securities to retain customer free credit
balances and securities for use in margin lending activities subject to SEC
and NASD rules. Prior to its conversion to self-clearing, the Company cleared
all of its customer transactions as a fully disclosed correspondent of Herzog,
Heine, Geduld, Inc. ("Herzog"). The Company has entered into a seven-year
agreement with BETA Systems for the provision of computer services by BETA
Systems to support order entry, order routing, securities processing,
customer statements, tax reporting, regulatory reporting, and other services
necessary to the management of a brokerage clearing business.
Since the Company's conversion to self-clearing, customers' securities
typically are 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 collects dividends and interest
on securities held in nominee name and makes the appropriate credits to
customer accounts. The Company also facilitates exercise of subscription
rights on securities held for its customers. The Company arranges for the
transmittal of proxy, annual report and tender offer materials to customers.
E*TRADE Securities relies upon certificate counts and microfilming procedures
as deterrents to theft of securities and, as required by the NASD and certain
other regulatory authorities, carries fidelity bonds covering loss or theft.
Self-clearing, especially where conducted by firms such as the Company,
without significant prior experience, involves substantial risks. The failure
of the Company to perform self-clearing accurately and cost-effectively could
have a material adverse effect on the Company's business, financial condition
and operating results.
Lending and Borrowing Activities
Margin Lending. The Company makes loans to customers collateralized by
customer securities. Margin lending by the Company is subject to the margin
rules of the Board of Governors of the Federal Reserve System, NASD margin
requirements and the Company's internal policies, which are more stringent
than the Federal Reserve and NASD requirements. In permitting customers to
purchase securities on margin, the Company takes the risk of a market decline
that could reduce the value of the collateral held by the Company to below
the customers' indebtedness before the collateral can be sold, which could
result in losses to the Company. Under applicable NASD rules, in the event of
a decline in the market value of the securities in a margin account, the
Company is 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 current internal requirement, however, is that the customer's
equity not fall below 30%. If it does, the customer will be required to
increase the account's equity to 40%. Margin lending to customers constitutes
the major portion of the basis on which net capital requirements of the
Company are determined under the SEC's Net Capital Rule. To the extent these
activities expand, the Company's net capital requirements will increase.
Securities Lending and Borrowing. The Company borrows securities both to
cover short sales and to complete customer transactions in the event a
customer fails to deliver securities by the required settlement date. The
Company collateralizes such borrowings by depositing cash or securities with
the lender and receives a rebate (in the case of cash collateral) or pays a
fee calculated to yield a negotiated rate of return. When lending securities,
the Company receives cash or securities and generally pays a rebate (in the
case of cash collateral) to the other party in the transaction. Securities
lending and borrowing transactions are executed pursuant to written
agreements with counterparties that 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 are "marked to market" on a
daily basis through the facilities of the various national clearing
organizations.
<PAGE>17
Order Processing
All listed market orders other than those with special qualifiers (subject to
certain size limitations based on the size in the primary market) are
executed at the National Best Bid/Offer ("NBBO") or better 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), or
better at the time of receipt by the market-maker. Eligible orders are
subject to possible price improvement in the marketplace.
The Company receives orders principally through the Internet, online
services and touch-tone telephone. This method of trading is heavily
dependent on the integrity of the electronic systems supporting it. Heavy
stress placed on the Company's systems during peak trading times could
cause the Company's systems to operate at an unacceptably low speed or
fail. Any significant degradation or 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 such losses, including litigation claiming fraud or
negligence.
The Company has experienced such system failures and degradation 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
compensated customers for verifiable losses arising in connection with such
systems failures. The Company sustained losses in excess of $1.7 million for
such systems failures in May 1996. 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.
The Company relies on a number of third parties to process its transactions,
including online access providers, back office processing organizations,
service providers and market makers, all of which may need to expand the
scope of the operations they perform for the Company. Any backlog caused by a
third party's inability to expand at the rate necessary to meet the Company's
needs or a loss in the availability of these services and the inability of
the Company to make alternative arrangements in a timely manner, if at all,
could have a material adverse effect on the Company's business, financial
condition and operating results.
<PAGE>18
COMPETITION
The market for online investing services, particularly over the Internet, is
new, rapidly evolving and intensely competitive, and the Company expects
competition to continue to intensify in the future. E*TRADE encounters direct
competition from discount brokerage firms providing either touch-tone
telephone or online investing services, or both. These competitors include
Charles Schwab & Co., Inc. ("Charles Schwab") and Fidelity Brokerage
Services, Inc., among others. The Company also encounters competition from
established full-commission brokerage firms, such as Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("Merrill Lynch") and Paine Webber Incorporated,
among others. In addition, the Company competes with financial institutions,
mutual fund sponsors and other organizations, some of which provide online
investing services.
The Company believes that the principal competitive factors affecting the
market for its 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. Based on research conducted with both
customer and non-customer focus groups and the success the Company has
enjoyed, the Company believes that it presently competes favorably with
respect to each of these factors.
There are virtually no barriers to entry in the market in which the Company
operates. Many of the Company's competitors have longer operating histories
and significantly greater financial, technical, marketing and other resources
than the Company. Many current and potential competitors also have greater
name recognition and more extensive customer bases that could be leveraged,
thereby gaining market share to the Company's detriment. Additionally, it is
possible that new competitors or alliances among competitors may emerge and
rapidly acquire significant market share.
The general financial success of companies within the securities industry
over the past several years has strengthened existing competitors. Management
believes that such success will continue to attract new competitors to the
securities industry such as banks, software development companies, insurance
companies, providers of online financial and information services and others,
as such companies expand their product lines. The current trend toward
consolidation in the commercial banking industry could further increase
competition in all aspects of the Company's business. While it is not
possible to predict the type and extent of competitive services that
commercial banks and other financial institutions ultimately may offer or
whether administrative or legislative barriers will be repealed or modified,
firms such as the Company may be adversely affected by such competition or
legislation. In addition, competition among financial services firms exists
for experienced technical and other personnel.
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.
<PAGE>19
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, and the District of Columbia.
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. The Company is required to comply with many complex laws and
rules, 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
maintenance of a compliance system reasonably designed to ensure such
compliance. 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 shareholders of broker-dealers.
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 in
the form of an excess securities bond from National Union Fire Insurance
Company of Pittsburgh, Pennsylvania, a member company of American
International Group.
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 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.
<PAGE>20
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 fiscal
year ended September 30, 1996, the Company's revenues from accounts with
foreign addresses has not been a material part of its operating revenues. 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 varying compliance requirements of other national
regulatory jurisdictions may impose a limit to the Company's rate of
international expansion.
Net Capital Requirements
As registered broker-dealers and members of the NASD, E*TRADE Securities and
E*TRADE Capital (a non-operational broker-dealer subsidiary of the Company)
are subject to the Net Capital Rule. The Net Capital Rule, which specifies
minimum net capital requirements for registered broker-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 could require a firm's liquidation. The Net
Capital Rule prohibits payments of dividends, redemption of stock, the
prepayment of subordinated indebtedness, and the making of any unsecured
advance or loan to a shareholder, 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 shareholders, 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.
Net capital is essentially defined as net worth (assets minus liabilities),
plus qualifying subordinated borrowings and certain discretionary
liabilities, 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 its disposition.
<PAGE>21
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.
As of September 30, 1996, E*TRADE Securities was required to maintain minimum
net capital of $3.7 million and had total net capital of approximately $17.1
million, or approximately $13.4 million in excess of the minimum amount
required. In February 1996, E*TRADE Capital, then doing business as ET
Execution Services, undertook to act as guarantor pursuant to an agreement
between the Company and Merrill Lynch Business Financial Services, Inc. As a
result of a breakdown of internal controls for the monitoring of such
proposed contracts, this undertaking inadvertently caused E*TRADE Capital to
fall short of its minimum net capital requirement and thus be in violation of
the Net Capital Rule through May 30, 1996 when E*TRADE Capital was released
from the guarantee. The Company has reported the violation of E*TRADE Capital
to the SEC and the NASD. The Company believes that any penalty imposed by the
NASD will not be substantial, as the subsidiary in violation is non-
operational 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 the SEC or the NASD will not impose a penalty upon E*TRADE
Capital, including fines, restrictions on business activities or suspension
of trading activities, or that the imposition of any such penalty will not
have a material adverse effect on the Company's business, financial condition
and operating results. The Company has implemented internal controls intended
to prevent such violations in the future, including the review of proposed
contracts by finance personnel of the Company. There can be no assurance that
a violation of the Net Capital Rule will not occur in the future.
Electronic Commerce
The Company anticipates that it may be required to comply with record
keeping, data processing and other regulatory 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.
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. Although certain of these prohibitions have been held
unconstitutional by a federal trial court, that ruling is expected to be
appealed, and, in any event, 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.
<PAGE>22
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 the United States and certain other countries, and has certain
other registered trademarks. The inability of the Company to adequately
protect the name "E*TRADE" would have a material adverse effect on the
Company's business, financial condition and operating results.
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. The laws of other countries may afford the Company little or
no effective protection of its intellectual property. The inability of the
Company to protect its intellectual property rights 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. 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.
ASSOCIATES
At September 30, 1996, the Company had 327 full-time associates. 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. 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.
<PAGE>23
EXECUTIVE OFFICERS OF THE REGISTRANT
In addition to executive officers who are also directors of the Company, the
following executive officers are not directors and are elected by and serve
at the discretion of the Board of Directors:
NAME AGE POSITION
David R. Ewing................ 40 Senior Vice President, E*TRADE
Technologies and Chief Information Officer
Wayne H. Heldt................ 56 Vice President and Managing
Director, International Affairs
Kathy Levinson................ 41 Executive Vice President, Operations;
President and Chief Operating Officer,
E*TRADE Securities, Inc.
Rebecca L. Patton............. 41 Senior Vice President, Marketing and
Communications
Stephen C. Richards........... 42 Senior Vice President, Finance and
Administration, Chief Financial Officer
and Treasurer; Chief Financial Officer
of E*TRADE Securities, Inc.
David R. Ewing has served as Senior Vice President, E*TRADE Technologies
since August 1996, Senior Vice President of Systems from May 1996 to August
1996, Chief Information Officer of E*TRADE Group, Inc., since May 1996 and
Vice President since September 1995. From 1994 to September 1995, Mr. Ewing
served as President of Vital Business Solutions, Inc., a company that
provides information systems consulting services. From September 1990 to
September 1994, Mr. Ewing served as Director of Information Systems at
Nellcor Puritan Bennett, Inc., a manufacturer of critical care monitoring
components. Prior to that, Mr. Ewing served as a Manager in the Information
Technology practice at Price Waterhouse and as a Manager in the Information
Systems Division at Charles Schwab.
Wayne H. Heldt has been Vice President and Managing Director, International
Affairs for E*TRADE Group, Inc. since May 1996 and has served as a director
of E*TRADE Securities, Inc. since January 1995. 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 Capital, including Chairman of the Board and Chief Executive Officer,
from May 1993 to June 1996. 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.
<PAGE>24
Kathy Levinson has served as Executive Vice President of Operations for the
Company since November 1996, Senior Vice President of the Company from May
1996 to November 1996 and President and Chief Operating Officer of E*TRADE
Securities, Inc., since January 1996, and a director of E*TRADE Securities,
Inc. since June 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, most recently serving as Senior
Vice President of Custody Services and prior to that was Senior Vice
President of Credit Service from 1989 to October 1994. She received a BA in
Economics from Stanford University.
Rebecca L. Patton has served as Senior Vice President, Marketing and
Communications of E*TRADE Group, Inc. since October 1996, and Vice President,
Marketing 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.
Stephen C. Richards joined the Company in April 1996 as Chief Financial
Officer and Treasurer and, as of June 1996, Senior Vice President, Finance
and Administration, and Chief Financial Officer of E*TRADE Securities, Inc.
From 1984 to April 1996, Mr. Richards served in various positions at Bear
Stearns & Co., Inc., an investment bank, including Managing Director and
Chief Financial Officer of Correspondent 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.
The Company's present directors (including the director emeritus) and
executive officers and their respective affiliates own approximately 51% of
the outstanding Common Stock. As a result, these shareholders, if they act
together, will be able to exercise significant influence over all matters
requiring shareholder approval, including the election of directors and
approval of significant corporate transactions, and will have veto power with
respect to any shareholder action or approval requiring a majority vote. Such
concentration of ownership also may have the effect of delaying, preventing
or deterring a change in control of the Company.
Item 2. 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 2001. The Company established a secondary data center in
Rancho Cordova, California which became fully operational in July 1996,
replacing a back-up facility in Palo Alto. The Company leases an aggregate
70,000 square feet at the Rancho Cordova facility. The lease expires in July
2006. The Company believes that it has adequate space for its current needs.
<PAGE>25
Item 3. LEGAL PROCEEDINGS
The Company is not currently a party to any litigation that it believes could
have a material adverse effect on the Company's business, financial condition
or operating results. However, from time to time the Company has been
threatened with, or named as a defendant in, lawsuits and administrative
claims. Compliance and trading problems that are reported to the NASD or the
SEC by dissatisfied customers are investigated by the NASD or the SEC, and,
if pursued by such customers, may rise to the level of arbitration or
disciplinary action. One or more of such lawsuits, claims or disciplinary
actions decided adversely to the Company could have a material adverse effect
on the Company's business, financial condition and results of operations. The
Company is also subject to periodic regulatory audits and inspections.
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, hardware/software
damage, and directors and officers liability. The Company believes that such
insurance coverages are adequate for the purpose of its business.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On July 1, 1996, the following matters were submitted to E*TRADE Group, Inc.
security holders for written consent:
(i) Reincorporation in Delaware:
(a) votes cast for: 21,662,256 shares;
(b) votes cast against: 0 shares; and
(c) abstentions/votes withheld: 2,300,640 shares.
(ii) Adoption of the 1996 Stock Incentive Plan and the 1996 Stock Purchase
Plan:
(a) votes cast for: 21,974,676 shares;
(b) votes cast against: 100,020 shares; and
(c) abstentions/votes withheld: 1,888,200 shares.
<PAGE>26
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
Price range of Common Stock
The Company's common stock has been quoted on the Nasdaq National Market
under the symbol "EGRP" since August 16, 1996. The following table shows the
high and low closing sales prices for the Common Stock of the Company for the
period indicated, as reported by the Nasdaq National Market. The prices do
not include retail markups, markdowns or commissions.
<TABLE>
<CAPTION>
1996 High Low
<S> <C> <C>
Quarter ended September 30, 1996 $13.1875 $8.3750
</TABLE>
The closing sale price of the Company's Common Stock as reported on the
Nasdaq National Market on December 13, 1996 was $11.75 per share. As of
that date there were 255 holders of record of the Company's Common Stock.
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 often has 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.
Dividends
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.
<PAGE>27
Item 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL DATA
YEARS ENDED SEPTEMBER 30,
--------- --------- --------- --------- ---------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
(in thousands, except per share data)
Revenues:
<S> <C> <C> <C> <C> <C>
Transaction revenues $44,178 $20,835 $ 9,548 $ 2,158 $ 327
Net interest 4,813 1,004 302 17 -
Computer services
and other. 2,604 1,501 1,055 799 521
--------- --------- --------- --------- ---------
Net revenues 51,595 23,340 10,905 2,974 848
--------- --------- --------- --------- ---------
Cost of services:
Cost of services 30,688 12,678 6,796 1,973 579
Self-clearing
start-up costs 2,240 141 -- -- --
--------- --------- --------- --------- ---------
Total cost of services 32,928 12,819 6,796 1,973 579
--------- --------- --------- --------- ---------
Operating expenses:
Selling and marketing 7,600 2,466 998 282 116
Technology development 2,792 943 335 216 176
General and administrative 9,658 2,803 2,532 400 260
--------- --------- --------- --------- ---------
Total operating
expenses 20,050 6,212 3,865 898 552
--------- --------- --------- --------- ---------
Total cost of services
and operating expenses 52,978 19,031 10,661 2,871 1,131
--------- --------- --------- --------- ---------
Pre-tax income (loss) (1,383) 4,309 244 103 (283)
Income tax expense (benefit) (555) 1,728 (541) 4 2
--------- --------- --------- --------- ---------
Net income (loss) $ (828) $ 2,581 $ 785 $ 99 $ (285)
========= ========= ========= ========= =========
Net income (loss)
per share $ (0.03) $ 0.10 $ 0.03 $ -- $ (0.01)
========= ========= ========= ========= =========
Shares used to compute per
share data 28,564 26,481 26,186 26,677 24,828
========= ========= ========= ========= =========
SEPTEMBER 30,
--------- --------- --------- --------- ---------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
CONSOLIDATED BALANCE SHEET DATA (in thousands):
Cash and equivalents $14,641 $ 9,624 $ 692 $ 36 $ 48
Total assets 294,881 14,164 2,163 728 226
Long-term obligations 22 45 64 1,310 1,165
Shareholders'
equity (deficiency) 69,304 11,148 (92) (788) (1,107)
========= ========= ========= ========= =========
</TABLE>
<PAGE>28
Item 7. MANAGEMENT'S DISCUSSION 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 Form 10-K. This
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from those
anticipated as a result of certain factors, including, but not limited to,
those set forth elsewhere in this Form 10-K.
OVERVIEW
E*TRADE is a leading provider of cost-effective, secure online investing
services. Founded in 1982, the Company operated initially as a service
bureau, providing automated online securities transaction 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
investing services and account information 24 hours a day, seven days a
week.
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 transactions per day. By
the fourth quarter of fiscal 1996, the Company's average daily transaction
volume had grown to 7,500. 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 to the success of its advertising
campaigns in bringing brand name recognition to the E*TRADE name, the launch
of Internet access to E*TRADE and the continuing successful integration
of new product 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. 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 fiscal years 1996 and 1995 amounted to 22% and 20% 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.
<PAGE>29
The Company is making significant investments in systems technology and has
established a secondary site in Rancho Cordova, California, which became
fully functional in July 1996. This new facility supports systems, network
and transaction redundancy between the Company's Palo Alto and Rancho Cordova
locations, thereby providing an operational system in the event of a service
interruption at either facility. The Company also is making significant
investments in its customer service department. The Company's customer
service capacity has been strained at times. Through significant investments
in technology and personnel, the Company continues to address its growing
customer service needs.
The Company implemented self-clearing operations in July 1996. Prior to this
time, the Company cleared all of its customer transactions as a
fully-disclosed correspondent of Herzog. Clearing services include the
confirmation, receipt, settlement, custody and delivery functions involved in
securities transactions. In the first quarter of fiscal 1996, the Company
began hiring associates to perform these functions. As a consequence, the
Company incurred significant non-recurring costs associated with the hiring
and training of its associates, as well as systems integration costs. The
Company continued to incur expenses for clearing operations performed by
Herzog through June 1996. The Company believes that its conversion to
self-clearing was 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.
The Company now assumes direct responsibility for the possession and control
of customer securities and other customer assets and the clearance of
customers' securities transactions. Having this responsibility requires 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 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, effective upon its conversion to self-
clearing, the Company recorded receivables from customers, payables to
customers and collateralized bank loans, which has had a significant effect
on the Company's total assets and total liabilities. The Company recorded
receivables from customers, brokers, dealers and clearing organizations of
$193 million and payables to customers, brokers, dealers and clearing
organizations of $219 million as of September 30, 1996. In connection with
the transition to self-clearing, the Company obtained bank financing to
finance its customer balances. The Company also contracted with a third-party
service bureau, BETA Systems, for its customer record keeping and data
processing services, having previously relied on Herzog for these services.
<PAGE>30
The Company's transaction revenues have grown from $9.5 million in fiscal
1994 to $44.2 million in fiscal 1996. Transaction revenues include securities
brokerage transactions and, since late fiscal 1994, payments for order flow.
Interest revenues, net of interest expense, have grown from $302,000 in
fiscal 1994 to $4.8 million in fiscal 1996. The Company previously
participated in the interest spread on its customer debit and credit balances
through its clearing agreement with Herzog but is no longer subject to that
agreement as a result of the change to self-clearing. Consequently, the
Company now has greater control over interest rates charged to customers for
debit balances and interest rates paid for credit balances. The Company began
receiving fees on its customers' assets invested in money market funds in
September 1994, which were shared with Herzog until the change to self-
clearing. Computer service and other revenues have grown from $1.1 million in
fiscal 1994 to $2.6 million in fiscal 1996. Computer service revenues are
comprised primarily of fees for the time customers are connected to the
Company online. Other revenues represent the Company's return on its
investment in Roundtable Partners LLC, a consortium of broker-dealers that
provides the Company with alternative broker-dealers through which to route
its customers' orders for execution. The Company also participates in the
operating results of Roundtable Partners LLC as an equity owner.
The Company's cost of services has grown from $6.8 million in fiscal 1994 to
$32.9 million in fiscal 1996. Cost of services includes clearing fees paid to
the Company's former clearing broker, system maintenance and communication
expenses and expenses related to the Company's operations and customer
service activities.
Selling and marketing expenses have grown from $1.0 million in fiscal 1994 to
$7.6 million in fiscal 1996 and consist primarily of the costs associated
with the actual advertising placement expenses as well as the creative
development of advertising.
Technology development expenses have grown from $335,000 in fiscal 1994 to
$2.8 million in fiscal 1996 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 $2.5 million in fiscal
1994 to $9.7 million in fiscal 1996 and consist primarily of facilities
costs, equipment and maintenance expenses, as well as corporate management
costs, including accounting, human resources, compliance and other
administrative expenses.
The Company has experienced substantial changes in and expansion of its
business and operations since it began offering online investing services in
1992 and Internet investing services in February 1996 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.
Competition for highly qualified senior managers and technical personnel is
intense. If the Company fails to attract, assimilate and retain such
personnel, there would be a material adverse effect on the Company's
business, financial condition and operating results.
<PAGE>31
RESULTS OF OPERATIONS
The following table sets forth the percentage of net revenues represented by
certain items on the Company's consolidated statements of operations for the
following years ended September 30:
<TABLE>
<CAPTION>
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Revenues:
Transaction revenues 85.6% 89.3% 87.6%
Net interest 9.3 4.3 2.7
Computer services and other 5.1 6.4 9.7
----- ----- -----
Net revenues 100.0 100.0 100.0
----- ----- -----
Cost of services:
Cost of services 59.5 54.3 62.3
Self-clearing start-up costs 4.3 0.6 --
----- ----- -----
Total cost of services 63.8 54.9 62.3
----- ----- -----
Operating expenses:
Selling and marketing 14.8 10.6 9.2
Technology development 5.4 4.0 3.1
General and administrative 18.7 12.0 23.2
----- ----- -----
Total operating expenses 38.9 26.6 35.5
----- ----- -----
Total cost of services and operating
expenses 102.7 81.5 97.8
----- ----- -----
Pre-tax income (loss) (2.7) 18.5 2.2
Income tax expense (benefit) (1.1) 7.4 (5.0)
----- ----- -----
Net income (loss) (1.6)% 11.1% 7.2%
===== ===== =====
</TABLE>
<PAGE>32
Fiscal Years Ended September 30, 1996, 1995 and 1994
Revenues
Transaction revenues were $44.2 million in fiscal 1996, an increase of 112%
compared to $20.8 million in fiscal 1995 and $9.5 million in fiscal 1994. Of
these amounts, payments for order flow were $11.4 million in fiscal 1996, an
increase of 148% compared to $4.6 million in fiscal 1995. The increases in
transaction revenues were primarily the result of higher security transaction
volumes over both periods and the initiation of order flow rebates in early
fiscal 1995, offset in part by reductions in the commission rates charged for
certain transactions. The average revenue per securities transaction was
$27.81 in fiscal 1996, $31.61 in fiscal 1995 and $29.68 in fiscal 1994.
Net interest revenue was $4.8 million in fiscal 1996, an increase of 379%
compared to $1.0 million in fiscal 1995 and $302,000 in fiscal 1994. These
increases were primarily due to average customer margin debt of $124.4
million in fiscal 1996, an increase of 164% compared to $47.1 million
in fiscal 1995 and $25.3 million in fiscal 1994; average customer free
credit balances of $85.2 million in fiscal 1996, an increase of 492%
compared to $14.4 million in fiscal 1995 and $10.1 million in fiscal 1994;
and average customer money market fund balances of $290.7 million in fiscal
1996, an increase of 100% compared to $145.0 million in fiscal 1995 and $80.0
million in fiscal 1994.
Computer services and other revenues were $2.6 million in fiscal 1996, an
increase of 73% compared to $1.5 million in fiscal 1995 and $1.1 million in
fiscal 1994. The increase in computer services and other revenues is
primarily due to the increase in the amount of connect time used by customers
over both periods.
Cost of Services
Total cost of services was $32.9 million in fiscal 1996, an increase of 157%
compared to $12.8 million in fiscal 1995 and $6.8 million in fiscal 1994.
These increases were largely attributable to the increase in the number of
transactions processed by the Company and an increase in customer service
inquiries.
Self-clearing start-up costs were $2.2 million in fiscal 1996 compared to
$141,000 in fiscal 1995. The Company incurred these expenses as it continued
to hire associates and utilize consultants in preparation for the conversion
to self-clearing, which occurred in July 1996. The Company does not
anticipate incurring additional conversion costs in fiscal 1997.
Operating Expenses
Selling and marketing expenses were $7.6 million in fiscal 1996, an increase
of 208% compared to $2.5 million in fiscal 1995 and $1.0 million in fiscal
1994. These increases reflect the increased expenditures for advertising
placements, creative development and collateral materials. In fiscal 1996
there were additional costs attributed to the launch of the Company's Web
site and associated advertising campaign.
<PAGE>33
Technology development expenses were $2.8 million in fiscal 1996, an
increase of 196% compared to $943,000 in fiscal 1995 and $335,000 in fiscal
1994. These increases are attributable to the costs associated with enhancing
the Company's existing product offerings. In fiscal 1996 there were
additional costs associated with the Company's development efforts for the
launch of the Web site and the design and implementation of the Company's
secondary data center in Rancho Cordova, California.
General and administrative expenses were $9.7 million in fiscal 1996, an
increase of 240% compared to $2.8 million in fiscal 1995 and $2.5 million in
fiscal 1994. The increase in fiscal 1996 was the result of increased costs
associated with personnel additions, a $3.1 million 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 fiscal 1995 was
the result of additional expenses incurred for customer bad debts, claims
resulting from a systems failure in the third quarter of fiscal 1995 and
increases in the number of corporate associates needed to accommodate the
growth experienced by the Company during the year. These increases were
partially offset by claims the Company settled in the amount of $850,000 made
by its former clearing broker in fiscal 1994.
Income Tax Expense (Benefit)
Income tax expense (benefit) represents federal and state income taxes at an
effective rate of 40.1% for both fiscal 1996 and 1995. The Company recorded
a net income tax benefit of $541,000 in fiscal 1994, due to full recognition
of net operating loss carryforwards generated in prior years.
VARIABILITY OF RESULTS
The Company expects to experience significant fluctuations in future
quarterly operating results that may be caused by many factors, including the
following: the timing of introductions of enhancements to online financial
services and products by the Company or its competitors; market acceptance of
online financial services and products; the pace of development of the market
for online commerce; changes in transaction volume on the securities markets;
trends in the securities markets; changes in pricing policies by the Company
or its competitors; changes in strategy; the success of or costs associated
with acquisitions, joint ventures or other strategic relationships; changes
in key personnel; seasonal trends; the extent of international expansion; the
mix of international and domestic sales; changes in the level of operating
expenses to support projected growth; and general economic conditions.
Due to the foregoing factors, quarterly revenues and operating results are
difficult to forecast, and the Company believes that period-to-period
comparisons of its operating results will not necessarily be meaningful and
should not be relied upon as an indication of future performance. It is
likely that the Company's future quarterly operating results from time to
time will not meet the expectations of securities analysts or investors,
which may have an adverse effect on the market price of the Company's Common
Stock.
<PAGE>34
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its activities through cash provided by operations,
the private placement of Preferred Stock and, to a lesser extent, equipment
financing. In August 1996, the Company completed an initial public offering
of its Common Stock resulting in net proceeds to the Company of approximately
$46.4 million. 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 shareholders. 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 for $9.0 million. All of the Company's
Preferred Stock converted to Common Stock upon completion of the Company's
initial public offering.
In May 1996, the Company obtained $100 million in authorized financing, to be
collateralized by customer securities, which became available in July 1996
upon completion of its conversion to self-clearing. There were no borrowings
outstanding under these lines at September 30, 1996. In addition, the
Company has entered into numerous agreements with other broker-dealers to
provide financing for the Company's stock loan activities.
The Company currently anticipates that its available cash resources and
credit facilities will be sufficient to meet its presently anticipated
working capital and capital expenditure requirements for at least the next 12
months. However, the Company may need to raise additional funds in order to
support more rapid expansion, develop new or enhanced services and products,
respond to competitive pressures, acquire complementary businesses or
technologies or respond to unanticipated requirements. If additional funds
are raised through the issuance of equity securities, the percentage
ownership of the shareholders of the Company will be reduced, shareholders
may experience additional dilution in net book value per share or such equity
securities may have rights, preferences or privileges senior to those of the
holders of the Company's Common Stock. There can be no assurance that
additional financing will be available when needed on terms favorable to the
Company, if at all. If adequate funds are not available on acceptable terms,
the Company may be unable to develop or enhance its services and products,
take advantage of future opportunities or respond to competitive pressures or
unanticipated requirements, any of which could have a material adverse effect
on the Company's business, financial condition and operating results.
Cash used in operating activities was $7.9 million for fiscal 1996 primarily
as a result of the recording of $7.3 million in customer accounts and
statutorily required segregated balances subsequent to the operational change
of conversion to self-clearing of security transactions in July 1996.
Cash used in investing activities was $45.7 million for fiscal 1996 primarily
as a result of the investment of the proceeds from the initial public
offering and the Company's continued investment in technological
infrastructure and the new backup facility in Rancho Cordova.
Cash provided by financing activities was $58.6 million for fiscal 1996 due
to proceeds from the initial public offering and private offerings offset by
the repayment of long-term debt.
The Company expects that it will have $20.0 million of capital expenditures
during the fiscal year ending September 30, 1997.
<PAGE>35
RECENTLY ISSUED ACCOUNTING STANDARDS
The Company is 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.
The Company is also 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.
On June 28, 1996, the Financial Accounting Standards Board issued SFAS No.
125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, effective for transfers of financial assets
made after December 31, 1996. This new statement provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities. The Company does not expect SFAS No. 125 to
have a material effect on its consolidated financial statements.
<PAGE>36
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Independent Auditors' Report......................................... 37
Consolidated Balance Sheets, September 30, 1996 and 1995............. 38
Consolidated Statements of Operations for years ended
September 30, 1996, 1995 and 1994.............................. 39
Consolidated Statements of Shareholders' Equity for years
ended September 30, 1996, 1995 and 1994........................ 40
Consolidated Statements of Cash Flows for years ended
September 30, 1996, 1995 and 1994.............................. 41
Notes to Consolidated Financial Statements........................... 42
Schedules
All schedules have been omitted as the required information is inapplicable
or the information is presented in the consolidated financial statements or
related notes.
<PAGE>37
Independent Auditors' Report
To the Board of Directors and Shareholders 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, 1996 and
1995, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended
September 30, 1996. 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, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period
ended September 30, 1996 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
San Jose, California
November 22, 1996
<PAGE>38
<TABLE>
<CAPTION>
E*TRADE GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30,
1996 1995
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 14,641,000 $ 9,624,000
Cash and investments required to
be segregated under Federal or
other regulations 35,500,000 -
Investment securities 35,003,000 -
Brokerage receivables - net 193,228,000 1,936,000
Other assets 2,203,000 470,000
------------ ------------
Total current assets 280,575,000 12,030,000
Property and equipment--net 9,228,000 1,458,000
Equity investment 2,860,000 676,000
Other assets 2,218,000 -
------------ ------------
TOTAL $294,881,000 $ 14,164,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Brokerage payables $219,483,000 $ -
Income taxes payable - 602,000
Accounts payable,
accrued liabilities and other 6,072,000 2,369,000
------------ ------------
Total current liabilities 225,555,000 2,971,000
Long-term portion of capital leases 22,000 45,000
------------ ------------
Total liabilities 225,577,000 3,016,000
------------ ------------
COMMITMENTS AND CONTINGENCIES
(NOTES 8 AND 9)
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par: shares
authorized, 1,000,000; Series A: 800,000
shares designated; shares issued and
outstanding: 1996, none; 1995, 100,000 - 1,000
Common stock, $.01 par: shares authorized,
50,000,000; shares issued and
outstanding: 1996, 29,539,147;
1995, 14,890,980 295,000 149,000
Additional paid-in capital 68,738,000 9,899,000
Retained earnings 271,000 1,099,000
Total shareholders' equity 69,304,000 11,148,000
------------ ------------
TOTAL $294,881,000 $14,164,000
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>39
<TABLE>
<CAPTION>
E*TRADE GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years Ended
September 30,
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES:
Transaction revenues $44,178,000 $20,835,000 $9,548,000
Interest, net of interest expense
of $2,224,000; $83,000;
and $106,000 in 1996, 1995,
and 1994, respectively 4,813,000 1,004,000 302,000
Computer services and other 2,604,000 1,501,000 1,055,000
----------- ----------- -----------
Net revenues 51,595,000 23,340,000 10,905,000
----------- ----------- -----------
COST OF SERVICES:
Cost of services 30,688,000 12,678,000 6,796,000
Self-clearing start-up costs 2,240,000 141,000 -
----------- ----------- -----------
Total cost of services 32,928,000 12,819,000 6,796,000
----------- ----------- -----------
OPERATING EXPENSES:
Selling and marketing 7,600,000 2,466,000 998,000
Technology development 2,792,000 943,000 335,000
General and administrative 9,658,000 2,803,000 2,532,000
Total operating expenses 20,050,000 6,212,000 3,865,000
----------- ----------- -----------
Total cost of services and
operating expenses 52,978,000 19,031,000 10,661,000
----------- ----------- -----------
PRE-TAX INCOME (LOSS) (1,383,000) 4,309,000 244,000
INCOME TAX EXPENSE (BENEFIT) (555,000) 1,728,000 (541,000)
----------- ----------- -----------
NET INCOME (LOSS) $ (828,000) $ 2,581,000 $ 785,000
----------- ----------- -----------
Net income (loss) per share $ (0.03) $ 0.10 $ 0.03
----------- ----------- -----------
Weighted average number of common and
common equivalent shares outstanding 28,564,000 26,481,000 26,186,000
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>40
E*TRADE GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Total
Preferred Stock Common Stock Additional Retained Shareholders'
Paid-In Earnings Equity
Shares Amount Shares Amount Capital (Deficit) (Deficiency)
--------- ------- ----------- -------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE,
OCTOBER 1, 1993 15,498,180 $155,000 $ 1,325,000 $(2,267,000) $ (787,000)
Net income 785,000 785,000
Issuance of common
stock 380,520 4,000 159,000 163,000
Exercise of stock
warrants 1,235,940 12,000 (12,000) -
Repurchase of
common stock (2,160,240) (22,000) (231,000) (253,000)
--------- ------- ----------- -------- ------------ ------------ -------------
BALANCE,
SEPTEMBER 30, 1994 14,954,400 149,000 1,241,000 (1,482,000) (92,000)
Net income 2,581,000 2,581,000
Issuance of Series A
preferred stock 100,000 $1,000 12,299,000 12,300,000
Exercise of stock
warrants 1,293,120 13,000 - 13,000
Exercise of stock
options 497,100 5,000 141,000 146,000
Repurchase of
common stock (1,853,640) (18,000) (3,782,000) (3,800,000)
--------- ------- ----------- -------- ------------ ------------ -------------
BALANCE,
SEPTEMBER 30, 1995 100,000 1,000 14,890,980 149,000 9,899,000 1,099,000 11,148,000
Net loss (828,000) (828,000)
Issuance of Series B
preferred stock,
net of issuance
costs 20,336 - 2,837,000 2,837,000
Issuance of Series C
preferred stock,
net of issuance
costs 11,180 - 8,950,000 8,950,000
Initial public
offering 5,026,550 50,000 46,352,000 46,402,000
Conversion of
preferred stock (131,516) (1,000) 7,890,960 79,000 (78,000) -
Exercise of stock
warrants, including
tax benefit 403,080 4,000 286,000 290,000
Exercise of stock options,
including tax benefit 1,320,060 13,000 472,000 485,000
Issuance of common
stock for services 7,517 - 20,000 20,000
--------- ------- ----------- -------- ------------ ------------ -------------
BALANCE,
SEPTEMBER 30, 1996 - - 29,539,147 $295,000 $68,738,000 $ 271,000 $69,304,000
========= ======= =========== ======== ============ ============ =============
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>41
E*TRADE GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended
September 30,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (828,000) $2,581,000 $ 785,000
Noncash items included in net
income (loss):
Deferred income taxes (487,000) 303,000 (589,000)
Issuance of common stock for
services 20,000 - -
Depreciation and amortization 876,000 230,000 65,000
Equity income from investment (228,000) (353,000) -
Interest converted to
long-term notes payable - 67,000 87,000
Loss on the disposal of
office equipment 87,000 - -
Net effect of changes in:
Brokerage receivables (191,292,000) (1,437,000) (203,000)
Cash and investments required
to be segregated under Federal
or other regulations (35,500,000) - -
Other assets (3,112,000) (113,000) 97,000
Brokerage payables 219,483,000 - -
Accounts payable, accrued
liabilities and other 3,101,000 2,095,000 649,000
------------ ------------ ------------
Net cash provided by (used in)
operating activities (7,880,000) 3,373,000 891,000
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (8,733,000) (1,375,000) (124,000)
Purchase of equity investment (2,000,000) - -
Purchase of investment securities (337,073,000) (504,000) -
Sale/maturity of investment
securities 302,070,000 - -
Distributions received from
equity investment 44,000 181,000 -
------------ ------------ ------------
Net cash used in
investing activities (45,692,000) (1,698,000) (124,000)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of
Series A preferred stock - 12,300,000 -
Proceeds from issuance of
Series B preferred stock 2,837,000 - -
Proceeds from issuance of
Series C preferred stock 8,950,000 - -
Proceeds from issuance of
common stock 46,402,000 - 163,000
Proceeds from exercise of
stock options 310,000 146,000 -
Proceeds from exercise of
stock warrants 113,000 13,000 -
Proceeds from long-term
note payable 2,500,000 - -
Repurchase of common stock - (3,800,000) (253,000)
Repayment of long-term note
payable (2,500,000) (1,381,000) -
Repayment of capital leases (23,000) (21,000) (21,000)
------------ ------------ ------------
Net cash provided by (used in)
financing activities 58,589,000 7,257,000 (111,000)
------------ ------------ ------------
INCREASE IN CASH AND EQUIVALENTS 5,017,000 8,932,000 656,000
CASH AND EQUIVALENTS--Beginning of year 9,624,000 692,000 36,000
------------ ------------ ------------
CASH AND EQUIVALENTS--End of year $14,641,000 $9,624,000 $ 692,000
------------ ------------ ------------
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest $ 2,013,000 $ 399,000 $ 18,000
Cash paid for income taxes $ 1,025,000 $ 830,000 $ 41,000
Noncash investing and
financing activities:
Capital expenditures financed
with capital leases - - $ 26,000
Tax benefit on exercise of
non-qualified stock warrants $ 177,000 - -
Tax benefit on exercise of
stock options $ 175,000 - -
In August 1996, each share of
preferred stock was converted
into 60 shares of common stock
automatically after the closing
of the initial public offering
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>42
E*TRADE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 E*TRADE Capital, Inc.
(formerly, ET Execution Services, Inc.), securities broker-dealers. The
Company has two offices in California, and as of September 30, 1996,
approximately 25% of E*TRADE Securities' total customer accounts were located
in California. All intercompany balances and transactions have been
eliminated.
Effective January 18, 1996, the shareholders of the Company approved a
change in its name from Trade*Plus, Inc. to E*TRADE Group, Inc.
Transaction Revenues--The Company derives revenues from commissions and
payments from other broker-dealers for order flow related to customer
transactions in equity and debt securities and options. Securities
transactions are recorded on a trade date basis and are executed by
independent broker-dealers. Through June 1996 the Company did not receive or
hold customers' securities or funds. The Company implemented self-clearing
operations and took custody of securities and funds in customer accounts in
July 1996.
Interest, Net of Interest Expense--Prior to July 1996, these amounts
represent the Company's participation in the interest differential on its
customer debit and credit balances through a contractual agreement with its
former clearing broker, and fees on its customer assets invested in money
market accounts. Subsequent to the implementation of self-clearing in July
1996, these amounts primarily represent interest earned by the Company on
credit extended to its customers to finance their purchases of securities on
margin, fees on its customer assets invested in money market accounts and
interest earned on investment securities, offset by interest paid to
customers on certain credit balances at a rate that approximates the
prevailing money market rate.
Computer services revenue represents connect time charges for direct
modem access and touch-tone telephone customers. Such revenues are recorded
as earned.
Depreciation and Amortization--Furniture, fixtures and equipment are
stated at cost and are depreciated on a straight-line basis over their
estimated useful lives, generally three to seven years. Leasehold
improvements are amortized over the lesser of their useful lives or the life
of the lease.
Technology development costs are charged to operations as incurred.
Technology development costs include costs incurred in the development and
enhancement of software used in connection with services provided by the
Company that do not otherwise qualify as internally developed software costs.
Cash Equivalents--For purposes of reporting cash flows, the Company
considers all highly liquid investments with original maturities of three
months or less (except for amounts required to be segregated under Federal or
other regulations or amounts designated as trading securities) to be cash
equivalents.
Cash and investments required to be segregated under Federal or other
regulations consist primarily of money market funds.
Investment securities represent a portfolio of commercial paper, cash
and money market funds. The cost of these investments approximates fair
market value, and management has designated them as trading securities.
<PAGE>43
Equity investment represents the Company's 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.
Internally Developed Software Costs--The cost of internally developed
software is capitalized and included in other assets. The costs to develop
such software are capitalized when management authorizes and commits to
funding a project it believes will be completed and used to perform the
functions intended and the conceptual formulation, design and testing of
possible software project alternatives have been completed. Internally
developed software costs include payroll and consulting costs, and are
amortized on a straight line basis over their estimated useful lives,
generally two to three years.
Estimated Fair-Value of Financial Instruments--The Company believes the
amounts presented for financial instruments on the consolidated balance sheet
consisting of cash equivalents, money market funds, commercial paper, and
brokerage receivables and payables to be reasonable estimates of fair-value.
The Company uses available market information as of the balance sheet date
and appropriate valuation methodologies in deriving amounts reported for
financial instruments.
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 No. 109 requires the recognition of deferred tax
liabilities and assets at tax rates expected to be in effect when these
balances reverse. Future tax benefits attributable to temporary differences
are recognized to the extent that realization of such benefits is more likely
than not.
Earnings Per Share--Earnings per share is based on the fully diluted
weighted average number of common and common equivalent shares outstanding
during the period. Pursuant to rules of the Securities and Exchange
Commission, all common and common equivalent shares issued and options,
warrants and other rights to acquire shares of common stock at a price less
than the initial public offering price granted by the Company during the 12
months preceding the offering date (using the treasury stock method until
shares are issued) have been included in the computation of common and common
equivalent shares outstanding for all periods prior to the initial public
offering (see Note 6).
Recently Issued Accounting Standards--The Company is 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.
<PAGE>44
The Company is also 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.
On June 28, 1996, the Financial Accounting Standards Board issued SFAS
No. 125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, effective for transfers of financial assets
made after December 31, 1996. This new statement provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities. The Company does not expect SFAS No. 125 to
have a material effect on its consolidated financial statements.
Reclassifications--Certain items in prior years' financial statements
have been reclassified to conform to the fiscal 1996 presentation.
2. BROKERAGE RECEIVABLES AND PAYABLES--NET
Brokerage receivables and payables--net consists of the following:
<TABLE>
<CAPTION>
September 30,
1996 1995
------------ ------------
<S> <C> <C>
Receivable from brokers, dealers
and clearing organizations $ 24,451,000 $ 1,936,000
Receivable from customers (less
allowance for doubtful
accounts of $129,000 in 1996) 168,777,000 -
------------ ------------
Total brokerage receivables - net $193,228,000 $ 1,936,000
============ ============
Payable to brokers, dealers and
clearing organizations $ 35,922,000 $ -
Payable to customers 183,561,000 -
------------ ------------
Total brokerage payables $219,483,000 $ -
============ ============
</TABLE>
Receivable from and payable to brokers, dealers and clearing organizations
result from the Company's trading activities on behalf of its customers.
Receivable from customers represents credit extended to customers to finance
their purchases of securities on margin. At September 30, 1996, credit
extended to customers with respect to margin accounts was $171.3 million.
Securities owned by customers are held as collateral for amounts due on
margin balances (the value of which is not reflected on the accompanying
balance sheets). Payable to customers represents free credit balances and
other customer funds pending completion of security transactions. The Company
pays interest on certain customer credit balances (see Note 4).
<PAGE>45
3. PROPERTY AND EQUIPMENT--NET
Property and equipment--net consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------- -----------
1996 1995
----------- -----------
<S> <C> <C>
Furniture and fixtures $ 706,000 $ 206,000
Equipment 6,221,000 2,199,000
Leasehold improvements 4,164,000 52,000
----------- -----------
11,091,000 2,457,000
Less: Accumulated depreciation
and amortization 1,863,000 999,000
----------- -----------
Total $9,228,000 $1,458,000
=========== ===========
</TABLE>
4. LONG-TERM NOTES PAYABLE AND SHORT-TERM FUNDING
The Company used $2.5 million of the proceeds from the initial public
offering (see Note 6) to repay a term loan with Merrill Lynch Business
Financial Services, Inc. The term loan was obtained in February 1996 and was
used to finance the purchase of equipment and leasehold improvements.
Interest was accrued at the per annum rate equal to the sum of 2.70% over the
30-Day Commercial Paper Rate as defined. The original terms of such financing
provided for the repayment of the term loan in 60 consecutive monthly
installments. The term loan was collateralized by a first lien on all
business assets of the Company. There was no prepayment penalty.
The principal source of financing for E*TRADE Securities' margin lending is
cash balances in customers' accounts. At September 30, 1996, E*TRADE
Securities was paying interest at 4.9% on $151.4 million of cash balances in
customers' accounts, which were included in brokerage payables. For use in
its brokerage operations, E*TRADE Securities maintains committed lines of
financing totaling $100 million to provide collateral financing of customer
securities. There were no borrowings outstanding under these lines at
September 30, 1996.
<PAGE>46
5. INCOME TAXES
The components of income tax expense (benefit) for the years ended September
30 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal $ (66,000) $1,030,000 $ 11,000
State (2,000) 395,000 37,000
---------- ---------- ----------
Total current (68,000) 1,425,000 48,000
---------- ---------- ----------
Deferred:
Federal (441,000) 302,000 (563,000)
State (46,000) 1,000 (26,000)
---------- ---------- ----------
Total deferred (487,000) 303,000 (589,000)
---------- ---------- ----------
Total tax expense (benefit) $ (555,000) $1,728,000 $ (541,000)
========== ========== ==========
</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 that created deferred tax assets
at September 30 are as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Deferred tax assets:
Reserves and allowances $ 215,000 $ 156,000
Net operating loss carryforwards 804,000 --
Other 226,000 141,000
---------- ----------
Total deferred tax assets 1,245,000 297,000
---------- ----------
Deferred tax liabilities:
Depreciation and amortization 284,000 3,000
Roundtable Partners LLC investment 180,000 --
Other 8,000 8,000
---------- ----------
Total deferred tax liabilities 472,000 11,000
---------- ----------
Net deferred tax asset $ 773,000 $ 286,000
========== ==========
</TABLE>
There were no valuation allowances associated with the deferred tax assets at
September 30, 1996 and 1995.
<PAGE>47
The effective tax rates differed from the federal statutory rates as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Tax expense at federal statutory rate 35.0 % 35.0 % 34.0 %
State income taxes, net of federal tax benefit 2.3 6.1 2.8
Decrease in federal income tax asset valuation
allowance -- -- (260.4)
Other 2.8 (1.0) 1.5
------ ------ ------
Effective tax rate 40.1 % 40.1 % (222.1)%
====== ====== ======
</TABLE>
6. SHAREHOLDERS' 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 shareholders.
On April 10, 1996, the Company sold 20,336 shares of Series B Preferred Stock
("Series B") to Christos Cotsakos and affiliates, Richard Braddock, and
General Atlantic Partners and affiliates for $2,847,000 and incurred
issuance costs of $10,000. The Company used the proceeds to provide
additional working capital.
On June 6, 1996, the Company sold 11,180 shares of Series C Preferred Stock
("Series C") to SOFTBANK Holdings Inc. for $9,000,000 and incurred issuance
costs of $50,000. The Company used the proceeds to provide additional
regulatory net capital to ETRADE Securities.
In July 1996, the shareholders of the Company approved the re-incorporation
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. All references in the consolidated financial statements to
number of shares, per share amounts and share prices of the Company's common
stock were retroactively restated to reflect the increased number of common
shares outstanding.
The Company executed an initial public offering under the Securities Act of
1933 resulting in the issuance by the Company of 5,026,550 shares of common
stock on August 16, 1996, at a price to the public of $52.8 million. In
connection with this offering, the Company incurred issuance costs of $6.4
million, including underwriting discounts and commissions.
Each share of Series A, Series B and Series C Preferred Stock was converted
into 60 shares of common stock automatically upon the closing of the initial
public offering under the Securities Act of 1933.
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 the Company's common stock at a price
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.
<PAGE>48
In April 1993, the shareholders of the Company 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. In 1994, the number
of authorized shares under the 1993 Plan was increased to 3,000,000. In
January 1996, the authorized number of shares under the 1993 Plan was
increased to 4,200,000, and in April 1996, the authorized number of shares
was increased to 5,400,000.
In July 1996, the shareholders of the Company approved the 1996 Stock
Incentive Plan (the "1996 Plan") and reserved 4,000,000 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 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.
In July 1996, the shareholders of the Company approved the 1996 Stock
Purchase Plan ("Stock Purchase Plan") and reserved 650,000 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 first purchase date under the
Stock Purchase Plan will be January 31, 1997.
During 1994 and 1995, warrants that had been issued to the Company's
creditors in September 1990 in connection with a restructuring agreement (the
"Restructuring Warrants") to purchase 1,235,940 and 1,263,240 shares of
common stock, respectively, were exercised for $210 and $206, respectively.
The remaining Restructuring Warrants expired in September 1995. In January
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 fiscal 1996.
<PAGE>49
A summary of stock option activity follows:
<TABLE>
<CAPTION>
NUMBER OPTION PRICE
OF SHARES PER SHARE
---------- ------------
<S> <S> <S>
Outstanding at September 30, 1993 3,210,000 $.13-$.28
Granted 90,000 $0.28
---------- ------------
Outstanding at September 30, 1994 3,300,000 $.13-$.28
Granted 1,776,000 $.28-$.50
Canceled (876,000) $.28-$.42
Exercised (497,100) $.13-$.50
---------- ------------
Outstanding at September 30, 1995 3,702,900 $.13-$.50
Granted 4,045,000 $2.05-$13.42
Canceled (157,200) $.28-$10.50
Exercised (1,320,060) $.13-$.50
---------- ------------
Outstanding at September 30, 1996 6,270,640 $.13-$13.42
========== ============
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------- ---------- ----------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Options available for grant 3,184,100 900,000 1,800,000
Options exercisable 959,040 1,490,000 1,230,000
</TABLE>
In the opinion of management, exercise prices of stock options, warrants and
common stock issued to employees and consultants were not less than the fair
market value of the common stock at the time of grant or issuance. In
accordance with Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, no compensation expense has been recognized.
Estimates of the fair value of the common stock at the grant or issuance date
are based solely on management's opinion. Independent appraisals of the
Company's common stock were not obtained.
The Company has a 401(k) salary deferral program, which became effective on
January 1, 1995, for eligible employees who have met certain service
requirements. The Company matches certain employee contributions; additional
contributions to this plan are at the discretion of the Company. Total
Company contribution expense for the years ended September 30, 1996, 1995 and
1994 was $52,000, $6,000 and $0, respectively.
<PAGE>50
7. REGULATORY REQUIREMENTS
E*TRADE Securities is subject to the Uniform Net Capital Rule (the "Rule")
under the Securities Exchange Act of 1934 administered by the Securities and
Exchange Commission and the National Association of Securities Dealers, Inc.,
which requires the maintenance of minimum net capital. E*TRADE Securities has
elected to use the alternative method permitted by the Rule, which requires
that the Company maintain minimum net capital equal to the greater of
$250,000 or 2 percent of aggregate debit balances arising from customer
transactions, as defined. At September 30, 1996, E*TRADE Securities had net
capital of $17,117,000 (9.2% of aggregate debit balances), which was
$13,414,000 in excess of its required net capital of $3,703,000. Under the
alternative method, a broker-dealer may not repay subordinated borrowings,
pay cash dividends or make any unsecured advances or loans to its parent or
employees if such payment would result in net capital of less than 5% of
aggregate debit balances or less than 120% of its minimum dollar amount
requirement.
8. LEASE ARRANGEMENTS
The Company leases equipment under capital leases expiring through fiscal
1999. Future minimum lease payments under capital leases as of September 30,
1996, are as follows:
<TABLE>
<CAPTION>
Year ending September 30:
<S> <C>
1997 $27,000
1998 20,000
1999 2,000
--------
Total minimum lease payments 49,000
Less: Amount representing interest 5,000
--------
Present value of minimum lease payments $44,000
========
</TABLE>
The Company has three non-cancelable operating leases for office facilities
through 2006 and operating leases for equipment through 2001. Future minimum
rental commitments under these leases at September 30, 1996, are as follows:
<TABLE>
<CAPTION>
Year ending September 30:
<S> <C>
1997 $ 6,462,000
1998 6,534,000
1999 5,502,000
2000 2,158,000
2001 2,043,000
Thereafter 2,912,000
</TABLE>
Certain leases contain provisions for renewal options and rent escalations
based on increases in certain costs incurred by the lessor. Rent expense for
the years ended September 30, 1996, 1995 and 1994 was approximately
$2,441,000, $344,000 and $169,000, respectively.
<PAGE>51
9. COMMITMENTS, CONTINGENT LIABILITIES AND OTHER INFORMATION
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 consolidated 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 $253,000, 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 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.
10. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET CREDIT RISK AND
CONCENTRATIONS OF CREDIT RISK
The Company's customer securities activities are transacted on either a cash
or margin basis. In margin transactions, the Company extends credit to the
customer, subject to various regulatory and internal margin requirements,
collateralized by cash and securities in the customer's account. As
customers write option contracts or sell securities short, the Company may
incur losses if the customers do not fulfill their obligations and the
collateral in customer accounts is not sufficient to fully cover losses which
customers may incur from these strategies. To control this risk, the Company
monitors required margin levels daily, and customers are required to deposit
additional collateral, or reduce positions, when necessary.
Through its broker-dealer subsidiaries, the Company loans securities
temporarily to other brokers in connection with its securities lending
activities. The Company receives cash as collateral for the securities
loaned. Increases in security prices may cause the market value of the
securities loaned to exceed the amount of cash received as collateral. In
the event the counterparty to these transactions does not return the loaned
securities, the Company may be exposed to the risk of acquiring the
securities at prevailing market prices in order to satisfy its customer
obligations. The Company controls this risk by requiring credit approvals
for counterparties, by monitoring the market value of securities loaned on a
daily basis and by requiring deposits of additional cash as collateral when
necessary.
The Company is obligated to settle transactions with brokers and/or other
financial institutions even if its customers fail to meet their obligations
to the Company. Customers are required to complete their transactions on
settlement date, generally three business days after trade date. If
customers do not fulfill their contractual obligations, the Company may incur
losses. The Company has established procedures to reduce this risk by
requiring that customers deposit cash and/or securities into their account
prior to placing an order.
<PAGE>52
The Company may at times maintain inventories in equity securities on both a
long and short basis. While long inventory positions represent the Company's
ownership of securities, short inventory positions represent obligations of
the Company to deliver specified securities at a contracted price, which may
differ from market prices prevailing at the time of completion of the
transaction. Accordingly, both long and short inventory positions may result
in losses or gains to the Company as market values of securities fluctuate.
To mitigate the risk of losses, long and short positions are marked to market
daily and are continuously monitored by the Company.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
The Company's Proxy Statement for its 1997 Annual Meeting of Shareholders,
which, when filed pursuant to Regulation 14A under the Securities Exchange
Act of 1934, will be incorporated by reference in this Annual Report on Form
10-K pursuant to General Instruction G(3) of Form 10-K, provides the
information required under Part III (Items 10, 11, 12 and 13), except for the
information with respect to the Company's executive officers who are not
directors, which is included in "Item 1. Business-Executive Officers of the
Registrant."
<PAGE>53
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Consolidated Financial Statements and Financial Statement Schedules.
See "Item 8. Financial Statements and Supplementary Data."
(b) Reports on Form 8-K.
None
(c) Exhibits.
Exhibit
Number Document Description
3.1 Restated Certificate of Incorporation. (Incorporated by reference to
Exhibit 3.3 of the Company's Registration Statement on Form S-1,
Registration Statement No. 333-05525.)
3.2 Restated Bylaws of the Registrant. (Incorporated by reference to
Exhibit 3.4 of the Company's Registration Statement on Form S-1,
Registration Statement No. 333-05525.)
4.1 Specimen of Common Stock Certificate. (Incorporated by reference to
Exhibit 4.1 of the Company's Registration Statement on Form S-1,
Registration Statement No. 333-05525.)
4.2 Reference is hereby made to Exhibits 3.1 and 3.2.
*10.1 Underwriting Agreement dated August 15, 1996, by and among the
Company, Robertson, Stephens & Company LLC, Hambrecht & Quist LLC,
Deutsche Morgan Grenfell/C. J. Lawrence Inc., and the Selling
Stockholders named therein.
#10.2 Form of Indemnification Agreement entered into between the Registrant
and its directors and certain officers. (Incorporated by reference
to Exhibit 10.1 of the Company's Registration Statement on Form S-1,
Registration Statement No. 333-05525.)
#10.3 1983 Employee Incentive Stock Option Plan. (Incorporated by
reference to Exhibit 10.2 of the Company's Registration Statement on
Form S-1, Registration Statement No. 333-05525.)
#10.4 1993 Stock Option Plan. (Incorporated by reference to Exhibit 10.3
of the Company's Registration Statement on Form S-1, Registration
Statement No. 333-05525.)
#10.5 1996 Stock Incentive Plan. (Incorporated by reference to
Exhibit 99.1 of the Company's Registration Statement on Form S-8,
Registration Statement No. 333-12503.)
<PAGE>54
#10.6 401(k) Plan. (Incorporated by reference to Exhibit 10.8 of the
Company's Registration Statement on Form S-1, Registration Statement
No. 333-05525.)
#10.7 1996 Stock Purchase Plan. (Incorporated by reference to
Exhibit 99.13 of the Company's Registration Statement on Form S-8,
Registration Statement No. 333-12503.)
#10.8 Employee Bonus Plan. (Incorporated by reference to Exhibit 10.10 of
the Company's Registration Statement on Form S-1, Registration
Statement No. 333-05525.)
10.9 Lease of premises at Four Embarcadero Place, 2400 Geng Road, Palo
Alto, California. (Incorporated by reference to Exhibit 10.11 of the
Company's Registration Statement on Form S-1, Registration Statement
No. 333-05525.)
10.10 Lease of premises at 10951 White Rock Road, Rancho Cordova,
California. (Incorporated by reference to Exhibit 10.12 of the
Company's Registration Statement on Form S-1, Registration Statement
No. 333-05525.)
#10.11 Employment Agreement dated March 15, 1996, by and between Christos M.
Cotsakos and the Registrant. (Incorporated by reference to
Exhibit 10.13 of the Company's Registration Statement on Form S-1,
Registration Statement No. 333-05525.)
10.12 Clearing Agreement between E*TRADE Securities, Inc. and Herzog,
Heine, Geduld, Inc. dated May 11, 1994. (Incorporated by reference
to Exhibit 10.14 of the Company's Registration Statement on Form S-1,
Registration Statement No. 333-05525.)
10.13 Guarantee by the Registrant to Herzog, Heine, Geduld, Inc.
(Incorporated by reference to Exhibit 10.15 of the Company's
Registration Statement on Form S-1, Registration Statement No. 333-
05525.)
+10.14 BETAHOST Master Subscription Agreement between E*TRADE Securities,
Inc. and BETA Systems Inc. dated June 27, 1996. (Incorporated by
reference to Exhibit 10.13 of the Company's Registration Statement on
Form S-1, Registration Statement No. 333-05525.)
10.15 Stock Purchase Agreement among the Registrant, General Atlantic
Partners II, L.P. and GAP Coinvestment Partners, L.P. dated
September 28, 1995. (Incorporated by reference to Exhibit 10.17 of
the Company's Registration Statement on Form S-1, Registration
Statement No. 333-05525.)
10.16 Stock Purchase Agreement among the Registrant, General Atlantic
Partners II, L.P., and GAP Coinvestment Partners, L.P., Richard S.
Braddock and the Cotsakos Group dated April 10, 1996. (Incorporated
by reference to Exhibit 10.18 of the Company's Registration Statement
on Form S-1, Registration Statement No. 333-05525.)
<PAGE>55
10.17 Stock Purchase Agreement between the Registrant and SOFTBANK Holdings
Inc. dated June 6, 1996. (Incorporated by reference to Exhibit 10.19
of the Company's Registration Statement on Form S-1, Registration
Statement No. 333-05525.)
10.18 Stockholders Agreement among the Registrant, General Atlantic
Partners II, L.P., GAP Coinvestment Partners, L.P. and the
Stockholders named therein dated September 28, 1995 (the
"Stockholders Agreement"). (Incorporated by reference to
Exhibit 10.20 of the Company's Registration Statement on Form S-1,
Registration Statement No. 333-05525.)
10.19 Supplement No. 1 to Stockholders Agreement dated as of April 10, 1996
(Incorporated by reference to Exhibit 10.21 of the Company's
Registration Statement on Form S-1, Registration Statement No. 333-
05525.)
10.20 Stockholders Agreement Supplement and Amendment dated as of June 6,
(Incorporated by reference to Exhibit 10.22 of the Company's
Registration Statement on Form S-1, Registration Statement No. 333-
05525.)
#10.21 Consulting Agreement between the Registrant and George Hayter dated
as of June 7, 1996. (Incorporated by reference to Exhibit 10.23 of
the Company's Registration Statement on Form S-1, Registration
Statement No. 333-05525.)
*11.1 Statement regarding computation of per share earnings.
21.1 Subsidiaries of the Registrant. (Incorporated by reference to
Exhibit 21.1 of the Company's Registration Statement on Form S-1,
Registration Statement No. 333-05525.)
*23.1 Consent of Independent Auditors.
*27.1 Financial Data Schedule as of and for the year ended September 30,
1996.
*Filed herewith
#Management Contract, Compensatory Plan or Arrangement
+Confidential treatment has been requested with respect to certain portions
of this exhibit.
<PAGE>56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
E*TRADE Group, Inc.
By /s/ CHRISTOS M. COTSAKOS
-----------------------------
Christos M. Cotsakos
President, Chief Executive
Officer and Director
Dated: December 23, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
-------------------- -------------------------- -----------------
/s/ CHRISTOS M. COTSAKOS President, Chief Executive December 23, 1996
--------------------- Officer and Director
Christos M. Cotsakos (principal executive officer)
/s/ STEPHEN C. RICHARDS Senior Vice President, December 23, 1996
--------------------- Finance and Administration, Chief
Stephen C. Richards Financial Officer and Treasurer;
Chief Financial Officer of E*TRADE
Securities, Inc. (principal financial
and accounting officer)
/s/ WILLIAM A. PORTER Chairman of the Board December 23, 1996
- ----------------------
William A. Porter
/s/ RICHARD S. BRADDOCK Director December 23, 1996
- ------------------------
Richard S. Braddock
/s/ WILLIAM E. FORD Director December 23, 1996
- ------------------------
William E. Ford
/s/ GEORGE HAYTER Director December 23, 1996
- ------------------------
George Hayter
/s/ KEITH PETTY Director December 23, 1996
- ------------------------
Keith Petty
/s/ LEWIS E. RANDALL Director December 23, 1996
- ------------------------
Lewis E. Randall
/s/ LESTER C. THUROW Director December 23, 1996
- ------------------------
Lester C. Thurow
<PAGE>1
Exhibit 10.1
5,665,000 Shares
E*TRADE Group, Inc.
Common Stock
Underwriting Agreement
August 15, 1996
ROBERTSON, STEPHENS & COMPANY LLC
HAMBRECHT & QUIST LLC
DEUTSCHE MORGAN GRENFELD/C.J. LAWRENCE INC.
As representatives of the several Underwriters
c/o Robertson, Stephens & Company
555 California Street
Suite 2600
San Francisco, California 94104
Ladies/Gentlemen:
E*TRADE GROUP, INC., a Delaware corporation (the "Company"), and certain
stockholders of the Company named in Schedule B hereto (hereafter called the
"Selling Stockholders") address you as the Representatives of each of the
persons, firms and corporations listed in Schedule A hereto (herein
collectively called the "Underwriters") and hereby confirm their respective
agreements with the several Underwriters as follows:
1. Description of Shares. The Company proposes to issue and sell
5,000,000 shares of its authorized and unissued Common Stock, $.01 par value,
to the several Underwriters. The Selling Stockholders, acting severally and
not jointly, propose to sell an aggregate of 665,000 shares of the Company's
authorized and outstanding Common Stock, $.01 par value, to the several
Underwriters. The 5,000,000 shares of Common Stock, $.01 par value, of the
Company to be sold by the Company are hereinafter called the "Company Shares"
and the 665,000 shares of Common Stock, $.01 par value, to be sold by the
Selling Stockholders are hereinafter called the "Selling Stockholder Shares."
The Company Shares and the Selling Stockholder Shares are hereinafter
collectively referred to as the "Firm Shares." The Company and a certain
Selling Stockholder also propose to grant, severally and not jointly, to the
Underwriters an option to purchase up to 849,750 additional shares of the
Company's Common Stock, $.01 par value (the "Option Shares"), as provided in
Section 7 hereof. As used in this Agreement, the term "Shares" shall include
the Firm Shares and the Option Shares. All shares of Common Stock, $.01 par
value, of the Company to be outstanding after giving effect to the sales
contemplated hereby, including the Shares, are hereinafter referred to as
"Common Stock."
2. Representations, Warranties and Agreements of the Company and the
Selling Stockholders.
I. The Company represents and warrants to and agrees with each Underwriter
and each Selling Stockholder that:
<PAGE>2
(a) A registration statement on Form S-1 (File No. 333-05525)
with respect to the Shares, including a prospectus subject to completion, has
been prepared by the Company in conformity with the requirements of the
Securities Act of 1933, as amended (the "Act"), and the applicable rules and
regulations (the "Rules and Regulations") of the Securities and Exchange
Commission (the "Commission") under the Act and has been filed with the
Commission; such amendments to such registration statement, such amended
prospectuses subject to completion and such abbreviated registration
statements pursuant to Rule 462(b) of the Rules and Regulations as may have
been required prior to the date hereof have been similarly prepared and filed
with the Commission; and the Company will file such additional amendments to
such registration statement, such amended prospectuses subject to completion
and such abbreviated registration statements as may hereafter be required.
Copies of such registration statement and amendments, of each related
prospectus subject to completion (the "Preliminary Prospectuses"), and of any
abbreviated registration statement pursuant to Rule 462(b) of the Rules and
Regulations have been delivered to you.
If the registration statement relating to the Shares has been declared
effective under the Act by the Commission, the Company will prepare and
promptly file with the Commission the information omitted from the
registration statement pursuant to Rule 430A(a) or, if Robertson, Stephens &
Company LLC, on behalf of the several Underwriters, shall agree to the
utilization of Rule 434 of the Rules and Regulations, the information
required to be included in any term sheet filed pursuant to Rule 434(b) or
(c), as applicable, of the Rules and Regulations pursuant to subparagraph
(1), (4) or (7) of Rule 424(b) of the Rules and Regulations or as part of a
post-effective amendment to the registration statement (including a final
form of prospectus). If the registration statement relating to the Shares
has not been declared effective under the Act by the Commission, the Company
will prepare and promptly file an amendment to the registration statement,
including a final form of prospectus, or, if Robertson, Stephens & Company
LLC, on behalf of the several Underwriters, shall agree to the utilization of
Rule 434 of the Rules and Regulations, the information required to be
included in any term sheet filed pursuant to Rule 434(b) or (c), as
applicable, of the Rules and Regulations. The term "Registration Statement"
as used in this Agreement shall mean such registration statement, including
financial statements, schedules and exhibits, in the form in which it became
or becomes, as the case may be, effective (including, if the Company omitted
information from the registration statement pursuant to Rule 430A(a) or files
a term sheet pursuant to Rule 434 of the Rules and Regulations, the
information deemed to be a part of the registration statement at the time it
became effective pursuant to Rule 430A(b) or Rule 434(d) of the Rules and
Regulations) and, in the event of any amendment thereto or the filing of any
abbreviated registration statement pursuant to Rule 462(b) of the Rules and
Regulations relating thereto after the effective date of such registration
statement, shall also mean (from and after the effectiveness of such
amendment or the filing of such abbreviated registration statement) such
registration statement as so amended, together with any such abbreviated
registration statement. The term "Prospectus" as used in this Agreement
shall mean the prospectus relating to the Shares as included in such
Registration Statement at the time it becomes effective (including, if the
Company omitted information from the Registration Statement pursuant to Rule
430A(a) of the Rules and Regulations, the information deemed to be a part of
the Registration Statement at the time it became effective pursuant to Rule
<PAGE>3
430A(b) of the Rules and Regulations); provided, however, that if in reliance
on Rule 434 of the Rules and Regulations and with the consent of Robertson,
Stephens & Company LLC, on behalf of the several Underwriters, the Company
shall have provided to the Underwriters a term sheet pursuant to Rule 434(b)
or (c), as applicable, prior to the time that a confirmation is sent or given
for purposes of Section 2(10)(a) of the Act, the term "Prospectus" shall mean
the "prospectus subject to completion" (as defined in Rule 434(g) of the
Rules and Regulations) last provided to the Underwriters by the Company and
circulated by the Underwriters to all prospective purchasers of the Shares
(including the information deemed to be a part of the Registration Statement
at the time it became effective pursuant to Rule 434(d) of the Rules and
Regulations). Notwithstanding the foregoing, if any revised prospectus shall
be provided to the Underwriters by the Company for use in connection with the
offering of the Shares that differs from the prospectus referred to in the
immediately preceding sentence (whether or not such revised prospectus is
required to be filed with the Commission pursuant to Rule 424(b) of the Rules
and Regulations), the term "Prospectus" shall refer to such revised
prospectus from and after the time it is first provided to the Underwriters
for such use. If in reliance on Rule 434 of the Rules and Regulations and
with the consent of Robertson, Stephens & Company LLC, on behalf of the
several Underwriters, the Company shall have provided to the Underwriters a
term sheet pursuant to Rule 434(b) or (c), as applicable, prior to the time
that a confirmation is sent or given for purposes of Section 2(10)(a) of the
Act, the Prospectus and the term sheet, together, will not be materially
different from the prospectus in the Registration Statement.
(b) The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus or instituted proceedings
for that purpose, and each such Preliminary Prospectus has conformed in all
material respects to the requirements of the Act and the Rules and
Regulations and, as of its date, has not included any untrue statement of a
material fact or omitted to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; and at the time the Registration Statement became or
becomes, as the case may be, effective and at all times subsequent thereto up
to and on the Closing Date (hereinafter defined) and on any later date on
which Option Shares are to be purchased, (i) the Registration Statement and
the Prospectus, and any amendments or supplements thereto, contained and will
contain all material information required to be included therein by the Act
and the Rules and Regulations and will in all material respects conform to
the requirements of the Act and the Rules and Regulations, (ii) the
Registration Statement, and any amendments or supplements thereto, did not
and will not include any untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein not misleading, and (iii) the Prospectus, and any
amendments or supplements thereto, did not and will not include any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements therein, in the light of the circumstances under which
they were made, not misleading; provided, however, that none of the
representations and warranties contained in this subparagraph (b) shall apply
to information contained in or omitted from the Registration Statement or
Prospectus, or any amendment or supplement thereto, in reliance upon, and in
conformity with, written information relating to any Underwriter furnished to
<PAGE>4
the Company by such Underwriter specifically for use in the preparation
thereof.
(c) Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing under
the laws of the jurisdiction of its incorporation with full corporate power
and authority to own, lease and operate its properties and conduct its
business as described in the Prospectus; the Company owns all of the
outstanding capital stock of its subsidiaries free and clear of any pledge,
lien, security interest, encumbrance, claim or equitable interest; each of
the Company and its subsidiaries is duly qualified to do business as a
foreign corporation and is in good standing in each jurisdiction in the
United States in which the ownership or leasing of its properties or the
conduct of its business requires such qualification, except where the failure
to be so qualified or be in good standing would not have a material adverse
effect on the condition (financial or otherwise), earnings, operations,
business or business prospects of the Company and its subsidiaries considered
as one enterprise; no proceeding has been instituted in any such
jurisdiction, revoking, limiting or curtailing, or seeking to revoke, limit
or curtail, such power and authority or qualification; each of the Company
and its subsidiaries is in possession of and operating in compliance with all
authorizations, licenses, certificates, consents, orders and permits from
state, federal and other regulatory authorities which are material to the
conduct of its business, all of which are valid and in full force and effect;
neither the Company nor any of its subsidiaries is in violation of its
respective charter or bylaws or in default in the performance or observance
of any obligation, agreement, covenant or condition contained in any material
bond, debenture, note or other evidence of indebtedness, or in any material
lease, contract, indenture, mortgage, deed of trust, loan agreement, joint
venture or other agreement or instrument to which the Company or any of its
subsidiaries is a party or by which it or any of its subsidiaries or their
respective properties may be bound, except as to violations or defaults which
individually or in the aggregate would not have a material adverse effect on
the condition (financial or otherwise), earnings, operations, business or
business prospects of the Company and its subsidiaries considered as one
enterprise; and neither the Company nor any of its subsidiaries is in
violation of any law, order, rule, regulation, writ, injunction, judgment or
decree of any court, government or governmental agency or body, domestic or
foreign, having jurisdiction over the Company or any of its subsidiaries or
over their respective properties of which the Company has knowledge, except
as to violations or defaults which individually or in the aggregate would not
have a material adverse effect on the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company and its
subsidiaries considered as one enterprise. The Company does not own or
control, directly or indirectly, any corporation, association or other entity
other than E*TRADE Securities, Inc., a California corporation, E*TRADE
Capital, Inc., a California corporation, Trade*Plus Brokerage, Inc., a
California corporation, and E*TRADE Online Ventures, Inc., a California
corporation (each, a "Subsidiary" and collectively, the "Subsidiaries");
provided, however, that the Company has an equity interest in Roundtable
Partners LLC.
<PAGE>5
(d) The Company has full legal right, power and authority to
enter into this Agreement and perform the transactions contemplated hereby.
This Agreement has been duly authorized, executed and delivered by the
Company and is a valid and binding agreement on the part of the Company,
enforceable in accordance with its terms, except as rights to indemnification
and contribution hereunder may be limited by applicable law and except as the
enforcement hereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditors' rights generally or by general equitable principles or the
limitation on availability of equitable remedies; the performance of this
Agreement and the consummation of the transactions herein contemplated will
not result in a material breach or violation of any of the terms and
provisions of, or constitute (i) a material default under any material bond,
debenture, note or other evidence of indebtedness, or under any material
lease, contract, indenture, mortgage, deed of trust, loan agreement, joint
venture or other agreement or instrument to which the Company or any of its
subsidiaries is a party or by which it or any of its subsidiaries or their
respective properties may be bound, (ii) a default under the charter or
bylaws of the Company or any of its subsidiaries, or (iii) a material default
under any law, order, rule, regulation, writ, injunction, judgment or decree
of any court, government or governmental agency or body, domestic or foreign,
having jurisdiction over the Company or any of its subsidiaries or over their
respective properties. No consent, approval, authorization or order of or
qualification with any court, government or governmental agency or body,
domestic or foreign, having jurisdiction over the Company or any of its
subsidiaries or over their respective properties is required for the
execution and delivery of this Agreement and the consummation by the Company
or any of its subsidiaries of the transactions herein contemplated, except
such as may be required under the Act, or under state or other securities
laws, all of which requirements have been satisfied in all material respects
(except for any filings under Rule 424 of the Rules and Regulations, which
filings have been or will be made under Section 4(a) of this Agreement) or
Blue Sky laws.
(e) Except as set forth in the Prospectus, there is not any
pending or, to the best knowledge of the persons named in the table set forth
immediately under the heading "Management" in the Prospectus, excepting the
Secretary, the nonemployee directors and the director emeritus (the
"Company's Officers"), threatened action, suit, claim or proceeding against
the Company, any of its subsidiaries or any of their respective officers or
any of their respective properties, assets or rights before any court,
government or governmental agency or body, domestic or foreign, having
jurisdiction over the Company or any of its subsidiaries or over their
respective officers or properties or otherwise which (i) would, if adversely
determined, result in any material adverse change in the condition (financial
or otherwise), earnings, operations, business or business prospects of the
Company and its subsidiaries considered as one enterprise or might materially
and adversely affect their properties, assets or rights, (ii) might prevent
consummation of the transactions contemplated hereby or (iii) is required to
be disclosed in the Registration Statement or Prospectus and is not so
disclosed; and there are no agreements, contracts, leases or documents of the
Company or any of its subsidiaries of a character required to be described or
referred to in the Registration Statement or Prospectus or to be filed as an
exhibit to the Registration Statement by the Act or the Rules and Regulations
which have not been accurately described in all material respects in the
<PAGE>6
Registration Statement or Prospectus or filed as exhibits to the Registration
Statement.
(f) All outstanding shares of capital stock of the Company
(including the Selling Stockholder Shares) have been duly authorized and
validly issued and are fully paid and nonassessable, have been issued in
compliance with all federal and state securities laws, were not issued in
violation of or subject to any preemptive rights or other rights to subscribe
for or purchase securities, and the authorized and outstanding capital stock
of the Company is, in all material respects, as set forth in the Prospectus
under the caption "Capitalization" and conforms in all material respects to
the statements relating thereto contained in the Registration Statement and
the Prospectus (and such statements correctly state the substance of the
instruments defining the capitalization of the Company); the Firm Company
Shares and the Option Shares to be purchased from the Company hereunder have
been duly authorized for issuance and sale to the Underwriters pursuant to
this Agreement and, when issued and delivered by the Company against payment
therefor in accordance with the terms of this Agreement, will be duly and
validly issued and fully paid and nonassessable, and will be sold free and
clear of any pledge, lien, security interest, encumbrance, claim or equitable
interest; and no preemptive right, co-sale right, registration right, right
of first refusal or other similar right of stockholders exists with respect
to any of the Firm Company Shares or Option Shares to be purchased from the
Company hereunder or the issuance and sale thereof other than those that have
been expressly waived prior to the date hereof and those that will
automatically expire upon and will not apply to the consummation of the
transactions contemplated on the Closing Date. No further approval or
authorization of any stockholder, the Board of Directors of the Company or
others is required for the issuance and sale or transfer of the Shares except
as may be required under the Act or under state or other securities or Blue
Sky laws. All issued and outstanding shares of capital stock of each
subsidiary of the Company have been duly authorized and validly issued and
are fully paid and nonassessable, and were not issued in violation of or
subject to any preemptive right, or other rights to subscribe for or purchase
shares and are owned by the Company free and clear of any pledge, lien,
security interest, encumbrance, claim or equitable interest. Except as
disclosed in the Prospectus and the financial statements of the Company, and
the related notes thereto, included in the Prospectus, neither the Company
nor any subsidiary has outstanding any options to purchase, or any preemptive
rights or other rights to subscribe for or to purchase, any securities or
obligations convertible into, or any contracts or commitments to issue or
sell, shares of its capital stock or any such options, rights, convertible
securities or obligations. The description of the Company's stock option,
stock bonus and other stock plans or arrangements, and the options or other
rights granted and exercised thereunder, set forth in the Prospectus
accurately and fairly presents the information required to be shown by the
Act and the applicable Rules and Regulations with respect to such plans,
arrangements, options and rights.
(g) Deloitte & Touche LLP, which has examined the consolidated
financial statements of the Company, together with the related schedules and
notes, as of September 30, 1995 and 1994 and for each of the years in the
three (3) years ended September 30, 1995 filed with the Commission as a part
<PAGE>7
of the Registration Statement, which are included in the Prospectus, are, to
the Company's knowledge, independent accountants within the meaning of the
Act and the Rules and Regulations; the audited consolidated financial
statements of the Company, together with the related schedules and notes, and
the unaudited consolidated financial information, forming part of the
Registration Statement and Prospectus, fairly present the financial position
and the results of operations of the Company and its subsidiaries at the
respective dates and for the respective periods to which they apply; and all
audited consolidated financial statements of the Company, together with the
related schedules and notes, and the unaudited consolidated financial
information, filed with the Commission as part of the Registration Statement,
have been prepared in accordance with generally accepted accounting
principles consistently applied throughout the periods involved except as may
be otherwise stated therein. The selected and summary financial and
statistical data included in the Registration Statement present fairly the
information shown therein and have been compiled on a basis consistent with
the audited financial statements presented therein. No other financial
statements or schedules are required to be included in the Registration
Statement.
(h) Subsequent to the respective dates as of which information
is given in the Registration Statement and Prospectus, there has not been (i)
any material adverse change in the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company and its
subsidiaries considered as one enterprise, (ii) any transaction that is
material to the Company and its subsidiaries considered as one enterprise,
except transactions entered into in the ordinary course of business, (iii)
any obligation, direct or contingent, that is material to the Company and its
subsidiaries considered as one enterprise, incurred by the Company or its
subsidiaries, except obligations incurred in the ordinary course of business,
(iv) any change in the capital stock or outstanding indebtedness of the
Company or any of its subsidiaries that is material to the Company and its
subsidiaries considered as one enterprise (other than upon the sale of the
Shares hereunder, the exercise of options and warrants described in the
Registration Statement and the automatic conversion of the outstanding shares
of Preferred Stock into Common Stock prior to the First Closing as described
in the Registration Statement), (v) any dividend or distribution of any kind
declared, paid or made on the capital stock of the Company or any of its
subsidiaries, or (vi) any loss or damage (whether or not insured) to the
property of the Company or any of its subsidiaries which has been sustained
which has a material adverse effect on the condition (financial or
otherwise), earnings, operations, business or business prospects of the
Company and its subsidiaries considered as one enterprise.
(i) Except as set forth in the Registration Statement and
Prospectus, (i) each of the Company and its subsidiaries has good title to
all properties and assets described in the Registration Statement and
Prospectus as owned by it, free and clear of any pledge, lien, security
interest, encumbrance, claim or equitable interest, other than such as would
not have a material adverse effect on the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company and its
subsidiaries considered as one enterprise, (ii) the agreements to which the
Company or any of its subsidiaries is a party described in the Registration
<PAGE>8
Statement and Prospectus are valid agreements, enforceable by the Company and
its subsidiaries (as applicable), except as the enforcement thereof may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other similar laws relating to or affecting creditors' rights generally or by
general equitable principles or the limitation on availability of equitable
remedies and, to the best of the Company's knowledge, the other contracting
party or parties thereto are not in material breach or material default under
any of such agreements, and (iii) each of the Company and its subsidiaries
has valid and enforceable leases for all properties described in the
Registration Statement and Prospectus as leased by it, except as the
enforcement thereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditors' rights generally or by general equitable principles or the
limitation on availability of equitable remedies. Except as set forth in the
Registration Statement and Prospectus, the Company owns or leases all such
properties as are necessary to its operations as now conducted.
(j) The Company and its subsidiaries have timely filed all
necessary federal, state and foreign income and franchise tax returns and
have paid all taxes shown thereon as due, and there is no tax deficiency that
has been or, to the best of the Company's knowledge, might properly and
validly be asserted against the Company or any of its subsidiaries that would
have a material adverse effect on the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company and its
subsidiaries considered as one enterprise; and all tax liabilities are
adequately provided for on the books of the Company and its subsidiaries.
(k) The Company and its subsidiaries (or the Company on behalf
of its subsidiaries) maintain insurance with insurers of recognized financial
responsibility of the types and in the amounts generally deemed adequate for
the businesses of the Company and its subsidiaries and consistent with
insurance coverage maintained by similar companies in similar businesses,
including, but not limited to, insurance covering real and personal property
owned or leased by the Company or its subsidiaries against theft, damage,
destruction, acts of vandalism and all other risks customarily insured
against, all of which insurance is in full force and effect; neither the
Company nor any such subsidiary has been refused any insurance coverage
sought or applied for; and neither the Company nor any such subsidiary has
any reason to believe that it will not be able to renew its existing
insurance coverage as and when such coverage expires or to obtain similar
coverage from similar insurers as may be necessary to continue its business
at a cost that would not materially and adversely affect the condition
(financial or otherwise), earnings, operations, business or business
prospects of the Company and its subsidiaries considered as one enterprise.
(l) To the best knowledge of the Company's Officers, no labor
disturbance by the employees of the Company or any of its subsidiaries exists
or is imminent; and none of the Company's Officers is aware of any existing
or imminent labor disturbance by the employees of any of the Company's
principal suppliers that might be expected to result in a material adverse
change in the condition (financial or otherwise), earnings, operations,
business or business prospects of the Company and its subsidiaries considered
as one enterprise. No collective bargaining agreement exists with any of the
<PAGE>9
Company's employees and, to the best knowledge of the Company's Officers, no
such agreement is imminent.
(m) Each of the Company and its subsidiaries owns or possesses
adequate rights to use all patents, patent rights, inventions, trade secrets,
know-how, trademarks, service marks, trade names and copyrights which are
necessary to conduct its businesses as described in the Registration
Statement and Prospectus; the Company has not received any written notice of,
and none of the Company's Officers has received any notice or has any
knowledge of, any infringement of or conflict with asserted rights of the
Company by others with respect to any patent, patent rights, inventions,
trade secrets, know-how, trademarks, service marks, trade names or copyrights
(other than the use of the name "eBroker" by TransTerra Co.); and the Company
has not received any written notice of, and none of the Company's Officers
has any knowledge of, any infringement of or conflict with asserted rights of
others with respect to any patent, patent rights, inventions, trade secrets,
know-how, trademarks, service marks, trade names or copyrights which, singly
or in the aggregate, if the subject of an unfavorable decision, ruling or
finding, might have a material adverse effect on the condition (financial or
otherwise), earnings, operations, business or business prospects of the
Company and its subsidiaries considered as one enterprise.
(n) The Common Stock has been approved for quotation on the
Nasdaq National Market, subject to official notice of issuance.
(o) The Company has been advised concerning the Investment
Company Act of 1940, as amended (the "1940 Act"), and the rules and
regulations thereunder, and has in the past conducted, and intends in the
future to use its best efforts to conduct, its affairs in such a manner as to
ensure that it will not become an "investment company" or a company
"controlled" by an "investment company" within the meaning of the 1940 Act
and such rules and regulations.
(p) The Company has not distributed and will not distribute
prior to the later of (i) the Closing Date, or any date on which Option
Shares are to be purchased, as the case may be, and (ii) completion of the
distribution of the Shares, any offering material in connection with the
offering and sale of the Shares other than any Preliminary Prospectuses, the
Prospectus, the Registration Statement and other materials, if any, permitted
by the Act.
(q) Neither the Company nor any of its subsidiaries has at any
time during the last five (5) years (i) made any unlawful contribution to any
candidate for foreign office or failed to disclose fully any such
contribution in violation of law, or (ii) made any payment to any federal or
state governmental officer or official, or other person charged with similar
public or quasi-public duties, other than payments required or permitted by
the laws of the United States or any jurisdiction thereof.
(r) The Company has not taken and will not take, directly or
indirectly, any action designed to or that might reasonably be expected to
cause or result in stabilization or manipulation of the price of the Common
Stock to facilitate the sale or resale of the Shares.
<PAGE>10
(s) Each officer and director of the Company, each Selling
Stockholder and the beneficial owners of 95% of the outstanding shares of
Common Stock (assuming conversion of all outstanding shares of Preferred
Stock into Common Stock) (including shares held by such officers, directors
and Selling Stockholders) as of the date hereof have agreed in writing that
such person will not, for a period of 180 days from the date that the
Registration Statement is declared effective by the Commission (the "Lock-up
Period"), offer to sell, contract to sell, or otherwise sell, dispose of,
loan, pledge or grant any rights with respect to (collectively, a
"Disposition") 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 (collectively, "Securities") now
owned or hereafter acquired directly by such person or with respect to which
such person has or hereafter acquires the power of disposition, otherwise
than (i) as a bona fide gift or gifts, provided the donee or donees thereof
agree in writing to be bound by this restriction, (ii) as a distribution to
partners or stockholders of such person, provided that the distributees
thereof agree in writing to be bound by the terms of this restriction, or
(iii) with the prior written consent of Robertson, Stephens & Company LLC.
The foregoing restriction has been expressly agreed to preclude the holder of
the Securities from engaging in any hedging or other transaction which is
designed to or reasonably expected to lead to or result in a Disposition of
Securities during the Lock-up Period, even if such Securities would be
disposed of by someone other than such holder. Such prohibited hedging or
other transactions would include, without limitation, any short sale (whether
or not against the box) or any purchase, sale or grant of any right
(including, without limitation, any put or call option) with respect to any
Securities or with respect to any security (other than a broad-based market
basket or index) that includes, relates to or derives any significant part of
its value from Securities. Furthermore, such person has also agreed and
consented to the entry of stop transfer instructions with the Company's
transfer agent against the transfer of the Securities held by such person
except in compliance with this restriction. The Company has provided to
counsel for the Underwriters a complete and accurate list of all
securityholders of the Company and the number and type of securities held by
each securityholder. The Company has provided to counsel for the
Underwriters true, accurate and complete copies of all of the agreements
pursuant to which its officers, directors and stockholders have agreed to
such or similar restrictions (the "Lock-up Agreements") presently in effect
or effected hereby. The Company hereby represents and warrants that it will
not release any of its officers, directors or other stockholders from any
Lock-up Agreements currently existing or hereafter effected without the prior
written consent of Robertson, Stephens & Company LLC. Notwithstanding the
foregoing, the foregoing restrictions shall not prohibit the sale of Shares
by any such person pursuant to this Agreement.
(t) Except as set forth in the Registration Statement and
Prospectus, (i) the Company is in material compliance with all rules, laws
and regulations relating to the use, treatment, storage and disposal of toxic
substances and protection of health or the environment ("Environmental Laws")
which are applicable to its business, (ii) the Company has received no notice
from any governmental authority or third party of an asserted claim under
Environmental Laws, which claim is required to be disclosed in the
<PAGE>11
Registration Statement and the Prospectus, (iii) to its knowledge, the
Company will not be required to make future material capital expenditures to
comply with Environmental Laws and (iv) no property which is owned, leased or
occupied by the Company has been designated as a Superfund site pursuant to
the Comprehensive Response, Compensation and Liability Act of 1980, as
amended (42 U.S.C. section 9601, et seq.), or otherwise designated as a
contaminated site under applicable state or local law.
(u) Each of the Company and E*TRADE Securities, Inc. maintains
a system of internal accounting controls sufficient to provide reasonable
assurances that (i) transactions are executed in accordance with management's
general or specific authorizations, (ii) transactions are recorded as
necessary to permit preparation of financial statements in conformity with
generally accepted accounting principles and to maintain accountability for
assets, (iii) access to assets is permitted only in accordance with
management's general or specific authorization, and (iv) the recorded
accountability for assets is compared with existing assets at reasonable
intervals and appropriate action is taken with respect to any differences.
(v) There are no outstanding loans, advances (except normal
advances for business expenses in the ordinary course of business) or
guarantees of indebtedness by the Company to or for the benefit of any of the
officers or directors of the Company or any of the members of the families of
any of them required to be disclosed in the Registration Statement and
Prospectus pursuant to the Act and the Rules and Regulations, except as
disclosed in the Registration Statement and the Prospectus.
(w) The Company has complied with all provisions of Section
517.075, Florida Statutes, relating to doing business with the Government of
Cuba or with any person or affiliate located in Cuba.
II. Each Selling Stockholder, severally and not jointly, represents
and warrants to and agrees with each Underwriter and the Company that:
(a) Such Selling Stockholder now has and on the Closing Date,
and on any later date on which Option Shares are purchased from such Selling
Stockholder, will have valid marketable title to the Shares to be sold by
such Selling Stockholder, free and clear of any pledge, lien, security
interest, encumbrance, claim or equitable interest other than pursuant to
this Agreement; and upon delivery of such Shares hereunder and payment of the
purchase price as herein contemplated, each of the Underwriters will obtain
valid marketable title to the Shares purchased by it from such Selling
Stockholder, free and clear of any pledge, lien, security interest pertaining
to such Selling Stockholder or such Selling Stockholder's property,
encumbrance, claim or equitable interest, including any liability for estate
or inheritance taxes, or any liability to or claims of any creditor, devisee,
legatee or beneficiary of such Selling Stockholder.
(b) Such Selling Stockholder has duly authorized (if
applicable), executed and delivered, in the form heretofore furnished to the
Representatives, an irrevocable Power of Attorney (the "Power of Attorney")
appointing Christos M. Cotsakos, Wayne H. Heldt and Stephen C. Richards as
attorneys-in-fact (collectively, the "Attorneys" and individually, an
<PAGE>12
"Attorney") and a Custody Agreement (the "Custody Agreement") with American
Stock Transfer & Trust Company, as custodian (the "Custodian") (which Custody
Agreement may be executed by an attorney-in-fact for the Selling Stockholder
under the Custody Agreement); each of the Power of Attorney and the Custody
Agreement constitutes a valid and binding agreement on the part of such
Selling Stockholder, enforceable in accordance with its terms, except as the
enforcement thereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditors' rights generally or by general equitable principles; and each of
such Selling Stockholder's Attorneys, acting alone, is authorized to execute
and deliver this Agreement and the certificate referred to in Section 6(h)
hereof on behalf of such Selling Stockholder, to determine the purchase price
to be paid by the several Underwriters to such Selling Stockholder as
provided in Section 3 hereof, to authorize the delivery of the Selling
Stockholder Shares and the Option Shares to be sold by such Selling
Stockholder under this Agreement and to duly endorse (in blank or otherwise)
the certificate or certificates representing such Shares or a stock power or
powers with respect thereto, to accept payment therefor, and otherwise to act
on behalf of such Selling Stockholder in connection with this Agreement.
(c) All consents, approvals, authorizations and orders required
for the execution and delivery by such Selling Stockholder of the Power of
Attorney and the Custody Agreement, the execution and delivery by or on
behalf of such Selling Stockholder of this Agreement and the sale and
delivery of the Selling Stockholder Shares and the Option Shares to be sold
by such Selling Stockholder under this Agreement (other than, at the time of
the execution hereof (if the Registration Statement has not yet been declared
effective by the Commission), the issuance of the order of the Commission
declaring the Registration Statement effective and such consents, approvals,
authorizations or orders as may be necessary under state or other securities
or Blue Sky laws) have been obtained and are in full force and effect; such
Selling Stockholder, if other than a natural person, has been duly organized
and is validly existing in good standing under the laws of the jurisdiction
of its organization as the type of entity that it purports to be; and such
Selling Stockholder has full legal right, power and authority to enter into
and perform its obligations under this Agreement and such Power of Attorney
and Custody Agreement, and to sell, assign, transfer and deliver the Shares
to be sold by such Selling Stockholder under this Agreement.
(d) Such Selling Stockholder will not, during the Lock-up
Period, effect the Disposition of any Securities now owned or hereafter
acquired directly by such Selling Stockholder or with respect to which such
Selling Stockholder has or hereafter acquires the power of disposition,
otherwise than (i) as a bona fide gift or gifts, provided the donee or donees
thereof agree in writing to be bound by this restriction, (ii) as a
distribution to partners or stockholders of such Selling Stockholder,
provided that the distributees thereof agree in writing to be bound by the
terms of this restriction, or (iii) with the prior written consent of
Robertson, Stephens & Company LLC. The foregoing restriction is expressly
agreed to preclude the holder of the Securities from engaging in any hedging
or other transaction which is designed to or reasonably expected to lead to
or result in a Disposition of Securities during the Lock-up Period, even if
such Securities would be disposed of by someone other than the Selling
<PAGE>13
Stockholder. Such prohibited hedging or other transactions would include,
without limitation, any short sale (whether or not against the box) or any
purchase, sale or grant of any right (including, without limitation, any put
or call option) with respect to any Securities or with respect to any
security (other than a broad-based market basket or index) that includes,
relates to or derives any significant part of its value from Securities.
Such Selling Stockholder also agrees and consents to the entry of stop
transfer instructions with the Company's transfer agent against the transfer
of the securities held by such Selling Stockholder except in compliance with
this restriction. Notwithstanding the foregoing, the foregoing restrictions
shall not prohibit the sale of Shares by such Selling Stockholder pursuant to
this Agreement.
(e) Certificates in negotiable form for all Shares to be sold
by such Selling Stockholder under this Agreement, together with a stock power
or powers duly endorsed in blank by such Selling Stockholder, have been
placed in custody with the Custodian for the purpose of effecting delivery
hereunder.
(f) This Agreement has been duly authorized by each Selling
Stockholder that is not a natural person and has been duly executed and
delivered by or on behalf of such Selling Stockholder and is a valid and
binding agreement of such Selling Stockholder, enforceable in accordance with
its terms, except as rights to indemnification and contribution hereunder may
be limited by applicable law and except as the enforcement hereof may be
limited by bankruptcy, insolvency, reorganization, moratorium or other
similar laws relating to or affecting creditors' rights generally or by
general equitable principles; and the performance of this Agreement and the
consummation of the transactions herein contemplated will not result in a
breach or violation of any of the terms and provisions of or constitute a
default under any bond, debenture, note or other evidence of indebtedness, or
under any lease, contract, indenture, mortgage, deed of trust, loan
agreement, joint venture or other agreement or instrument to which such
Selling Stockholder is a party or by which such Selling Stockholder, or any
Selling Stockholder Shares or any Option Shares to be sold by such Selling
Stockholder hereunder, may be bound or, to the best of such Selling
Stockholders' knowledge, result in any violation of any law, order, rule,
regulation, writ, injunction, judgment or decree of any court, government or
governmental agency or body, domestic or foreign, having jurisdiction over
such Selling Stockholder or over the properties of such Selling Stockholder,
or, if such Selling Stockholder is other than a natural person, result in any
violation of any provisions of the charter, bylaws or other organizational
documents of such Selling Stockholder.
(g) Such Selling Stockholder has not taken and will not take,
directly or indirectly, any action designed to or that might reasonably be
expected to cause or result in stabilization or manipulation of the price of
the Common Stock to facilitate the sale or resale of the Shares.
(h) Such Selling Stockholder has not distributed and will not
distribute any prospectus or other offering material in connection with the
offering and sale of the Shares.
<PAGE>14
(i) All information furnished by or on behalf of such Selling
Stockholder relating to such Selling Stockholder and the Selling Stockholder
Shares that is contained in the representations and warranties of such
Selling Stockholder in such Selling Stockholder's Power of Attorney or set
forth in the Registration Statement or the Prospectus is, and at the time the
Registration Statement became or becomes, as the case may be, effective and
at all times subsequent thereto up to and on the Closing Date (hereinafter
defined), and on any later date on which Option Shares are to be purchased
from such Selling Stockholder, was or will be, true, correct and complete,
and does not, and at the time the Registration Statement became or becomes,
as the case may be, effective and at all times subsequent thereto up to and
on the Closing Date, and on any later date on which Option Shares are to be
purchased from such Selling Stockholder, will not, contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make such information not misleading.
(j) Such Selling Stockholder will review the Prospectus and
will comply with all agreements and satisfy all conditions on its part to be
complied with or satisfied pursuant to this Agreement on or prior to the
Closing Date, or any later date on which Option Shares are to be purchased
from such Selling Stockholder, as the case may be, and will advise one of its
Attorneys and Robertson, Stephens & Company LLC prior to the Closing Date or
such later date on which Option Shares are to be purchased from such Selling
Stockholder, as the case may be, if any statement to be made on behalf of
such Selling Stockholder in the certificate contemplated by Section 6(h)
would be inaccurate if made as of the Closing Date or such later date on
which Option Shares are to be purchased from such Selling Stockholder, as the
case may be.
(k) Such Selling Stockholder does not have, or has waived prior
to the date hereof, any preemptive right, co-sale right or right of first
refusal or other similar right to purchase any of the Shares that are to be
sold by the Company or any of the other Selling Stockholders to the
Underwriters pursuant to this Agreement; such Selling Stockholder does not
have, or has waived prior to the date hereof, any registration right or other
similar right to participate in the offering made by the Prospectus, other
than such rights of participation as have been satisfied by the participation
of such Selling Stockholder in the transactions to which this Agreement
relates in accordance with the terms of this Agreement; and such Selling
Stockholder does not own any warrants, options or similar rights to acquire,
and does not have any right or arrangement to acquire, any capital stock,
rights, warrants, options or other securities from the Company, other than
those described in the Registration Statement and the Prospectus.
(l) Such Selling Stockholder is not aware (without having
conducted any investigation or inquiry) that any of the representations and
warranties of the Company set forth in Section 2.I. above is untrue or
inaccurate in any material respect.
3. Purchase, Sale and Delivery of Shares. On the basis of the
representations, warranties and agreements herein contained, but subject to
the terms and conditions herein set forth, the Company and the Selling
Stockholders agree, severally and not jointly, to sell to the Underwriters,
<PAGE>15
and each Underwriter agrees, severally and not jointly, to purchase from the
Company and the Selling Stockholders, respectively, at a purchase price of
$9.765 per share, the respective number of Firm Company Shares as hereinafter
set forth and Selling Stockholder Shares set forth opposite the names of the
Company and the Selling Stockholders in Schedule B hereto. The obligation of
each Underwriter to the Company and to each Selling Stockholder shall be to
purchase from the Company or such Selling Stockholder that number of Firm
Company Shares or Selling Stockholder Shares, as the case may be, which (as
nearly as practicable, as determined by you) is in the same proportion to the
number of Company Shares or Selling Stockholder Shares, as the case may be,
set forth opposite the name of the Company or such Selling Stockholder in
Schedule B hereto as the number of Firm Shares which is set forth opposite
the name of such Underwriter in Schedule A hereto (subject to adjustment as
provided in Section 10) is to the total number of Firm Shares to be purchased
by all the Underwriters under this Agreement.
The certificates in negotiable form for the Selling Stockholder Shares
have been placed in custody (for delivery under this Agreement) under the
Custody Agreement. Each Selling Stockholder agrees that the certificates for
the Selling Stockholder Shares of such Selling Stockholder so held in custody
are subject to the interests of the Underwriters hereunder, that the
arrangements made by such Selling Stockholder for such custody, including the
Power of Attorney is to that extent irrevocable and that the obligations of
such Selling Stockholder hereunder shall not be terminated by the act of such
Selling Stockholder or by operation of law, whether by the death or
incapacity of such Selling Stockholder or the occurrence of any other event,
except as specifically provided herein or in the Custody Agreement. If any
Selling Stockholder should die or be incapacitated, or if any other such
event should occur, before the delivery of the certificates for the Selling
Stockholder Shares hereunder, the Selling Stockholder Shares to be sold by
such Selling Stockholder shall, except as specifically provided herein or in
the Custody Agreement, be delivered by the Custodian in accordance with the
terms and conditions of this Agreement as if such death, incapacity or other
event had not occurred, regardless of whether the Custodian shall have
received notice of such death or other event.
Delivery of definitive certificates for the Firm Shares to be purchased
by the Underwriters pursuant to this Section 3 shall be made against payment
of the purchase price therefor by the several Underwriters by wire transfer
or certified or official bank check or checks, at the option of the Company,
drawn in same-day funds, payable to the order of the Company with regard to
the Shares being purchased from the Company, and to the order of the
Custodian for the respective accounts of the Selling Stockholders with regard
to the Shares being purchased from such Selling Stockholders, at the offices
of Brobeck, Phleger & Harrison LLP, One Market, Spear Street Tower, San
Francisco, California 94105 (or at such other place as may be agreed upon
among the Representatives and the Company and the Attorneys), at 7:00 a.m.,
San Francisco time (a) on the third (3rd) full business day following the
first day that Shares are traded, (b) if this Agreement is executed and
delivered after 1:30 p.m., San Francisco time, the fourth (4th) full business
day following the day that this Agreement is executed and delivered or (c) at
such other time and date not later than seven (7) full business days
following the first day that Shares are traded as the Representatives and the
<PAGE>16
Company and the Attorneys may determine (or at such time and date to which
payment and delivery shall have been postponed pursuant to Section 10
hereof), such time and date of payment and delivery being herein called the
"Closing Date;" provided, however, that if the Company has not made available
to the Representatives copies of the Prospectus within the time provided in
Section 4(d) hereof, the Representatives may, in their sole discretion,
postpone the Closing Date until no later than two (2) full business days
following delivery of copies of the Prospectus to the Representatives. The
certificates for the Firm Shares to be so delivered will be made available to
you at such office or such other location including, without limitation, in
New York City, as you may reasonably request for checking at least one (1)
full business day prior to the Closing Date and will be in such names and
denominations as you may request, such request to be made at least two (2)
full business days prior to the Closing Date. If the Representatives so
elect, delivery of the Firm Shares may be made by credit through full fast
transfer to the accounts at The Depository Trust Company designated by the
Representatives.
It is understood that you, individually, and not as the Representatives
of the several Underwriters, may (but shall not be obligated to) make payment
of the purchase price on behalf of any Underwriter or Underwriters whose
check or checks shall not have been received by you prior to the Closing Date
for the Firm Shares to be purchased by such Underwriter or Underwriters. Any
such payment by you shall not relieve any such Underwriter or Underwriters of
any of its or their obligations hereunder.
After the Registration Statement becomes effective, the several
Underwriters intend to make an initial public offering (as such term is
described in Section 11 hereof) of the Firm Shares at an initial public
offering price of $10.50 per share. After the initial public offering, the
several Underwriters may, in their discretion, vary the public offering
price.
The information set forth in the last paragraph on the front cover page
(insofar as such information relates to the Underwriters), on the inside
front cover concerning stabilization and over-allotment by the Underwriters,
and under the second, sixth and seventh paragraphs and the third sentence of
the fifth paragraph under the caption "Underwriting" in any Preliminary
Prospectus and in the Prospectus constitutes the only information furnished
by the Underwriters to the Company for inclusion in any Preliminary
Prospectus, the Prospectus or the Registration Statement, and you, on behalf
of the respective Underwriters, represent and warrant to the Company and the
Selling Stockholders that the statements made therein do not include any
untrue statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein, in the
light of the circumstances under which they were made, not misleading.
4. Further Agreements of the Company. The Company agrees with the
several Underwriters that:
(a) The Company will use its best efforts to cause the
Registration Statement and any amendment thereof, if not effective at the
time and date that this Agreement is executed and delivered by the parties
<PAGE>17
hereto, to become effective as promptly as possible; the Company will use its
best efforts to cause any abbreviated registration statement pursuant to Rule
462(b) of the Rules and Regulations as may be required subsequent to the date
the Registration Statement is declared effective to become effective as
promptly as possible; the Company will notify you, promptly after it shall
receive notice thereof, of the time when the Registration Statement, any
subsequent amendment to the Registration Statement or any abbreviated
registration statement has become effective or any supplement to the
Prospectus has been filed; if the Company omitted information from the
Registration Statement at the time it was originally declared effective in
reliance upon Rule 430A(a) of the Rules and Regulations, the Company will
provide evidence satisfactory to you that the Prospectus contains such
information and has been filed, within the time period prescribed, with the
Commission pursuant to subparagraph (1) or (4) of Rule 424(b) of the Rules
and Regulations or as part of a post-effective amendment to such Registration
Statement as originally declared effective which is declared effective by the
Commission; if the Company files a term sheet pursuant to Rule 434 of the
Rules and Regulations, the Company will provide evidence satisfactory to you
that the Prospectus and term sheet meeting the requirements of Rule 434(b) or
(c), as applicable, of the Rules and Regulations, have been filed, within the
time period prescribed, with the Commission pursuant to subparagraph (7) of
Rule 424(b) of the Rules and Regulations; if for any reason the filing of the
final form of Prospectus is required under Rule 424(b)(3) of the Rules and
Regulations, it will provide evidence satisfactory to you that the Prospectus
contains such information and has been filed with the Commission within the
time period prescribed; it will notify you promptly of any request by the
Commission for the amending or supplementing of the Registration Statement or
the Prospectus or for additional information; promptly upon your request, it
will prepare and file with the Commission any amendments or supplements to
the Registration Statement or Prospectus which, in the opinion of counsel for
the several Underwriters, Cooley Godward Castro Huddleson & Tatum
("Underwriters' Counsel"), may be necessary or advisable in connection with
the distribution of the Shares by the Underwriters; it will promptly prepare
and file with the Commission, and promptly notify you of the filing of, any
amendments or supplements to the Registration Statement or Prospectus which
may be necessary to correct any statements or omissions, if, at any time when
a prospectus relating to the Shares is required to be delivered under the
Act, any event shall have occurred as a result of which the Prospectus or any
other prospectus relating to the Shares as then in effect would include any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; in case any Underwriter is
required to deliver a prospectus nine (9) months or more after the effective
date of the Registration Statement in connection with the sale of the Shares,
it will prepare promptly upon request, but at the expense of such
Underwriter, such amendment or amendments to the Registration Statement and
such prospectus or prospectuses as may be necessary to permit compliance with
the requirements of Section 10(a)(3) of the Act; and it will file no
amendment or supplement to the Registration Statement or Prospectus which
shall not previously have been submitted to you a reasonable time prior to
the proposed filing thereof or to which you shall reasonably object in
writing, subject, however, to compliance with the Act and the Rules and
Regulations and the provisions of this Agreement.
<PAGE>18
(b) The Company will advise you, promptly after it shall
receive notice or obtain knowledge, of the issuance of any stop order by the
Commission suspending the effectiveness of the Registration Statement or of
the initiation or threat of any proceeding for that purpose; and it will
promptly use its best efforts to prevent the issuance of any stop order or to
obtain its withdrawal at the earliest possible moment if such stop order
should be issued.
(c) The Company will use its best efforts to qualify the Shares
for offering and sale under the securities laws of such jurisdictions as you
may designate and to continue such qualifications in effect for so long as
may be required for purposes of the distribution of the Shares, except that
the Company shall not be required in connection therewith or as a condition
thereof to qualify as a foreign corporation or to execute a general consent
to service of process in any jurisdiction in which it is not otherwise
required to be so qualified or to so execute a general consent to service of
process. In each jurisdiction in which the Shares shall have been qualified
as above provided, the Company will make and file such statements and reports
in each year as are or may be required by the laws of such jurisdiction for
such purpose.
(d) The Company will furnish to you, as soon as available, and,
in the case of the Prospectus and any term sheet or abbreviated term sheet
under Rule 434, in no event later than the first (1st) full business day
following the first day that Shares are traded, copies of the Registration
Statement (three of which will be signed and which will include all
exhibits), each Preliminary Prospectus, the Prospectus and any amendments or
supplements to such documents, including any prospectus prepared to permit
compliance with Section 10(a)(3) of the Act, all in such quantities as you
may from time to time reasonably request. Notwithstanding the foregoing, if
Robertson, Stephens & Company LLC, on behalf of the several Underwriters,
shall agree to the utilization of Rule 434 of the Rules and Regulations, the
Company shall provide to you copies of a Preliminary Prospectus updated in
all respects through the date specified by you in such quantities as you may
from time to time reasonably request.
(e) The Company will make generally available to its
securityholders as soon as practicable, but in any event not later than the
forty-fifth (45th) day following the end of the fiscal quarter first
occurring after the first anniversary of the effective date of the
Registration Statement, an earnings statement (which will be in reasonable
detail but need not be audited) complying with the provisions of Section
11(a) of the Act (including, at the election of the Company, Rule 158 of the
Rules and Regulations) and covering a twelve (12) month period beginning
after the effective date of the Registration Statement.
(f) During a period of five (5) years after the date hereof,
the Company will furnish to its stockholders as soon as practicable after the
end of each respective period, annual reports (including financial statements
audited by independent certified public accountants) and unaudited quarterly
reports of operations for each of the first three quarters of the fiscal
year, and will furnish to you and the other several Underwriters hereunder,
upon request (i) concurrently with furnishing such reports to its
<PAGE>19
stockholders, statements of operations of the Company for each of the first
three (3) quarters in the form furnished to the Company's stockholders, (ii)
concurrently with furnishing to its stockholders, a balance sheet of the
Company as of the end of such fiscal year, together with statements of
operations, of stockholders' equity, and of cash flows of the Company for
such fiscal year, accompanied by a copy of the certificate or report thereon
of independent certified public accountants, (iii) as soon as they are
available, copies of all reports (financial or other) mailed to stockholders,
(iv) as soon as they are available, copies of all reports and financial
statements furnished to or filed with the Commission, any securities exchange
or the National Association of Securities Dealers, Inc. ("NASD"), (v) every
material press release and every material news item or article in respect of
the Company or its affairs which was generally released to stockholders by
the Company or any of its subsidiaries, and (vi) any additional information
of a public nature concerning the Company or its subsidiaries, or its
business which you may reasonably request. During such five (5) year period,
if the Company shall have active subsidiaries, the foregoing financial
statements shall be on a consolidated basis to the extent that the accounts
of the Company and its subsidiaries are consolidated, and shall be
accompanied by similar financial statements for any significant subsidiary
which is not so consolidated.
(g) The Company will apply the net proceeds from the sale of
the Shares being sold by it in the manner set forth under the caption "Use of
Proceeds" in the Prospectus.
(h) The Company will maintain a transfer agent and, if
necessary under the jurisdiction of incorporation of the Company, a registrar
(which may be the same entity as the transfer agent) for its Common Stock.
(i) The Company will file Form SR in conformity with the
requirements of the Act and the Rules and Regulations.
(j) If the transactions contemplated hereby are not consummated
by reason of any failure, refusal or inability on the part of the Company or
any Selling Stockholder to perform any agreement on their respective parts to
be performed hereunder or to fulfill any condition of the Underwriters'
obligations hereunder, or if the Company shall terminate this Agreement
pursuant to Section 11(a) hereof, or if the Underwriters shall terminate this
Agreement pursuant to Section 11(b)(i), the Company will reimburse the
several Underwriters for all out-of-pocket expenses (including fees and
disbursements of Underwriters' Counsel) incurred by the Underwriters in
investigating or preparing to market or marketing the Shares.
(k) If at any time after the Registration Statement becomes
effective until the later of (i) 25 days after the date of the Prospectus and
(ii) the date the Representatives advise the Company that the distribution of
Shares has been completed (which, in the absence of express notice, will be
deemed to be the closing of the sale of the Option Shares or the termination
or expiration of the option period set forth in Section 7(a)), any rumor,
publication or event relating to or affecting the Company shall occur as a
result of which in your opinion the market price of the Common Stock has been
or is likely to be materially affected (regardless of whether such rumor,
<PAGE>20
publication or event necessitates a supplement to or amendment of the
Prospectus), the Company will, after written notice from you advising the
Company to the effect set forth above, forthwith prepare, consult with you
concerning the substance of and disseminate a press release or other public
statement, reasonably satisfactory to you, responding to or commenting on
such rumor, publication or event.
(l) During the Lock-up Period, the Company will not, without
the prior written consent of Robertson Stephens & Company LLC, effect the
Disposition of, directly or indirectly, any Securities other than (i) the
sale of the Firm Company Shares and the Option Shares to be sold by the
Company hereunder, (ii) the issuance of options or Common Stock under the
Company's presently authorized 1996 Stock Incentive Plan and the issuance of
Common Stock upon the exercise of options outstanding under the 1993 Stock
Option Plan and the 1983 Employee Incentive Stock Option Plan, (iii) the
issuance of options (or Common Stock upon exercise thereof) to employees,
consultants or directors or otherwise for compensatory purposes outside the
1996 Stock Incentive Plan (provided that the optionee agrees upon exercise of
such options to be bound by a Lock-up Agreement for the days remaining in the
Lock-up Period) or (iv) pursuant to equipment or lease financing activities
entered into in the ordinary course of the Company's business, in connection
with the acquisition by the Company of another business, product or
technology, or to a strategic investor or partner of the Company in
conjunction with an agreement involving a technical, manufacturing or
marketing collaboration in the ordinary course of business; provided, that,
in each case, the parties receiving any such Securities agree not to make a
Disposition of, directly or indirectly, any Securities and such parties are
bound to a Lock-up Agreement for the days remaining in the Lock-up Period.
5. Expenses.
(a) The Company and the Selling Stockholders agree with each
Underwriter that:
(i) The Company will pay and bear all costs and expenses
in connection with the preparation, printing and filing of the Registration
Statement (including financial statements, schedules and exhibits),
Preliminary Prospectuses and the Prospectus and any amendments or supplements
thereto; the printing of this Agreement, the Agreement Among Underwriters,
the Selected Dealer Agreement, the Preliminary Blue Sky Survey and any
Supplemental Blue Sky Survey, the Underwriters' Questionnaire and Power of
Attorney, and any instruments related to any of the foregoing; the issuance
and delivery of the Shares hereunder to the several Underwriters, including
transfer taxes, if any, the cost of all certificates representing the Shares
and transfer agents' and registrars' fees; the fees and disbursements of
counsel for the Company; all fees and other charges of the Company's
independent certified public accountants; the cost of furnishing to the
several Underwriters copies of the Registration Statement (including
appropriate exhibits), Preliminary Prospectus and the Prospectus, and any
amendments or supplements to any of the foregoing; NASD filing fees and the
cost of qualifying the Shares under the laws of such jurisdictions as you may
designate (including filing fees and reasonable and customary fees and
disbursements of Underwriters' Counsel in connection with such NASD filings
<PAGE>21
and Blue Sky qualifications); and all other expenses directly incurred by the
Company in connection with the performance of their obligations hereunder.
Any additional expenses incurred as a result of the sale of the Shares by the
Selling Stockholders will be borne collectively by the Company and the
Selling Stockholders. The provisions of this Section 5(a)(i) are intended to
relieve the Underwriters from the payment of the expenses and costs which the
Selling Stockholders and the Company hereby agree to pay, but shall not
affect any agreement which the Selling Stockholders and the Company may make,
or may have made, for the sharing of any of such expenses and costs. Such
agreements shall not impair the obligations of the Company and the Selling
Stockholders hereunder to the several Underwriters.
(ii) In addition to its other obligations under Section
8(a) hereof, the Company agrees that, as an interim measure during the
pendency of any claim, action, investigation, inquiry or other proceeding
described in Section 8(a) hereof, it will reimburse the Underwriters on a
monthly basis for all reasonable legal or other expenses reasonably incurred
in connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the
Company's obligation to reimburse the Underwriters for such expenses and the
possibility that such payments might later be held to have been improper by
the Commission, a court or arbitration tribunal of competent jurisdiction.
To the extent that any such interim reimbursement payment is so held to have
been improper, the Underwriters shall promptly return such payment to the
Company together with interest, compounded daily, determined on the basis of
the prime rate (or other commercial lending rate for borrowers of the highest
credit standing) listed from time to time in The Wall Street Journal which
represents the base rate on corporate loans posted by a substantial majority
of the nation's thirty (30) largest banks (the "Prime Rate"). Any such
interim reimbursement payments which are not made to the Underwriters within
thirty (30) days of a request for reimbursement shall bear interest at the
Prime Rate from the date of such request.
(iii) In addition to their other obligations under Section
8(b) hereof, each Selling Stockholder agrees that, as an interim measure
during the pendency of any claim, action, investigation, inquiry or other
proceeding described in Section 8(b) hereof relating to such Selling
Stockholder, it will reimburse the Underwriters on a monthly basis for all
reasonable legal or other expenses reasonably incurred in connection with
investigating or defending any such claim, action, investigation, inquiry or
other proceeding, notwithstanding the absence of a judicial determination as
to the propriety and enforceability of such Selling Stockholder's obligation
to reimburse the Underwriters for such expenses and the possibility that such
payments might later be held to have been improper by a court of competent
jurisdiction. To the extent that any such interim reimbursement payment is
so held to have been improper, the Underwriters shall promptly return such
payment to the Selling Stockholders, together with interest, compounded
daily, determined on the basis of the Prime Rate. Any such interim
reimbursement payments which are not made to the Underwriters within thirty
(30) days of a request for reimbursement shall bear interest at the Prime
Rate from the date of such request.
<PAGE>22
(b) In addition to their other obligations under Section 8(c)
hereof, the Underwriters severally and not jointly agree that, as an interim
measure during the pendency of any claim, action, investigation, inquiry or
other proceeding described in Section 8(c) hereof, they will reimburse the
Company and each Selling Stockholder on a monthly basis for all reasonable
legal or other expenses reasonably incurred in connection with investigating
or defending any such claim, action, investigation, inquiry or other
proceeding, notwithstanding the absence of a judicial determination as to the
propriety and enforceability of the Underwriters' obligation to reimburse the
Company and each such Selling Stockholder for such expenses and the
possibility that such payments might later be held to have been improper by a
court of competent jurisdiction. To the extent that any such interim
reimbursement payment is so held to have been improper, the Company and each
such Selling Stockholder shall promptly return such payment to the
Underwriters together with interest, compounded daily, determined on the
basis of the Prime Rate. Any such interim reimbursement payments which are
not made to the Company and each such Selling Stockholder within thirty (30)
days of a request for reimbursement shall bear interest at the Prime Rate
from the date of such request.
(c) It is agreed that any controversy arising out of the
operation of the interim reimbursement arrangements set forth in Sections
5(a)(ii), 5(a)(iii) and 5(b) hereof, including the amounts of any requested
reimbursement payments, the method of determining such amounts and the basis
on which such amounts shall be apportioned among the reimbursing parties,
shall be settled by arbitration conducted under the provisions of the
Constitution and Rules of the Board of Governors of the New York Stock
Exchange, Inc. or pursuant to the Code of Arbitration Procedure of the NASD.
Any such arbitration must be commenced by service of a written demand for
arbitration or a written notice of intention to arbitrate, therein electing
the arbitration tribunal. In the event the party demanding arbitration does
not make such designation of an arbitration tribunal in such demand or
notice, then the party responding to said demand or notice is authorized to
do so. Any such arbitration will be limited to the operation of the interim
reimbursement provisions contained in Sections 5(a)(ii), 5(a)(iii) and 5(b)
hereof and will not resolve the ultimate propriety or enforceability of the
obligation to indemnify for expenses that is created by the provisions of
Sections 8(a), 8(b) and 8(c) hereof or the obligation to contribute to
expenses that is created by the provisions of Section 8(e) hereof.
6. Conditions of Underwriters' Obligations. The obligations of the
several Underwriters to purchase and pay for the Shares as provided herein
shall be subject to the accuracy, as of the date hereof and the Closing Date
and any later date on which Option Shares are to be purchased, as the case
may be, of the representations and warranties of the Company and the Selling
Stockholders herein, to the performance by the Company and the Selling
Stockholders of their respective obligations hereunder and to the following
additional conditions:
(a) The Registration Statement shall have become effective not
later than 2:00 p.m., San Francisco time, on the date following the date of
this Agreement, or such later date as shall be consented to in writing by
you; and no stop order suspending the effectiveness thereof shall have been
<PAGE>23
issued and no proceedings for that purpose shall have been initiated or, to
the knowledge of the Company, any Selling Stockholder or any Underwriter,
threatened by the Commission, and any request of the Commission for
additional information (to be included in the Registration Statement or the
Prospectus or otherwise) shall have been complied with to the satisfaction of
Underwriters' Counsel.
(b) All corporate proceedings and other legal matters in
connection with this Agreement, the form of Registration Statement and the
Prospectus, and the registration, authorization, issue, sale and delivery of
the Shares, shall have been reasonably satisfactory to Underwriters' Counsel,
and such counsel shall have been furnished with such papers and information
as they may reasonably have requested to enable them to pass upon the matters
referred to in this Section.
(c) Subsequent to the execution and delivery of this Agreement
and prior to the Closing Date, or any later date on which Option Shares are
to be purchased, as the case may be, there shall not have been any change in
the condition (financial or otherwise), earnings, operations, business or
business prospects of the Company and its subsidiaries considered as one
enterprise from that set forth in the Registration Statement or Prospectus,
which, in your reasonable judgment, is material and adverse and that makes
it, in your reasonable judgment, impracticable or inadvisable to proceed with
the public offering of the Shares as contemplated by the Prospectus.
(d) You shall have received on the Closing Date and on any
later date on which Option Shares are to be purchased, as the case may be,
the following opinion of counsel for the Company and the Selling
Stockholders, dated the Closing Date or such later date on which Option
Shares are to be purchased addressed to the Underwriters and with reproduced
copies or signed counterparts thereof for each of the Underwriters, to the
effect that:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State of
Delaware, with full corporate power and authority to own or lease its
properties and conduct its business as described in the Registration
Statement and Prospectus;
(ii) Each of E*TRADE Securities, Inc. and E*TRADE Online
Ventures, Inc. has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation, with the corporate power and authority to own or lease its
properties and conduct its business as described in the Registration
Statement and Prospectus;
(iii) To such counsel's knowledge, each of the Company,
E*TRADE Securities, Inc. and E*TRADE Online Ventures, Inc. is duly qualified
to do business as a foreign corporation and is in good standing in each state
in the United States, if any, in which the ownership or leasing of its
properties or the conduct of its business requires such qualification, except
where the failure to be so qualified or be in good standing would not have a
material adverse effect on the condition (financial or otherwise), earnings,
<PAGE>24
operations or business of the Company and its subsidiaries considered as one
enterprise. To such counsel's knowledge, the Company does not own (other
than minority interests) or control, directly or indirectly, any corporation,
association or other entity other than E*TRADE Securities, Inc., E*TRADE
Capital, Inc., TRADE*Plus Brokerage, Inc. and E*TRADE Online Ventures, Inc.;
(iv) The authorized capital stock of the Company conforms
as to legal matters in all material respects to the description thereof
contained in the Registration Statement and Prospectus under the captions
"Capitalization" and "Description of Capital Stock";
(v) The outstanding shares of capital stock of the
Company are as set forth in the Prospectus under the caption "Capitalization"
as of the dates stated therein, have been duly and validly authorized and
issued, are fully paid and nonassessable, and, to such counsel's knowledge,
are not subject to any preemptive or other similar rights to subscribe for or
purchase securities;
(vi) All issued and outstanding shares of capital stock
of each Subsidiary have been duly authorized and validly issued and are fully
paid and nonassessable, and, to such counsel's knowledge, have not been
issued in violation of or subject to any preemptive right, co-sale right,
registration right, right of first refusal or other similar right to
subscribe for or purchase securities and, to such counsel's knowledge, are
owned by the Company free and clear of any pledge, lien, security interest,
encumbrance, claim or equitable interest;
(vii) The Company has the corporate power and authority
to enter into this Agreement and to issue, sell and deliver to the
Underwriters the Shares;
(viii) This Agreement has been duly authorized, executed
and delivered by the Company and, assuming due authorization, execution and
delivery by you, is a valid and binding agreement of the Company, enforceable
in accordance with its terms, except insofar as indemnification and
contribution provisions may be limited by applicable law and except as
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium or similar laws relating to or affecting creditors' rights
generally or by general equitable principles and limitations on availability
of equitable remedies;
(ix) The execution and delivery by the Company of, and
the performance by the Company of its obligations under, this Agreement will
not contravene the certificate of incorporation or bylaws of the Company or
its Subsidiaries, or, to such counsel's knowledge, any provision of
applicable law or any judgment, order or decree of any governmental body,
agency or court having jurisdiction over the Company or any of its properties
or any of its Subsidiaries or any of their properties, or, to such counsel's
knowledge, constitute a material breach or default under any material
agreement or other instrument binding upon the Company or any of its
Subsidiaries that has been identified to such counsel by the Company as
material and filed as an exhibit to the Registration Statement, and no
consent, approval, authorization or order of or qualification with any
<PAGE>25
governmental agency in the United States is required for the performance by
the Company of its obligations under this Agreement, except such as have been
obtained under the Act or such as may be required by the securities or Blue
Sky laws of the various states (on which such counsel need express no
opinion) in connection with the purchase and distribution of the Firm Shares
or the Option Shares, as the case may be, by the Underwriters;
(x) The Registration Statement has become effective
under the Act and, to such counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement has been issued and no
proceedings for that purpose have been instituted or are pending or
threatened under the Act;
(xi) The descriptions in the Registration Statement and
the Prospectus of the charter and bylaws of the Company as set forth under
the captions "Risk Factors -- Effects of Certain Charter and Bylaw
Provisions" and "Description of Capital Stock" are accurate and fairly
present the information required to be presented by the Act and the
applicable Rules and Regulations;
(xii) To such counsel's knowledge, there are no legal or
governmental proceedings pending or threatened to which the Company or any of
its Subsidiaries is or may become a party or to which any of the properties
of the Company or any of the properties of its Subsidiaries is or may become
subject that are required to be described in the Registration Statement or
the Prospectus by the Act or the Rules and Regulations and are not so
described, nor, to such counsel's knowledge, is there any statute or
regulation to which the Company is subject or any contract or other document
to which the Company is a party that is known to such counsel that is
required by the Act or the Rules and Regulations to be described in the
Registration Statement or the Prospectus or to be filed as an exhibit to the
Registration Statement that is not described or filed as required;
(xiii) The certificates evidencing the Firm Shares or
the Option Shares, as the case may be, to be delivered hereunder are in
proper form under Delaware law and, when duly countersigned by the Company's
transfer agent and registrar, and delivered to you or upon your order against
payment of the agreed consideration therefor in accordance with the
provisions of this Agreement, the Firm Shares or the Option Shares, as the
case may be, represented thereby will be duly authorized and validly issued,
fully paid and nonassessable and will not have been issued in violation of or
subject to any preemptive rights or, to such counsel's knowledge, other
rights to subscribe for or purchase securities;
(xiv) To such counsel's knowledge, no holders of
securities of the Company have rights which have not been waived to the
registration of shares of Common Stock or other securities because of the
filing of the Registration Statement by the Company or the issuance and sale
of the Firm Shares or the Option Shares, as the case may be;
(xv) To such counsel's knowledge: each Selling
Stockholder that is not a natural person has full legal right, power and
authority to enter into and to perform its obligations under the Power of
<PAGE>26
Attorney and Custody Agreement to be executed and delivered by it in
connection with the transactions contemplated herein; the Power of Attorney
and Custody Agreement of each Selling Stockholder that is not a natural
person has been duly authorized by such Selling Stockholder; the Power of
Attorney and Custody Agreement of each Selling Stockholder has been duly
executed and delivered by or on behalf of such Selling Stockholder; and the
Power of Attorney and Custody Agreement of each Selling Stockholder
constitutes the valid and binding agreement of such Selling Stockholder,
enforceable in accordance with its terms, except as the enforcement thereof
may be limited by bankruptcy, insolvency, reorganization, moratorium or other
similar laws relating to or affecting creditors' rights generally or by
general equitable principles or the limitation on availability of equitable
remedies, and except with respect to those provisions relating to indemnities
or contributions for liabilities, as to which such counsel need express no
opinion;
(xvi) To such counsel's knowledge, each of the Selling
Stockholders has full legal right, power and authority to enter into and to
perform its obligations under this Agreement and to sell, transfer, assign
and deliver the Shares to be sold by such Selling Stockholder hereunder;
(xvii) To such counsel's knowledge, this Agreement has
been duly authorized by each Selling Stockholder that is not a natural person
and has been duly executed and delivered by or on behalf of each Selling
Stockholder; and
(xviii) To such counsel's knowledge, upon the delivery
of and payment for the Shares as contemplated in this Agreement, each of the
Underwriters will receive valid title to the Shares purchased by it from such
Selling Stockholder, free and clear of any pledge, lien, security interest
pertaining to such Selling Stockholder or to such Selling Stockholder's
property, encumbrance, claim or equitable interest. In rendering such
opinion, such counsel may assume that the Underwriters are bona fide
purchasers and without notice of any defect in the title of the Shares being
purchased from the Selling Stockholders.
In addition, such counsel shall state that, in addition to rendering
legal advice and assistance to the Company in the course of the preparation
of the Registration Statement and the Prospectus, involving, among other
things, discussions and inquiries concerning various legal matters and the
review of certain corporate records, documents and proceedings, such counsel
also participated in conferences with certain officers and other
representatives of the Company, including its independent public accountants
and with you and your counsel at which the contents of the Registration
Statement, the Prospectus and related matters were discussed. Such counsel
may state that such counsel has not, however, except with respect to matters
expressly covered above by such counsel's opinion, independently checked or
verified the accuracy, completeness or fairness of the information contained
in the Registration Statement and the Prospectus.
Such counsel shall state, however, that based upon such counsel's
participation as described in the preceding paragraph, (i) such counsel
believes that the Registration Statement and the Prospectus (except for
<PAGE>27
financial statements, as to which such counsel need express no belief), as of
the effective date of the Registration Statement, complied as to form in all
material respects with the requirements of the Act and the applicable rules
and regulations of the Commission thereunder, and (ii) such counsel confirms
that such counsel has no reason to believe that (except for financial
statements, as to which such counsel need express no belief) either the
Registration Statement or the Prospectus, as of such effective date,
contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading or that (except for financial statements,
as to which such counsel need express no belief) the Prospectus, on the
Closing Date or any later date on which the Option Shares are to be
purchased, as the case may be, contains any untrue statement of a material
fact or omits to state a material fact necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
Such counsel is not called upon to express, and need not express, any
view, opinion or belief as to the financial statements, schedules,
statistical data and other financial data contained in the Registration
Statement or the Prospectus.
Counsel rendering the foregoing opinion may rely as to questions of law
not involving the laws of the United States or the State of California or the
Delaware General Corporation Law upon opinions of local counsel, and as to
questions of fact upon representations or certificates of officers of the
Company, the Selling Stockholders or officers of the Selling Stockholders
(when the Selling Stockholder is not a natural person), and of government
officials, in which case their opinion is to state that they are so relying
and that they have no knowledge of any material misstatement or inaccuracy in
any such opinion, representation or certificate. Copies of any opinion,
representation or certificate so relied upon shall be delivered to you, as
Representatives of the Underwriters, and to Underwriters' Counsel.
(e) You shall have received on the Closing Date and on any
later date on which Option Shares are to be purchased, as the case may be, an
opinion of Cooley Godward Castro Huddleson & Tatum, in form and substance
reasonably satisfactory to you, with respect to the sufficiency of all such
corporate proceedings and other legal matters relating to this Agreement and
the transactions contemplated hereby as you may reasonably require, and the
Company shall have furnished to such counsel such documents as they may have
reasonably requested for the purpose of enabling them to pass upon such
matters.
(f) You shall have received on the Closing Date and on any
later date on which Option Shares are to be purchased, as the case may be, a
letter from Deloitte & Touche LLP addressed to the Underwriters, dated the
Closing Date or such later date on which Option Shares are to be purchased,
as the case may be, confirming that they are independent certified public
accountants with respect to the Company within the meaning of the Act and the
applicable published Rules and Regulations and based upon the procedures
described in such letter delivered to you concurrently with the execution of
this Agreement (herein called the "Original Letter"), but carried out to a
<PAGE>28
date not more than five (5) business days prior to the Closing Date or such
later date on which Option Shares are to be purchased, as the case may be,
(i) confirming, to the extent true, that the statements and conclusions set
forth in the Original Letter are accurate as of the Closing Date or such
later date on which Option Shares are to be purchased, as the case may be,
and (ii) setting forth any revisions and additions to the statements and
conclusions set forth in the Original Letter which are necessary to reflect
any changes in the facts described in the Original Letter since the date of
such letter, or to reflect the availability of more recent financial
statements, data or information. The letter shall not disclose any change in
the condition (financial or otherwise), earnings, operations, business or
business prospects of the Company and its subsidiaries considered as one
enterprise from that set forth in the Registration Statement or Prospectus,
which, in your reasonable judgment, is material and adverse and that makes
it, in your reasonable judgment, impracticable or inadvisable to proceed with
the public offering of the Shares as contemplated by the Prospectus. The
Original Letter from Deloitte & Touche LLP shall be addressed to or for the
use of the Underwriters in form and substance satisfactory to the
Underwriters and shall (i) represent, to the extent true, that Deloitte &
Touche LLP are independent certified public accountants with respect to the
Company within the meaning of the Act and the applicable published Rules and
Regulations, (ii) set forth their opinion with respect to their examination
of the consolidated balance sheet of the Company as of September 30, 1995 and
related consolidated statements of operations, stockholders' equity, and cash
flows for the twelve (12) months ended September 30, 1995, (iii) state that
Deloitte & Touche LLP has performed the procedures set out in Statement on
Auditing Standards No. 71 ("SAS 71") for a review of interim financial
information and providing the report of Deloitte & Touche LLP as described in
SAS 71 on the financial statements for each of the quarters presented in the
Prospectus (the "Quarterly Financial Statements"), (iv) state that in the
course of such review, nothing came to their attention that leads them to
believe that any material modifications need to be made to any of the
Quarterly Financial Statements in order for them to be in compliance with
generally accepted accounting principles consistently applied across the
periods presented, and (v) address other matters agreed upon by Deloitte &
Touche LLP and you. In addition, you shall have received from Deloitte &
Touche LLP a letter addressed to the Company and made available to you for
the use of the Underwriters stating that their review of the Company's system
of internal accounting controls, to the extent they deemed necessary in
establishing the scope of their examination of the Company's consolidated
financial statements as of September 30, 1995, did not disclose any
weaknesses in internal controls that they considered to be material
weaknesses.
(g) You shall have received on the Closing Date and on any
later date on which Option Shares are to be purchased, as the case may be, a
certificate of the Company, dated the Closing Date or such later date on
which Option Shares are to be purchased, as the case may be, signed by the
Chief Executive Officer and Chief Financial Officer of the Company, to the
effect that, and you shall be reasonably satisfied that:
(i) The representations and warranties of the Company in
this Agreement are true and correct, as if made on and as of the Closing Date
<PAGE>29
or any later date on which Option Shares are to be purchased, as the case may
be, and the Company has complied with all the agreements and satisfied all
the conditions on its part to be performed or satisfied at or prior to the
Closing Date or any later date on which Option Shares are to be purchased, as
the case may be;
(ii) No stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that purpose
have been instituted or are pending or threatened under the Act;
(iii) When the Registration Statement became effective and
at all times subsequent thereto up to the delivery of such certificate, the
Registration Statement and the Prospectus, and any amendments or supplements
thereto, contained all material information required to be included therein
by the Act and the Rules and Regulations and in all material respects
conformed to the requirements of the Act and the Rules and Regulations, the
Registration Statement, and any amendment or supplement thereto, did not and
does not include any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading, the Prospectus, and any amendment or
supplement thereto, did not and does not include any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, and, since the effective date of the Registration
Statement, there has occurred no event required to be set forth in an amended
or supplemented Prospectus which has not been so set forth; and
(iv) Subsequent to the respective dates as of which
information is given in the Registration Statement and Prospectus, there has
not been (a) any material adverse change in the condition (financial or
otherwise), earnings, operations, business or business prospects of the
Company and its subsidiaries considered as one enterprise, (b) any
transaction that is material to the Company and its subsidiaries considered
as one enterprise, except transactions entered into in the ordinary course of
business, (c) any obligation, direct or contingent, that is material to the
Company and its subsidiaries considered as one enterprise, incurred by the
Company or its subsidiaries, except obligations incurred in the ordinary
course of business, (d) any change in the capital stock or outstanding
indebtedness of the Company or any of its subsidiaries that is material to
the Company and its subsidiaries considered as one enterprise, (e) any
dividend or distribution of any kind declared, paid or made on the capital
stock of the Company or any of its subsidiaries, or (f) any loss or damage
(whether or not insured) to the property of the Company or any of its
subsidiaries which has been sustained which has a material adverse effect on
the condition (financial or otherwise), earnings, operations, business or
business prospects of the Company and its subsidiaries considered as one
enterprise.
(h) You shall be satisfied that, and you shall have received a
certificate, dated the Closing Date, or any later date on which Option Shares
are to be purchased, as the case may be, from the Attorneys for each Selling
Stockholder to the effect that, as of the Closing Date, or any later date on
which Option Shares are to be purchased, as the case may be, they have not
<PAGE>30
been informed that:
(i) The representations and warranties made by such
Selling Stockholder herein are not true or correct in any material respect on
the Closing Date or on any later date on which Option Shares are to be
purchased, as the case may be; or
(ii) Such Selling Stockholder has not complied with any
obligation or satisfied any condition which is required to be performed or
satisfied on the part of such Selling Stockholder at or prior to the Closing
Date or any later date on which Option Shares are to be purchased, as the
case may be.
(i) The Company shall have obtained and delivered to you
an agreement from each officer and director of the Company, each Selling
Stockholder and the beneficial owners of 95% of the outstanding shares of
Common Stock (assuming conversion of all outstanding shares of Preferred
Stock into Common Stock) (including shares held by such officers, directors
and Selling Stockholders) as of the date hereof in writing prior to the date
hereof that such person will not, during the Lock-up Period, effect the
Disposition of any Securities now owned or hereafter acquired directly by
such person or with respect to which such person has or hereafter acquires
the power of disposition, otherwise than (i) as a bona fide gift or gifts,
provided the donee or donees thereof agree in writing to be bound by this
restriction, (ii) as a distribution to partners or stockholders of such
person, provided that the distributees thereof agree in writing to be bound
by the terms of this restriction, or (iii) with the prior written consent of
Robertson, Stephens & Company LLC. The foregoing restriction shall have been
expressly agreed to preclude the holder of the Securities from engaging in
any hedging or other transaction which is designed to or reasonably expected
to lead to or result in a Disposition of Securities during the Lock-up
Period, even if such Securities would be disposed of by someone other than
such holder. Such prohibited hedging or other transactions would include,
without limitation, any short sale (whether or not against the box) or any
purchase, sale or grant of any right (including, without limitation, any put
or call option) with respect to any Securities or with respect to any
security (other than a broad-based market basket or index) that includes,
relates to or derives any significant part of its value from Securities.
Furthermore, such person will have also agreed and consented to the entry of
stop transfer instructions with the Company's transfer agent against the
transfer of the Securities held by such person except in compliance with this
restriction. Notwithstanding the foregoing, the fore-going restrictions
shall not prohibit the sale of Shares by such person pursuant to this
Agreement.
(j) The Company and the Selling Stockholders shall have
furnished to you such further certificates and documents as you shall
reasonably request (including certificates of officers of the Company, the
Selling Stockholders or officers of the Selling Stockholders (when the
Selling Stockholder is not a natural person) as to the accuracy of the
representations and warranties of the Company and the Selling Stockholders
herein, as to the performance by the Company and the Selling Stockholders of
their respective obligations hereunder and as to the other conditions
<PAGE>31
concurrent and precedent to the obligations of the Underwriters hereunder).
All such opinions, certificates, letters and documents will be in
compliance with the provisions hereof only if they are reasonably
satisfactory to Underwriters' Counsel. The Company and the Selling
Stockholders will furnish you with such number of conformed copies of such
opinions, certificates, letters and documents as you shall reasonably
request.
7. Option Shares.
(a) On the basis of the representations, warranties and
agreements herein contained, but subject to the terms and conditions herein
set forth, the Company and a certain Selling Stockholder identified on
Schedule B hereto hereby grant to the several Underwriters, for the purpose
of covering over-allotments in connection with the distribution and sale of
the Firm Shares only, a nontransferable option to purchase up to an aggregate
of 849,750 Option Shares at the purchase price per share for the Firm Shares
set forth in Section 3 hereof. Such option may be exercised by the
Representatives on behalf of the several Underwriters on only one (1)
occasion in whole or in part during the period of thirty (30) days after the
date on which the Firm Shares are initially offered to the public, by giving
written notice to the Company and the Attorneys for Selling Stockholders.
The number of Option Shares to be purchased by each Underwriter upon the
exercise of such option shall be the same proportion of the total number of
Option Shares to be purchased by the several Underwriters pursuant to the
exercise of such option as the number of Firm Shares purchased by such
Underwriter (set forth in Schedule A hereto) bears to the total number of
Firm Shares purchased by the several Underwriters (set forth in Schedule A
hereto), adjusted by the Representatives in such manner as to avoid
fractional shares. The number of Option Shares to be purchased from the
Company and such Selling Stockholder pursuant to this Section 7 shall be that
number of Option Shares as is set forth opposite the name of the Company and
such Selling Stockholder in Schedule B hereto.
The certificate or certificates in negotiable form for the Option Shares
to be sold by the Selling Stockholder set forth on Schedule B hereto have
been placed in custody (for delivery under this Agreement) under the Custody
Agreement. The Selling Stockholder who has granted the option hereunder
agrees that the certificate or certificates for the Option Shares of such
Selling Stockholder so held in custody are subject to the interests of the
Underwriters hereunder, that the arrangements made by such Selling
Stockholder for such custody, including the Power of Attorney, are to that
extent irrevocable and that the obligations of such Selling Stockholder
hereunder shall not be terminated by the act of such Selling Stockholder or
by operation of law, whether by the death or incapacity of such Selling
Stockholder or the occurrence of any other event, except as specifically
provided herein or in the Custody Agreement. If such Selling Stockholder
should die or be incapacitated, or if any other such event should occur,
before the delivery of the certificate or certificates for the Option Shares
hereunder, the Option Shares to be sold by such Selling Stockholder shall,
except as specifically provided herein or in the Custody Agreement, be
delivered by the Custodian in accordance with the terms and conditions of
<PAGE>32
this Agreement as if such death, incapacity or other event had not occurred,
regardless of whether the Custodian shall have received notice of such death
or other event.
Delivery of definitive certificates for the Option Shares to be
purchased by the several Underwriters pursuant to the exercise of the option
granted by this Section 7 shall be made against payment of the purchase price
therefor by the several Underwriters by wire transfer or certified or
official bank check or checks, at the option of the Company, drawn in same-
day funds, payable to the order of the Company with regard to the Shares
being purchased from the Company, and to the order of the Custodian for the
account of the Selling Stockholder with regard to the Shares being purchased
from such Selling Stockholder, at the offices of Brobeck, Phleger & Harrison
LLP, One Market, Spear Street Tower, San Francisco, California 94105 (or at
such other place as may be agreed upon among the Representatives and the
Company and the Attorneys), at 7:00 a.m., San Francisco time (i) on the
Closing Date, if written notice of the exercise of such option is received by
the Company at least two (2) full business days prior to the Closing Date, or
(ii) on a date which shall not be later than the third (3rd) full business
day following the date the Company and the Attorneys for the Selling
Stockholders receive written notice of the exercise of such option, if such
notice is received by the Company and the Attorneys for the Selling
Stockholders less than two (2) full business days prior to the Closing Date.
The certificates for the Option Shares to be so delivered will be made
available to you at such office or such other location including, without
limitation, in New York City, as you may reasonably request for checking at
least one (1) full business day prior to the date of payment and delivery and
will be in such names and denominations as you may request, such request to
be made at least two (2) full business days prior to such date of payment and
delivery. If the Representatives so elect, delivery of the Option Shares may
be made by credit through full fast transfer to the accounts at The
Depository Trust Company designated by the Representatives.
It is understood that you, individually, and not as the Representatives
of the several Underwriters, may (but shall not be obligated to) make payment
of the purchase price on behalf of any Underwriter or Underwriters whose
check or checks shall not have been received by you prior to the date of
payment and delivery for the Option Shares to be purchased by such
Underwriter or Underwriters. Any such payment by you shall not relieve any
such Underwriter or Underwriters of any of its or their obligations
hereunder.
(b) Upon exercise of any option provided for in Section 7(a)
hereof, the obligations of the several Underwriters to purchase such Option
Shares will be subject (as of the date hereof and as of the date of payment
and delivery for such Option Shares) to the accuracy of and compliance with
the representations, warranties and agreements of the Company and the Selling
Stockholders herein, to the accuracy of the statements of the Company, the
Selling Stockholders and officers of the Company made pursuant to the
provisions hereof, to the performance by the Company and the Selling
Stockholders of their respective obligations hereunder, to the conditions set
forth in Section 6 hereof, as applicable, and to the condition that all
<PAGE>33
proceedings taken at or prior to the payment date in connection with the sale
and transfer of such Option Shares shall be satisfactory in form and
substance to you and to Underwriters' Counsel, and you shall have been
furnished with all such documents, certificates and opinions as you may
reasonably request in order to evidence the accuracy and completeness of any
of the representations, warranties or statements, the performance of any of
the covenants or agreements of the Company and the Selling Stockholders or
the satisfaction of any of the conditions herein contained.
8. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless each
Underwriter against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject under the Act, the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), or
otherwise, specifically including, but not limited to, losses, claims,
damages or liabilities (or actions in respect thereof) arising out of or
based upon (i) any breach of any representation, warranty, agreement or
covenant of the Company herein contained, (ii) any untrue statement or
alleged untrue statement of any material fact contained in the Registration
Statement or any amendment or supplement thereto, or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or (iii) any untrue
statement or alleged untrue statement of any material fact contained in any
Preliminary Prospectus or the Prospectus or any amendment or supplement
thereto, or the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading,
and agrees to reimburse each Underwriter for any legal or other related
expenses reasonably incurred by it in connection with investigating or
defending any such loss, claim, damage, liability or action; provided,
however, that the Company shall not be liable in any such case to the extent
that any such loss, claim, damage, liability or action arises out of or is
based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in the Registration Statement, such Preliminary
Prospectus or the Prospectus, or any such amendment or supplement thereto, in
reliance upon, and in conformity with, written information relating to any
Underwriter furnished to the Company by such Underwriter, directly or through
you, specifically for use in the preparation thereof and, provided further,
that the indemnity agreement provided in this Section 8(a) with respect to
any Preliminary Prospectus shall not inure to the benefit of any Underwriter
from whom the person asserting any losses, claims, damages, liabilities or
actions based upon any untrue statement or alleged untrue statement of
material fact or omission or alleged omission to state therein a material
fact purchased Shares, if a copy of the Prospectus in which such untrue
statement or alleged untrue statement or omission or alleged omission was
corrected had not been sent or given to such person within the time required
by the Act and the Rules and Regulations, unless such failure is the result
of noncompliance by the Company with Section 4(d) hereof.
The indemnity agreement in this Section 8(a) shall extend upon the same
terms and conditions to, and shall inure to the benefit of, each person, if
any, who controls any Underwriter within the meaning of the Act or the
<PAGE>34
Exchange Act. This indemnity agreement shall be in addition to any
liabilities which the Company may otherwise have.
(b) Each Selling Stockholder, severally and not jointly, agrees
to indemnify and hold harmless each Underwriter against any losses, claims,
damages or liabilities, joint or several, to which such Underwriter may
become subject under the Act, the Exchange Act or otherwise, specifically
including, but not limited to, losses, claims, damages or liabilities (or
actions in respect thereof) arising out of or based upon (i) any breach of
any representation, warranty, agreement or covenant of such Selling
Stockholder herein contained, (ii) any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement or any
amendment or supplement thereto, or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, or (iii) any untrue statement or
alleged untrue statement of any material fact contained in any Preliminary
Prospectus or the Prospectus or any amendment or supplement thereto, or the
omission or alleged omission to state therein a material fact necessary to
make the statements therein, in the light of the circumstances under which
they were made, not misleading, in the case of subparagraphs (ii) and (iii)
of this Section 8(b) to the extent, but only to the extent, that such untrue
statement or alleged untrue statement or omission or alleged omission was
made in reliance upon and in conformity with written information furnished to
the Company or such Underwriter by such Selling Stockholder, directly or
through such Selling Stockholder's representatives, specifically for use in
the preparation thereof, and agrees to reimburse each Underwriter for any
legal or other expenses reasonably incurred by it in connection with
investigating or defending any such loss, claim, damage, liability or action;
provided, however, that the indemnity agreement provided in this Section 8(b)
with respect to any Preliminary Prospectus shall not inure to the benefit of
any Underwriter from whom the person asserting any losses, claims, damages,
liabilities or actions based upon any untrue statement or alleged untrue
statement of a material fact or omission or alleged omission to state therein
a material fact purchased Shares, if a copy of the Prospectus in which such
untrue statement or alleged untrue statement or omission or alleged omission
was corrected had not been sent or given to such person within the time
required by the Act and the Rules and Regulations, unless such failure is the
result of noncompliance by the Company with Section 4(d) hereof.
The indemnity agreement in this Section 8(b) shall extend upon the same
terms and conditions to, and shall inure to the benefit of, each person, if
any, who controls any Underwriter within the meaning of the Act or the
Exchange Act. This indemnity agreement shall be in addition to any
liabilities which such Selling Stockholder may otherwise have.
(c) Each Underwriter, severally and not jointly, agrees to
indemnify and hold harmless the Company and each Selling Stockholder against
any losses, claims, damages or liabilities, joint or several, to which the
Company or such Selling Stockholder may become subject under the Act or
otherwise, specifically including, but not limited to, losses, claims,
damages or liabilities (or actions in respect thereof) arising out of or
based upon (i) any breach of any representation, warranty, agreement or
covenant of such Underwriter herein contained, (ii) any untrue statement or
<PAGE>35
alleged untrue statement of any material fact contained in the Registration
Statement or any amendment or supplement thereto, or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or (iii) any untrue
statement or alleged untrue statement of any material fact contained in any
Preliminary Prospectus or the Prospectus or any amendment or supplement
thereto, or the omission or alleged omission to state therein a material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, in the case of subparagraphs (ii)
and (iii) of this Section 8(c) to the extent, but only to the extent, that
such untrue statement or alleged untrue statement or omission or alleged
omission was made in reliance upon and in conformity with written information
furnished to the Company by such Underwriter, directly or through you,
specifically for use in the preparation thereof, and agrees to reimburse the
Company and each such Selling Stockholder for any legal or other expenses
reasonably incurred by the Company and each such Selling Stockholder in
connection with investigating or defending any such loss, claim, damage,
liability or action.
The indemnity agreement in this Section 8(c) shall extend upon the same
terms and conditions to, and shall inure to the benefit of, each officer of
the Company who signed the Registration Statement and each director of the
Company, each Selling Stockholder and each person, if any, who controls the
Company or any Selling Stockholder within the meaning of the Act or the
Exchange Act. This indemnity agreement shall be in addition to any
liabilities which each Underwriter may otherwise have.
(d) Promptly after receipt by an indemnified party under this
Section 8 of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against any indemnifying
party under this Section 8, notify the indemnifying party in writing of the
commencement thereof but the omission so to notify the indemnifying party
will not relieve it from any liability which it may have to any indemnified
party otherwise than under this Section 8, except to the extent that the
indemnifying party has been materially prejudiced by such omission. In case
any such action is brought against any indemnified party, and it notified the
indemnifying party of the commencement thereof, the indemnifying party will
be entitled to participate therein and, to the extent that it shall elect by
written notice delivered to the indemnified party promptly after receiving
the aforesaid notice from such indemnified party, to assume the defense
thereof, with counsel reasonably satisfactory to such indemnified party;
provided, however, that if the defendants in any such action include both the
indemnified party and the indemnifying party and the indemnified party shall
have reasonably concluded that there may be legal defenses available to it
and/or other indemnified parties which are different from or additional to
those available to the indemnifying party, the indemnified party or parties
shall have the right to select separate counsel to assume such legal defenses
and to otherwise participate in the defense of such action on behalf of such
indemnified party or parties. Upon receipt of notice from the indemnifying
party to such indemnified party of the indemnifying party's election so to
assume the defense of such action and approval by the indemnified party of
counsel, the indemnifying party will not be liable to such indemnified party
under this Section 8 for any legal or other expenses subsequently incurred by
<PAGE>36
such indemnified party in connection with the defense thereof unless (i) the
indemnified party shall have employed separate counsel in accordance with the
proviso to the next preceding sentence (it being understood, however, that
the indemnifying party shall not be liable for the expenses of more than one
separate counsel (together with appropriate local counsel) approved by the
indemnifying party representing all the indemnified parties under Section
8(a), 8(b) or 8(c) hereof who are parties to such action), (ii) the
indemnifying party shall not have employed counsel reasonably satisfactory to
the indemnified party to represent the indemnified party within a reasonable
time after notice of commencement of the action or (iii) the indemnifying
party has authorized the employment of counsel for the indemnified party at
the expense of the indemnifying party. In no event shall any indemnifying
party be liable in respect of any amounts paid in settlement of any action
unless the indemnifying party shall have approved the terms of such
settlement; provided that such consent shall not be unreasonably withheld.
No indemnifying party shall, without the prior written consent of the
indemnified party, effect any settlement of any pending or threatened
proceeding in respect of which any indemnified party is or could have been a
party and indemnification could have been sought hereunder by such
indemnified party, unless such settlement includes an unconditional release
of such indemnified party from all liability on all claims that are the
subject matter of such proceeding.
(e) In order to provide for just and equitable contribution in
any action in which a claim for indemnification is made pursuant to this
Section 8 but it is judicially determined (by the entry of a final judgment
or decree by a court of competent jurisdiction and the expiration of time to
appeal or the denial of the last right of appeal) that such indemnification
may not be enforced in such case notwithstanding the fact that this Section 8
provides for indemnification in such case, all the parties hereto shall
contribute to the aggregate losses, claims, damages or liabilities to which
they may be subject (after contribution from others) in such proportion so
that, except as set forth in Section 8(f) hereof, the Underwriters severally
and not jointly are responsible pro rata for the portion represented by the
percentage that the underwriting discount bears to the initial public
offering price, and the Company and the Selling Stockholders are responsible
for the remaining portion, provided, however, that (i) no Underwriter shall
be required to contribute any amount in excess of the amount by which the
underwriting discount applicable to the Shares purchased by such Underwriter
exceeds the amount of damages which such Underwriter has otherwise been
required to pay and (ii) no person guilty of a fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who is not guilty of such fraudulent
misrepresentation. The contribution agreement in this Section 8(e) shall
extend upon the same terms and conditions to, and shall inure to the benefit
of, each person, if any, who controls any Underwriter, the Company or any
Selling Stockholder within the meaning of the Act or the Exchange Act and
each officer of the Company who signed the Registration Statement and each
director of the Company.
(f) Any provision hereof to the contrary notwithstanding, the
liability of each Selling Stockholder under the representations, warranties
and agreements contained herein and under the indemnity and contribution
<PAGE>37
agreements contained in the provisions of this Section 8 shall be limited to
an amount equal to the initial public offering price of the Selling
Stockholder Shares sold by such Selling Stockholder to the Underwriters minus
the amount of the underwriting discount paid thereon to the Underwriters by
such Selling Stockholder. In addition, a Selling Stockholder shall not be
required to provide indemnification or contribution hereunder to the
Underwriters in an amount in excess of such Selling Stockholder's pro rata
share of the amount of such indemnification or contribution (based on the
number of shares sold by such Selling Stockholder and the Company) until the
Underwriters have first made a demand on the Company with respect to such
indemnification or contribution and the Company shall have either rejected
such demand or failed to make such requested payment within sixty (60) days
after receipt of such demand. The Company and such Selling Stockholders may
agree, as among themselves and without limiting the rights of the
Underwriters under this Agreement, as to the respective amounts of such
liability for which they each shall be responsible.
(g) The parties to this Agreement hereby acknowledge that they
are sophisticated business persons who were represented by counsel during the
negotiations regarding the provisions hereof including, without limitation,
the provisions of this Section 8, and are fully informed regarding said
provisions. They further acknowledge that the provisions of this Section 8
fairly allocate the risks in light of the ability of the parties to
investigate the Company and its business in order to assure that adequate
disclosure is made in the Registration Statement and Prospectus as required
by the Act and the Exchange Act.
9. Representations, Warranties, Covenants and Agreements to Survive
Delivery. All representations, warranties, covenants and agreements of the
Company, the Selling Stockholders and the Underwriters herein or in
certificates delivered pursuant hereto, and the indemnity and contribution
agreements contained in Section 8 hereof shall remain operative and in full
force and effect regardless of any investigation made by or on behalf of any
Underwriter or any person controlling any Underwriter within the meaning of
the Act or the Exchange Act, or by or on behalf of the Company or any Selling
Stockholder, or any of their officers, directors or controlling persons
within the meaning of the Act or the Exchange Act, and shall survive the
delivery of the Shares to the several Underwriters hereunder or termination
of this Agreement.
10. Substitution of Underwriters. If any Underwriter or Underwriters
shall fail to take up and pay for the number of Firm Shares agreed by such
Underwriter or Underwriters to be purchased hereunder upon tender of such
Firm Shares in accordance with the terms hereof, and if the aggregate number
of Firm Shares which such defaulting Underwriter or Underwriters so agreed
but failed to purchase does not exceed 10% of the Firm Shares, the remaining
Underwriters shall be obligated, severally in proportion to their respective
commitments hereunder, to take up and pay for the Firm Shares of such
defaulting Underwriter or Underwriters.
If any Underwriter or Underwriters so defaults and the aggregate number
of Firm Shares which such defaulting Underwriter or Underwriters agreed but
failed to take up and pay for exceeds 10% of the Firm Shares, the remaining
<PAGE>38
Underwriters shall have the right, but shall not be obligated, to take up and
pay for (in such proportions as may be agreed upon among them) the Firm
Shares which the defaulting Underwriter or Underwriters so agreed but failed
to purchase. If such remaining Underwriters do not, at the Closing Date,
take up and pay for the Firm Shares which the defaulting Underwriter or
Underwriters so agreed but failed to purchase, the Closing Date shall be
postponed for twenty-four (24) hours to allow the several Underwriters the
privilege of substituting within twenty-four (24) hours (including non-
business hours) another underwriter or underwriters (which may include any
nondefaulting Underwriter) satisfactory to the Company. If no such
underwriter or underwriters shall have been substituted as aforesaid by such
postponed Closing Date, the Closing Date may, at the option of the Company,
be postponed for a further twenty-four (24) hours, if necessary, to allow the
Company the privilege of finding another underwriter or underwriters,
satisfactory to you, to purchase the Firm Shares which the defaulting
Underwriter or Underwriters so agreed but failed to purchase. If it shall be
arranged for the remaining Underwriters or substituted underwriter or
underwriters to take up the Firm Shares of the defaulting Underwriter or
Underwriters as provided in this Section 10, (i) the Company shall have the
right to postpone the time of delivery for a period of not more than seven
(7) full business days, in order to effect whatever changes may thereby be
made necessary in the Registration Statement or the Prospectus, or in any
other documents or arrangements, and the Company agrees promptly to file any
amendments to the Registration Statement, supplements to the Prospectus or
other such documents which may thereby be made necessary, and (ii) the
respective number of Firm Shares to be purchased by the remaining
Underwriters and substituted underwriter or underwriters shall be taken as
the basis of their underwriting obligation. If the remaining Underwriters
shall not take up and pay for all such Firm Shares so agreed to be purchased
by the defaulting Underwriter or Underwriters or substitute another
underwriter or underwriters as aforesaid and the Company shall not find or
shall not elect to seek another underwriter or underwriters for such Firm
Shares as aforesaid, then this Agreement shall terminate.
In the event of any termination of this Agreement pursuant to the
preceding paragraph of this Section 10, neither the Company nor any Selling
Stockholder shall be liable to any Underwriter (except as provided in
Sections 5 and 8 hereof) nor shall any Underwriter (other than an Underwriter
who shall have failed, otherwise than for some reason permitted under this
Agreement, to purchase the number of Firm Shares agreed by such Underwriter
to be purchased hereunder, which Underwriter shall remain liable to the
Company, the Selling Stockholders and the other Underwriters for damages, if
any, resulting from such default) be liable to the Company or any Selling
Stockholder (except to the extent provided in Sections 5 and 8 hereof).
The term "Underwriter" in this Agreement shall include any person
substituted for an Underwriter under this Section 10.
11. Effective Date of this Agreement and Termination.
(a) This Agreement shall become effective at the earlier of (i)
6:30 a.m., San Francisco time, on the first full business day following the
effective date of the Registration Statement, or (ii) the time of the initial
<PAGE>39
public offering of any of the Shares by the Underwriters after the
Registration Statement becomes effective. The time of the initial public
offering shall mean the time of the release by you, for publication, of the
first newspaper advertisement relating to the Shares, or the time at which
the Shares are first generally offered by the Underwriters to the public by
letter, telephone, telegram or telecopy, whichever shall first occur. By
giving notice as set forth in Section 12 before the time this Agreement
becomes effective, you, as Representatives of the several Underwriters, or
the Company, may prevent this Agreement from becoming effective without
liability of any party to any other party, except as provided in Sections
4(j), 5 and 8 hereof.
(b) You, as Representatives of the several Underwriters, shall
have the right to terminate this Agreement by giving notice as hereinafter
specified at any time on or prior to the Closing Date or on or prior to any
later date on which Option Shares are to be purchased, as the case may be,
(i) if the Company or any Selling Stockholder shall have failed, refused or
been unable to perform any agreement on its part to be performed, or because
any other condition of the Underwriters' obligations hereunder required to be
fulfilled is not fulfilled, including, without limitation, any change in the
condition (financial or otherwise), earnings, operations, business or
business prospects of the Company and its subsidiaries considered as one
enterprise from that set forth in the Registration Statement or Prospectus,
which, in your reasonable judgment, is material and adverse, or (ii) if
additional material governmental restrictions, not in force and effect on the
date hereof, shall have been imposed upon trading in securities generally or
minimum or maximum prices shall have been generally established on the New
York Stock Exchange or on the American Stock Exchange or in the over the
counter market by the NASD, or trading in securities generally shall have
been suspended on either such exchange or in the over the counter market by
the NASD, or if a banking moratorium shall have been declared by federal, New
York or California authorities, or (iii) if the Company shall have sustained
a loss by strike, fire, flood, earthquake, accident or other calamity of such
character as to interfere materially with the conduct of the business and
operations of the Company regardless of whether or not such loss shall have
been insured, or (iv) if there shall have been a material adverse change in
the general political or economic conditions or financial markets as in your
reasonable judgment makes it inadvisable or impracticable to proceed with the
offering, sale and delivery of the Shares, or (v) if there shall have been an
outbreak or escalation of hostilities or of any other insurrection or armed
conflict or the declaration by the United States of a national emergency
which, in the reasonable opinion of the Representatives, makes it
impracticable or inadvisable to proceed with the public offering of the
Shares as contemplated by the Prospectus. In the event of termination
pursuant to subparagraph (i) above, the Company shall remain obligated to pay
costs and expenses pursuant to Sections 4(j), 5 and 8 hereof. Any
termination pursuant to any of subparagraphs (ii) through (v) above shall be
without liability of any party to any other party except as provided in
Sections 5 and 8 hereof.
If you elect to prevent this Agreement from becoming effective or to
terminate this Agreement as provided in this Section 11, you shall promptly
notify the Company by telephone, telecopy or telegram, in each case confirmed
<PAGE>40
by letter. If the Company shall elect to prevent this Agreement from
becoming effective, the Company shall promptly notify you by telephone,
telecopy or telegram, in each case, confirmed by letter.
12. Notices. All notices or communications hereunder, except as
herein otherwise specifically provided, shall be in writing and if sent to
you shall be mailed, delivered, telegraphed (and confirmed by letter) or
telecopied (and confirmed by letter) to you c/o Robertson, Stephens & Company
LLC, 555 California Street, Suite 2600, San Francisco, California 94104,
telecopier number (415) 781-0278, Attention: General Counsel; if sent to the
Company, such notice shall be mailed, delivered, telegraphed (and confirmed
by letter) or telecopied (and confirmed by letter) to E*TRADE Group, Inc.,
Four Embarcadero Place, 2400 Geng Road, Palo Alto, California 94303,
telecopier number (415) 842-2552, Attention: Christos M. Cotsakos, Chief
Executive Officer; if sent to one or more of the Selling Stockholders, such
notice shall be sent mailed, delivered, telegraphed (and confirmed by letter)
or telecopied (and confirmed by letter) to Christos M. Cotsakos, Wayne H.
Heldt and Stephen C. Richards, as Attorneys-in-Fact for the Selling
Stockholders, at E*TRADE Group, Inc., Four Embarcadero Place, 2400 Geng Road,
Palo Alto, California 94303, telecopier number (415) 842-2552.
13. Parties. This Agreement shall inure to the benefit of and be
binding upon the several Underwriters and the Company and the Selling
Stockholders and their respective executors, administrators, successors and
assigns. Nothing expressed or mentioned in this Agreement is intended or
shall be construed to give any person or entity, other than the parties
hereto and their respective executors, administrators, successors and
assigns, and the controlling persons within the meaning of the Act or the
Exchange Act, officers and directors referred to in Section 8 hereof, any
legal or equitable right, remedy or claim in respect of this Agreement or any
provisions herein contained, this Agreement and all conditions and provisions
hereof being intended to be and being for the sole and exclusive benefit of
the parties hereto and their respective executors, administrators, successors
and assigns and said controlling persons and said officers and directors, and
for the benefit of no other person or entity. No purchaser of any of the
Shares from any Underwriter shall be construed a successor or assign by
reason merely of such purchase.
In all dealings with the Company and the Selling Stockholders under this
Agreement, you shall act on behalf of each of the several Underwriters, and
the Company and the Selling Stockholders shall be entitled to act and rely
upon any statement, request, notice or agreement made or given by you jointly
or by Robertson, Stephens & Company LLC on behalf of you.
14. Applicable Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of California.
15. Counterparts. This Agreement may be signed in several
counterparts, each of which will constitute an original.
If the foregoing correctly sets forth the understanding among the
Company, the Selling Stockholders and the several Underwriters, please so
indicate in the space provided below for that purpose, whereupon this letter
<PAGE>41
shall constitute a binding agreement among the Company, the Selling
Stockholders and the several Underwriters.
Very truly yours,
E*TRADE GROUP, INC.
By:/s/ CHRISTOS M. COTSAKOS
---------------------------
SELLING STOCKHOLDERS
By:/s/ CHRISTOS M. COTSAKOS
---------------------------
Attorney-in-Fact for the Selling Stockholders
named in Schedule B hereto
ACCEPTED AS OF THE DATE FIRST ABOVE WRITTEN:
ROBERTSON, STEPHENS & COMPANY LLC
HAMBRECHT & QUIST LLC
DEUTSCHE MORGAN GRENFELL/C. J. LAWRENCE INC.
On their behalf and on behalf of each of the
several Underwriters named in Schedule A hereto.
ROBERTSON, STEPHENS & COMPANY LLC
By ROBERTSON, STEPHENS & COMPANY GROUP, L.L.C.
By:/s/ KENNETH R. FITZSIMMONS
- -----------------------------
Authorized Signatory
<PAGE>42
<TABLE>
<CAPTION>
SCHEDULE A
Underwriters Number of
Firm Shares
To Be
Purchased
<S> <C>
Robertson, Stephens & Company LLC 2,099,250
Hambrecht & Quist LLC 1,866,000
Deutsche Morgan Grenfell/C. J. Lawrence Inc. 699,750
William Blair & Company, L.L.C. 200,000
Gerard Klauer Mattison & Co., L.L.C. 200,000
Mesirow Financial, Inc. 200,000
Sands Brothers & Co., Ltd. 200,000
Unterberg Harris 200,000
---------
Total 5,665,000
=========
</TABLE>
<PAGE>43
<TABLE>
<CAPTION>
SCHEDULE B
Number of Firm Number of Option
Shares To Be Sold Shares To Be Sold
<S> <C> <C>
E*Trade Group, Inc. 5,000,000 609,750
========= =======
</TABLE>
<TABLE>
<CAPTION>
Name of Selling Stockholder
Number of Firm Number of Option
Shares To Be Sold Shares To Be Sold
<S> <C> <C>
Kristin Marit Dahl 90,000 0
R. D. Fritts 2,100 0
Fred Haeckl & Ann G. Haeckl, Trustees,
Fred Haeckl & Ann G. Haeckl Family
Trust 269 U/A Dated 08/28/91 36,600 0
William R. Happ & Roxann M. Happ,
Trustees,
William & Roxann Happ Revocable
Living Trust Dated 4/12/91 47,530 0
Susan M. Harning 8,820 0
Hawaiian Trust Company, Ltd., Agent for the
Alexander S. Atherton Family
Limited Partnership 54,840 0
Charles R. Huegel 17,040 0
Jackson, Tufts, Cole & Black Profit
Sharing Plan
f/b/o Templeton C. Peck 7,200 0
Robert C. & Normalee A. Jacobson, as Joint Tenants 18,930 0
Robert C. Jacobson, Individual Retirement Account 60,000 0
Brian S. Kahn & Julie O. Kahn, Trustees,
Kahn Revocable Family Trust 12,000 0
Jacqueline Lancaster 14,040 0
Larkin S. Lapides 1,000 0
Diane F. Lee 27,660 0
Frank T. McIntosh 11,040 0
Kathleen P. McIntosh 4,020 0
Diane Munro 15,000 0
Robert Donald Murie & Nancy Dolores Murie,
Trustees, Robert D. Murie and Nancy D.
Murie Intervivos Trust
Dated August 16, 1993 15,000 0
Raymond J. Noorda & Lewena Noorda 100,460 0
Arden Orrell 4,500 0
Jeannie Pasturel 4,500 0
Herbert & Marlene Swanson 6,000 0
John M. & Lynn Thornburn 7,000 0
Thomas A. & Rosemary Tisch Trust 72,000 0
Brenda L. Vogel 720 0
Agnes Waters 9,000 0
Robert L. Waymost & Catherine M. Waymost,
Trustees, Waymost Family Revocable Trust 12,000 0
Thomas R. Yates/Wayne S. Fuller, as Joint Tenants 6,000 0
William A. Porter 0 240,000
--------- ---------
TOTAL 665,000 240,000
========= =========
</TABLE>
<PAGE>1
Exhibit 11.1
Earnings per share is based on the fully diluted weighted average number of
common and common equivalent shares outstanding during the period. Pursuant
to rules of the Securities and Exchange Commission, all common and common
equivalent shares issued and options, warrants and other rights to acquire
shares of common stock at a price less than the initial public offering price
granted by the Company during the 12 months preceding the offering date
(using the treasury stock method until shares are issued) have been included
in the computation of common and common equivalent shares outstanding for all
periods prior to the initial public offering.
E*TRADE GROUP, INC.
STATEMENT RE: COMPUTATION OF PER-SHARE EARNINGS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
--------------------------
1996 1995 1994
-------- -------- --------
(in thousands, except per share amounts)
<S> <C> <C> <C>
Weighted average shares
outstanding................... 18,344 15,741 15,226
Series A convertible preferred
stock......................... -- -- --
Options and warrants granted
prior to June 7, 1995 (on a
treasury stock basis)......... 1,406 2,213 2,433
Securities issued after June 7,
1995, in accordance with Staff
Accounting Bulletin 83:
Series A convertible
preferred................... 5,244 4,825 4,825
Series B convertible
preferred................... 1,066 950 950
Stock options................ 2,504 2,752 2,752
-------- -------- --------
Shares used to compute per
share data.................... 28,564 26,481 26,186
======== ======== ========
Net income (loss).............. $ (828)$ 2,581 $ 785
======== ======== ========
Net income (loss) per share.... $ (0.03)$ 0.10 $ 0.03
======== ======== ========
</TABLE>
<PAGE>1
Exhibit 23.1
Consent of independent auditors
We consent to the incorporation by reference in Registration Statement No.
333-12503 of E*TRADE Group, Inc. on Form S-8 of our report dated November 22,
1996, appearing in this Annual Report on Form 10-K of E*TRADE Group, Inc. for
the year ended September 30, 1996.
DELOITTE & TOUCHE LLP
San Jose, California
December 23, 1996
<TABLE> <S> <C>
<S> <C>
<ARTICLE> BD
<LEGEND>
Exhibit 27.1 - FINANCIAL DATA SCHEDULE
This schedule contains summary financial information extracted from the
Consolidated Statements of Operations and Consolidated Balance Sheets of the
Company's Annual Report on Form 10-K for the period ended September 30, 1996,
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<CASH> 14641
<RECEIVABLES> 193228
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 37863
<PP&E> 9228
<TOTAL-ASSETS> 294881
<SHORT-TERM> 6072
<PAYABLES> 219483
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 0
<LONG-TERM> 22
<COMMON> 295
0
0
<OTHER-SE> 69009
<TOTAL-LIABILITY-AND-EQUITY> 294881
<TRADING-REVENUE> 0
<INTEREST-DIVIDENDS> 4813
<COMMISSIONS> 44178
<INVESTMENT-BANKING-REVENUES> 0
<FEE-REVENUE> 0
<INTEREST-EXPENSE> 2224
<COMPENSATION> 0
<INCOME-PRETAX> (1383)
<INCOME-PRE-EXTRAORDINARY> (828)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (828)
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
