<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 22, 1996
REGISTRATION NO. 333-05525
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
E*TRADE GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 6211 94-2844166
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
INCORPORATION OR
ORGANIZATION)
FOUR EMBARCADERO PLACE
2400 GENG ROAD
PALO ALTO, CA 94303
(415) 842-2500
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
CHRISTOS M. COTSAKOS
PRESIDENT AND CHIEF EXECUTIVE OFFICER
E*TRADE GROUP, INC.
FOUR EMBARCADERO PLACE
2400 GENG ROAD
PALO ALTO, CA 94303
(415) 842-2500
(NAME AND ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA
CODE, OF AGENT FOR SERVICE)
---------------
COPIES TO:
THOMAS A. BEVILACQUA KENNETH L. GUERNSEY
THOMAS J. LIMA KARYN R. SMITH
VALERIE J. HORWITZ JONATHAN S. DICKSTEIN
BROBECK, PHLEGER & HARRISON LLP
ONE MARKET, SPEAR STREET TOWER COOLEY GODWARD CASTRO HUDDLESON
& TATUM
SAN FRANCISCO, CA 94105 ONE MARITIME PLAZA, 20TH FLOOR
(415) 442-0900 SAN FRANCISCO, CA 94111
---------------
(415) 693-2000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS
PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
---------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TITLE OF EACH CLASS OF AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION
REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) FEE(3)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value
$.01 per share......... 5,364,750 $12.00 $64,377,000 $22,199
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Includes 699,750 shares which the Underwriters have the option to purchase
to cover over-allotments, if any.
(2) Estimated solely for the purpose of computing the registration fee.
(3) A registration fee of $35,056 was previously paid with the initial filing
of the Registration Statement on June 7, 1996.
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES
AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
E*TRADE GROUP, INC.
CROSS-REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
SHOWING LOCATION IN PROSPECTUS OF INFORMATION REQUIRED BY ITEMS ON FORM S-1
<TABLE>
ITEM NUMBER AND HEADING
IN FORM S-1 REGISTRATION LOCATION IN PROSPECTUS
- -------------------------------------------------------------------------------
<C> <S>
1.Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus.. Outside Front Cover Page
2.Inside Front and Outside Back Cover Pages
of Prospectus........................... Inside Front and Outside Back
Cover Pages
3.Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges...... Prospectus Summary; Risk
Factors; Inside Front Cover
Page
4.Use of Proceeds........................... Prospectus Summary; Use of
Proceeds
5.Determination of Offering Price........... Outside Front Cover Page;
Underwriting
6.Dilution.................................. Dilution
Principal and Selling
7.Selling Security Holders.................. Stockholders
Outside Front Cover Page;
8.Plan of Distribution...................... Underwriting
Prospectus Summary;
9.Description of Securities to be
Registered.............................. Capitalization; Description of
Capital Stock
10.Interests of Named Experts and Counsel.... Management
11.Information with Respect to the
Registrant.............................. Outside Front Cover Page;
Prospectus Summary; Risk
Factors; Dividend Policy;
Capitalization; Selected
Financial Data; Management's
Discussion and Analysis of
Financial Condition and Results
of Operations; Business;
Management; Certain
Transactions; Principal and
Selling Stockholders;
Description of Capital Stock;
Shares Eligible for Future
Sale; Experts; Additional
Information; Consolidated
Financial Statements
12.Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities............................. Not Applicable
</TABLE>
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JULY 22, 1996
[E*TRADE LOGO]
4,665,000 SHARES
COMMON STOCK
Of the 4,665,000 shares of Common Stock offered hereby, 4,000,000 shares are
being sold by E*TRADE Group, Inc. ("E*TRADE" or the "Company") and 665,000
shares are being sold by the Selling Stockholders. See "Principal and Selling
Stockholders." The Company will not receive any of the proceeds from the sale
of shares by the Selling Stockholders. Prior to this offering, there has been
no public market for the Common Stock of the Company. It is currently estimated
that the initial public offering price will be between $10.00 and $12.00 per
share. See "Underwriting" for information relating to the method of determining
the initial public offering price.
--------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 7.
--------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS
PRICE TO DISCOUNTS AND PROCEEDS TO TO SELLING
PUBLIC COMMISSIONS COMPANY(1) STOCKHOLDERS
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share.............. $ $ $ $
- -------------------------------------------------------------------------------
Total(2)............... $ $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1)Before deducting expenses payable by the Company, estimated at $1,745,000.
(2) The Company and a Selling Stockholder have granted to the Underwriters a
30-day option to purchase up to an additional 699,750 shares of Common
Stock solely to cover over-allotments, if any. See "Underwriting." If such
option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions, Proceeds to Company and Proceeds to Selling
Stockholders will be $ , $ , $ and $ , respectively.
--------
The Common Stock is offered by the Underwriters as stated herein, subject to
receipt and acceptance by them and subject to their right to reject any order
in whole or in part. It is expected that delivery of such shares will be made
through the offices of Robertson, Stephens & Company LLC ("Robertson, Stephens
& Company"), San Francisco, California, on or about , 1996.
ROBERTSON, STEPHENS & COMPANY
HAMBRECHT & QUIST
DEUTSCHE MORGAN GRENFELL
The date of this Prospectus is , 1996
<PAGE>
JOIN THE ELECTRONIC TRADING REVOLUTION
WWW.ETRADE.COM
[GRAPHIC OF GLOBE WITH CIRCLING RINGS]
INFORMATION CONTAINED IN THE COMPANY'S WEB SITE SHALL NOT BE DEEMED TO BE PART
OF THIS PROSPECTUS.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN
THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY
BE DISCONTINUED AT ANY TIME.
<PAGE>
E*TRADE: INNOVATION, TECHNOLOGY, SERVICE, VALUE
E*TRADE is a leading provider of cost-effective, secure online discount
brokerage services, offering its customers a combination of innovation,
technology, service and value.
Its services feature an easy-to-use graphical user interface, the ability to
create personalized environments reflecting users' individual needs and
interests and unbundled services for cost-effective pricing.
Customers can access E*TRADE through the Internet, direct modem link, online
service providers America Online and CompuServe and touch-tone telephone.
Automated order placement, portfolio tracking, related market information and
news are available 24 hours a day, seven days a week.
ELECTRONIC
COMMERCE
THE INTERNET: INNOVATIVE BUSINESS OPPORTUNITIES
Just as the microprocessor changed computing, the emergence of the Internet as
a tool for communication and commerce is driving a revolution in online
transactions and information services, providing organizations and individuals
around the world with new ways of conducting business.
SOLUTIONS
[collage graphic/photos, including computer hardware, globe in palm]
TECHNOLOGY
<PAGE>
ELECTRONIC COMMERCE: FASTER, LESS EXPENSIVE, MORE CONVENIENT
With the proliferation of personal computers and modems and the rise of the
Internet, companies that have traditionally conducted business in person,
through the mail or by telephone are utilizing electronic commerce. Consumers
are recognizing that self-directed online transactions can be faster, less
expensive and more convenient than transactions conducted through a human
intermediary.
E*TRADE'S MISSION: TO BE A RECOGNIZED LEADER IN ELECTRONIC COMMERCE
E*TRADE offers electronic access virtually anywhere, at any time, thereby
shifting the financial services paradigm from a business hours only,
intermediary-based model to one in which consumers have ultimate control over
when and where they initiate transactions. The Company's technology can be
adapted to other aspects of electronic commerce. Leveraging this technology
and its position as a leading provider of online discount brokerage services,
E*TRADE's mission is to be a recognized leader in electronic commerce.
INNOVATION
[collage graphic/photos, including globe in palm, clock, money, person with
briefcase]
<PAGE>
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, ANY SELLING STOCKHOLDER OR ANY OF THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES OTHER THAN THE SHARES OF COMMON STOCK TO WHICH IT
RELATES OR AN OFFER TO, OR A SOLICITATION OF, ANY PERSON IN ANY JURISDICTION
WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
COMPANY OR THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
-------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary................................................................... 4
Risk Factors.............................................................. 7
Use of Proceeds........................................................... 19
Dividend Policy........................................................... 19
Capitalization............................................................ 20
Dilution.................................................................. 21
Selected Consolidated Financial Data...................................... 22
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 23
Business.................................................................. 32
Management................................................................ 54
Certain Transactions...................................................... 64
Principal and Selling Stockholders........................................ 66
Description of Capital Stock.............................................. 69
Shares Eligible for Future Sale........................................... 72
Underwriting.............................................................. 74
Legal Matters............................................................. 76
Experts................................................................... 76
Additional Information.................................................... 76
Index to Consolidated Financial Statements................................ F-1
</TABLE>
-------------
The Company intends to mail to all of its stockholders an annual report
containing financial statements audited by its independent accountants for
each fiscal year and quarterly reports containing unaudited summary
information for each of the first three quarters of each fiscal year.
E*TRADE (R) is a registered trademark of the Company. TELE*MASTER(TM), among
other marks, is an additional common law trademark of the Company. This
Prospectus also includes trademarks of entities other than the Company.
3
<PAGE>
SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors," and the consolidated financial
statements and notes thereto, appearing elsewhere in this Prospectus. Investors
should consider carefully the information discussed under the heading "Risk
Factors."
THE COMPANY
E*TRADE Group, Inc. ("E*TRADE or the "Company") is a leading provider of
cost-effective, secure online discount brokerage services. The Company offers
automated order placement, portfolio tracking and related market information,
news and other information services 24 hours a day, seven days a week by means
of the Internet, online service providers CompuServe and America Online, direct
modem access, touch-tone telephone and, to a lesser extent, interactive
television. E*TRADE's proprietary transaction processing technology enables it
to offer highly automated, easy-to-use and cost-effective services that empower
its customers to take control of their own financial transactions. Further, the
Company's technology can be adapted to provide information and transaction
processing services related to other aspects of electronic commerce, such as
the processing of insurance transactions and electronic cash transfers. See
"Business--Strategic Relationships and Business Development."
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 phenomenon is providing 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 its customers with the ability to place orders for stock
trades and other investment transactions directly, and at a lower, more
predictable transaction cost than traditional full-commission or discount
brokerage firms. The Company's services feature an easy-to-use graphical user
interface, the ability to create "personalized environments" reflecting users'
individual needs and interests, accessibility from virtually anywhere at any
time via multiple gateways, unbundled services for cost-effective pricing and
highly secure services through the use of encryption and authentication
technology.
The Company had over 73,000 accounts as of June 30, 1996, with an average
monthly growth in accounts of 11% since January 1, 1996, and had an average
daily trading volume of approximately 8,000 transactions in June 1996, as
compared to 4,200 transactions in December 1995, representing an average
monthly growth of 11% over that period. The Internet is the Company's most
rapidly growing gateway, with trading volume increasing from approximately
1,300 Internet trades for the first full week the Company offered trading
through the Internet (the week ended February 23, 1996) to over 10,900 for the
week ended June 28, 1996.
E*TRADE's objective is to leverage its leading position as a provider of
electronic brokerage and information services through automation, innovation,
technology, service and value. The Company's strategy to accomplish this
objective includes continued aggressive marketing of its electronic brokerage
services to further establish E*TRADE's brand name recognition and increase its
share of the electronic brokerage market, continual broadening of the
functionality of its services and enhancement of its customers' online
experience, leveraging the benefits of its highly automated services to enhance
their cost-effectiveness, establishing additional strategic relationships with
online service, software and information service providers, and expanding into
international markets and new electronic commerce applications.
4
<PAGE>
In June 1996, SOFTBANK Holdings Inc. ("SOFTBANK"), an affiliate of SOFTBANK
Corporation, purchased Preferred Stock which will convert automatically upon
the completion of this offering into 670,800 shares of Common Stock for an
aggregate price of $9.0 million, or $13.42 per share (the "SOFTBANK
Investment"). As a result, SOFTBANK will own approximately 2.2% of the
Company's outstanding Common Stock upon the completion of this offering.
SOFTBANK Corporation is Japan's largest distributor of computer software,
peripherals and systems, as well as Japan's largest publisher of computer-
related magazines and books. See "Certain Transactions."
The Company was incorporated in California in 1982 and will be reincorporated
in Delaware prior to the commencement of this offering. Its principal corporate
offices are located at Four Embarcadero Place, 2400 Geng Road, Palo Alto,
California 94303, and its telephone number is (415) 842-2500. Unless otherwise
indicated, all references in this Prospectus to "E*TRADE" 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 Web site shall not be deemed to be part of this
Prospectus.
THE OFFERING
<TABLE>
<C> <S>
Common Stock offered by the Company........ 4,000,000 shares
Common Stock offered by the Selling
Stockholders.............................. 665,000 shares
Common Stock to be outstanding after the
Offering.................................. 28,392,597 shares(1)
Use of Proceeds............................ To repay debt and for working
capital and general corporate
purposes, including capital
expenditures and potential
acquisitions. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol..... EGRP
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
(in thousands, except per share and operating data)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED SEPTEMBER 30, JUNE 30,
----------------------------------------- ---------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF INCOME DATA:
Total revenues.......... $ 832 $ 848 $ 2,974 $10,905 $23,340 $15,149 $34,483
Pre-tax income (loss)... (108) (283) 103 244 4,309 3,590 (2,224)
Net income (loss)....... (110) (285) 99 785 2,581 2,150 (1,334)
Net income (loss) per
share(2)............... $ (0.01) $ (0.01) $ -- $ 0.03 $ 0.10 $ 0.08 $ (0.05)
Shares used to compute
per share data(2)...... 23,954 24,954 26,803 26,312 26,608 25,577 28,550
OPERATING DATA:
Average customer trades
per day................ -- 12 194 869 2,335 1,926 5,606
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
-------------------
AS
ACTUAL ADJUSTED(3)
------- -----------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and equivalents........................................ $15,409 $52,251
Total assets................................................ 29,685 66,527
Long-term obligations....................................... 1,860 27
Stockholders' equity........................................ 22,379 61,554
</TABLE>
(footnotes on following page)
5
<PAGE>
- --------
(footnotes from preceding page)
(1) Excludes 5,619,840 shares of Common Stock issuable upon the exercise of
outstanding options as of June 30, 1996. See "Management--Associate Benefit
Plans" and Notes 5 and 10 of Notes to Consolidated Financial Statements.
(2) See Note 1 of Notes to Consolidated Financial Statements.
(3) Adjusted to give effect to the sale of 4,000,000 shares of Common Stock
offered by the Company hereby at an assumed initial public offering price
per share of $11.00 and the receipt and application of the estimated net
proceeds therefrom. See "Use of Proceeds" and "Capitalization."
----------------
Except as set forth in the Consolidated Financial Statements or as otherwise
indicated, all information in this Prospectus (i) gives effect to the automatic
conversion of all outstanding shares of Preferred Stock into Common Stock upon
the completion of this offering, (ii) assumes no exercise of the Underwriters'
over-allotment option and (iii) reflects the filing of the Restated Certificate
of Incorporation, the reincorporation of the Company in Delaware in July 1996
and the related conversion of each share of Common Stock of the Company into 60
shares of Common Stock of the Delaware corporation and adjustment of the
conversion ratio of all outstanding shares of Preferred Stock so that each
share of Preferred Stock is convertible into 60 shares of Common Stock.
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in "Risk
Factors" and elsewhere in this Prospectus.
6
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following risk factors should be considered in evaluating the Company and its
business before purchasing shares of the Common Stock offered hereby. This
Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in "Risk
Factors" and elsewhere in this Prospectus.
RISKS ASSOCIATED WITH MANAGEMENT OF A CHANGING BUSINESS
The Company has experienced substantial changes in and expansion of its
business and operations since it began offering electronic brokerage services
in 1992 and expects to continue to experience periods of rapid change. The
Company's past expansion has placed, and any future expansion would place,
significant demands on the Company's administrative, operational, financial
and other resources. The Company expects operating expenses and staffing
levels to increase substantially in the future. In particular, the Company
intends to hire a significant number of additional skilled personnel in 1996
and later years, including persons with experience in both the computer and
brokerage industries, and, in particular, persons with Series 7 or other
broker-dealer licenses. Competition for such personnel is intense, and there
can be no assurance that the Company will be able to attract, assimilate or
retain additional highly qualified senior managers and technical persons in
the future. The Company also expects to expend resources with respect to
future expansion of its accounting and internal management systems and the
implementation of a variety of new systems and procedures. In addition, the
Company expects that future expansion will continue to challenge the Company's
ability to hire, train, motivate and manage its associates. If the Company's
revenues do not increase in proportion to its operating expenses, the
Company's management systems do not expand to meet increasing demands, the
Company fails to attract, assimilate and retain qualified personnel, or the
Company's management otherwise fails to manage the Company's expansion
effectively, there would be a material adverse effect on the Company's
business, financial condition and operating results. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business--Associates" and "Management."
The rapid growth in the use of the Company's services has strained its
ability to adequately expand technologically. The haste required in acquiring
new equipment and applications may result in less rigorous testing and
validation of hardware and software, which could lead to performance problems.
In addition, the Company relies on a number of third parties to process its
transactions, including online access providers, back office processing
organizations, services providers and market makers, all of which will 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 could have a material adverse effect on the Company's
business, financial condition and operating results. As trading volume
increases, the Company may have difficulty hiring, training and integrating
qualified personnel at the necessary pace, and the shortage of licensed
personnel could cause a backlog in the processing of orders requiring review,
exposing the Company not only to unsatisfied customers, but also to liability
for transactions that were ordered but not executed on a timely basis.
RISKS OF SYSTEMS FAILURE
The Company receives and processes trade 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.
Orders placed from the close of the stock markets one day until the opening
the next business day must be processed through the Company's system in a
short period of time prior to the opening of the stock markets. Heavy stress
placed on the Company's systems during peak trading times could cause the
Company's systems to operate at 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 losses, including litigation
7
<PAGE>
claiming fraud or negligence. The Company has experienced such systems
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 has 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.
Notwithstanding these payments, the Company is aware of electronic third-party
communications in which a potential class action lawsuit against the Company
relating to such systems failures is discussed. Any such lawsuit would require
the attention of senior management and could have a material adverse effect on
the Company's business, financial condition and operating results. During a
systems failure, the Company may be able to take orders by telephone. However,
under applicable regulations, all Company associates accepting telephone
orders must have securities brokers' licenses. An adequate number of personnel
with securities brokers' licenses may not be available to take calls in the
event of a systems failure. There can be no assurance that the Company's
network structure will operate appropriately in the event of a sub-system,
component or software failure or that, in the event of an earthquake, fire or
any other natural disaster, power or telecommunications failure, act of God or
act of war, the Company will be able to prevent an extended systems failure.
Any systems failure that causes interruptions in the Company's operations
could have a material adverse effect on the Company's business, financial
condition and operating results. In addition, the Company has recently
received adverse publicity in the financial press primarily relating to
systems failures. See "Business--E*TRADE Processing Technology."
RISKS ASSOCIATED WITH THE SECURITIES BUSINESS; CONCENTRATION OF SERVICES
Substantially all of the Company's revenues in recent years have been from
electronic brokerage services, and the Company expects its electronic
brokerage services to continue to account for substantially all of its
revenues for the foreseeable future. E*TRADE, like other securities firms, is
directly affected by national and international economic and political
conditions, broad trends in business and finance and substantial fluctuations
in volume and price levels of securities and futures transactions. In October
1987 and October 1989, the stock market suffered two of the largest declines
in history. As a result of these declines, many firms in the industry suffered
financial losses, and the level of individual investor trading activity
decreased. Reduced trading volume and prices have historically resulted in
reduced transaction revenues. In periods of low volume, the Company's
profitability would be adversely affected because certain expenses, consisting
primarily of salaries and benefits, computer hardware and software costs and
occupancy expenses, remain relatively fixed. 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. See "--
Substantial Competition."
E*TRADE's brokerage business, by its nature, is subject to various other
risks, including customer default and employees' misconduct and errors. In
addition, to the extent E*TRADE permits customers to purchase securities on
margin, the Company is subject to risks inherent in extending credit,
especially during periods of rapidly declining markets in which the value of
the collateral held by the Company could fall below the amount of a customer's
indebtedness. Under specific regulatory guidelines, the borrowing and lending
of securities by E*TRADE are accompanied, respectively, by the disbursement
and receipt of cash deposits. Failure to maintain cash deposit levels at all
times at least equal to the value of the related securities can subject
E*TRADE to risk of loss, should there be sharp changes in market values of
substantial amounts of securities and parties to the borrowing and lending
transactions fail to honor their commitments. Any such losses could have a
material adverse effect on the Company's business, financial condition and
operating results. See "Business--Operations."
DEPENDENCE ON IMPROVED CUSTOMER SERVICE OPERATIONS
The Company believes that providing an effective customer service team to
handle customer needs is critical to its success. The Company's customer
service capacity has been and may continue to be severely strained at times.
During the three months ended June 30, 1996, the Company's customer service
department serviced approximately 80% of its inquiries through telephone calls
and approximately 20% through e-mail. This department handles only non-revenue
interactions with customers needing extra assistance and generally
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is not involved in order processing. The Company frequently has fallen far
short of its target response time for customer service calls, with callers
waiting over 20 minutes during peak times. Continued sub-optimal customer
service could damage the E*TRADE name and lead some customers to transfer
their business to other, less congested online brokers, limit their trading
activity or refrain from electronic trading entirely. Although the Company is
addressing the problem through significant investments in technology and
personnel and recently experienced a meaningful improvement in the time
required to respond to customer service calls, such attempts have remained
short of targeted response times. Even if the Company is able to remedy its
current capacity problems, on any given day a surge of activity could cause
the Company to fail to provide adequate customer service. There can be no
assurance that the Company will be able to remedy its customer service
capacity constraints, and the failure to do so could have a material adverse
effect on the Company's business, financial condition and operating results.
See "Business--Customer Service."
RISKS ASSOCIATED WITH ENTERING NEW MARKETS
One element of the Company's strategy is to leverage the E*TRADE brand and
technology to enter new markets. No assurance can be given that the Company
will be able to successfully adapt its proprietary processing technology to
provide information and transaction processing services in other markets or
that, if successful with such adaptation, it will compete successfully in any
such new markets. E*TRADE Securities plans, subject to regulatory approval, to
establish investment banking operations, raising public and private equity
capital for companies over the Internet and other electronic media. In
addition, the Company's strategy is to pursue opportunities, through its
subsidiary E*TRADE Online Ventures, Inc. ("E*TRADE Online Ventures"), to
increase the Company's customer base and the transaction value and number of
products and services offered to the Company's customers. 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. See "Business--Strategic
Relationships and Business Development."
RISKS ASSOCIATED WITH CONVERSION TO SELF-CLEARING OPERATIONS
The Company implemented self-clearing operations in July 1996. Clearing
services include the confirmation, receipt, settlement and delivery functions
involved in securities transactions. Prior to its conversion to self-clearing
operations, the Company cleared all of its customer trades as a fully-
disclosed correspondent of Herzog, Heine, Geduld, Inc. ("Herzog"), a broker-
dealer that provides clearing services. Because clearing for itself is a new
area of operations for the Company, there can be no assurance that the Company
will perform these operations as accurately and efficiently as they have been
performed by third parties. Self-clearing securities firms are subject to
substantially more regulatory control and examination than the Company has
experienced in the past. Errors in performing clearing functions or reporting
could lead to civil penalties imposed by the Securities and Exchange
Commission (the "SEC") or the National Association of Securities Dealers, Inc.
(the "NASD"). Self-clearing operations, especially where conducted by firms
such as the Company, without significant prior experience, involve substantial
risks of losses due to clerical errors related to the handling of customer
funds and securities. Errors in the clearing process also may lead to civil
liability for actions in negligence brought by parties who are financially
harmed as a result of such errors. Any liability that arises as a result of
self-clearing operations could have a material adverse effect on the Company's
business, financial condition and operating results. Clearing operations have
accounted for a significant portion of the Company's cost of services, and
there can be no assurance that clearing for itself will not result in
significantly higher clearing costs in the future. During the Company's
transition to self-clearing operations, it ran conversion tests to verify the
accuracy of its internal systems, while at the same time continuing to incur
substantial expenses to Herzog for clearing services. There can be no
assurance that such activities accurately tested the reliability of the
Company's clearing operations. The failure of the Company to perform self-
clearing operations accurately and cost-effectively could have a material
adverse effect on the Company's business, financial condition and operating
results. See "Business--Operations."
As a self-clearing firm, the Company assumes direct responsibility for the
possession and control of customer securities and other assets and the
clearance of customer 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
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collateralized by securities in the customers' margin accounts at the Company)
and customer free credit balances (i.e., customer cash balances maintained by
the Company), respectively. In addition, to the extent that the Company's
customer debit balances exceed customer free credit balances, the Company must
obtain financing for any excess debit balance. As a result, effective upon
conversion to its self-clearing operations, 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 of $185 million and payables
to customers of $113 million. In addition, as a self-clearing firm, the
Company contracted with a third-party service bureau, Beta Systems, Inc., a
subsidiary of Thomson Information Services, Inc. ("Beta Systems"), for its
customer record keeping and data processing services. The Company previously
relied on Herzog and its data processor for these services. The Company is one
of Beta Systems' largest customers and is receiving certain services from Beta
Systems that are in addition to and unlike the services Beta Systems provides
to any of its other customers. There can be no assurance that Beta Systems
will be able to provide these services in an efficient, cost-effective manner
and will be able to adequately expand its services to meet the Company's
needs. A loss in the availability of these services from Beta Systems and the
inability of the Company to make alternative arrangements in a timely manner,
if at all, would have a material adverse effect on the Company's business,
financial condition and operating results.
POTENTIAL LOSS OF FUTURE ORDER FLOW PAYMENTS
The Company has arrangements with various Nasdaq market makers, third market
firms and exchanges to receive cash payments in exchange for routing trade
orders to these firms for execution. This practice of receiving payments for
order flow is widespread in the securities industry. Under applicable SEC
regulations, receipt of these payments requires disclosure of such payments by
the Company to its customers. The revenues received by the Company under these
arrangements for the year ended September 30, 1995 and the nine months ended
June 30, 1996 amounted to 20% and 22% of total revenues, respectively. There
can be no assurance that these revenues will continue at their present levels
or that the Company will be able to continue its present arrangements and
terms for such payments for order flow. In 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. See "Business--
Operations."
SIGNIFICANT FLUCTUATIONS IN QUARTERLY OPERATING RESULTS; LOSS IN QUARTER ENDED
JUNE 30, 1996
The Company expects to experience significant fluctuations in future
quarterly operating results that may be caused by many factors, including the
following: the timing of introductions or enhancements of online brokerage
services and products by the Company or its competitors; market acceptance of
online brokerage services and products; the pace of development of the market
for online commerce; changes in trading volume in the securities markets;
trends in the securities markets; changes in pricing policies by the Company
or its competitors; changes in strategy; the success of or costs associated
with acquisitions, joint ventures or other strategic relationships; changes in
key personnel; seasonal trends; the extent of international expansion; the mix
of international and domestic sales; changes in the level of operating
expenses to support projected growth; and general economic conditions.
Due to the foregoing factors, quarterly revenues and operating results are
difficult to forecast, and the Company believes that period-to-period
comparisons of its operating results will not necessarily be meaningful and
should not be relied upon as any indication of future performance. It is
likely that the Company's future quarterly operating results from time to time
will not meet the expectations of securities analysts or investors, which may
have an adverse effect on the market price of the Company's Common Stock.
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In connection with its transition to self-clearing operations, the Company
began hiring consultants, in fiscal 1995, to perform clearing functions that
previously were performed by Herzog. As a consequence, the Company has
incurred not only significant nonrecurring costs associated with the hiring
and training of its associates, but also ongoing personnel and other costs
associated with its transition to self-clearing operations and the integration
of its own systems. At the same time, the Company continued to incur expenses
to Herzog for clearing operations through June 1996.
As a result of the costs associated with the Company's conversion to self-
clearing operations and its recent systems failures, the Company incurred a
loss of $2.4 million in the quarter ended June 30, 1996. See "-- Risks of
Systems Failure," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business--Operations."
SUBSTANTIAL COMPETITION
The market for electronic brokerage services, particularly over the
Internet, is new, rapidly evolving and intensely competitive, and the Company
expects competition to continue and intensify in the future. E*TRADE
encounters direct competition from other discount brokerage firms providing
either touch-tone telephone or online brokerage services, or both. Discount
brokerage firms generally effect transactions for their customers on an
"execution only" basis, without offering other services such as portfolio
valuation, investment recommendations and research. These competitors include
such discount brokerage firms as Charles Schwab & Co., Inc. ("Charles
Schwab"), Fidelity Brokerage Services, Inc., Waterhouse Securities, Inc.,
Quick & Reilly, Inc. ("Quick & Reilly"), Pacific Brokerage Services, Inc.,
National Discount Brokers (a subsidiary of Sherwood Securities Corp.), Lombard
Institutional Brokerage, Inc., firms owned by TransTerra Co. (including All-
American Brokers, also known as eBroker) and PC Financial Network (a division
of Donaldson, Lufkin & Jenrette Securities Corporation), among others. The
Company also encounters competition from established full-commission brokerage
firms such as Dean Witter Reynolds Inc., Paine Webber Incorporated, Merrill
Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and Smith Barney,
Inc., among others. In addition, the Company competes with financial
institutions, mutual fund sponsors and other organizations, some of which
provide electronic brokerage services.
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. In addition, many of these competitors offer a wider range
of services and financial products than the Company, and thus may be able to
respond more quickly to new or changing opportunities, technologies and
customer requirements. 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. Such competitors may be able to undertake
more extensive promotional activities, offer more attractive terms to
customers than the Company and adopt more aggressive pricing policies,
possibly even sparking a price war in the electronic brokerage business.
Moreover, current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties to enhance
their services and products. For example, Charles Schwab's One-Source mutual
fund service and similar, more complete services may discourage potential
customers from using the Company's brokerage services. Accordingly, it is
possible that new competitors or alliances among competitors may emerge and
rapidly acquire significant market share.
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
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. Commercial banks and other financial
institutions have become a competitive factor in the securities industry by
offering their customers certain corporate and individual financial services
traditionally provided by securities firms. The current trend toward
consolidation in the commercial banking industry could further increase
competition in all aspects of the Company's business. Commercial banks
generally are expanding
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their securities activities, as well as their activities relating to the
provision of financial services. While it is not possible to predict the type
and extent of competitive services that commercial banks and other financial
institutions ultimately may offer or whether administrative or legislative
barriers will be repealed or modified, brokerage firms such as the Company may
be adversely affected by such competition or legislation. Particularly as
financial services and products proliferate, to the extent the Company's
competitors are able to attract and retain customers on the basis of the
convenience of one-stop shopping, the Company's business or its ability to
grow could be adversely affected. In many instances, the Company is competing
with such organizations for the same customers. In addition, competition among
financial services firms 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. See "Business--
Competition."
EARLY STAGE OF MARKET DEVELOPMENT; DEPENDENCE ON ONLINE COMMERCE AND THE
INTERNET
The market for electronic brokerage services, particularly over the
Internet, is at an early stage of development and is rapidly evolving. As is
typical for new and rapidly evolving industries, demand and market acceptance
for recently introduced services and products are subject to a high level of
uncertainty. With respect to the Company, this uncertainty is compounded by
the risks that consumers will not adopt online commerce and that an
appropriate infrastructure necessary to support increased commerce on the
Internet will fail to develop, in each case, to a sufficient extent and within
an adequate time frame to permit the Company to succeed.
Sales of many of the Company's services and products will depend upon the
adoption of the Internet 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,
such as a reliable network backbone, or timely development of complementary
services and products, such as high speed modems and high speed communication
lines. The Internet has experienced, and is expected to continue to
experience, significant growth in the number of users and amount of traffic.
There can be no assurance that the Internet infrastructure will continue to be
able to support the demands placed on it by this continued growth. In
addition, the Internet could lose its viability due to delays in the
development or adoption of new standards and protocols to handle increased
levels of Internet activity or due to increased governmental regulation.
Moreover, critical issues concerning the commercial use of the Internet
(including security, reliability, cost, ease of use, accessibility and quality
of service) remain unresolved and may negatively affect the growth of Internet
use or the attractiveness of commerce and communication on the Internet.
Because global commerce and online exchange of information on the Internet and
other similar open wide area networks are new and evolving, there can be no
assurance that the Internet will prove to be a viable commercial marketplace.
If critical issues concerning the commercial use of the Internet are not
favorably resolved, if the necessary infrastructure is not developed, or if
the Internet does not become a viable commercial marketplace, the Company's
business, financial condition and operating results will be materially
adversely affected.
Adoption of online commerce, particularly by those individuals that have
historically relied upon traditional means of commerce, will require a broad
acceptance by such individuals of new and substantially different methods of
conducting business. Moreover, the Company's brokerage services over the
Internet involve a new approach to securities trading and, as a result,
intensive marketing and sales efforts may be necessary to educate prospective
customers regarding the uses and benefits of the Company's brokerage services
and products. For example, consumers who already obtain brokerage services
from more traditional full-commission brokerage firms, or even discount
brokers, may be reluctant or slow to change to obtaining brokerage services
over the Internet. Moreover, the security and privacy concerns of existing and
potential users of the Company's services may inhibit the growth of online
commerce generally, and online brokerage trading in particular, which could
have a material adverse effect on the Company's business, financial condition
and operating results. See "Business--Background."
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RAPID TECHNOLOGICAL CHANGE; DELAYS IN INTRODUCTION OF NEW SERVICES AND
PRODUCTS
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. The
development of new services and products or enhanced versions of existing
services and products entails significant technical risks. There can be no
assurance that the Company will be successful in effectively using new
technologies, adapting its services and products to emerging industry
standards, developing, introducing and marketing service and product
enhancements, or new services and products, or that it will not experience
difficulties that could delay or prevent the successful development,
introduction or marketing of these services and products, or that its new
service and product enhancements will adequately meet the requirements of the
marketplace and achieve market acceptance. If the Company is unable, for
technical or other reasons, to develop and introduce new services and products
or enhancements of existing services and products in a timely manner in
response to changing market conditions or customer requirements, or if new
services and products do not achieve market acceptance, the Company's
business, financial condition and operating results will be materially
adversely affected. See "Business--Strategy," "--Brokerage and Information
Services and Products" and "--E*TRADE Processing Technology."
RISKS ASSOCIATED WITH ENCRYPTION TECHNOLOGY
A significant barrier to online commerce and communication is the secure
transmission of confidential information over public networks. The Company
relies on encryption and authentication technology, including public key
cryptography technology licensed from RSA Data Security, Inc. ("RSA"), to
provide the security and authentication necessary to effect secure
transmission of confidential information. There can be no assurance that
advances in computer capabilities, new discoveries in the field of
cryptography or other events or developments will not result in a compromise
or breach of the RSA or other algorithms used by the Company to protect
customer transaction data. If any such compromise of the Company's security
were to occur, it could have a material adverse effect on the Company's
business, financial condition and operating results. See "Business--Brokerage
and Information Services and Products."
DEPENDENCE ON INTELLECTUAL PROPERTY RIGHTS
The Company's success and ability to compete are dependent to a significant
degree on its proprietary technology. The Company relies primarily on
copyright, trade secret and trademark law to protect its technology. The
Company has no patents. Effective trademark protection may not be available
for the Company's trademarks. Although the Company has registered the
trademark "E*TRADE" in the United States and certain other countries, and has
certain other registered trademarks, there can be no assurance that the
Company will be able to secure significant protection for these trademarks. It
is possible that competitors of the Company or others will adopt product or
service names similar to "E*TRADE," thereby impeding the Company's ability to
build brand identity and possibly leading to customer confusion.
Notwithstanding the precautions taken by the Company, it may be possible for a
third party to copy or otherwise obtain and use the Company's software or
other proprietary information without authorization or to develop similar
software independently. Policing unauthorized use of the Company's technology
is difficult, particularly because the global nature of the Internet makes it
difficult to control the ultimate destination or security of software or other
data transmitted. The laws of other countries may afford the Company little or
no effective protection of its intellectual property. There can be no
assurance that the steps taken by the Company will prevent misappropriation of
its technology or that agreements entered into for that purpose will be
enforceable. In addition, litigation may be necessary in the future to enforce
the Company's intellectual
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property rights, to protect the Company's trade secrets, to determine the
validity and scope of the proprietary rights of others, or to defend against
claims of infringement or invalidity. Such litigation, whether successful or
unsuccessful, could result in substantial costs and diversions of resources,
either of which could have a material adverse effect on the Company's
business, financial condition and operating results. See "Business--
Intellectual Property and Other Proprietary Rights."
RISK OF INFRINGEMENT
The Company may in the future receive notices of claims of infringement of
other parties' proprietary rights. There can be no assurance that claims for
infringement or invalidity (or claims for indemnification resulting from
infringement claims) will not be asserted or prosecuted against the Company.
Any such claims, with or without merit, could be time consuming to defend,
result in costly litigation, divert management's attention and resources or
require the Company to enter into royalty or licensing agreements. There can
be no assurance that such licenses would be available on reasonable terms, if
at all, and the assertion or prosecution of any such claims could have a
material adverse effect on the Company's business, financial condition and
operating results. See "Business--Intellectual Property and Other Proprietary
Rights."
DEPENDENCE ON KEY PERSONNEL
The Company's success has been, and will be, dependent to a large degree on
its ability to retain the services of its existing executive officers and to
attract and retain qualified additional senior and middle managers and key
personnel in the future. The Company does not have "key person" life insurance
policies on any of its officers or associates. The loss of the services of any
of the key personnel or the inability to identify, hire, train and retain
other highly qualified technical and managerial personnel, including qualified
customer service personnel, in the future could have a material adverse effect
on the Company's business, financial condition and operating results.
Competition for such personnel is intense. There can be no assurance that the
Company will be able to attract, assimilate or retain qualified technical and
managerial personnel in the future, and the failure of the Company to do so
would have a material adverse effect on the Company's business, financial
condition and operating results. See "Business--Associates" and "Management."
GOVERNMENT REGULATION
The securities industry in the United States is subject to extensive
regulation under both federal and state laws. Broker-dealers are subject to
regulations covering all aspects of the securities business, including sales
methods, trade practices among broker-dealers, use and safekeeping of
customers' funds and securities, capital structure, record keeping and the
conduct of directors, officers and employees. The Company is required to
comply with many complex laws and rules to which it previously has not been
subject as a fully-disclosed broker-dealer, including rules relating to
possession and control of customer funds and securities, margin lending and
execution and settlement of transactions.
Additional legislation, changes in rules promulgated by the SEC, the NASD,
the Board of Governors of the Federal Reserve System, the various stock
exchanges and other self-regulatory organizations, or changes in the
interpretation or enforcement of existing laws and rules, may directly affect
the mode of operation and profitability of broker-dealers. The SEC, the NASD
or other self-regulatory organizations and state securities commissions may
conduct administrative proceedings, which can result in censure, fine, the
issuance of cease-and-desist orders or the suspension or expulsion of a
broker-dealer or any of its officers or employees. The Company's ability to
comply with all applicable laws and rules is dependent in large part upon the
establishment and maintenance of a compliance system reasonably designed to
ensure such compliance, as well as the Company's ability to attract and retain
qualified compliance personnel. The Company's growth has placed considerable
strain on its ability to ensure such compliance, and it has experienced recent
turnover in its compliance personnel. The principal purpose of regulation and
discipline of broker-dealers is the protection of customers and the securities
markets, rather than protection of creditors and stockholders of
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broker-dealers. The Company could in the future be subject to disciplinary or
other actions due to claimed noncompliance, which could have a material
adverse effect on the Company's business, financial condition and operating
results.
The Company has initiated an aggressive marketing campaign designed to bring
brand name recognition to E*TRADE. All marketing activities by E*TRADE
Securities are regulated by the NASD, and all such marketing materials are
required by the NASD to be reviewed by E*TRADE Securities' compliance officer
prior to release. The Company has in the past been requested by the NASD to
discontinue the use of certain marketing materials. The NASD can impose
certain penalties, including censure, fine, suspension of all advertising the
issuance of cease-and-desist orders or the suspension or expulsion of a
broker-dealer or any of its officers or employees for violations of the NASD's
advertising regulations. The Company does not currently solicit orders from
its customers or make investment recommendations. However, if the Company were
to engage in such activities, it would become subject to additional rules and
regulations governing, among other things, the suitability of recommendations
to customers and sales practices.
It is the Company's intent to expand its business in United States
securities to other countries through the Internet and other gateways. For the
nine months ended June 30, 1996, the Company received approximately 2.5% of
its commission revenues from customers with addresses in over 60 foreign
countries. In order to expand its services globally, E*TRADE Securities must
comply with the regulatory controls of each specific country in which it
conducts business. E*TRADE Securities is regulated in the United States
primarily by the NASD and the SEC. The varying compliance requirements of
other national regulatory jurisdictions will impose a limit to the Company's
rate of international expansion.
There can be no assurance that other federal, state or foreign agencies will
not attempt to regulate the Company's online and other electronic activities.
The Company anticipates that it may be required to comply with record keeping,
data processing and other 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, thereby rendering the Company's business or
operations more costly or burdensome, less efficient or even impossible, any
of which could have a material adverse effect on the Company's business,
financial condition and operating results.
Due to the increasing popularity of the Internet, it is possible that laws
and regulations may be enacted with respect to the Internet, covering issues
such as user privacy, pricing, content and quality of products and services.
The Telecommunications Act of 1996, which was enacted in January 1996,
prohibits the transmission over the Internet of certain types of information
and content. 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. In addition, the
adoption of other laws or regulations may reduce the rate of growth of the
Internet, which could in turn decrease the demand for the Company's services
or could otherwise have a material adverse effect on the Company's business,
financial condition and operating results. See "Business--Government
Regulation; Net Capital Requirements."
EFFECT OF NET CAPITAL REQUIREMENTS
The SEC, the NASD and various other regulatory agencies have stringent rules
with respect to the maintenance of specific levels of net capital by
securities brokers, including the SEC's Uniform Net Capital Rule (the "Net
Capital Rule"), which governs both E*TRADE Securities and E*TRADE Capital,
Inc. (formerly ET Execution Services), a non-operational broker-dealer
subsidiary of E*TRADE Group, Inc.
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("E*TRADE Capital"). Net capital is the net worth of a broker or dealer
(assets minus liabilities), less certain deductions that result from excluding
assets that are not readily convertible into cash and from conservatively
valuing certain other assets. 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 the firm's liquidation. In addition, a change in the net capital
rules, the imposition of new rules or any unusually large charge against net
capital could limit those operations of the Company that require the intensive
use of capital, such as trading activities and the financing of customer
account balances, and also could restrict the Company's ability to withdraw
capital from its brokerage subsidiaries, which in turn could limit the
Company's ability to pay dividends, repay debt and redeem or purchase shares
of its outstanding stock. A significant operating loss or any unusually large
charge against net capital could adversely affect the ability of the Company
to expand or even maintain its present levels of business, which could have a
material adverse effect on the Company's business, financial condition and
operating results. See "Business--Government Regulation; Net Capital
Requirements."
As of June 30, 1996, E*TRADE Securities was required to maintain minimum net
capital of $250,000 and had total net capital of approximately $13.9 million,
or approximately $13.6 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. This undertaking 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 and is awaiting their
decisions. 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. In addition,
there can be no assurance that a violation of the Net Capital Rule will not
occur in the future. See "Business--Government Regulation--Net Capital
Requirements."
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING
The Company currently anticipates that its available cash resources and
credit facilities, combined with the net proceeds to the Company from this
offering, will be sufficient to meet its presently anticipated working capital
and capital expenditure requirements for at least the next 12 months. However,
the Company may need to raise additional funds in order to support more rapid
expansion, develop new or enhanced services and products, respond to
competitive pressures, acquire complementary businesses or technologies or
respond to unanticipated requirements. If additional funds are raised through
the issuance of equity securities, the percentage ownership of the
stockholders of the Company will be reduced, stockholders may experience
additional dilution in net book value per share, or such equity securities may
have rights, preferences or privileges senior to those of the holders of the
Company's Common Stock. There can be no assurance that additional financing
will be available when needed on terms favorable to the Company, if at all. If
adequate funds are not available on acceptable terms, the Company may be
unable to develop or enhance its services and products, take advantage of
future opportunities or respond to competitive pressures or unanticipated
requirements, any of which could have a material adverse effect on the
Company's business, financial condition and operating results. See "Dilution"
and "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources."
RISKS ASSOCIATED WITH ACQUISITIONS, JOINT VENTURES AND OTHER STRATEGIC
RELATIONSHIPS
While the Company has no current agreements or negotiations underway with
respect to any potential acquisitions, the Company may make acquisitions of
other companies or technologies in the future, and the Company regularly
evaluates such opportunities. Acquisitions entail numerous risks, including
difficulties in the assimilation of acquired operations and products,
diversion of management's attention to other business concerns, amortization
of acquired intangible assets and potential loss of key employees of acquired
companies. The Company has no experience in assimilating acquired
organizations into the Company's operations. No assurance can be given as to
the ability of the Company to integrate successfully any
16
<PAGE>
operations, personnel, services or products that might be acquired in the
future, and the failure of the Company to do so could have a material adverse
effect on the Company's business, financial condition and operating results.
The Company has established a number of strategic relationships with online
service providers and software and information service providers. A
significant number of such relationships have only recently been entered into.
There can be no assurance that any such relationships will be maintained, that
if such relationships are maintained, they will be successful or profitable,
or that the Company will develop any new such relationships. See "Business--
Strategic Relationships and Business Development."
RISKS ASSOCIATED WITH INTERNATIONAL STRATEGY
A component of the Company's strategy is its planned increase in efforts to
attract more international customers. To date, the Company has limited
experience in providing brokerage services internationally. There can be no
assurance that the Company will be able to market successfully its services
and products in international markets. In addition, there are certain risks
inherent in doing business in international markets, particularly in the
heavily regulated brokerage industry, such as unexpected changes in regulatory
requirements, tariffs and other trade barriers, difficulties in staffing and
managing foreign operations, political instability, fluctuations in currency
exchange rates, reduced protection for intellectual property rights in some
countries, seasonal reductions in business activity during the summer months
in Europe and certain other parts of the world, and potentially adverse tax
consequences, any of which could adversely impact the success of the Company's
international operations. There can be no assurance that one or more of such
factors will not have a material adverse effect on the Company's future
international operations, if any, and, consequently, on the Company's
business, financial condition and operating results. See "Business--Strategy"
and
"--Marketing."
MANAGEMENT'S DISCRETION AS TO USE OF UNALLOCATED NET PROCEEDS
The Company has designated only limited specific use for the net proceeds
from the sale of Common Stock described in this Prospectus. The Company
expects to use approximately $2.3 million of the net proceeds to repay debt
and the remainder for working capital and general corporate purposes.
Consequently, the Board of Directors and management of the Company will have
broad discretion in allocating a significant portion of the net proceeds of
this offering. See "Use of Proceeds."
CONCENTRATION OF STOCK OWNERSHIP
Upon the completion of this offering, the Company's present directors
(including the director emeritus) and executive officers and their respective
affiliates will beneficially own approximately 53.0% of the outstanding Common
Stock. As a result, these stockholders, if they act together, will be able to
exercise significant influence over all matters requiring stockholder
approval, including the election of directors and approval of significant
corporate transactions, and will have veto power with respect to any
stockholder 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. See "Principal and Selling Stockholders" and
"Description of Capital Stock--Certain Provisions Affecting Stockholders."
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this offering, there has been no public market for the Company's
Common Stock, and there can be no assurance that an active public market for
the Common Stock will develop or be sustained after the offering. The initial
offering price will be determined by negotiation among the Company,
representatives of the Selling Stockholders and the representatives of the
Underwriters based upon several factors. For a discussion of the factors to be
taken into account in determining the initial public offering price, see
"Underwriting." The market price of the Company's Common Stock is likely to be
highly volatile and could be subject to wide fluctuations in response to
quarterly variations in operating results, announcements of technological
innovations or new software, services or products by the Company or its
competitors, changes in financial estimates by securities analysts or other
events or factors, many of which are beyond the Company's control. In
addition, the stock market has experienced significant price and volume
fluctuations that have particularly affected the market prices of equity
securities of many technology and services companies and that often have been
unrelated to the operating performance of such companies. These broad
market fluctuations may adversely affect the market price of the Company's
Common Stock. In the past, following periods of volatility in the market price
for a company's securities, securities class action litigation
17
<PAGE>
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.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial numbers of shares of Common Stock in the public market
following this offering could adversely affect the market price of the Common
Stock. Upon the completion of this offering, the Company will have outstanding
an aggregate of 28,392,597 shares of Common Stock, based upon the number of
shares outstanding as of June 30, 1996. Of these shares, all of the shares sold
in this offering will be freely tradeable without restriction or further
registration under the Securities Act of 1933, as amended (the "Securities
Act"), unless such shares are purchased by "affiliates" of the Company, as that
term is defined in Rule 144 under the Securities Act ("Affiliates"). The
remaining 23,727,597 shares of Common Stock held by existing stockholders (the
"Restricted Shares") are "restricted securities" as that term is defined in
Rule 144 under the Securities Act. Restricted Shares may be sold in the public
market only if registered or if they qualify for an exemption from registration
under Rule 144 or Rule 701 promulgated under the Securities Act. As a result of
contractual restrictions and the provisions of Rule 144 and Rule 701,
additional shares will be available for sale in the public market as follows:
(i) approximately 933,060 Restricted Shares will be eligible for immediate sale
on the date of this Prospectus; (ii) approximately 569,820 Restricted Shares
will be eligible for sale 90 days after the date of this Prospects; (iii)
approximately 12,627,450 Restricted Shares will be eligible for sale upon
expiration of the lock-up agreements 180 days after the date of this
Prospectus; and (iv) the remainder of the Restricted Shares will be eligible
for sale from time to time thereafter upon expiration of their respective two-
year holding periods. Pursuant to an agreement between the Company and the
holders (or their permitted transferees) of approximately 13,663,560 shares of
Common Stock, these holders are entitled to certain rights with respect to the
registration of such shares under the Securities Act. See "Description of
Capital Stock" and "Shares Eligible for Future Sale."
IMMEDIATE AND SUBSTANTIAL DILUTION
Investors participating in this offering will incur immediate and substantial
dilution in the amount of $8.83 per share. To the extent that outstanding
options or warrants to purchase the Common Stock are exercised, there will be
further dilution. See "Dilution."
EFFECTS OF CERTAIN CHARTER AND BYLAW PROVISIONS
The Company's Board of Directors has the authority to issue up to an
additional 868,484 shares of Preferred Stock and to determine the price,
rights, preferences and privileges of those shares without any further vote or
action by the Company's stockholders. The rights of the holders of Common Stock
will be subject to, and may be adversely affected by, the rights of the holders
of Preferred Stock. While the Company has no present intention to issue shares
of Preferred Stock, such issuance, while providing desirable flexibility in
connection with the possible acquisitions and other corporate purposes, could
have the effect of delaying, deferring or preventing a change in control of the
Company and entrenching existing management. In addition, such Preferred Stock
may have other rights, including economic rights, senior to the Common Stock,
and, as a result, the issuance thereof could have a material adverse effect on
the market value of the Common Stock. The Company is also subject to the anti-
takeover provisions of Section 203 of the Delaware General Corporation Law,
which restricts certain "business combinations" with "interested stockholders"
for three years following the date the person becomes an interested
stockholder, unless the Board of Directors approves the business combination.
By delaying and deterring unsolicited takeover attempts, these provisions could
adversely affect prevailing market prices for the Company's Common Stock.
Certain other provisions of the Company's Restated Certificate of Incorporation
or Restated Bylaws, including elimination of the ability of stockholders to act
by written consent, a staggered Board of Directors and advance notice for
stockholder proposals and director nominations , may have the effect of
delaying or preventing changes of control or management of the Company, which
could adversely affect the market price of the Company's Common Stock. See
"Description of Capital Stock."
18
<PAGE>
USE OF PROCEEDS
The net proceeds from the sale of the 4,000,000 shares of Common Stock
offered by the Company hereby are estimated to be approximately $39.2 million
($43.9 million if the Underwriters' over-allotment option is exercised in
full), assuming an initial public offering price of $11.00 per share and after
deducting estimated underwriting discounts and commissions and offering
expenses payable by the Company. The Company will not receive any proceeds
from the sale of shares of Common Stock by the Selling Stockholders. See
"Principal and Selling Stockholders."
The principal purposes of the offering are to increase the Company's working
capital and equity base, to provide a public market for its Common Stock, to
permit future acquisitions using cash or publicly tradeable Common Stock and
to facilitate future access to public capital markets. The net proceeds will
be used to repay approximately $2.3 million of debt and for working capital
and general corporate purposes, which will include capital expenditures,
increasing capacity and funding potential acquisitions. The loan being repaid
was obtained in February 1996 from Merrill Lynch Business Financial Services
Inc. to provide financing for equipment purchases. The loan can be drawn in
installments of a minimum of $100,000 and with a maximum outstanding of $2.5
million. The loan bears an interest rate equal to 2.70% over the 30-day
commercial paper rate as published in the Wall Street Journal and was 8.2% at
June 28, 1996.
The Company continues to evaluate potential acquisition opportunities;
however, none are presently under active consideration. Pending such uses, the
Company will invest the net proceeds of this offering in short-term,
investment-grade, interest-bearing securities.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its capital stock.
The Company currently intends to retain all of its earnings, if any, for use
in its business and does not anticipate paying any cash dividends in the
foreseeable future. The payment of any future dividends will be at the
discretion of the Company's Board of Directors and will depend upon a number
of factors, including future earnings, the success of the Company's business
activities, capital requirements, the general financial condition and future
prospects of the Company, general business conditions and such other factors
as the Board of Directors may deem relevant.
19
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1996 (i) on an actual basis, (ii) on a pro forma basis to reflect the
automatic conversion of all outstanding shares of Preferred Stock into
7,890,960 shares of Common Stock upon the completion of this offering and
(iii) on such pro forma basis as adjusted to reflect the sale by the Company
of 4,000,000 shares of Common Stock offered hereby at an assumed initial
public offering price of $11.00 per share and the receipt and application of
the estimated net proceeds therefrom. This table should be read in conjunction
with the consolidated financial statements and notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1996
--------------------------
PRO AS
ACTUAL FORMA ADJUSTED
------- ------- --------
(in thousands)
<S> <C> <C> <C>
Current portion of long-term obligations(1)......... $ 523 $ 523 $ 23
======= ======= =======
Long-term obligations, net of current portion(1).... $ 1,860 $ 1,860 $ 27
======= ======= =======
Stockholders' equity:
Preferred Stock, issuable in series, $.01 par value;
1,000,000 shares authorized, 131,516 shares
outstanding, actual; no shares outstanding, pro
forma and as adjusted.............................. 1 -- --
Common Stock, $.01 par value, 50,000,000 shares
authorized, 16,501,637 shares outstanding, actual;
24,392,597 shares outstanding, pro forma; and
28,392,597 shares outstanding, as adjusted(2)...... 165 244 284
Additional paid-in capital ......................... 22,448 22,370 61,505
Retained earnings (deficit)......................... (235) (235) (235)
------- ------- -------
Total stockholders' equity...................... 22,379 22,379 61,554
------- ------- -------
Total capitalization.......................... $24,762 $24,762 $61,604
======= ======= =======
</TABLE>
- --------
(1) See Notes 3 and 7 of Notes to Consolidated Financial Statements.
(2) Excludes 4,000,000 shares of Common Stock reserved for issuance under the
Company's 1996 Stock Incentive Plan, options to purchase 54,000 of which
were outstanding as of June 30, 1996, and also excludes 5,565,840 shares
of Common Stock as of June 30, 1996 reserved for issuance pursuant to the
exercise of options granted under the Company's 1993 Stock Option Plan and
1983 Employee Incentive Stock Option Plan. Also excludes 650,000 shares of
Common Stock reserved for issuance under the Company's 1996 Stock Purchase
Plan. See "Management--Associate Benefit Plans" and Notes 5 and 10 of
Notes to Consolidated Financial Statements.
20
<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of June 30, 1996 was
$22.4 million, or $0.92 per share of Common Stock. Pro forma net tangible book
value per share represents the amount of the Company's total assets less total
liabilities, divided by the pro forma number of shares of Common Stock
outstanding, after giving effect to the automatic conversion of all
outstanding shares of Preferred Stock into Common Stock upon the completion of
this offering. Pro forma net tangible book value dilution per share represents
the difference between the amount per share paid by purchasers of shares of
Common Stock in this offering and the pro forma net tangible book value per
share of Common Stock immediately after the completion of this offering. After
giving effect to the sale of the 4,000,000 shares of Common Stock offered by
the Company hereby at an assumed initial public offering price of $11.00 per
share and after deduction of estimated underwriting discounts and commissions
and offering expenses payable by the Company, the pro forma net tangible book
value of the Company as of June 30, 1996 would have been $61.6 million, or
$2.17 per share. This represents an immediate increase in pro forma net
tangible book value of $1.25 per share to the existing stockholders and an
immediate dilution of $8.83 per share to purchasers of Common Stock in this
offering. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.............. $11.00
Pro forma net tangible book value per share as of June 30,
1996....................................................... $0.92
Increase per share attributable to new stockholders......... 1.25
-----
Pro forma net tangible book value per share at June 30, 1996
after the offering.......................................... 2.17
------
Dilution per share to new stockholders....................... $ 8.83
======
</TABLE>
The following table summarizes, on a pro forma basis as of June 30, 1996,
the number of shares of Common Stock purchased from the Company, the total
consideration paid to the Company and the average price per share paid by
existing stockholders and by new stockholders purchasing shares of Common
Stock in this offering (based on an assumed initial public offering price of
$11.00 per share and before the deduction of estimated underwriting discounts,
commissions and offering expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED(1) TOTAL CONSIDERATION AVERAGE
------------------------------------------ PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ --------------------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)... 24,392,597 85.9% $35,629,502 44.7% $ 1.46
New stockholders........... 4,000,000 14.1 44,000,000 55.3 11.00
------------ ------- ----------- -----
Total.................... 28,392,597 100.0% $79,629,502 100.0%
============ ======= =========== =====
</TABLE>
- --------
(1) Sales by the Selling Stockholders in this offering will cause the number
of shares held by existing stockholders to be reduced to 23,727,597
shares, or 83.6% (23,487,597 shares, or 81.4%, if the Underwriters' over-
allotment option is exercised in full) of the total number of shares of
Common Stock to be outstanding after this offering, and will increase the
number of shares held by new stockholders to 4,665,000 shares, or 16.4%
(5,364,750 shares, or 18.6%, if the Underwriters' over-allotment option is
exercised in full) of the total number of shares of Common Stock to be
outstanding after the offering. See "Principal and Selling Stockholders."
The foregoing assumes no exercise of options to purchase Common Stock after
June 30, 1996. As of June 30, 1996, there were options outstanding to purchase
a total of 5,619,840 shares of Common Stock under the Company's 1996 Stock
Incentive Plan, 1993 Stock Option Plan and 1983 Employee Incentive Stock
Option Plan, at a weighted average exercise price of $2.33 per share. To the
extent that any of these options or other options granted after June 30, 1996
are exercised, there will be further dilution to new stockholders. See
"Management--Associate Benefit Plans" and Notes 5 and 10 of Notes to
Consolidated Financial Statements.
21
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth for the periods indicated selected
consolidated financial data for the Company. The consolidated statement of
income data for the years ended September 30, 1993, 1994 and 1995 and the
consolidated balance sheet data at September 30, 1994 and 1995 have been
derived from the Company's consolidated financial statements included
elsewhere in this Prospectus. The following selected consolidated financial
data are qualified by the more detailed consolidated financial statements of
the Company and the notes thereto included elsewhere in this Prospectus and
should be read in conjunction with such consolidated financial statements and
notes and the discussion under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
Prospectus. The consolidated statement of income data for the year ended
September 30, 1992 and the consolidated balance sheet data at September 30,
1993 has been derived from audited financial statements not included in this
Prospectus. The consolidated statement of income data for the year ended
September 30, 1991 and for the nine months ended June 30, 1995 and 1996 and
the consolidated balance sheet data at September 30, 1991 and 1992 and June
30, 1996 are derived from unaudited consolidated financial statements which,
in the opinion of management, have been prepared on the same basis as the
audited consolidated financial statements and contain all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the results of operations for such periods. The results of
operations for the nine months ended June 30, 1996 are not necessarily
indicative of results to be expected for the full year.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, JUNE 30,
------------------------------------------- -----------------
1991 1992 1993 1994 1995 1995 1996
------------------ ------- ------- ------- -------- --------
CONSOLIDATED STATEMENT OF INCOME
DATA: (in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues
Transaction revenues... $ 184 $ 327 $ 2,158 $ 9,548 $20,835 $ 13,592 $ 30,208
Computer services...... 455 480 709 953 1,425 911 1,794
Interest and other..... 193 41 107 404 1,080 646 2,481
-------- ------- ------- ------- ------- -------- --------
Total revenues....... 832 848 2,974 10,905 23,340 15,149 34,483
-------- ------- ------- ------- ------- -------- --------
Cost of services
Cost of services....... 470 579 1,973 6,796 12,678 8,011 21,105
Self-clearing start-up
costs................. -- -- -- -- 141 85 1,844
-------- ------- ------- ------- ------- -------- --------
Total cost of
services............ 470 579 1,973 6,796 12,819 8,096 22,949
-------- ------- ------- ------- ------- -------- --------
Operating expenses
Selling and marketing.. 17 116 282 998 2,466 1,539 5,749
Technology development. 189 176 216 335 943 538 1,322
General and
administrative........ 264 260 400 2,532 2,803 1,386 6,687
-------- ------- ------- ------- ------- -------- --------
Total operating
expenses............ 470 552 898 3,865 6,212 3,463 13,758
-------- ------- ------- ------- ------- -------- --------
Total cost of
services
and operating
expenses............ 940 1,131 2,871 10,661 19,031 11,559 36,707
-------- ------- ------- ------- ------- -------- --------
Pre-tax income (loss).... (108) (283) 103 244 4,309 3,590 (2,224)
Income tax expense
(benefit)............... 2 2 4 (541) 1,728 1,440 (890)
-------- ------- ------- ------- ------- -------- --------
Net income (loss).... $ (110) $ (285) $ 99 $ 785 $ 2,581 $ 2,150 $ (1,334)
======== ======= ======= ======= ======= ======== ========
Net income (loss) per
share................... $ (0.01) $ (0.01) $ -- $ 0.03 $ 0.10 $ 0.08 $ (0.05)
======== ======= ======= ======= ======= ======== ========
Shares used to compute
per share data.......... 23,954 24,954 26,803 26,312 26,608 25,577 28,550
======== ======= ======= ======= ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------------------------ JUNE 30,
1991 1992 1993 1994 1995 1996
------ ------- ------- ------- ------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET
DATA:
Cash and equivalents....... $ 50 $ 48 $ 36 $ 692 $ 9,624 $15,409
Total assets............... 140 226 728 2,163 14,164 29,685
Long-term obligations...... 1,085 1,165 1,310 64 45 1,860
Stockholders' equity
(deficiency).............. (1,022) (1,107) (788) (92) 11,148 22,379
</TABLE>
22
<PAGE>
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 Prospectus.
This discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from those
anticipated in these forward-looking statements as a result of certain
factors, including, but not limited to, those set forth under "Risk Factors"
and elsewhere in this Prospectus.
OVERVIEW
E*TRADE is a leading provider of cost-effective, secure electronic brokerage
services. Founded in 1982, the Company operated initially as a service bureau,
providing automated online stock trading services to various brokerage firms,
including Fidelity Brokerage Services, Inc., Quick & Reilly and, through an
agreement with Bank of America for Charles Schwab. In 1992, the Company formed
E*TRADE Securities and began to offer retail brokerage services, with
automated order placement now available 24 hours a day, seven days a week by
means of the Internet, direct modem access, online service providers America
Online Inc. ("America Online") and CompuServe, Inc. ("CompuServe"), touch-tone
telephone and, to a lesser extent, interactive television.
The Company's revenues consist principally of transaction revenues, which
include securities brokerage commissions and payments based on order flow
(described below), interest and certain other fees related to the Company's
product offerings. The Company has experienced substantial growth in its
revenues since the inception of E*TRADE Securities. At the end of fiscal 1992,
the Company was processing slightly over 100 trades per day, and by September
30, 1995, the end of the Company's most recent fiscal year, the Company was
processing in excess of 3,800 trades per day. By June 30, 1996, the Company's
average daily trade volume had grown to 8,000 trades per day. Although
increases in the overall activity in the securities markets have contributed
to the Company's growth, the Company believes that its growth has also been
due in part to the success of its advertising campaign to bring brand name
recognition to the E*TRADE name, the launch of Internet access to E*TRADE and
the continuing successful integration of new system developments.
The Company uses other broker-dealers to execute its customers' orders and,
in recent years, has derived a significant portion of its revenues from these
broker-dealers for such order flow. The revenues received by the Company under
these arrangements for the year ended September 30, 1995 and the nine months
ended June 30, 1996 amounted to 20% and 22% of total revenues, respectively.
There can be no assurance that these revenues will continue at their present
levels or that the Company will be able to continue its present relationships
and terms for such payments for order flow. In addition, there can be no
assurance that payments for order flow will continue to be permitted by the
SEC, the NASD or other regulatory agencies, courts or governmental units. Loss
of any or all of these revenues could have a material adverse effect on the
Company's business, financial condition and operating results.
The Company is making significant investments in systems technology and has
designed a "hot" back-up site in Rancho Cordova, California. The Rancho
Cordova site will become fully operational in late July 1996. This new
facility will support systems, network and transaction redundancy between the
Company's Palo Alto and Rancho Cordova data centers, thereby providing a fully
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 severely strained
at times and the Company is seeking to address this problem through
significant investments in technology and personnel. See "Risk Factors--Risks
Associated with Management of a Changing Business, "--Risks of System Failure"
and "--Dependence on Improved Customer Service Operations."
The Company implemented self-clearing operations in July 1996. Clearing
services include the confirmation, receipt, settlement and delivery functions
involved in securities transactions. Prior to its
23
<PAGE>
conversion to self-clearing operations, the Company cleared all of its
customer trades as a fully-disclosed correspondent of Herzog. In the first
quarter of fiscal 1996, the Company began hiring and training associates to
perform the clearing functions that previously were performed by Herzog. As a
consequence, the Company has incurred not only significant non-recurring costs
associated with the hiring and training of its associates, but also ongoing
personnel and other costs associated with the transition to self-clearing
operations and the integration of its own systems. At the same time, the
Company continued to incur expenses to Herzog for clearing operations through
June 1996. The Company believes that its conversion to self-clearing
operations is a strategic investment in the Company's future that will allow
the Company to realize significant future savings, although there can be no
assurance in that regard. See "Risk Factors--Risks of Systems Failures" and
"--Risks Associated with Conversion to Self-clearing Operations."
As a self-clearing firm, the Company assumes direct responsibility for the
possession and control of customer securities and other 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 conversion
to its self-clearing operations, 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 of $185 million and payables to
customers of $113 million. The difference between receivables from customers
and payables to customers is being financed through a combination of corporate
resources, settlement facilities and customer collateralized bank loans. In
connection with the transition to self-clearing operations, the Company
obtained bank financing to finance its customer balances. In addition, as a
self-clearing firm, the Company contracted with a third-party service bureau,
Beta Systems, for its customer record keeping and data processing services.
The Company previously relied on Herzog and its data processor for these
services. A loss in the availability of these services from Beta Systems and
the inability of the Company to make alternative arrangements in a timely
manner, if at all, would have a material adverse effect on the Company's
business, financial condition and operating results. See "--Liquidity and
Capital Resources" and "Risk Factors--Risks Associated with Conversion to
Self-clearing Operations."
The Company's transaction revenues have grown from $327,000 in fiscal 1992,
the first year that the Company began to offer retail brokerage services, to
$20.8 million in fiscal 1995. Transaction revenues include securities
brokerage transactions and, since late fiscal 1994, payments based on order
flow. Computer service revenues have grown from $480,000 in fiscal 1992 to
$1.4 million in fiscal 1995, and are comprised primarily of fees for the time
customers are connected to the Company online. Interest and other revenues
have grown from $41,000 in fiscal 1992 to $1.1 million in fiscal 1995. The
Company previously participated in the interest spread on its customer debit
and credit balances through its clearing agreement with Herzog. The Company
began receiving fees on its customers' assets invested in money market
accounts in September 1994. Other revenues represent the Company's return on
its investment in Roundtable Partners LLC, a consortium of broker-dealers that
provides the Company with an alternative broker-dealer 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 $579,000 in fiscal 1992 to
$12.8 million in fiscal 1995. Cost of services includes clearing fees paid to
the Company's clearing broker, system maintenance and communication expenses,
and expenses related to the Company's order operations and customer service
departments. In connection with its conversion to self-clearing operations,
the Company incurred ongoing expenses such as payroll and systems
expenditures.
Selling and marketing expenses have grown from $116,000 in fiscal 1992 to
$2.5 million in fiscal 1995 and consist primarily of the costs associated with
the actual placement expenses as well as the creative development of
advertising.
24
<PAGE>
Technology development expenses have grown from $176,000 in fiscal 1992 to
$943,000 in fiscal 1995 and consist of payroll and consulting costs associated
with the development and enhancement of the Company's product offerings.
General and administrative expenses have grown from $260,000 in fiscal 1992
to $2.8 million in fiscal 1995 and consist primarily of facilities costs,
equipment and maintenance expenses, as well as corporate management costs,
including accounting, human resources and other administrative expenses.
The Company has experienced substantial changes in and expansion of its
business and operations since it began offering electronic brokerage services
in 1992 and expects to continue to experience periods of rapid change. The
Company's past expansion has placed, and any future expansion would place,
significant demands on the Company's administrative, operational, financial
and other resources. The Company expects operating expenses and staffing
levels to increase substantially in the future. In particular, the Company
intends to hire a significant number of additional skilled personnel in 1996
and later years, including persons with experience in both the computer and
brokerage industries, and, in particular, persons with Series 7 or other
broker-dealer licenses. Competition for such personnel is intense, and there
can be no assurance that the Company will be able to attract, assimilate or
retain additional highly qualified senior managers and technical persons in
the future. The Company also expects to expend resources with respect to
future expansion of its accounting and internal management systems and the
implementation of a variety of new systems and procedures. In addition, the
Company expects that future expansion will continue to challenge the Company's
ability to hire, train, motivate and manage its associates. If the Company's
revenues do not increase in proportion to its operating expenses, the
Company's management systems do not expand to meet increasing demands, the
Company fails to attract, assimilate and retain qualified personnel, or the
Company's management otherwise fails to manage the Company's expansion
effectively, there would be a material adverse effect on the Company's
business, financial condition and operating results. See "Risk Factors--Risks
Associated with Management of a Changing Business," "Business--Associates" and
"Management."
RESULTS OF OPERATIONS
The following table sets forth the percentage of total revenues represented
by certain items on the Company's consolidated statements of income for the
periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
SEPTEMBER 30, JUNE 30,
------------------- ------------
1993 1994 1995 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues
Transaction revenues...................... 72.6% 87.6% 89.3% 89.7% 87.6%
Computer services......................... 23.8 8.7 6.1 6.0 5.2
Interest and other........................ 3.6 3.7 4.6 4.3 7.2
----- ----- ----- ----- -----
Total revenues.......................... 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- -----
Cost of services
Cost of services.......................... 66.3 62.3 54.3 52.9 61.2
Self-clearing start-up costs.............. -- -- 0.6 0.6 5.4
----- ----- ----- ----- -----
Total cost of services.................. 66.3 62.3 54.9 53.5 66.6
----- ----- ----- ----- -----
Operating expenses
Selling and marketing..................... 9.5 9.2 10.6 10.2 16.7
Technology development.................... 7.3 3.1 4.0 3.6 3.8
General and administrative................ 13.4 23.2 12.0 9.0 19.4
----- ----- ----- ----- -----
Total operating expenses................ 30.2 35.5 26.6 22.8 39.9
----- ----- ----- ----- -----
Total cost of services and
operating expenses..................... 96.5 97.8 81.5 76.3 106.5
----- ----- ----- ----- -----
Pre-tax income (loss) ...................... 3.5 2.2 18.5 23.7 (6.5)
Income tax expense (benefit)................ 0.2 (5.0) 7.4 9.5 (2.6)
----- ----- ----- ----- -----
Net income (loss)....................... 3.3% 7.2% 11.1% 14.2% (3.9)%
===== ===== ===== ===== =====
</TABLE>
25
<PAGE>
Nine Months Ended June 30, 1996 and 1995
Revenues
Transaction revenues increased 122% to $30.2 million for the nine months
ended June 30, 1996 from $13.6 million for the comparable period in 1995. Of
that amount, payments for order flow increased 167% to $7.5 million for the
nine months ended June 30, 1996 from $2.8 million for the comparable period in
1995. The increase in transaction revenues was primarily the result of the
rise in the number of securities transactions processed by the Company, offset
in part by reductions in the commission rates charged for certain
transactions. The average revenue per securities transaction was $31.76 for
the nine months ended June 30, 1996 compared with $36.16 during the same
period in the prior year. Computer services revenues increased 97% to $1.8
million for the nine months ended June 30, 1996 from $911,000 for the
comparable period in 1995, primarily due to an increase in the amount of
connect time utilized by customers. Interest and other revenues increased 284%
to $2.5 million for the nine months ended June 30, 1996 from $646,000 for the
comparable period in 1995. The increase was largely due to an increase in
customer margin debt of 181% to $135 million, an increase in customer free
credit balances of 330% to $77 million and an increase in customer money
market fund balances of 85% to $317 million.
Cost of Services
Cost of services increased 163% to $21.1 million for the nine months ended
June 30, 1996 from $8.0 million for the comparable period in 1995, due to both
the increase in the number of securities transactions processed by the Company
and the increase in customer service calls following the May 1996 systems
failures. Self-clearing start-up costs increased to $1.8 million for the nine
months ended June 30, 1996 from $85,000 for the comparable period in 1995. The
Company incurred these expenses as it continued to hire associates and utilize
consultants in preparation of the conversion to self-clearing operations.
Operating Expenses
Selling and marketing expenses increased 274% to $5.7 million for the nine
months ended June 30, 1996 from $1.5 million for the comparable period in
1995. This increase reflects the brand name advertising campaign that was
initiated by the Company during the nine months ended June 30, 1996, as well
as the advertising costs associated with the launch of the Company's Web site
in February 1996. The Company expects that these expenses will fluctuate as a
percent of revenue from period to period.
Technology development expenses increased 146% to $1.3 million for the nine
months ended June 30, 1996 from $538,000 for the comparable period in 1995.
This increase was attributable to an acceleration of the Company's development
efforts associated with the launch of the Web site in February 1996, as well
as the work associated with designing and implementing the Company's "hot"
back-up site in Rancho Cordova, California.
General and administrative expenses increased 382% to $6.7 million for the
nine months ended June 30, 1996 from $1.4 million for the comparable period in
1995. This increase was a result of increased costs associated with personnel
additions in the finance, human resources, facilities and compliance
departments, a $3.0 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 personnel and the Company's relocation to new
facilities were undertaken to accommodate the growth experienced during the
period.
Income Tax Expense (Benefit)
Income tax benefit represents federal and state income taxes at an effective
rate of 40.0% for the nine months ended June 30, 1996 and 40.1% income tax
expense for the comparable period in 1995.
Fiscal Years Ended September 30, 1995 and 1994
Revenues
Transaction revenues increased 118% to $20.8 million for fiscal 1995 from
$9.5 million for fiscal 1994. The increase was attributable to an increase in
the number of securities transactions processed by the
26
<PAGE>
Company. The average revenue per securities transaction increased to $31.61 in
fiscal 1995 from $29.68 in fiscal 1994 because of the initiation of order flow
payments partially offset by reductions of the base commission rate charged to
customers for securities transactions late in fiscal 1994. Computer services
revenues increased 50% to $1.4 million for fiscal 1995 from $953,000 for
fiscal 1994. The increase was due to an increase in amount of connect time
utilized by customers. Interest and other revenues increased 167% to $1.1
million for fiscal 1995 from $404,000 for fiscal 1994. The increase was
largely due to an increase of 172% in customer margin debt to $68.9 million,
an increase of 85% in customer credit balances to $18.7 million and an
increase of 160% in customer money market fund balances to $209.4 million.
Cost of Services
Cost of services increased 87% to $12.7 million for fiscal 1995 from $6.8
million for fiscal 1994. The increase was largely attributable to an increase
in the Company's payments to its clearing broker and, to a lesser extent,
modest increases in brokerage operations and quotation expenses. Self-clearing
start-up costs were $141,000 for fiscal 1995, as the Company began to utilize
consultants in preparation of its conversion to self-clearing operations. No
such expenses were incurred in fiscal 1994.
Operating Expenses
Selling and marketing expenses increased 147% to $2.5 million for fiscal
1995 from $998,000 for the comparable period in fiscal 1994. This increase was
due to increased expenditures on advertising placements, creative development
and collateral materials.
Technology development expenses increased 181% to $943,000 for fiscal 1995
from $335,000 for the comparable period in fiscal 1994. This increase was
attributable to activities associated with enhancing the Company's existing
product offerings, as well as costs associated with the development of the
Company's Web site, which was launched in February 1996.
General and administrative expenses increased 11% to $2.8 million for fiscal
1995 from $2.5 million for the comparable period in fiscal 1994. In fiscal
1994, the Company settled claims in the amount of $850,000 made by its former
clearing broker. Excluding this claim, fiscal 1995 general and administrative
expenses increased 67% over fiscal 1994. This increase was a result of
additional expenses incurred for customer bad debts, claims resulting from a
systems failure in the fourth quarter of fiscal 1995 and increases in the
number of corporate associates needed to accommodate the growth experienced by
the Company during the period.
Income Tax Expense
Income tax expense represents the provision for federal and state income
taxes at an effective rate of 40.1% for fiscal 1995. The Company recorded a
net income tax benefit of $541,000 for fiscal 1994, due to full recognition of
net operating loss carryforwards generated in prior years.
Fiscal Years Ended September 30, 1994 and 1993
Revenues
Transaction revenues increased 342% to $9.5 million for fiscal 1994 from
$2.2 million for fiscal 1993. The increase was attributable to an increase in
the number of securities transactions processed by the Company. Computer
services revenues increased 34% to $953,000 for fiscal 1994 from $709,000 for
fiscal 1993. This increase was due to an increase in the connect time access
charges utilized by the customers. Interest and other revenue increased 279%
to $404,000 for fiscal 1994 from $107,000 for fiscal 1993. The increase was
due to an overall increase in customer margin debit and free credit balances.
Cost of Services
Cost of services increased 245% to $6.8 million for fiscal 1994 from $2.0
million for fiscal 1993. This increase was attributable to increases in
clearing fees and communication expenses.
27
<PAGE>
Operating Expenses
Selling and marketing expenses increased 253% to $998,000 for the fiscal
1994 from $282,000 for fiscal 1993. This increase was a result of increased
advertising expenses. Technology development expenses increased 55% to
$335,000 for fiscal 1994 from $216,000 for fiscal 1993. This increase was a
result of additional resources being applied to product development. General
and administrative expenses increased 532% to $2.5 million for fiscal 1994
from $401,000 for fiscal 1993. This increase was attributable to increases in
customer claims and bad debt reserves as well as the $850,000 settlement in
fiscal 1994 noted above.
28
<PAGE>
QUARTERLY RESULTS
The following table sets forth certain unaudited quarterly financial data
for the seven quarters ended June 30, 1996. In the opinion of the Company's
management, this unaudited information has been prepared on the same basis as
the audited consolidated financial statements contained herein and includes
all adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the information set forth therein when read in conjunction with
the consolidated financial statements and footnotes. The operating results for
any quarter are not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1994 1995 1995 1995 1995 1996 1996
------------ --------- -------- ------------- ------------ --------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues
Transaction revenues.. $3,272 $4,206 $6,114 $7,243 $7,329 $ 9,160 $13,719
Computer services..... 267 280 364 514 455 624 715
Interest and other.... 162 204 280 434 644 666 1,171
------ ------ ------ ------ ------ ------- -------
Total revenues...... 3,701 4,690 6,758 8,191 8,428 10,450 15,605
------ ------ ------ ------ ------ ------- -------
Cost of services
Cost of services...... 2,049 2,480 3,482 4,667 4,373 5,855 10,877
Self-clearing start-up
costs................ 2 39 44 56 166 469 1,209
------ ------ ------ ------ ------ ------- -------
Total cost of
services........... 2,051 2,519 3,526 4,723 4,539 6,324 12,086
------ ------ ------ ------ ------ ------- -------
Operating expenses
Selling and marketing. 459 578 502 927 1,127 2,391 2,231
Technology
development.......... 63 65 410 405 253 359 710
General and
administrative....... 415 438 533 1,417 1,042 1,058 4,587
------ ------ ------ ------ ------ ------- -------
Total operating
expenses........... 937 1,081 1,445 2,749 2,422 3,808 7,528
------ ------ ------ ------ ------ ------- -------
Total cost of
services and
operating expenses. 2,988 3,600 4,971 7,472 6,961 10,132 19,614
------ ------ ------ ------ ------ ------- -------
Pre-tax income (loss)... 713 1,090 1,787 719 1,467 318 (4,009)
Income tax expense
(benefit).............. 286 437 717 288 589 133 (1,612)
------ ------ ------ ------ ------ ------- -------
Net income (loss)... $ 427 $ 653 $1,070 $ 431 $ 878 $ 185 $(2,397)
====== ====== ====== ====== ====== ======= =======
<CAPTION>
AS A PERCENTAGE OF TOTAL REVENUES
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues
Transaction revenues.. 88.4% 89.7% 90.5% 88.4% 87.0% 87.7% 87.9%
Computer services..... 7.2 6.0 5.4 6.3 5.4 6.0 4.6
Interest and other.... 4.4 4.3 4.1 5.3 7.6 6.3 7.5
------ ------ ------ ------ ------ ------- -------
Total revenues...... 100.0 100.0 100.0 100.0 100.0 100.0 100.0
------ ------ ------ ------ ------ ------- -------
Cost of services
Cost of services...... 55.4 52.9 51.5 57.0 51.9 56.0 69.7
Self-clearing start-up
costs................ -- 0.8 0.7 0.7 2.0 4.5 7.7
------ ------ ------ ------ ------ ------- -------
Total cost of
services........... 55.4 53.7 52.2 57.7 53.9 60.5 77.4
------ ------ ------ ------ ------ ------- -------
Operating expenses
Selling and marketing. 12.4 12.3 7.4 11.3 13.4 22.9 14.3
Technology
development.......... 1.7 1.4 6.1 4.9 3.0 3.4 4.6
General and
administrative....... 11.2 9.3 7.9 17.3 12.3 10.1 29.4
------ ------ ------ ------ ------ ------- -------
Total operating
expenses........... 25.3 23.0 21.4 33.5 28.7 36.4 48.3
------ ------ ------ ------ ------ ------- -------
Total cost of
services and
operating expenses. 80.7 76.7 73.6 91.2 82.6 96.9 125.7
------ ------ ------ ------ ------ ------- -------
Pre-tax income (loss)... 19.3 23.3 26.4 8.8 17.4 3.1 (25.7)
Income tax expense
(benefit).............. 7.8 9.4 10.6 3.5 7.0 1.3 (10.3)
------ ------ ------ ------ ------ ------- -------
Net income (loss)... 11.5% 13.9% 15.8% 5.3% 10.4% 1.8% (15.4)%
====== ====== ====== ====== ====== ======= =======
</TABLE>
29
<PAGE>
The Company expects to experience significant fluctuations in future
quarterly operating results that may be caused by many factors, including the
following: the timing of introductions or enhancements of online brokerage
services and products by the Company or its competitors; market acceptance of
online brokerage services and products; the pace of development of the market
for online commerce; changes in trading volume on the securities markets;
trends in the securities markets; changes in pricing policies by the Company
or its competitors; changes in strategy; the success of or costs associated
with acquisitions, joint ventures or other 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 any indication of future performance. It is
likely that the Company's future quarterly operating results from time to time
will not meet the expectations of securities analysts or investors, which may
have an adverse effect on the market price of the Company's Common Stock.
During fiscal 1995, in connection with its transition to self-clearing
operations, the Company began hiring consultants to perform clearing functions
that previously were performed by Herzog. As a consequence, the Company has
incurred not only significant non-recurring costs associated with the hiring
and training of its associates, but also ongoing personnel and other costs
associated with the transition to self-clearing operations and the integration
of its own systems, while still incurring expenses to Herzog for clearing
operations.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its activities through cash
provided by operations, the private placement of Common Stock and Preferred
Stock and, to a lesser extent, equipment financing. In September 1995, the
Company privately placed $12.3 million of convertible Preferred Stock, of
which $3.8 million was used to repurchase and retire outstanding Common Stock
from existing stockholders. In April 1996, the Company sold an additional
20,336 shares of convertible Preferred Stock for $2.8 million. In June 1996,
the Company sold an additional 11,180 shares of convertible Preferred Stock to
SOFTBANK for $9.0 million.
In February 1996, the Company obtained $2.5 million in equipment financing
from Merrill Lynch Business Financial Services, Inc. to finance the purchase
of equipment and facilities at the Company's new corporate headquarters in
Palo Alto, California. In May 1996, the Company obtained $100 million in
authorized financing, to be collateralized by customer securities, which
became available in July 1996 upon completion of its conversion to self-
clearing operations. In addition, the Company has entered into numerous
agreements with other broker-dealers to provide financing for the Company's
stock loan activities.
The Company currently anticipates that its available cash resources and
credit facilities, combined with the net proceeds to the Company from this
offering, will be sufficient to meet its presently anticipated working capital
and capital expenditure requirements for at least the next 12 months. However,
the Company may need to raise additional funds in order to support more rapid
expansion, develop new or enhanced services and products, respond to
competitive pressures, acquire complementary businesses or technologies or
respond to unanticipated requirements. If additional funds are raised through
the issuance of equity securities, the percentage ownership of the
stockholders of the Company will be reduced, stockholders may experience
additional dilution in net book value per share, or such equity securities may
have rights, preferences or privileges senior to those of the holders of the
Company's Common Stock. There can be no assurance that additional financing
will be available when needed on terms favorable to the Company, if at all. If
adequate funds are not available on acceptable terms, the Company may be
unable to develop or enhance its services and products, take advantage of
future opportunities or respond to competitive pressures or unanticipated
30
<PAGE>
requirements, any of which could have a material adverse effect on the
Company's business, financial condition and operating results.
Cash provided by (used in) operating activities was $(4.1) million for the
nine months ended June 30, 1996 compared to $3.1 million for the comparable
period in 1995. The cash provided by (used in) operating activities of both
periods was primarily the result of net income (loss), respectively, which for
the nine months ended June 30, 1996 was reduced by an increase in deposits
with clearing organizations and other long-term assets. Cash provided by (used
in) operating activities was $(112,000), $891,000 and $3.4 million in fiscal
1993, 1994 and 1995, respectively. The increases were due to higher net income
during the periods.
Cash used in investing activities was $2.1 million for the nine months ended
June 30, 1996 compared to $1.3 million for the comparable period in 1995 and
was $114,000, $124,000 and $1.7 million in fiscal 1993, 1994 and 1995,
respectively. The increases were primarily a result of additional purchases of
office facilities, equipment and leasehold improvements.
Cash provided by financing activities was $12.0 million for the nine months
ended June 30, 1996 compared to cash used in financing activities of $703,000
for the comparable period in 1995. The Company sold stock and received the
proceeds from exercised warrants in the nine months ended June 30, 1996 and
retired long-term notes payable in the comparable period in 1995. Cash
provided by (used in) financing activities was $215,000, ($111,000) and $7.3
million in fiscal 1993, 1994 and 1995, respectively. The increases and
decreases in each fiscal period are the net result of the issuance and
retirement of Company securities, respectively.
The Company expects that it will have $10.0 million of capital expenditures
through June 30, 1997.
RECENTLY ISSUED ACCOUNTING STANDARDS
The Company is required to adopt SFAS No. 123, Accounting for Stock-Based
Compensation, in fiscal 1997. SFAS No. 123 establishes accounting and
disclosure requirements using a fair-value based method of accounting for
stock based employee compensation plans. Under SFAS No. 123, the Company may
either adopt the new fair-value based accounting method or continue the
intrinsic value based method and provide pro forma disclosures of net income
and earnings per share as if the accounting provisions of SFAS No. 123 had
been adopted. The Company plans to adopt only the disclosure requirements of
SFAS No. 123; therefore, such adoption will have no effect on the Company's
consolidated net income or cash flows.
The Company is also required to adopt SFAS No. 121, Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
in fiscal 1997. SFAS No. 121 establishes the accounting and reporting
requirements for recognizing and measuring impairment of long-lived assets to
be either held and used or held for disposal. The Company does not expect SFAS
No. 121 to have a material effect on its consolidated financial statements.
31
<PAGE>
BUSINESS
The following discussion of the Company's business contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
may differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including, but not limited to,
those set forth under "Risk Factors" and elsewhere in this Prospectus.
OVERVIEW
E*TRADE Group, Inc. ("E*TRADE or the "Company") is a leading provider of
cost-effective, secure online discount brokerage services. The Company offers
automated order placement, portfolio tracking and related market information,
news and other information services 24 hours a day, seven days a week by means
of the Internet, online service providers CompuServe and America Online,
direct modem access, touch-tone telephone and, to a lesser extent, interactive
television. E*TRADE's proprietary transaction processing technology enables it
to offer highly automated, easy-to-use and cost-effective services that
empower its customers to take control of their own financial transactions.
Further, the Company's technology can be adapted to provide information and
transaction processing services related to other aspects of electronic
commerce, such as the processing of insurance transactions and electronic cash
transfers. See "--Strategic Relationships and Business Development."
E*TRADE provides its customers with the ability to place orders for stock
trades and other investment transactions directly, and at a lower, more
predictable transaction cost than traditional full-commission or discount
brokerage firms. The Company's services feature an easy-to-use graphical user
interface, the ability to create "personalized environments" reflecting users'
individual needs and interests, accessibility from virtually anywhere at any
time via multiple gateways, unbundled services for cost-effective pricing, and
highly secure services through the use of encryption and authentication
technology.
The Company had over 73,000 accounts as of June 30, 1996, with an average
monthly growth in accounts of 11% since January 1, 1996, and had an average
daily trading volume of approximately 8,000 in June 1996, as compared to 4,200
transactions in December 1995, representing an average monthly growth of 11%
over that period. The Internet is the Company's most rapidly growing gateway,
with trading volume increasing from approximately 1,300 Internet trades for
the first full week the Company offered trading through the Internet (the week
ended February 23, 1996) to over 10,900 for the week ended June 28, 1996.
E*TRADE's objective is to leverage its leading position as a provider of
electronic brokerage and information services through automation, innovation,
technology, service and value. The Company's strategy to accomplish this
objective includes continued aggressive marketing of its electronic brokerage
services to further establish E*TRADE's brand name recognition and increase
its share of the electronic brokerage market, continual broadening of the
functionality of its services and enhancement of its customers' online
experience, leveraging the benefits of its highly automated services to
enhance their cost-effectiveness, establishing additional strategic
relationships with online service, software and information service providers,
and expanding into international markets and new electronic commerce
applications.
BACKGROUND
Advancements in telecommunications and information technology have
fundamentally altered the way individuals conduct business. For example, the
development of the microprocessor and the personal computer revolutionized the
way individuals use computers by providing inexpensive and powerful
capabilities to them. Consumers have embraced the personal computer and
expressed strong preferences for the convenience and control it provides. In a
similar fashion, consumers also have begun using a variety of other electronic
devices such as the automatic teller machine ("ATM") and the facsimile
machine, which are now seen as valuable tools for expediting and controlling
transactions and eliminating human intermediaries.
Just as the microprocessor changed the use of computers, the emergence of
the Internet as a tool for communications and commerce is driving a revolution
in the world of financial transactions and information
32
<PAGE>
services. Consumers are rapidly embracing the Internet because it is simple to
access, makes vast amounts of information available instantaneously, and
allows individuals to communicate with one another regardless of location.
With the proliferation of personal computers and modems and the development of
easy-to-use Web browsers, use of the Internet grew to 56 million users
worldwide by the end of 1995, according to International Data Corporation,
which estimates that the number will reach approximately 200 million by the
end of 1999.
The Emergence of Electronic Commerce
The Internet and online services have provided organizations and individuals
with innovative ways of conducting business. With the emergence of the
Internet as a globally accessible, fully interactive and individually
addressable communications and computing medium, companies that have
traditionally conducted business in person, through the mail or over the
telephone are increasingly utilizing electronic commerce. Increased use of
credit cards, ATMs, the incidence of electronic funds transfers and online
banking and bill paying has automated, simplified and reduced the costs of
financial transactions for consumers, businesses and financial institutions.
Consumers are showing strong preferences for transacting certain types of
business--such as paying bills, buying insurance, booking airline tickets and
trading securities--electronically, rather than in person or over the
telephone. These transactions are being streamlined through online commerce
and can now be performed directly by individuals virtually anywhere at any
time. Consumers have accepted and even welcomed self-directed online
transactions because such transactions can be faster, less expensive and more
convenient than transactions conducted through a human intermediary.
Development of Online Brokerage Services
In the past, the individual investor could access the financial markets only
through a full-commission broker, who would give investment advice and place
trades. With the deregulation of brokerage commissions in 1975 and the
resulting unbundling of brokerage services, investors began to realize that
they could separate financial advisory services from securities trading. This
brought about the advent of the discount brokerage firm, which provided an
alternative investment approach by completing trades at a reduced cost.
With the emergence of electronic brokerage services, investors are being
given the ability to further unbundle the costs associated with the human
interaction required by full-commission and traditional discount brokerage
firms. By requiring personnel to handle each transaction, most traditional
brokerage firms restrict their customers' access to trading and information to
the availability of the person processing the transaction. In addition,
although full-commission and discount brokerage firms are able to offer
electronic trading services, their continued reliance on personnel, branch
offices and the associated infrastructure for a major part of their business
prevents them from reducing their cost structure to the lower level achievable
through an all electronic model. As a result of these factors, online
brokerage accounts are gaining popularity, and Forrester Research, Inc.
reports that by the year 2000, over $46 billion of financial assets is
expected to be managed on the Internet.
The Company believes that a shift in demographics and societal norms is
fundamentally altering the way consumers manage their personal financial
assets. The Company also believes that consumers are increasingly taking
direct control over their personal financial affairs, not simply because they
are able to do so, but because they find it more convenient and less expensive
than relying on financial intermediaries. Investors want the flexibility to
transact business at times and places that are convenient for them. In
addition, the broad availability of financial information online has
dramatically narrowed the gap between the resources available to the
individual investor and the institutional investor. Individual investors have
become increasingly sophisticated and knowledgeable about investing, having
experienced greater access to stock quotes, company financial information,
investment advice and other investment information on the Web or through other
online services. As investors obtain even more access to investment
information, the Company believes they
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will desire greater control over their financial decisions and seek
alternative ways to invest more conveniently and cost-effectively and with
less interaction with brokers and other financial services professionals. The
Company believes that this trend has created a growing opportunity to provide
online trading services that are easy to access, easy to use, cost-effective
and secure.
THE E*TRADE SOLUTION
E*TRADE uses its proprietary processing technology to provide consumers with
easy-to-use and cost-effective online securities brokerage services. E*TRADE's
service is accessible through multiple gateways: the Internet, direct modem
access, online service providers CompuServe and America Online, touch-tone
telephone and, to a lesser extent, interactive television. The Company offers
order placement services 24 hours a day, seven days a week, thereby shifting
the financial transactions paradigm from a business hours only, intermediary-
based model to one in which consumers have the ultimate control over where and
when they initiate transactions.
The Company's services are highly automated, with most customer orders being
entered, processed and confirmed electronically and without human
intervention. By avoiding the inefficiencies and personnel requirements and
associated costs of non-automated order entry and processing, the Company is
able to provide its services at a lower cost than traditional full-commission
or discount brokerage firms. The Company's technology is based on a modular
architecture which is scalable 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. The
Company's first target market for the application of its proprietary
processing technology is the electronic brokerage industry. However, this
technology can be adapted to provide information and transaction processing
services related to other electronic commerce applications.
E*TRADE empowers its customers to take control of their own financial
transactions through the following features:
. User-Friendly Web Trading Interface. Through its easy-to-use graphical
trading interface, E*TRADE has made online trading simple, fast and fun.
Consumers accessing E*TRADE for the first time are able to 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 is being replicated on other gateways.
. Personalized Environments. Customers are able to create "personalized
environments," including personalized watch lists and portfolios for
tracking securities. A customer's trading experience is enhanced with
portfolio, account and market information readily available prior to
initiating a trade. The Company plans to enable customers to customize
further 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.
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. 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.
As depicted below, 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.
CONNECT ANYWHERE, ANY TIME
E*TRADE Transacts Business Through Multiple Gateways
[Graphical depiction of multiple gateways with E*TRADE logo]
. 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 that they want at lower costs. The Company, through its
proprietary processing technology, is able to charge a lower price, yet
provide value-added products and services.
. Secure Operations. The Company believes that account security is one of
the key factors for success in the brokerage industry. By offering
highly secure services through the use of encryption and authentication
technology, the Company has achieved a leadership position in the secure
provision of online brokerage services.
The Company believes that the robust processing technology that it has
developed for the provision of online electronic brokerage services can be
adapted for the provision of additional services within that market segment,
as well as for application to other aspects of electronic commerce.
STRATEGY
The Company's objective is to be a leader in the provision of commercial
transaction processing services through automation, innovation, technology,
service and value. The key elements of the Company's strategy to accomplish
this objective include the following:
. Enhance E*TRADE Brand Awareness. The Company intends to continue to
aggressively market its online brokerage services to further establish
E*TRADE's brand name recognition through media reports, both in print
and on television, and through advertisements in mass market
publications.
. Increase Electronic Brokerage Market Share. Through aggressive mass
market advertising, the Company intends to raise consumer awareness and
generate new accounts to increase its share of the electronic brokerage
market. The Company's brokerage accounts increased from over 39,000 at
January 1, 1996 to over 73,000 at June 30, 1996, representing an average
monthly growth in accounts of 11% during that period.
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. Continue to Broaden Service Offerings. The Company continually strives
to increase the functionality of its services, as well as to offer new
services that enhance its customers' online experience. For example, the
Company currently provides portfolio tracking and records management,
market data and access to delayed quotes through the Internet at no
additional cost, while real-time quotes can be obtained online for a
small fee. The Company recently entered into an agreement with Quote.com
to provide current news and charting capabilities to the Company's
customers expected to be available by August 1996. In addition, the
Company intends to expand its existing services to include immediate
access to research reports and company financial information and an
automatic deposit program. The Company also plans to adapt its
proprietary processing technology to provide additional online brokerage
services, such as mutual fund trading, fixed income securities trading,
401(k) plan administration and stock option plan management. In
addition, E*TRADE Securities intends to commence, subject to regulatory
approval, investment banking operations, raising public and private
equity capital for companies over the Internet and other electronic
media.
. Leverage Benefits of Highly Automated Operations. 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 and discount
brokerage firms. The Company continually seeks ways to automate other
aspects of its business, such as the customer new account application,
lead fulfillment cashiering and customer service functions. In addition,
the Company recently implemented self-clearing operations, which it
expects will further reduce the cost of providing its services to
customers.
. Develop and Maintain Strategic Relationships. In order to enhance
accessibility of its services and provide new service offerings, the
Company has established strategic relationships with online service
providers CompuServe and America Online, whose subscribers are potential
consumers for online brokerage services, as well as certain software and
information service providers. The Company believes that these
relationships help build E*TRADE's brand name recognition and enable the
low-cost acquisition of additional customers. E*TRADE also seeks to
develop and maintain alternative distribution channels through the
expansion of its service bureau business.
. Leverage E*TRADE Brand and Technology to Enter New Markets. E*TRADE
seeks to capitalize on its brand name recognition by leveraging its
branded proprietary processing technology to provide other individual
and business-to-business clients with electronic services. E*TRADE's
proprietary processing technology, while currently used for the
processing of online brokerage transactions, can be adapted to provide
information and transaction processing services related to other
electronic commerce applications.
. Penetrate International Customer Base. The Internet, America Online and
CompuServe permit the Company's customers to access its system without
regard to geographic location. Although E*TRADE currently has no
marketing program directed specifically at consumers outside the United
States, it already has over 400 accounts for customers with addresses in
over 60 foreign countries, and it plans to increase its 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 foreign investors, to facilitate the
handling of foreign securities, and to ensure the Company is in
compliance with local laws and regulations.
The Company's strategy involves substantial risks and uncertainties. There
can be no assurance that the Company will be successful in implementing its
strategy or that its strategy, even if implemented, will lead to successful
achievement of the Company's objectives. If the Company is unable to implement
its strategy effectively, the Company's business, financial condition and
operating results would be materially adversely affected.
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BROKERAGE AND INFORMATION SERVICES AND PRODUCTS
The Company's consumer services are based on proprietary processing
technology and are designed to meet the needs of individuals who make their
own investment decisions. The Company's services include fully automated stock
and option order processing via personal computer or touch-tone telephone,
online investment portfolio tracking and financial market news and
information. The Company offers its services to consumers through a broad
range of electronic access points, including the Internet, direct modem
access, 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 and can place orders through multiple gateways.
The Company continually strives to increase the functionality of its
services, as well as to offer new services that enhance its customers' online
trading experiences. The Company's services give consumers increased control
of their personal investments by providing a direct link to the financial
markets through a customized user interface. The Company's existing and
anticipated services and product offerings include those described below:
Stock and Option Trading
Customers can directly place orders to buy and sell Nasdaq and exchange-
listed securities, as well as equity options, through the E*TRADE automated
order processing system. E*TRADE supports a range of order types, including
market 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 trade 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.
Customers also receive annual reports, which are distributed by E*TRADE as
received from the respective companies and proxy statements from those
companies that supply them to E*TRADE for distribution.
Customer payments are received through the mail or federal wire system and
are credited to customer accounts upon receipt. The Company is currently
reviewing various electronic funds transfer systems. The Company intends to
implement a "frequent trader" program in which high-volume customers are given
credit for a number of free trades or free access to services that are
ordinarily priced separately, such as real-time quotes and market data. In
addition, the Company is exploring the provision of mutual fund trading
capabilities in the future.
All listed market orders (subject to certain size limitations) are executed
at the National Best Bid/Offer ("NBBO") at the time of receipt by the third
market firm or exchange. 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) at the time of receipt by the market-maker.
Market Data
During trading hours, E*TRADE continually receives a direct feed of detailed
quote data, market information and news. Customers can create their own
personal lists of stocks and options for quick access to current pricing
information. E*TRADE provides its customers free access 20-minute delayed
data, including quotes, 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 and 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 on the
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Company's system. The Company's Web site provides links to other business and
financial Web sites, including the CNN Financial Network and the SEC's EDGAR
database, which provides access to SEC filings of public companies. The
Company is expanding its existing services to include immediate access to
breaking news, charts and company financial information.
Portfolio Tracking and Records Management
Customers have online access to a listing of all their portfolio assets held
through E*TRADE, including data on the date of purchase, cost basis, current
price and current market value. The system automatically calculates unrealized
profits and losses for each asset held. Detailed account balance and
transaction information includes cash and money fund balances, buying power,
net market portfolio value, dividends paid, interest earned, deposits and
withdrawals. Brokerage history includes all orders, changes and cancellations.
Tax records include total short-term or long-term gain/loss and commissions
paid. Customers can also create "shadow" portfolios to include any number of
financial instruments a customer is interested in tracking --for example,
portfolio assets held at another firm. These shadow portfolios can include
stocks, options, bonds and mutual funds.
Cash Management Services
The Company provides certain cash management services to its customers. For
example, uninvested funds earn interest in a credit interest program or can be
invested in one of five money market funds. In addition, the Company provides
limited checking services through a commercial bank and is exploring 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, 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 an efficient
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 options trades, review account balances and check messages
through any touch-tone telephone.
Interactive Television. GTE MainStreet, an interactive television system
operated by GTE Corporation, is available as a gateway to the Company's
brokerage service. GTE MainStreet has been on the air over certain cable
television franchises on a pilot basis for approximately four years and is now
operational in three test
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markets. Revenues and volume of trades through GTE MainStreet represent an
immaterial portion of the Company's business.
E*TRADE PROCESSING TECHNOLOGY
The E*TRADE engine is a proprietary transaction processor that automates
traditionally labor-intensive transactions. Because it was custom-tailored for
electronic marketplace use, the E*TRADE engine provides customers with
efficient service and has the added advantage of being scalable and adaptable
as usage increases and service offerings are expanded. Beyond these features,
the design of the E*TRADE engine and related software allows for rapid
expansion of network and computing capacity without interrupting service or
requiring replacement of existing hardware or software. Although the E*TRADE
engine can be adapted to provide information and transaction processing
services related to electronic commerce applications other than brokerage,
there can be no assurance that the Company will be able to successfully adapt
its technology to other markets or that, if successful with such adaptation,
it will compete successfully in any such new markets.
[Graphical depiction of E*TRADE engine showing gateway servers; interface
server and automated transaction processor]
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 run on any Netscape-
enabled computer. It is also being adapted to a second Internet browser,
Microsoft Internet Explorer. E*TRADE's GUI connects to the interface
server through a bank of Sun Sparc servers. These "gateway servers"
provide a round-robin method
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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 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 fully
redundant and secure.
. The Automated Processor. The core of the E*TRADE engine is the Automated
Processor, designed to provide the highest degree of automation for all
E*TRADE transactions. The Automated Processor was written for the
Digital Equipment Corporation ("DEC") hardware and operating system to
rapidly read data files, process transactions and transmit information
back to the customer. Because of this, the Company is able to process
approximately 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 internal security from DEC and user ID and password
protection at the application level, provide security for the Automated
Processor. Internet access to the processor is through the Company's Web
site, which 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
individual customer needs.
The Company is establishing a remote back-up data center in Rancho Cordova,
California. This facility will replace the current back-up facility in Palo
Alto, California, in late July 1996. This new facility will support systems,
network and transaction redundancy between the Company's Palo Alto and Rancho
Cordova data centers, thereby providing a fully 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.
STRATEGIC RELATIONSHIPS AND BUSINESS DEVELOPMENT
The Company recently formed a subsidiary, E*TRADE Online Ventures, with the
objective of leveraging its transaction-processing capabilities, access to
online consumers and brand name recognition into growth and diversification
opportunities. E*TRADE Online Ventures continues the Company's focus on
strategic alliances and represents a new emphasis on acquisitions and internal
development of new businesses. These efforts are designed to expand the
Company's core business, offer new products and services to its online
customers and diversify its customer base and revenue stream by providing
transaction processing services in areas outside its core business.
Core Business Expansion
With the objective of expanding the Company's core business, E*TRADE Online
Ventures has secured or is actively pursuing alliances with (i) Internet
access and service providers, (ii) Internet software providers, (iii)
providers of home and online banking services, (iv) financial advisors and
money managers, (v) electronic commerce and currency companies and (vi) other
companies either requiring an efficient operation or wanting to offer new
services to their established customer bases. Although the focus with these
alliances is on utilizing the Company's brand name, private branding
opportunities are considered on occasion. The Company intends that these
alliances will increase its core customer base, trading volume and operational
efficiency and will further enhance its brand name recognition.
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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 go through 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
[LOGO business relationship for over nine years. The Company is
APPEARS negotiating a non-exclusive agreement with America Online to
HERE] place E*TRADE in America Online's new Investment Area,
currently scheduled for release in mid-summer 1996. E*TRADE
would receive a more prominent presence, accessible through an icon to an
upgraded graphical user interface. E*TRADE's current non-graphical, ASCII
interface through the America Online service can be accessed only through
a key word search. There can be no assurance that the Company will reach
agreement with America Online on terms favorable to the Company, or at
all, or that, absent a formal written agreement with America Online, the
Company's relationship with America Online will continue on the same basis
as it has in the past, or at all.
CompuServe. CompuServe and the Company have had a non-exclusive
[LOGO contractual relationship for over ten years. Initially,
APPEARS CompuServe served as an access point for the Company's service
HERE] 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 trades. The
Company has also entered into a three-year network agreement with
CompuServe Network Services for the provision of network access for the
Company's customers who wish to access E*TRADE using direct modem
software.
Data Broadcasting Corporation. Data Broadcasting Corporation
[LOGO ("DBC"), a provider of financial and sports information to
APPEARS individual investors, has entered into an agreement with the
HERE] Company whereby DBC will provide direct access to E*TRADE's
services from its own Internet Web site and that of the brand
labeled quote sites it provides to others.
GTE Corporation. The Company entered into an agreement with GTE
[LOGO Corporation ("GTE") in 1989 to develop an online interactive
APPEARS television brokerage service that would be made available
HERE] 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 trades
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
[LOGO strategic relationship with Quicken Investment Services, Inc.,
APPEARS a subsidiary of Intuit, Inc. ("Intuit"), pursuant to which the
HERE] 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 for trades 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.
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New Products and Services
E*TRADE Online Ventures is also pursuing opportunities to increase the
number of products and services offered to E*TRADE customers. These include
(i) other investment products, including mutual funds, additional fixed income
securities and foreign securities, (ii) electronic cash, (iii) preferred
vendor relationships, and (iv) insurance. The Company intends to provide its
customers with electronic means to apply for and process various products,
including life, homeowners and auto insurance. The Company intends to offer
electronic transfer of funds which will allow them to fund their accounts or
purchase products and services provided by E*TRADE by electronic means. In
addition, E*TRADE Securities intends to commence, subject to regulatory
approval, investment banking operations, raising public and private equity
capital for companies over the Internet and other electronic media. 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.
Significant relationships formed to date are as follows:
Baseline. The Company signed an agreement with Baseline
[LOGO Financial Services in June 1996 to provide company
APPEARS information and earnings estimates to E*TRADE's Internet
HERE] customers. Baseline information provides customers with
access to a wide array of fundamentals, First Call earnings
estimates and historical prices on over 7,500 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.
LOGO
CyberCash. The Company has signed a memorandum of
[LOGO understanding for a strategic relationship with CyberCash,
APPEARS Inc. ("CyberCash"), pursuant to which E*TRADE would use the
HERE] 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
[LOGO of intent with National Processing Company ("NPC") to
APPEARS provide the ability for E*TRADE's Internet customers to
HERE] 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.
Quote.com. Quote.com and the Company signed an agreement in
[LOGO June 1996 to provide value-added information to E*TRADE
APPEARS Internet customers. Quote.com will provide current news and
HERE] 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
are being integrated into E*TRADE's Web site and will be free to E*TRADE
customers.
LOGO
Alternative Distribution Channels Through Service Bureau Business
The Company began as an online brokerage transaction service bureau and
seeks to develop and maintain alternative distribution channels through the
expansion of its service bureau business. The Company's service bureau
business permits third-party institutions' customers to place brokerage
orders, access their accounts and access other resources online using the
E*TRADE system. The Company has relationships with Quick & Reilly and Bank of
America to offer online services to their customers. The advantage of this
type of relationship is that the Company is able to provide its services to a
greater number of customers at little added cost, eliminating the necessity to
deal directly with customer service and other administrative responsibilities
of providing direct service.
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A significant number of the Company's strategic relationships have only
recently been entered into. There can be no assurance that any such
relationships will be maintained, that if such relationships are maintained,
they will be successful or profitable, or that the Company will develop any
new such relationships.
The information 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. The
development of new services and products or enhanced versions of existing
services and products entails significant technical risks. There can be no
assurance that the Company will be successful in effectively using new
technologies, adapting its services and products to emerging industry
standards, developing, introducing and marketing service and product
enhancements, or new services and products, including those identified above,
or that it will not experience difficulties that could delay or prevent the
successful development, introduction or marketing of these services and
products, or that its new service enhancements will adequately meet the
requirements of the marketplace and achieve market acceptance. If the Company
is unable, for technical or other reasons, to develop and introduce new
services and products or enhancements of existing services and products in a
timely manner in response to changing market conditions or customer
requirements, or if new services and products do not achieve market
acceptance, the Company's business, financial condition and operating results
will be materially adversely affected.
Substantially all of the Company's revenues in recent years have been from
electronic brokerage services, and the Company expects its electronic
brokerage services to continue to account for substantially all of its
revenues for the foreseeable future. E*TRADE, like other securities firms, is
directly affected by national and international economic and political
conditions, broad trends in business and finance and substantial fluctuations
in volume and price levels of securities and futures transactions. In October
1987 and October 1989, the stock market suffered two of the largest declines
in history. As a result of these declines, many firms in the industry suffered
financial losses, and the level of individual investor trading activity
decreased. Reduced trading volume and prices have historically resulted in
reduced transaction revenues. In periods of low volume, the Company's
profitability would be adversely affected because certain expenses, consisting
primarily of salaries and benefits, computer hardware and software costs and
occupancy expenses, remain relatively fixed. 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. See "--
Competition."
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. All communications by E*TRADE Securities
with the public are regulated by the NASD. See "--Government Regulation; Net
Capital Requirements."
Direct Response Advertising; Web Site Marketing
The Company's advertising focuses on marketing online trading as a better
way of initiating transactions, building awareness of the E*TRADE brand and
selling the benefits of E*TRADE services. Advertising is
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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, SmartMoney and
Wired. E*TRADE also advertises regularly on CNBC and on national business
radio networks. The Company believes its aggressive advertising program has
contributed to significant growth in new accounts, based on the increase in
the number of accounts following the launch of new advertising campaigns.
At the Web site, prospective customers can get detailed information on the
Company's services, use an interactive demonstration system, request
additional information and complete an account application online. Since May
1, 1996, a majority of the Company's new accounts have been generated through
the Internet. The Company believes its increasing Internet focus is resulting
in decreased customer acquisition costs. The Company may capitalize on the
popularity of its Web site by selling advertising to third parties who are
interested in targeted marketing. The Company regards this revenue as
additional income, raised without a significant increase in overall costs and
with no increase in capital costs.
Public Relations Program
The Company aggressively pursues public relations opportunities to build
brand awareness. This campaign has resulted in appearances on The Today Show,
CNN and CNBC, in addition to profiles in Business Week, Time, the Financial
Times, Investor's Business Daily and the Wall Street Journal. There are links
to E*TRADE's home page from more than 900 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, 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.
International Customer Base
The Company's customers are able to trade securities online from anywhere in
the world. The Internet, America Online and CompuServe permit the Company's
customers to access its system without regard to geographic location. Although
E*TRADE currently has no marketing program directed specifically at consumers
outside the United States, it has over 400 accounts for customers with
addresses in over 60 foreign countries, who open accounts directly with the
Company. The Company expects its international customer base to grow with the
continued proliferation of the Internet and increasing free trade, although
there can be no assurance in that regard.
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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 foreign investors, to facilitate the handling of foreign
securities, and to ensure the Company is in compliance with local laws and
regulations. In addition, the Company recognizes the revenue potential of
providing online trading services for the purchase of foreign securities and
plans to pursue this market in the future.
To date, the Company has limited experience in providing brokerage services
internationally. There can be no assurance that the Company will be able to
market successfully its services and products in international markets. In
addition, there are certain risks inherent in doing business in international
markets, particularly in the heavily regulated brokerage industry, such as
unexpected changes in regulatory requirements, tariffs and other trade
barriers, difficulties in staffing and managing foreign operations, political
instability, fluctuations in currency exchange rates, reduced protection for
intellectual property rights in some countries, seasonal reductions in
business activity during the summer months in Europe and certain other parts
of the world, and potentially adverse tax consequences, any of which could
adversely impact the success of the Company's international operations. There
can be no assurance that one or more of such factors will not have a material
adverse effect on the Company's future international operations, if any, and,
consequently, on the Company's business, financial condition and operating
results.
CUSTOMER SERVICE
The Company believes that providing 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 9:00
a.m. to 8:00 p.m. Eastern time, Monday through Friday. The Company's current
policy specifies that customer service associates have or obtain a securities
broker's license.
The Company believes that it can further enhance the quality of its customer
service by leveraging currently available technology. For example, current
interactive voice response ("IVR") technology has the capability of allowing
customers to request forms from their touch-tone telephones and immediately
receive them via fax. The Company believes that these "faxes-on-demand" have
resulted in a reduction of about 5% of the Company's current call volume. By
July 1996, key portions of the help text currently available on the Company's
Internet site will be available on the IVR system, accessible by those
customers whose access is telephonic rather than personal-computer based. The
Company expects to continue to enhance this IVR capability and is exploring
additional self-help options over the Internet. Also in development is an
"electronic trouble ticket," which will allow customers to obtain answers via
the Internet or touch-tone telephone to most system-related access questions.
The Company believes that broadening the access of the most frequently asked
questions regarding terms, procedures and policies will result in a
substantial reduction in the number of customer service calls received by the
Company.
The Company's customer service capacity has been and may continue to be
severely strained at times. During the three months ended June 30, 1996, the
Company's customer service department serviced approximately 80% of its
inquiries through telephone calls and approximately 20% through e-mail. This
department handles only non-revenue interactions with customers needing extra
assistance and generally is not involved in order processing. The Company
frequently has fallen far short of its target response time for customer
service calls, with callers waiting over 20 minutes during peak times.
Continued sub-optimal customer service could damage the E*TRADE name and lead
some customers to transfer their business to other, less congested online
brokers, limit their trading activity or refrain from electronic trading
entirely. Although the Company is addressing the problem through significant
investments in technology and personnel and has recently experienced a
meaningful improvement in the time required to respond to customer service
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calls, such attempts have fallen short of increased requirements thus far, as
growth in inquiries has, over certain periods, exceeded the growth in the
Company's capacity to handle such volumes. The training received by new and
current associates now emphasizes efficient call handling and reduced call
processing times.
The Company has contracted with external vendors, allowing for potential
outsourcing of certain customer calls during peak call times, without the
Company having to pay for such excess capacity in house. On certain high
volume days, such vendors have already handled as much as 15% of the Company's
daily customer inquiries, generally achieving response times of a few seconds;
however on any given day a surge of activity could cause the Company to fail
to provide adequate customer service. There can be no assurance that the
Company will be able to remedy its customer service capacity constraints, and
the failure to do so could have a material adverse effect on the Company's
business, financial condition and operating results.
The Company's previous investments in customer service were primarily
personnel-driven. The Company's new focus on customer independence and
technology has successfully resulted in fewer inquiries to E*TRADE personnel
per trade 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.
OPERATIONS
Clearing
The Company implemented self-clearing operations in July 1996. Clearing
operations include the confirmation, receipt, settlement and delivery
functions involved in securities transactions. Performing its own clearing
operations will allow E*TRADE Securities to retain free credit balances and
securities for use in margin lending activities subject to SEC and NASD rules.
Prior to its conversion to self-clearing operations, the Company cleared all
of its customer trades as a fully disclosed correspondent of Herzog. See "Risk
Factors--Risks Associated with Conversion to Self-clearing Operations."
Since the Company's conversion to self-clearing operations, 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 the
customer's account. The Company also facilitates exercise of subscription
rights on securities held for customers. The Company arranges for the
transmittal of proxy and tender offer materials and issuer reports to
customers. E*TRADE Securities' operations department 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 operations, especially where conducted by firms such as the
Company, without significant prior experience, involve substantial risks of
losses due to clerical errors related to the handling of customer funds and
securities. Errors in the clearing process also may lead to civil liability
for actions in negligence brought by parties who are financially harmed as a
result of such errors. Any liability that arises as a result of self-clearing
operations could have a material adverse effect on the Company's business,
financial condition and operating results. Clearing operations have accounted
for a significant portion of the Company's cost of services, and there can be
no assurance that clearing for itself will not result in significantly higher
clearing costs in the future. During the Company's transition to self-clearing
operations, it ran conversion tests to verify the accuracy of its internal
systems, while at the same time continuing to incur substantial expenses to
Herzog for clearing services. There can be no assurance that such activities
accurately tested the reliability of the Company's clearing operations. The
failure of the Company to perform self-clearing operations accurately and
cost-effectively could have a material adverse effect on the Company's
business, financial condition and operating results. See "Risk Factors--Risks
Associated with Conversion to Self-clearing Operations."
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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 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. 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 various clearing houses.
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") at the time of receipt by the
third market firm or exchange. Eligible orders are exposed to the marketplace
for possible price improvement, but in no case are orders executed at a price
inferior to the NBBO. Limit orders are executed based on an indicated price
and time priority. All Nasdaq market orders (subject to certain size
limitations based on the trading characteristics of the particular security)
are executed at the Best Bid/Offer (Inside Market), at the time of receipt by
the market-maker. Eligible orders are subject to possible price improvement in
the marketplace.
The Company receives and processes trade 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.
Orders placed from the close of the stock markets one day until the opening
the next business day must be processed through the Company's system in a
short period of time prior to the opening of the stock markets. Heavy stress
placed on the Company's systems during peak trading times could cause the
Company's systems to operate at 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 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. 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.
In addition, the Company has recently received adverse publicity in the
financial press primarily relating to systems failures. See "Risk Factors--
Risks of Systems Failure."
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The rapid growth in the use of the Company's services has strained its
ability to adequately expand technologically. The haste required in acquiring
new equipment and applications may result in less rigorous testing and
validation of hardware and software, which could lead to performance problems.
In addition, the Company relies on a number of third parties to process its
transactions, including online access providers, back office processing
organizations, services providers and market makers, all of which will 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 could have a material adverse effect on the Company's
business, financial condition and operating results. As trading volume
increases, the Company may have difficulty hiring, training and integrating
qualified personnel at the necessary pace, and the shortage of licensed
personnel could cause a backlog in the processing of orders requiring review,
exposing the Company not only to unsatisfied customers, but also to liability
for transactions that were ordered but not executed on a timely basis.
COMPETITION
The market for electronic brokerage services, particularly over the
Internet, is new, rapidly evolving and intensely competitive, and the Company
expects competition to continue and intensify in the future. E*TRADE
encounters direct competition from other discount brokerage firms providing
either touch-tone telephone or online brokerage services, or both. Discount
brokerage firms generally effect transactions for their customers on an
"execution only" basis, without offering other services such as portfolio
valuation, investment recommendations and research. These competitors include
such discount brokerage firms as Charles Schwab, Fidelity Brokerage Services,
Inc., Waterhouse Securities, Inc., Quick & Reilly, Pacific Brokerage Services,
Inc., National Discount Brokers (a subsidiary of Sherwood Securities Corp.),
Lombard Institutional Brokerage, Inc., firms owned by TransTerra Co.
(including All-American Brokers, also known as eBroker) and PC Financial
Network (a division of Donaldson, Lufkin & Jenrette Securities Corporation),
among others. The Company also encounters competition from established full-
commission brokerage firms such as Dean Witter Reynolds Inc., PaineWebber
Incorporated, Merrill Lynch and Smith Barney, Inc., among others. In addition,
the Company competes with financial institutions, mutual fund sponsors and
other organizations, some of which provide electronic and online brokerage
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. 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. In addition, many of these competitors offer a wider range
of services and financial products than the Company, and thus may be able to
respond more quickly to new or changing opportunities, technologies and
customer requirements. 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. Such
competitors may be able to undertake more extensive promotional activities,
offer more attractive terms to customers than the Company, and adopt more
aggressive pricing policies, possibly even sparking a price war in the
electronic brokerage business. Moreover, current and potential competitors
have established or may establish cooperative relationships among themselves
or with third parties to enhance their services and products. For example,
Charles Schwab's One-Source mutual fund service and similar, more complete
services may discourage potential customers from using the Company's brokerage
services. Accordingly, it is possible that new competitors or alliances among
competitors may emerge and rapidly acquire significant market share.
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
industry such as banks, software development companies, insurance companies,
providers
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of online financial and information services and others, as such companies
expand their product lines. Commercial banks and other financial institutions
have become a competitive factor in the securities industry by offering their
customers certain corporate and individual financial services traditionally
provided by securities firms. The current trend toward consolidation in the
commercial banking industry could further increase competition in all aspects
of the Company's business. Commercial banks generally are expanding their
securities activities, as well as their activities relating to the provision
of financial services. While it is not possible to predict the type and extent
of competitive services that commercial banks and other financial institutions
ultimately may offer or whether administrative or legislative barriers will be
repealed or modified, brokerage firms such as the Company may be adversely
affected by such competition or legislation. Particularly as financial
services and products proliferate, to the extent the Company's competitors are
able to attract and retain customers on the basis of the convenience of one-
stop shopping, the Company's business or its ability to grow could be
adversely affected. In many instances, the Company is competing with such
organizations for the same customers. In addition, competition among financial
services firms 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.
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. Although the Company has registered the
trademark "E*TRADE" in the United States and certain other countries, and has
certain other registered trademarks, there can be no assurance that the
Company will be able to secure significant protection for these trademarks. It
is possible that competitors of the Company or others will adopt product or
service names similar to "E*TRADE," thereby impeding the Company's ability to
build brand identity and possibly leading to customer confusion. The source
code for the Company's proprietary software is protected both as a trade
secret and as a copyrighted work. The Company's policy is to enter into
confidentiality and assignment agreements with its associates, consultants and
vendors and generally to control access to and distribution of its software,
documentation and other proprietary information. Notwithstanding the
precautions taken by the Company, it may be possible for a third party to copy
or otherwise obtain and use the Company's software or other proprietary
information without authorization or to develop similar software
independently. Policing unauthorized use of the Company's technology is
difficult, particularly because the global nature of the Internet makes it
difficult to control the ultimate destination or security of software or other
data transmitted. The laws of other countries may afford the Company little or
no effective protection of its intellectual property. There can be no
assurance that the steps taken by the Company will prevent misappropriation of
its technology or that agreements entered into for that purpose will be
enforceable. In addition, litigation may be necessary in the future to enforce
the Company's intellectual property rights, to protect the Company's trade
secrets, to determine the validity and scope of the proprietary rights of
others, or to defend against claims of infringement or invalidity. Such
litigation, whether successful or unsuccessful, could result in substantial
costs and diversions of resources, either of which could have a material
adverse effect on the Company's business, financial condition and operating
results.
The Company may in the future receive notices of claims of infringement of
other parties' proprietary rights. There can be no assurance that claims for
infringement or invalidity (or claims for indemnification resulting from
infringement claims) will not be asserted or prosecuted against the Company.
Any such claims, with or without merit, could be time consuming to defend,
result in costly litigation, divert management's attention and resources or
require the Company to enter into royalty or licensing agreements. There can
be no assurance that such licenses would be available on reasonable terms, if
at all, and the assertion or
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prosecution of any such claims could have a material adverse effect on the
Company's business, financial condition and operating results.
GOVERNMENT REGULATION; NET CAPITAL REQUIREMENTS
Securities Industry
The securities industry in the United States is subject to extensive
regulation under both federal and state laws. The SEC is the federal agency
responsible for the administration of the federal securities laws. E*TRADE
Securities is registered as a broker-dealer with the SEC. Much of the
regulation of broker-dealers has been delegated to self-regulatory
organizations, principally the NASD, which has been designated by the SEC as
E*TRADE Securities' primary regulator. These self-regulatory organizations
adopt rules (subject to approval by the SEC) that govern the industry and
conduct periodic examinations of E*TRADE Securities' operations. Securities
firms are also subject to regulation by state securities administrators in
those states in which they conduct business. E*TRADE Securities is registered
as a broker-dealer in all 50 states, the District of Columbia and Puerto Rico.
Broker-dealers are subject to regulations covering all aspects of the
securities business, including sales methods, trade practices among broker-
dealers, use and safekeeping of customers' funds and securities, capital
structure, record keeping and the conduct of directors, officers and
employees. The Company is required to comply with many complex laws and rules
to which it previously has not been subject as a fully-disclosed broker-
dealer, including rules relating to possession and control of customer funds
and securities, margin lending and execution and settlement of transactions.
Additional legislation, changes in rules promulgated by the SEC, the NASD, the
Board of Governors of the Federal Reserve System, the various stock exchanges,
and other self-regulatory organizations, or changes in the interpretation or
enforcement of existing laws and rules, may directly affect the mode of
operation and profitability of broker-dealers. The SEC, the NASD or other
self-regulatory organizations and state securities commissions may conduct
administrative proceedings, which can result in censure, fine, the issuance of
cease-and-desist orders or the suspension or expulsion of a broker-dealer or
any of its officers or employees. The Company's ability to comply with all
applicable laws and rules is dependent in large part upon the establishment
and maintenance of a compliance system reasonably designed to ensure such
compliance, as well as the Company's ability to attract and retain qualified
compliance personnel. The Company's growth has placed considerable strain on
its ability to ensure such compliance, and it has experienced recent turnover
in its compliance personnel. The principal purpose of regulation and
discipline of broker-dealers is the protection of customers and the securities
markets, rather than protection of creditors and stockholders of broker-
dealers. The Company could in the future be subject to disciplinary or other
actions due to claimed noncompliance, which could have a material adverse
effect on the Company's business, financial condition and operating results.
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 has in the past been requested by the NASD to
discontinue the use of certain marketing materials. The NASD can impose
certain penalties, including censure, fine, suspension of all advertising, the
issuance of cease-and-desist orders or the suspension or expulsion of a
broker-dealer or any of its officers or employees for violations of the NASD's
advertising regulations. The Company does not currently solicit orders from
its customers or make investment recommendations. However, if the Company were
to
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engage in such activities, it would become subject to additional rules and
regulations governing, among other things, the suitability of recommendations
to customers and sales practices.
It is the Company's intent to expand its business in United States
securities to other countries through the Internet and other gateways. For the
nine months ended June 30, 1996, the Company received approximately 2.5% of
its commission revenues from customers with addresses in over 60 foreign
countries. In order to expand its services globally, E*TRADE Securities must
comply with the regulatory controls of each specific country in which it
conducts business. E*TRADE Securities is regulated in the United States
primarily by the NASD and the SEC. The varying compliance requirements of
other national regulatory jurisdictions will 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 brokers and dealers, is
designed to measure the general financial integrity and liquidity of a broker-
dealer and requires that at least a minimum part of its assets be kept in
relatively liquid form.
E*TRADE Securities has elected to compute net capital under the alternative
method of calculation permitted by the Net Capital Rule. Under the alternative
method, E*TRADE Securities is required to maintain minimum net capital, as
defined in the Net Capital Rule, equal to the greater of $250,000 or 2% of the
amount of its "aggregate debit items" computed in accordance with the Formula
for Determination of Reserve Requirements for Brokers and Dealers. The
"aggregate debit items" are assets that have as their source transactions with
customers, primarily margin loans. Failure to maintain the required net
capital may subject a firm to suspension or revocation of registration by the
SEC and suspension or expulsion by the NASD and other regulatory bodies and
ultimately could require the 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 stockholder, employee or affiliate, if aggregate debit items rise beyond 5%
of net capital. The Net Capital Rule also provides that the SEC may restrict
for up to 20 business days any withdrawal of equity capital, or unsecured
loans or advances to stockholders, employees or affiliates ("capital
withdrawal") if such capital withdrawal, together with all other net capital
withdrawals during a 30-day period, exceeds 30% of excess net capital and the
SEC concludes that the capital withdrawal may be detrimental to the financial
integrity of the broker-dealer. The Net Capital Rule also provides that the
total outstanding principal amount of a broker-dealer's indebtedness under
certain subordination agreements, the proceeds of which are included in its
net capital, may not exceed 70% of the sum of the outstanding principal amount
of all subordinated indebtedness included in net capital, par or stated value
of capital stock, paid in capital in excess of par, retained earnings and
other capital accounts for a period in excess of 90 days.
Net capital is essentially defined as net worth (assets minus liabilities),
plus qualifying subordinated borrowings and certain discretionary liabilities,
and less certain mandatory deductions that result from excluding assets that
are not readily convertible into cash and from valuing conservatively certain
other assets. Among these deductions are adjustments (called "haircuts") which
reflect the possibility of a decline in the market value of an asset prior to
disposition.
A change in the Net Capital Rule, the imposition of new rules or any
unusually large charge against net capital could limit those operations of the
Company that require the intensive use of capital, such as trading activities
and the financing of customer account balances, and also could restrict the
Company's ability to withdraw capital from its brokerage subsidiaries, which
in turn could limit the Company's ability to pay dividends, repay debt and
redeem or purchase shares of its outstanding stock. A significant operating
loss or any unusually large charge against net capital could adversely affect
the ability of the Company to expand or even maintain its present levels of
business, which could have a material adverse effect on the Company's
business, financial condition and operating results.
51
<PAGE>
As of June 30, 1996, E*TRADE Securities was required to maintain minimum net
capital of $250,000 and had total net capital of approximately $13.9 million,
or approximately $13.6 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 by finance
personnel of the Company, 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 and is awaiting their decisions. The
Company believes that any penalty imposed by the NASD will not be substantial,
as the subsidiary in violation is 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. Although 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
There can be no assurance that other federal, state or foreign agencies will
not attempt to regulate the Company's online and other electronic activities.
The Company anticipates that it may be required to comply with record keeping,
data processing and other 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, thereby rendering the Company's business or
operations more costly or burdensome, less efficient or even impossible, any
of which could have a material adverse effect on the Company's business,
financial condition and operating results.
Due to the increasing popularity of the Internet, it is possible that laws
and regulations may be enacted with respect to the Internet, covering issues
such as user privacy, pricing, content and quality of products and services.
The Telecommunications Act of 1996, which was enacted in January 1996,
prohibits the transmission over the Internet of certain types of information
and content. 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. In addition, the
adoption of other laws or regulations may reduce the rate of growth of the
Internet, which could in turn decrease the demand for the Company's services,
or could otherwise have a material adverse effect on the Company's business,
financial condition and operating results.
ASSOCIATES
At June 30, 1996, the Company had 297 full-time associates, of whom 82 were
employed by E*TRADE Group, Inc. and 215 were employed by E*TRADE Securities.
The 82 associates in E*TRADE Group, Inc. performed the following functions:
systems (47); marketing (10); strategic relationships (4); finance (5); human
resources and facilities (11); and administration (5). The 215 associates in
E*TRADE Securities performed the following functions: account initiation (36);
customer service (114); clearing operations (43); trading (17); compliance
(3); and administration (2).
52
<PAGE>
The Company's success has been, and will be, dependent to a large degree on
its ability to retain the services of its existing executive officers and to
attract and retain qualified additional senior and middle managers and key
personnel in the future. Competition for such personnel is intense. There can
be no assurance that the Company will be able to attract, assimilate or retain
qualified technical and managerial personnel in the future, and the failure of
the Company to do so would have a material adverse effect on the Company's
business, financial condition and operating results. None of the Company's
associates is subject to collective bargaining agreements or is represented by
a union. The Company considers its relations with its associates to be good.
PROPERTIES
The Company currently leases two spaces for its corporate offices in Palo
Alto, California. The leases comprise an aggregate of 59,000 square feet and
expire in December 2001. The Company believes that it has adequate space for
its current needs. The Company established a remote back-up data center in
Rancho Cordova, California, which facility will become fully operational in
late 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. In addition, the Company leases a small office in New
York City under a lease expiring in February 2001.
LEGAL AND ADMINISTRATIVE PROCEEDINGS
The Company is not currently a party to any litigation that it believes
could have a material adverse effect on the Company's business, financial
condition or operating results. However, from time to time the Company has
been threatened with or named as a defendant in lawsuits and administrative
claims. Compliance and trading problems that are reported to the NASD 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 government audits and inspections. See
"Risk Factors--Government Regulation."
The Company is aware of electronic third-party communications in which a
potential class action lawsuit against the Company relating to its systems
failures in May 1996 is discussed. The Company believes that any such suit
would be without merit and the Company would rigorously defend against it. See
"Risk Factors--Risks of Systems Failure."
The Company maintains insurance in such amounts and with such coverages,
deductibles and policy limits as management believes are reasonable and
prudent. The principal risks that the Company insures against are
comprehensive general liability, commercial property and hardware/software
damage. The Company believes that such insurance coverages are adequate for
the purposes of its business.
SUBSIDIARIES
The following are wholly owned subsidiaries of the Company: (i) E*TRADE
Securities, Inc., a California corporation, is a discount online brokerage
firm performing financial transactions through the Internet, direct modem
link, online service providers America Online and Compuserve and touch-tone
telephone; (ii) E*TRADE Online Ventures, Inc., a California corporation,
develops strategic alliances for the Company, with an emphasis on acquisitions
and internal development of new business; (iii) E*TRADE Capital, Inc.,
formerly ET Execution Services, Inc., a California corporation, is a non-
operational broker-dealer; and (iv) TRADE*PLUS Brokerage, Inc., a California
corporation, is non-operational.
53
<PAGE>
MANAGEMENT
DIRECTORS AND OFFICERS
The directors and officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
William A. Porter(1).......... 67 Chairman of the Board
Christos M. Cotsakos(1)....... 47 President, Chief Executive Officer and
Director
David R. Ewing................ 40 Corporate Senior Vice President, Systems and
Chief Information Officer
Wayne H. Heldt................ 56 Corporate Vice President and Managing
Director, International Affairs
Kathy Levinson................ 41 Corporate Senior Vice President; President
and Chief Operating Officer of E*TRADE
Securities, Inc.
Rodney E. Paterson............ 47 Corporate Vice President; Vice President of
E*TRADE Online Ventures
Rebecca L. Patton............. 40 Corporate Vice President, Marketing,
Communications and Quality
Stephen C. Richards........... 42 Corporate Senior Vice President, Finance and
Administration, Chief Financial Officer and
Treasurer; Chief Financial Officer of E*TRADE
Securities, Inc.
Robin N. Rosenberg............ 41 Corporate Vice President, Human Resources
David M. Traversi............. 37 Corporate Senior Vice President; President
and Chief Operating Officer of E*TRADE Online
Ventures; Executive Director, Investment
Banking and Research of E*TRADE Securities
Thomas A. Bevilacqua.......... 39 Secretary
Richard S. Braddock(2)........ 54 Director
William E. Ford(2)(3)......... 35 Director
George Hayter(3).............. 57 Director
Bernard A. Newcomb............ 52 Director Emeritus
Keith Petty(2)................ 76 Director
Lewis E. Randall(1)........... 54 Director
Lester C. Thurow(3)........... 58 Director
</TABLE>
- --------
(1) Member of the Nominating Committee
(2) Member of the Compensation Committee
(3) Member of the Audit Committee
William A. Porter is the Chairman and Founder of E*TRADE Group, Inc. He
founded the Company in 1982 and served as President until October 1993 and
Chief Executive Officer, Chief Financial Officer, Treasurer and Secretary,
until April 1996. He founded E*TRADE Securities, Inc. in 1992. Mr. Porter
received a BA in Mathematics from Adams State College, an MA in Physics from
Kansas State College, and an MBA in Management from the Massachusetts
Institute of Technology. In May 1996, Mr. Porter was named Silicon Valley's
Emerging Company Entrepreneur of the Year by the San Jose Business Journal.
Christos M. Cotsakos joined E*TRADE Group, Inc. in March 1996 as President,
Chief Executive Officer and a director. Prior to joining E*TRADE, he served as
President, Co-Chief Executive Officer, Chief Operating Officer and a director
of A.C. Nielsen, Inc. from March 1995 to January 1996, as President and Chief
Executive Officer of Nielsen International from September 1993 to March 1995,
and as President and Chief Operating Officer of Nielsen Europe, Middle East
and Africa from March 1992 to September 1993. Mr. Cotsakos joined Nielsen
after 19 years with the Federal Express Corporation from 1973 to 1992, where
54
<PAGE>
he held a number of senior executive positions both in the United States and
Europe, including vice president and general manager for Europe, Africa and
the Near East from 1988 to March 1992. Mr. Cotsakos serves as a director of
National Processing, Inc., a provider of transaction processing services and
customized processing software. A decorated Vietnam Veteran, he received a BA,
cum laude, from William Paterson College, an MBA, summa cum laude, from
Pepperdine University and is currently pursuing a PhD in the field of
corporate governance at the Management School, University of London.
David R. Ewing has served as Corporate Senior Vice President, Systems and
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 Corporate 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.
Kathy Levinson has served as Corporate Senior Vice President of the Company
since May 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.
Rodney E. Paterson has been a Corporate Vice President of the Company since
September 1995, most recently serving as Vice President of E*TRADE Online
Ventures. From January 1992 to July 1995, Mr. Paterson served as Chief
Executive Officer for MAI Financial Services Ltd., a financial information and
software company, now a subsidiary of United News and Media PLC. Prior to that
time, he served as a Vice President of Marketing for Shark Information
Services, Inc., a trading information service company, from 1984 to December
1991. Mr. Paterson serves as a director of Audicom Corp., a broadcasting
technology company. He received a BA in Science from Open University.
Rebecca L. Patton has served as Corporate Vice President, Marketing of
E*TRADE Group, Inc. since September 1995. From 1988 to September 1995, Ms.
Patton served in a variety of management positions at Apple Computer,
including Worldwide Marketing Manager of the Personal Interactive Electronics
Division and Manager of Apple's PowerBook marketing group. Ms. Patton received
a BA in Economics, summa cum laude, from Duke University and an MBA from
Stanford University.
Stephen C. Richards joined the Company in April 1996 as Chief Financial
Officer and Treasurer and, as of June 1996, Corporate 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
55
<PAGE>
& 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.
Robin N. Rosenberg has been the Company's Corporate Vice President, Human
Resources since August 1995. Ms. Rosenberg served as President of Career
Transitions, a human resources consulting service, from August 1991 to August
1995. Prior to that, she served as Vice President of Human Resources for Wells
Fargo Bank for nine years. Ms. Rosenberg received a bachelor's degree in music
from Indiana University.
David M. Traversi joined E*TRADE Group, Inc. in May 1996 as Corporate Senior
Vice President of the Company, President and Chief Operating Officer of
E*TRADE Online Ventures and Executive Director, Investment Banking and
Research of E*TRADE Securities. Before joining E*TRADE, Mr. Traversi served in
various positions at Montgomery Securities, an investment banking firm, from
June 1989 to May 1996, most recently as Managing Director, Corporate Finance
and Co-Head of the Financial Services Technology Group. He has a BS from
California State University at Chico, a JD from the University of California
at Davis and an MBA from the University of California at Berkeley. He has been
admitted to the bar in California and Alaska.
Thomas A. Bevilacqua has served as the Secretary of E*TRADE Group, Inc.
since May 1996 and also serves as a director of E*TRADE Online Ventures. Mr.
Bevilacqua has been a partner at the law firm of Brobeck, Phleger & Harrison
LLP since 1991. He has a BA and a JD from the University of California.
Richard S. Braddock has been a director of the Company since April 1996.
From June 1994 to September 1995, he served as a partner in Clayton, Dubilier
& Rice, a leveraged buy-out firm. From January 1993 to July 1993, he served as
Chief Executive Officer of Medco Containment. From 1974 to October 1992, Mr.
Braddock served in various capacities with a division of Citibank, including
as President and Chief Executive Officer from 1990 to October 1992 and as a
director from 1985. Mr. Braddock serves on the board of directors of Eastman
Kodak Company, True North Communications, an advertising company, ION Laser
Technology and Excimer Vision Leasing. He received a BA in History from
Dartmouth and an MBA from Harvard University.
William E. Ford has been a director of the Company since September 1995. Mr.
Ford is a managing member of General Atlantic Partners, LLC ("GAP LLC") and
has been with GAP LLC since July 1991. From August 1987 to July 1991, Mr. Ford
was an associate with Morgan Stanley & Co., Incorporated. Mr. Ford is also a
director of Envoy Corporation, a publicly traded health insurance claims
processing company, GT Interactive Software, a publicly traded software
company, Marcam Corporation, a publicly traded software company, SS&C
Technologies, Inc., a publicly traded software company, and several private
software companies in which GAP LLC or one of its affiliates is an investor.
Mr. Ford received a BA in Economics from Amherst College and an MBA from the
Stanford Graduate School of Business.
George Hayter has been a director of the Company since December 1995 and
currently provides consulting services to the Company. Mr. Hayter has served
as a partner of George Hayter Associates, a consulting firm, from 1990 to the
present. From 1976 to December 1990, he served with the London Stock Exchange,
serving in his final position as the Managing Director of Trading Markets
Division. Mr. Hayter serves on the boards of directors of Critchley Group PLC,
an electrical accessories company listed on the London Stock Exchange, Linea
Directa Aseguradora SA, a car insurance company in Spain, Pegasus Group PLC,
an accounting software company listed on the London Stock Exchange, and Active
Imaging PLC, a digital image processing manufacturer traded on the London AIM
Market. He received an MA in Natural Sciences from Queens' College, Cambridge,
England.
Bernard A. Newcomb was a co-founder of the Company, has a been a director
emeritus of the Company since May 1996 and served as a director from 1982 to
May 1996 and Vice President of Research and Development from 1982 to June
1996. Mr. Newcomb has a BS in Business from Oregon State University.
56
<PAGE>
Keith Petty has been a director of the Company since 1982. Mr. Petty was a
founding partner of the law firm of Jackson Tufts Cole & Black, LLP (formerly
Petty, Andrews, Tufts & Jackson) and retired from that firm in 1986. He
received a BS in Business (major in accounting) from the University of Idaho
and a JD from Stanford Law School, is a certified public accountant and has
been admitted to the bar in California and Idaho. Mr. Petty currently provides
business and legal consulting to start-up companies, and serves as a Director
for four other privately held for profit companies and two nonprofit
companies.
Lewis E. Randall has been a director of the Company since 1983. Mr. Randall
served both Apple Computer and Intel during their formative years, largely in
the capacity of software and hardware engineering management. Mr. Randall is a
private investor.
Lester C. Thurow has been a director of the Company since April 1996. Mr.
Thurow has been a Professor of Economics at Massachusetts Institute of
Technology ("MIT") since 1990. From 1987 to 1993, he served as Dean of MIT's
Sloan School of Management. Mr. Thurow received a BA in economics from
Williams College, an MA from Oxford and a Ph.D. from Harvard University.
Messrs. Braddock, Ford, Hayter, Petty, Randall and Thurow are independent
directors. Failure to maintain two independent directors could result in a
delisting of the Company's Common Stock from the Nasdaq National Market.
The members of the Board of Directors of the Company are classified into
three classes. One class will be elected at each annual meeting of
stockholders, with the members of each class to hold office for a three-year
term and until successors of such class have been elected and qualified. See
"Description of Capital Stock--Certain Provisions Affecting Stockholders."
Messrs. Porter, Cotsakos and Braddock will initially serve as Class I
directors of the Company until the annual meeting of stockholders held in
1999, or until their respective successors have been elected and qualified.
Messrs. Ford, Hayter and Petty will initially serve as Class II directors of
the Company until the annual meeting of stockholders held in 1998, or until
their respective successors have been elected and qualified. Messrs. Randall
and Thurow will initially serve as Class III directors of the Company until
the annual meeting of stockholders held in 1997, or until their respective
successors have been elected and qualified. Subject in the case of Mr.
Cotsakos to an employment agreement, all officers of the Company serve at the
pleasure of the Board. See "--Employment Contract." There are no family
relationships among any of the directors or officers of the Company.
BOARD COMMITTEES
The Board of Directors has created an Audit Committee, a Compensation
Committee and a Nominating Committee of the Board. The Audit Committee is
composed of William E. Ford (Chair), Lester C. Thurow and George Hayter and is
charged with reviewing the Company's annual audit and meeting with the
Company's independent accountants to review the Company's internal controls
and financial management practices. The Compensation Committee, which is
composed of Richard S. Braddock (Chair), William E. Ford and Keith Petty,
recommends to the Board of Directors compensation for the Company's key
associates and will administer the 1996 Stock Incentive Plan, the 1993 Stock
Option Plan, the 1983 Employee Incentive Stock Option Plan and the 1996 Stock
Purchase Plan. See "--Associate Benefit Plans." The Nominating Committee,
which is comprised of Christos M. Cotsakos (Chair), William A. Porter and
Lewis E. Randall, nominates for stockholder approval persons to membership on
the Board of Directors.
DIRECTOR COMPENSATION
Non-employee directors will receive $5,000 per year, in addition to $800 for
each meeting of the Board attended (and $400 for committee meetings attended).
In addition, each non-employee director will receive stock options pursuant to
the automatic option grant provisions of the Company's 1996 Stock Incentive
Plan. See "--Associate Benefit Plans." All directors will receive
reimbursement of reasonable out-of-pocket
57
<PAGE>
expenses incurred in connection with meetings of the Board. No director who is
an employee of the Company will receive compensation for services rendered as a
director.
In January 1996, Mr. Hayter was granted an option to purchase 60,000 shares
of Common Stock at an exercise price of $2.05 per share. In March 1996, Messrs.
Braddock, Ford, Petty, Randall and Thurow were each granted options to purchase
60,000 shares of Common Stock at an exercise price of $2.33 per share. The
options become exerciseable 20% after each year of service from the date of
grant.
In December 1995, the Company entered into a consulting arrangement with Mr.
Hayter, a director of the Company, to provide international business consulting
at a base rate of $1,500 for each day of consulting plus expenses, with the
exception of attendance at Board meetings. Mr. Hayter's fees were payable in
the form of $750 in cash and $750 in Common Stock (issued at fair market value
on the dates of services rendered). During the six months ended March 31, 1996,
Mr. Hayter was paid $23,520 and accrued 6,096 shares of Common Stock pursuant
to this arrangement. He also accrued 1,421 shares of Common Stock pursuant to
this arrangement from April 1, 1996 through June 6, 1996. The Company and Mr.
Hayter restated the consulting arrangement on June 7, 1996, at which time the
Common Stock component of the arrangement terminated.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company anticipates reincorporating in Delaware in July 1996, in part to
take advantage of certain provisions in Delaware's corporate law relating to
limitations on liability of corporate officers and directors. The Company
believes that the reincorporation into Delaware, the provisions of its Restated
Certificate of Incorporation and Restated Bylaws and the separate
indemnification agreements outlined below are necessary to attract and retain
qualified persons as directors and officers. The Company's Restated Certificate
of Incorporation limits the liability of directors to the maximum extent
permitted by Delaware law. This provision is intended to allow the Company's
directors the benefit of Delaware General Corporation Law, which provides that
directors of Delaware corporations may be relieved of monetary liabilities for
breach of their fiduciary duties as directors, except under certain
circumstances, including breach of their duty of loyalty, acts or omissions not
in good faith or involving intentional misconduct or a knowing violation of
law, unlawful payments or dividends or unlawful stock repurchases or
redemptions or any transaction from which the director derived an improper
personal benefit. The Company's Restated Bylaws provide that the Company shall
indemnify its officers and directors to the fullest extent provided by Delaware
law. The Restated Bylaws authorize the use of indemnification agreements and
the Company intends to enter into such agreements with each of its directors
and executive officers. The Company has been advised by the SEC that, in the
SEC's view, indemnification for liabilities arising under the Securities Act is
contrary to the federal securities laws and, therefore, unenforceable.
The Company intends to obtain officer and director liability insurance with
respect to liabilities arising out of certain matters, including matters
arising under the Securities Act.
There is no pending litigation or proceeding involving a director, officer,
associate or other agent of the Company as to which indemnification is being
sought, nor is the Company aware of any threatened litigation that may result
in claims for indemnification by any director, officer, associate or other
agent.
EXECUTIVE COMPENSATION
Summary of Cash and Other Compensation
The following table sets forth the compensation for services rendered to the
Company during the year ended September 30, 1995, awarded to or earned by the
three most highly compensated executive officers of the Company whose combined
salary and bonus were in excess of $100,000 (the "Named Executive Officers").
58
<PAGE>
SUMMARY COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
ANNUAL COMPENSATION AWARDS
------------------------------------- ------------
SECURITIES
NAME AND SALARY BONUS OTHER ANNUAL UNDERLYING
PRINCIPAL POSITION YEAR ($) ($) COMPENSATION OPTIONS (#)
------------------ ---- -------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
William A. Porter.......... 1995 $140,713(3) $22,395 $1,315(4) --
Chief Executive Officer
and Chairman of the
Board(2)
Wayne H. Heldt............. 1995 $127,500(6) $21,664 $ 629(4) 1,080,000
President(5)
Bernard A. Newcomb(7)...... 1995 $112,709(8) $14,745 $ 963(4) --
Vice President of Research
and Development
</TABLE>
- --------
(1) In accordance with the rules of the SEC, the compensation described in
this table does not include medical, group life insurance or other
benefits received by the Named Executive Officers that are available
generally to all salaried employees of the Company, and certain
perquisites and other personal benefits received by the Named Executive
Officers that do not exceed the lesser of $50,000 or 10% of any such
officer's salary and bonus disclosed in this table.
(2)Since April 1996, Mr. Porter has served as Chairman of the Board.
(3)Includes $5,000 paid to Mr. Porter in his capacity as a director.
(4) Represents employer contributions to the Company's 401(k) Plan.
(5) Mr. Heldt now serves as Corporate Vice President and Managing Director,
International Affairs.
(6) Includes $5,000 paid to Mr. Heldt in his capacity as a director.
(7) Mr. Newcomb now serves as a director emeritus of the Company.
(8) Includes $5,000 paid to Mr. Newcomb in his capacity as a director.
Stock Option Grants to Named Executive Officers
No stock options were granted to the Named Executive Officers during the
year ended September 30, 1995.
Option Exercises and Holdings
The following table sets forth certain information with respect to exercises
of stock options during the year ended September 30, 1995 by the Named
Executive Officers and with respect to stock options held by each of the Named
Executive Officers as of September 30, 1995.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS/SARS
NUMBER OF OPTIONS/SARS AT AT SEPTEMBER 30,
SHARES VALUE SEPTEMBER 30, 1995 1995($)(2)
ACQUIRED ON REALIZED ------------------------- -------------------------
NAME EXERCISE(#) ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
William A. Porter....... -- -- -- -- -- --
Wayne H. Heldt.......... 127,980 $179,098 520,020 432,000 $918,702 $763,200
Bernard A. Newcomb...... -- -- -- -- -- --
</TABLE>
(footnotes on following page)
59
<PAGE>
(footnotes from preceding page)
(1) The amount set forth represents the difference between the fair market
value of the shares at the time of exercise, as determined by the Board of
Directors, and the exercise price of the option, multiplied by the
applicable number of options.
(2) The amount set forth represents the difference between the fair market
value of the shares at September 30, 1995, as determined by the Board of
Directors, and the exercise price of the option, multiplied by the
applicable number of options.
ASSOCIATE BENEFIT PLANS
Stock Incentive Plan and Option Plans
The Company's 1996 Stock Incentive Plan (the "1996 Plan") is intended to
serve as the successor equity incentive program to the Company's existing 1993
Stock Option Plan (the "1993 Plan") which is the successor to the Company's
1983 Employee Incentive Stock Option Plan (the "1983 Plan"). The 1996 Plan
became effective on May 31, 1996 upon adoption by the Board of Directors.
The authorized reserves under the 1996 Plan consist of all of the
outstanding options under the 1993 Plan and 1983 Plan, which are incorporated
into the 1996 Plan, and an additional 4,000,000 shares, which have been
authorized for issuance under the 1996 Plan. No further option grants will be
made under the 1993 Plan and the 1983 Plan. The incorporated options will
continue to be governed by their existing terms, unless the Plan Administrator
elects to extend one or more features of the 1996 Plan to those options.
However, except as otherwise noted below, the outstanding options under the
1993 Plan and the 1983 Plan contain substantially the same terms and
conditions summarized below for the Discretionary Option Grant Program in
effect under the 1996 Plan.
The 1996 Plan is divided into three separate components: (i) the
Discretionary Option Grant Program under which eligible individuals in the
Company's employ or service (including officers, non-employee Board members
and consultants) may, at the discretion of the Plan Administrator, be granted
options to purchase shares of Common Stock at an exercise price not less than
the fair market value of those shares on the grant date, (ii) the Stock
Issuance Program under which such individuals may, in the Plan Administrator's
discretion, be issued shares of Common Stock directly, through the purchase of
such shares at a price not less than the fair market value of those shares at
the time of issuance or as a bonus tied to the performance of services, and
(iii) the Automatic Option Grant Program under which option grants will
automatically be made at periodic intervals to eligible non-employee Board
members to purchase shares of Common Stock at an exercise price equal to the
fair market value of those shares on the grant date.
The Discretionary Option Grant Program and the Stock Issuance Program will
be administered by the Compensation Committee of the Board. The Compensation
Committee as Plan Administrator will have complete discretion to determine
which eligible individuals are to receive option grants or stock issuances,
the time or times when such option grants or stock issuances are to be made,
the number of shares subject to each such grant or issuance, the status of any
granted option as either an incentive stock option or a non-statutory stock
option under the federal tax laws, the vesting schedule to be in effect for
the option grant or stock issuance and the maximum term for which any granted
option is to remain outstanding. The administration of the Automatic Option
Grant Program will be self-executing in accordance with the express provisions
of each such program.
The exercise price for the shares of Common Stock subject to option grants
made under the 1996 Plan may be paid in cash or in shares of Common Stock
valued at fair market value on the exercise date. The option also may be
exercised through a same-day sale program without any cash outlay by the
optionee. In addition, the Plan Administrator may provide financial assistance
to one or more optionees in the exercise of their outstanding options by
allowing such individuals to deliver a full-recourse, interest-bearing
promissory note in payment of the exercise price and any associated
withholding taxes incurred in connection with such exercise.
60
<PAGE>
In the event that the Company is acquired by merger or asset sale, each
outstanding option under the Discretionary Option Grant Program which is not
to be assumed by the successor corporation will automatically accelerate in
full, and all unvested shares under the Stock Issuance Program will
immediately vest, except to the extent the Company's repurchase rights with
respect to those shares are to be assigned to the successor corporation. The
Plan Administrator will have the authority under the Discretionary Option
Grant and Stock Issuance Programs to grant options and to structure repurchase
rights so that the shares subject to those options or repurchase rights will
automatically vest in the event the individual's service is terminated,
whether involuntarily or through a resignation for good reason, within twelve
(12) months following (i) a merger or asset sale in which those options are
assumed or those repurchase rights are assigned or (ii) a hostile change in
control of the Company effected by a successful tender offer for more than 50%
of the outstanding voting stock or by proxy contest for the election of Board
members. Options outstanding under the 1993 Plan upon merger or asset sale
will be assumed by the acquiring entity. In the event the acquiring entity
refuses to assume or substitute the options or in the event of a dissolution
or liquidation of the Company, the options will expire on a date at least 20
days after the plan administrator gives written notice to the optionees
specifying the terms and conditions of such termination.
Stock appreciation rights are authorized for issuance under the
Discretionary Option Grant Program that provide the holders with the election
to surrender their outstanding options for an appreciation distribution from
the Company equal to the excess of (i) the fair market value of the vested
shares of Common Stock subject to the surrendered option over (ii) the
aggregate exercise price payable for such shares. Such appreciation
distribution may be made in cash or in shares of Common Stock. There are
currently no outstanding stock appreciation rights under the 1993 Plan or the
1983 Plan.
The Plan Administrator has the authority to effect the cancellation of
outstanding options under the Discretionary Option Grant Program (including
options incorporated from the 1993 Plan and the 1983 Plan) in return for the
grant of new options for the same or different number of option shares with an
exercise price per share not less than the fair market value of the Common
Stock on the new grant date.
Under the Automatic Option Grant Program, each individual who is serving as
a non-employee member of the Board on the date the underwriting agreement for
this offering is executed and who has not previously received a stock option
grant from the Company will receive at that time an option grant for 20,000
shares of Common Stock with an exercise price equal to the price per share at
which the Common Stock is to be sold in this offering. Each individual who
first joins the Board after the effective date of this offering as a non-
employee Board member will also receive an option grant for 20,000 shares of
Common Stock at the time of his or her commencement of Board service, provided
such individual has not otherwise been in the prior employ of the Company. In
addition, at each annual stockholders meeting, beginning with the 1997 annual
meeting, each individual who is to continue to serve as a non-employee Board
will receive an option grant to purchase 5,000 shares of Common Stock, whether
or not such individual has been in the prior employ of the Company.
Each automatic grant will have an exercise price equal to the fair market
value per share of Common Stock on the grant date and will have a maximum term
of 10 years, subject to earlier termination following the optionee's cessation
of Board service. Each automatic option will be immediately exercisable;
however, any shares purchased upon exercise of the option will be subject to
repurchase, at the option exercise price paid per share, should the optionee's
service as a non-employee Board member cease prior to vesting in the shares.
The 20,000-share grant will vest in four equal and successive annual
installments over the optionee's period of Board service. Each additional
5,000-share grant will vest upon the optionee's completion of two years of
Board service measured from the grant date. However, each outstanding option
will immediately vest upon (i) certain changes in the ownership or control of
the Company or (ii) the death or disability of the optionee while serving as a
Board member.
The Board may amend or modify the 1996 Plan at any time. The 1996 Plan will
terminate on May 30, 2006, unless sooner terminated by the Board.
61
<PAGE>
Options to purchase an aggregate of 5,619,840 shares were outstanding under
the 1996 Plan, the 1993 Plan and the 1983 Plan as of June 30, 1996. Thomas A.
Bevilacqua, in his capacity as a director of E*TRADE Online Ventures, received
in May 1996 options to purchase 30,000 shares of Common Stock of the Company
with an exercise price of $9.50 per share. This number of option shares
represents one-half the options granted to nonemployee directors of the
Company. See "--Director Compensation."
1996 Stock Purchase Plan
The Company's 1996 Stock Purchase Plan (the "Purchase Plan") was adopted by
the Board of Directors on May 31, 1996. The Purchase Plan is designed to allow
eligible associates of the Company and participating subsidiaries to purchase
shares of Common Stock, at semi-annual intervals, through their periodic
payroll deductions under the Purchase Plan, and a reserve of 650,000 shares of
Common Stock has been established for this purpose.
The Purchase Plan will be implemented in a series of successive offering
periods, each with a maximum duration of 24 months. However, the initial
offering period will begin on the day the underwriting agreement is executed
in connection with this offering and will end on the last business day in July
1998.
Individuals who are eligible associates on the start date of any offering
period may enter the Purchase Plan on that start date or on any subsequent
semi-annual entry date (February 1 or August 1 each year). Individuals who
become eligible associates after the start date of the offering period may
join the Purchase Plan on any subsequent semi-annual entry date within that
period.
Payroll deductions may not exceed 10% of the participant's base salary for
each semi-annual period of participation, and the accumulated payroll
deductions will be applied to the purchase of shares on the participant's
behalf on each semi-annual purchase date (the last business day in January and
July each year, with the first such purchase date to occur on January 31,
1997) at a purchase price per share not less than 85% of the lower of (i) the
fair market value of the Common Stock on the participant's entry date into the
offering period or (ii) the fair market value on the semi-annual purchase
date. Should the fair market value of the Common Stock on any semi-annual
purchase date be less than the fair market value of the Common Stock on the
first day of the offering period, then the current offering period will
automatically end and a new 24-month offering period will begin, based on the
lower fair market value.
The Board may amend or modify the Purchase Plan following any semi-annual
purchase date. The Purchase Plan will terminate on the last business day in
July 2006, unless sooner terminated by the Board.
401(k) Plan
Effective January 1, 1995, the Company adopted a 401(k) (the "401(k) Plan")
that covers all eligible associates of the Company. An associate is eligible
to participate in the plan upon hire, and may elect to defer, in the form of
contributions to the 401(k) Plan, up to the $9,500 limitation imposed by
Internal Revenue Code Section 402(g). Associates' contributions are invested
in specific assets, specific funds or other investments permitted under the
401(k) Plan according to the directions of each individual associate and the
directed investment procedure. The contributions are fully vested and
nonforfeitable at all times. Upon completion of one year of service, the
401(k) Plan provides for employer contributions to the 401(k) Plan of an
amount equal to 25% of the amount contributed by all eligible associates, up
to 2% for individual associates total compensation. The Company has made
contributions of $5,994 and $11,938 for the year ended September 30, 1995 and
the nine months ended June 30, 1996, respectively.
Bonus Plan
Effective October 1, 1994, the Company adopted a bonus plan (the "Bonus
Plan") to allow all eligible associates to share a portion of the Company's
profits. Thirty days after the end of each fiscal quarter, the
62
<PAGE>
Company will pay 20% of any operating profit that is in excess of 10% of gross
revenue into the Bonus Plan. Each eligible associate will be allocated a
percent of the total Bonus Plan pool based on the Company's total salary base,
that associate's gross earnings for the quarter and designation by group.
Bonus payments are distributed over time to associates, who receive 50% of the
bonus payment at the end of the month following the end of the quarter, and
the remaining 50% over the succeeding three-year time period in increments of
one-sixth. If an associate leaves the Company for any reason other than
disability, death or retirement, that associate's accumulation of earnings in
the bonus pool remains in the pool as additional earnings for the remaining
eligible associates.
EMPLOYMENT CONTRACT
Christos M. Cotsakos entered into an employment agreement with the Company
in March 1996. The agreement provides for annual base salary compensation of
$250,000. Mr. Cotsakos' base salary is subject to adjustment as follows: if,
at the end of any fiscal quarter during the term of the agreement, the
Company's annualized revenues equal or exceed $75 million and there is a
positive net income at the end of such quarter, the base salary shall be
increased to an annualized basis of $320,000; and if, at the end of any fiscal
quarter during the term of the agreement, the Company's annualized revenues
equal or exceed $100 million and there is a positive net income at the end of
such quarter, the base salary shall be increased to an annualized basis of
$390,000. Mr. Cotsakos is also eligible to participate in the Company's bonus
plan and other benefit plans.
Pursuant to the employment agreement, on March 29, 1996, Mr. Cotsakos was
granted options to purchase 600,000 shares at the Company's Common Stock at an
exercise price of $2.33 per share under the Company's 1993 Stock Option Plan.
In addition, on May 15, 1996, Mr. Cotsakos was granted additional options to
purchase 480,000 shares of Common Stock at the then-current fair market value.
The options vest for 20% of the shares on September 1, 1996 and 80% of the
shares in equal monthly installments of employment over a period of four
years. These options are exercisable until March 28, 2006, subject to certain
exceptions.
The employment agreement terminates on December 31, 2001, but is renewable
for successive one-year periods, unless either party gives 180 days' notice.
Upon termination of Mr. Cotsakos' employment, he is entitled to severance
payments as follows: (i) payment equal to five full years of current total
annual compensation if termination within three years after a change in
control of the Company (as defined) or if he elects to terminate his
employment for good reason (as defined) within three years after any change in
control, and (ii) payment equal to four full years of (A) current total annual
compensation if he is terminated by the Company other than for cause (as
defined) and such termination is not described in (i) above and (B) he elects
to terminate his employment for good reason and such termination is not
described in (i) above. In addition, Mr. Cotsakos' options become immediately
exercisable upon a change in control or upon the termination of Mr. Cotsakos
other than for cause or at his election for good reason.
The Company is in the process of establishing revised terms of employment
for Bernard A. Newcomb, a founder of the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the year ended September 30, 1995, the Company's Compensation
Committee consisted of William A. Porter, Keith Petty and Lewis E. Randall.
Mr. Porter was an executive officer of the Company during the year ended
September 30, 1995.
In September 1990, the Company entered into a restructuring agreement with
all of its long-term creditors, whereby certain obligations of the Company,
totaling $999,508, were converted to subordinated and unsecured promissory
notes bearing interest at a rate of seven percent per annum (the "7% Notes").
At that time, the Company's founders, William Porter, the Chairman of the
Board, and Bernard Newcomb, then a director and Vice President of Research and
Development, received 7% Notes in principal amounts of $230,316 and $152,490,
respectively. The Company's indebtedness to Messrs. Porter and Newcomb
resulted from accrued but unpaid salaries owed to them. In September 1995, all
outstanding principal and accrued interest on the 7% Notes was repaid. Messrs.
Porter and Newcomb received $318,276 and $210,741, respectively, pursuant to
the 7% Notes.
63
<PAGE>
CERTAIN TRANSACTIONS
PREFERRED STOCK FINANCING TRANSACTIONS
On September 28, 1995, the Company sold 100,000 shares of Series A Preferred
Stock for $123 per share. On April 10, 1996, the Company sold 20,336 shares of
Series B Preferred Stock for $140 per share. On June 6, 1996, the Company sold
11,180 shares of Series C Preferred Stock for $805 per share. All Preferred
Stock was sold in private financings, pursuant to preferred stock purchase
agreements and investors' rights agreements. The terms of those agreements
(with the exception of amount and price) are substantially similar for the
Series A, Series B and Series C, under which the Company made the standard
representations, warranties and covenants, and which provided the purchasers
thereunder with rights of first offer, tag-along rights, preemptive rights,
and demand and piggyback registration rights. All of the material terms of the
Series A and Series B agreements, with the exception of the registration
rights, will terminate upon the effective date of the Registration Statement
of which this Prospectus is a part. All shares of Preferred Stock will convert
into Common Stock on a 60-for-1 basis automatically upon the completion of
this offering. See "Shares Eligible for Future Sale--Registration Rights." The
purchasers of the Preferred Stock included, among others, the following
directors, entities associated with directors, and holders of 5% or more of
the Company's Common Stock:
<TABLE>
<CAPTION>
SHARES OF PREFERRED STOCK PURCHASED
--------------------------------------
INVESTOR SERIES A SERIES B SERIES C
-------- ------------ ----------- ------------
<S> <C> <C> <C>
General Atlantic Partners II, L.P.(1).. 87,742 6,267 --
GAP Coinvestment Partners, L.P.(1)..... 12,258 876 --
Christos M. Cotsakos(2)................ -- 6,050 --
Richard S. Braddock.................... -- 7,143 --
SOFTBANK Holdings Inc.(3).............. -- -- 11,180
</TABLE>
- --------
(1) The general partner of General Atlantic Partners II, L.P. ("GAP II") is
General Atlantic Partners, LLC ("GAP LLC"), a Delaware limited liability
company. William E. Ford, a director of the Company, is one of the
managing members of GAP LLC. The same managing members of GAP LLC are the
general partners of GAP Coinvestment Partners, L.P. ("GAP Coinvestors").
Mr. Ford disclaims beneficial ownership of shares owned by GAP II and GAP
Coinvestment except to the extent of his pecuniary interest.
(2) Includes shares held by the Cotsakos Revocable Trust under Agreement dated
September 3, 1987, shares held in an IRA account and shares held as a
custodian for his daughter. Mr. Cotsakos disclaims beneficial ownership of
shares held as a custodian and one-half of the shares held by the Cotsakos
Revocable Trust.
(3) E*TRADE is exploring a business relationship with Upgrade Corporation of
America dba UCA&L, a company in which SOFTBANK indirectly owns a majority
interest. The Company has no other relationship with SOFTBANK or SOFTBANK
Corporation other than SOFTBANK's investment in the Company.
OTHER TRANSACTIONS
In September 1990, the Company entered into a restructuring agreement with
all of its long-term creditors, whereby certain obligations of the Company,
totaling $999,508, were converted to subordinated and unsecured promissory
notes. At that time, the Company's founders, William Porter, the Chairman of
the Board, and Bernard Newcomb, then a director and Vice President of Research
and Development, received certain of the promissory notes. See "Management--
Compensation Committee Interlocks and Insider Participation."
In December 1995, the Company entered into a consulting arrangement with
George Hayter, a director of the Company, to provide international business
consulting. The agreement was modified in June 1996. See "Management--Director
Compensation."
64
<PAGE>
From January 1995 to December 1995, Kathy Levinson, the President and Chief
Operating Officer of E*TRADE Securities was self-employed as a consultant.
During this period, Ms. Levinson, worked under contract with the Company,
pursuant to which she provided consulting services to assist with E*TRADE's
transition to self-clearing operations. During the term of this agreement, Ms.
Levinson was paid $166,000 by the Company, and received a warrant to purchase
300,000 shares of Common Stock, which warrant was fully exercised by January
1996, and options to purchase 300,000 shares of Common Stock which vest at a
rate of 20% per year over a period of five years and will terminate on January
2, 2005.
In March 1996, Christos M. Cotsakos entered into an employment agreement
with the Company. See "Management--Employment Contracts."
The Company believes that each of these transactions were on terms no less
favorable to the Company than could be obtained from unaffiliated third
parties and were in connection with bona fide business purposes. As a matter
of policy, all future transactions between the Company and any of its
officers, directors or principal stockholders will be approved by a majority
of the independent and disinterested members of the Board of Directors, will
be on terms no less favorable to the Company than could be obtained from
unaffiliated third parties and will be in connection with bona fide business
purposes.
65
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of the Company's Common Stock as of June 30, 1996 and as adjusted to
reflect the sale of shares of Common Stock offered hereby by (i) each person
who is known to the Company to own beneficially more than 5% of the
outstanding shares of the Common Stock of the Company, (ii) each Named
Executive Officer, (iii) each director, (iv) each of the Selling Stockholders
and (v) all directors and executive officers as a group. Unless otherwise
indicated below, to the knowledge of the Company, all persons listed below
have sole voting and investment power with respect to their shares of Common
Stock, except to the extent authority is shared by spouses under applicable
law.
<TABLE>
<CAPTION>
SHARES TO BE
SHARES BENEFICIALLY BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
NAME OFFERING NUMBER OF OFFERING(2)
---- ------------------- SHARES TO BE -----------------
MANAGEMENT AND OTHER SOLD IN
SIGNIFICANT STOCKHOLDERS NUMBER PERCENT(1) THE OFFERING NUMBER PERCENT
------------------------ --------- --------- ------------ --------- -------
<S> <C> <C> <C> <C> <C>
William A. Porter(3)(4)(5). 3,086,940 12.7% -- 3,086,940 10.9%
Bernard A. Newcomb(4)...... 2,420,820 10.0 -- 2,420,820 8.5
Christos M. Cotsakos(4)(6). 1,443,000 5.9 -- 1,443,000 4.9
Wayne H. Heldt(4)(7)....... 700,020 2.8 -- 700,020 2.4
Richard S. Braddock........ 428,580 1.8 -- 428,580 1.5
William E. Ford(8)......... -- * -- -- *
George Hayter.............. 7,517 * -- 7,517 *
Keith Petty(9)............. 364,620 1.5 -- 364,620 1.3
Lewis E. Randall(10)....... 399,000 1.6 -- 399,000 1.4
Lester C. Thurow........... -- * -- -- *
General Atlantic Partners, 6,872,580 28.2 -- 6,872,580 24.2
LLC(11)...................
All directors and executive
officers as a group
(16 persons)(12).......... 6,228,617 25.5 -- 6,228,617 21.4
<CAPTION>
OTHER SELLING STOCKHOLDERS
--------------------------
<S> <C> <C> <C> <C> <C>
Kristin Marit Dahl(13)..... 213,000 * 90,000 123,000 *
R.D. Fritts................ 249,900 1.0 2,100 247,800 *
Fred Haeckl & Ann G.
Haeckl, Trustees, Fred
Haeckl & Ann G. Haeckl
Family Trust 269 U/A Dated
08/28/91.................. 576,600 2.4 36,600 540,000 1.9
William R. Happ & Roxann M.
Happ, Trustees, William &
Roxann Happ Revocable
Living Trust Dated
4/12/91................... 668,880 2.8 47,530 621,350 2.2
Susan M. Harning........... 20,820 * 8,820 12,000 *
Hawaiian Trust Company,
Ltd., Agent for the
Alexander S. Atherton
Family Limited
Partnership(14)........... 54,840 * 54,840 -- --
Charles R. Huegel.......... 26,040 * 17,040 9,000 *
Jackson, Tufts, Cole &
Black Profit Sharing Plan
f/b/o/ Templeton C. Peck.. 7,200 * 7,200 -- --
Robert C. & Normalee A.
Jacobson, as Joint
Tenants(15)............... 75,720 * 18,930 56,790 *
Robert C. Jacobson,
Individual Retirement
Account(16)............... 60,000 * 60,000 -- --
Brian S. Kahn & Julie O.
Kahn, Trustees, Kahn
Revocable Family Trust.... 60,720 * 12,000 48,720 *
</TABLE>
66
<PAGE>
<TABLE>
<CAPTION>
SHARES NUMBER OF
BENEFICIALLY SHARES TO BE SHARES TO BE
OWNED PRIOR TO SOLD IN BENEFICIALLY OWNED
NAME OFFERING THE OFFERING AFTER OFFERING(2)
---- ----------------- ------------ ---------------------
OTHER SELLING
STOCKHOLDERS NUMBER PERCENT(1) NUMBER PERCENT
------------- ------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Jacqueline Lancaster..... 26,040 * 14,040 12,000 *
Larkin S. Lapides........ 12,000 * 1,000 11,000 *
Diane F. Lee(17)......... 147,660 * 27,660 120,000 *
Frank T. McIntosh........ 26,040 * 11,040 15,000 *
Kathleen P. McIntosh..... 52,020 * 4,020 48,000 *
Diane Munro.............. 78,060 * 15,000 63,060 *
Robert Donald Murie &
Nancy Dolores Murie,
Trustees, Robert D.
Murie and Nancy D. Murie
Intervivos Trust Dated
August 16, 1993......... 52,020 * 15,000 37,020 *
Raymond J. Noorda &
Lewena Noorda........... 465,420 1.9 100,460 364,960 1.3
Arden Orrel.............. 9,000 * 4,500 4,500 *
Jeannie Pasturel......... 15,000 * 4,500 10,500 *
Herbert & Marlene
Swanson(18)............. 88,020 * 6,000 82,020 *
John M. & Lynn Thornburn. 104,100 * 7,000 97,100 *
Thomas A. & Rosemary
Tisch Trust............. 124,860 * 72,000 52,860 *
Brenda L. Vogel.......... 26,040 * 720 25,320 *
Agnes Waters............. 36,420 * 9,000 27,420 *
Robert L. Waymost &
Catherine M. Waymost,
Trustees, Waymost Family
Revocable Trust......... 60,720 * 12,000 48,720 *
Thomas R. Yates/Wayne S.
Fuller, as Joint
Tenants................. 20,820 * 6,000 14,820 *
-------
Total.................................. 665,000
=======
</TABLE>
- --------
* Less than 1%.
(1) Based on 24,392,597 shares outstanding on June 30, 1996.
(2) Assumes no exercise of the Underwriters' over-allotment option.
(3) If the Underwriters exercise their over-allotment option to purchase up
to an additional 699,750 shares of Common Stock, then William A. Porter
will sell up to 240,000 shares of Common Stock to the Underwriters and
Mr. Porter will beneficially own 2,846,940 shares of Common Stock, or
approximately 9.9% of the outstanding shares.
(4) The address of Mr. Porter, Mr. Newcomb, Mr. Cotsakos and Mr. Heldt is c/o
E*TRADE Group, Inc., Four Embarcadero Place, 2400 Geng Road, Palo Alto,
California 94303.
(5) Excludes 200,460 shares of Common Stock held by Mr. Porter's wife. Mr.
Porter disclaims beneficial ownership of such shares.
(6) Includes 198,000 shares held by the Cotsakos Revocable Trust under
Agreement dated September 3, 1987, 105,000 shares held in an IRA account
and 60,000 shares held as a custodian for his daughter. Mr. Cotsakos
disclaims beneficial ownership of shares held as a custodian and one-half
the shares held by the Cotsakos Revocable Trust. Also includes 1,080,000
shares of Common Stock which Mr. Cotsakos has the option to purchase. See
"Management--Employment Contract" for a description of the vesting of
these options to purchase Common Stock.
(7) Includes 420,000 shares of Common Stock issuable upon exercise of stock
options that are exercisable within 60 days.
(8) Excludes 6,030,120 shares held by General Atlantic Partners II, L.P. and
842,460 shares held by GAP Coinvestment Partners, L.P. See footnote 11
below.
(9) Represents shares held by Keith and Gail Wells Petty, as Trustees or the
Keith and Gail Wells Petty Trust.
67
<PAGE>
(10) Excludes 96,000 shares held solely by Mr. Randall's wife. Mr. Randall
disclaims beneficial ownership of such shares.
(11) Includes 6,030,120 shares held by General Atlantic Partners II, L.P.
("GAP II") and 842,460 shares held by GAP Coinvestment Partners, L.P.
("GAP Coinvestment"). The general partner of GAP II is General Atlantic
Partners, LLC ("GAP LLC"), a Delaware limited liability company. Mr.
Ford, a director of the Company, is one of the managing members of GAP
LLC. The same managing members of GAP LLC are the general partners of GAP
Coinvestment. Mr. Ford disclaims beneficial ownership of shares owned by
GAP II and GAP Coinvestment except to the extent of his pecuniary
interest therein. The address for GAP II, GAP Coinvestment, GAP LLC and
Mr. Ford is: c/o General Atlantic Service Corporation, Three Pickwick
Plaza, Greenwich, CT 06830.
(12) Includes the information in the notes above, as applicable. In addition,
includes an additional 248,820 shares of Common Stock issuable upon
exercise of stock options that are exercisable within 60 days, which
options are held by executive officers of the Company who are not
identified in the above table. Excludes 1,080,000 shares of Common Stock
which Mr. Cotsakos has the option to purchase. Excludes shares held by
Mr. Newcomb who is a director emeritus, but not currently an executive
officer of the Company.
(13) Includes 6,000 shares of Common Stock issuable upon exercise of stock
options held by Ms. Dahl exercisable within 60 days. Excludes 9,000
shares of Common Stock issuable upon exercise of stock options held by
Ms. Dahl not exercisable within 60 days.
(14) Excludes 54,840 shares held in trust for Mr. Atherton's wife.
(15) Excludes amounts held by Robert C. Jacobson, Individual Retirement
Account, below.
(16) Excludes amounts held by Robert C. & Normalee A. Jacobson, as Joint
Tenants, above.
(17) Excludes 2,640 shares held as a custodian.
(18) Includes 64,020 shares of Common Stock issuable upon exercise of stock
options held by Mr. Swanson exercisable within 60 days. Excludes 108,000
shares of Common Stock issuable upon exercise of stock options held by
Mr. Swanson not exercisable within 60 days.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the completion of this offering, the authorized capital stock of the
Company will consist of 50,000,000 shares of Common Stock, $.01 par value per
share ("Common Stock"), and 1,000,000 shares of Preferred Stock, $.01 par
value per share ("Preferred Stock").
COMMON STOCK
Subject to the rights of holders of Preferred Stock, the holders of
outstanding shares of Common Stock are entitled to share ratably in dividends
declared out of assets legally available therefor at such time and in such
amounts as the Board of Directors may from time to time lawfully determine.
Each holder of Common Stock is entitled to one vote for each share held. The
Common Stock is not entitled to conversion or preemptive rights and is not
subject to redemption or assessment. Subject to the rights of holders of any
outstanding Preferred Stock, upon liquidation, dissolution or winding up of
the Company, any assets legally available for distribution to stockholders as
such are to be distributed ratably among the holders of the Common Stock at
that time outstanding. As of June 30, 1996, giving effect to the conversion of
all outstanding shares of Preferred Stock into Common Stock automatically upon
the completion of this offering, there were 24,392,597 shares of Common Stock
outstanding held of record by approximately 150 stockholders. The Common Stock
presently outstanding is, and the Common Stock issued in this offering will
be, fully paid and nonassessable. The Common Stock has been approved for
quotation on the Nasdaq National Market under the trading symbol "EGRP."
PREFERRED STOCK
Preferred Stock may be issued in series from time to time with such
designations, relative rights, priorities, preferences, qualifications,
limitations and restrictions thereof, to the extent that such are not fixed in
the Company's Restated Certificate of Incorporation, as the Board of Directors
determines. The rights, preferences, limitations and restrictions of different
series of Preferred Stock may differ with respect to dividend rates, amounts
payable on liquidation, voting rights, conversion rights, redemption
provisions, sinking fund provisions and other matters. The Board of Directors
may authorize the issuance of Preferred Stock which ranks senior to the Common
Stock with respect to the payment of dividends and the distribution of assets
on liquidation. In addition, the Board of Directors is authorized to fix the
limitations and restrictions, if any, upon the payment of dividends on Common
Stock to be effective while any shares of Preferred Stock are outstanding. The
Board of Directors, without stockholder approval, can issue Preferred Stock
with voting and conversion rights which could adversely affect the voting
power of the holders of Common Stock. The issuance of Preferred Stock may have
the effect of delaying, deferring or preventing a change in control of the
Company. Upon the completion of the offering, there will be no shares of
Preferred Stock outstanding and the Company has no present intention to issue
any shares of Preferred Stock. See "Risk Factors--Effects of Certain Charter
and Bylaw Provisions."
CERTAIN PROVISIONS AFFECTING STOCKHOLDERS
Delaware, like many other states, permits a corporation to adopt a number of
measures through amendment of the corporate charter or bylaws or otherwise,
which may have the effect of delaying or deterring any unsolicited takeover
attempts. The right of stockholders to cumulate votes in the election of
directors is eliminated. In addition, Section 203 of the Delaware General
Corporation Law, which will apply to the Company if its Common Stock is
authorized for quotation on the Nasdaq National Market, restricts certain
"business combinations" with "interested stockholders" for three years
following the date that person becomes an interested stockholder, unless the
Board of Directors approves the business combination. By delaying or deterring
unsolicited takeover attempts, these provisions could adversely affect
prevailing market prices for the Company's Common Stock. See "Risk Factors--
Effects of Certain Charter and Bylaw Provisions."
69
<PAGE>
The Company's Restated Certificate of Incorporation and Restated Bylaws
contain certain provisions that could discourage potential takeover attempts
and make more difficult attempts by stockholders to change management. The
Restated Certificate of Incorporation and the Restated Bylaws provide for a
classified Board of Directors and permit the Board to create new directorships
and to elect new directors to serve for the full term of the class of
directors in which the new directorship was created. The terms of the
directors are staggered to provide for the election of approximately one-third
of the Board members each year, with each director serving a three-year term.
The Board (or its remaining members, even though less than a quorum) is also
empowered to fill vacancies on the Board occurring for any reason for the
remainder of the term of the class of directors in which the vacancy occurred.
Stockholders may remove a director or the entire Board only for cause, and
such removal requires the affirmative vote of two-thirds of the outstanding
voting stock. The Company's Restated Certificate of Incorporation provides
that stockholders may not take action by written consent but only at a
stockholders' meeting and that special meetings of the stockholders of the
Company may only be called by the Chairman of the Board, the President, a
majority of the directors or the holders of not less than 10% of the
outstanding voting stock. The Restated Bylaws also establish procedures,
including advance notice procedures with regard to the nomination of
candidates for election as directors, and stockholder proposals.
The Company's Restated Certificate of Incorporation provides that, in
addition to the requirements of the Delaware General Corporation Law, any
"Business Combination" (as defined in the Certificate of Incorporation)
requires the affirmative vote of two-thirds of the votes entitled to be cast
by the holders of the Company's then outstanding capital stock, voting
together as a class, unless two-thirds of the directors approve the proposed
transaction.
A "Business Combination" includes (i) a merger or consolidation of the
Company or any of its subsidiaries with an "Interested Stockholder" (as
defined in the Restated Certificate of Incorporation) or any other corporation
which is, or after such transaction would be, an "Affiliate" or "Associate"
(as such terms are defined in the Securities Exchange Act of 1934, as amended)
of an Interested Stockholder, (ii) any sale, lease, exchange, mortgage,
pledge, transfer or other disposition to or with, or proposed by or on behalf
of, any Interested Stockholder or any Affiliate or Associate of any Interested
Stockholder involving any assets of the Company or any subsidiary that
constitute 5% or more of the total assets of the Company, (iii) the issuance
or transfer by the Company or any subsidiary of any securities of the Company
or any subsidiary to, or proposed by or on behalf of, an Interested
Stockholder or any Affiliate or Associate of an Interested Stockholder in
exchange for cash, securities or other property that constitute 5% or more of
the total assets of the Company, (iv) the adoption of any plan or proposal for
the liquidation or dissolution of the Company or any spin-off or split-up of
any kind of the Company or any subsidiary, proposed by or on behalf of an
Interested Stockholder or an Affiliate or Associate of an Interested
Stockholder, or (v) any reclassification, recapitalization, or merger or
consolidation of the Company with any of its subsidiaries or any other
transaction that has the effect, directly or indirectly, of increasing the
proportionate share of any class or series of capital stock of the Company or
any of its subsidiaries that is beneficially owned by any Interested
Stockholder or an Affiliate or Associate of any Interested Stockholder.
An "Interested Stockholder" generally is defined as (i) an individual,
corporation or other entity which is or was at any time within the two-year
period preceding the date of the transaction in question, the beneficial owner
of 10% or more of the outstanding voting securities of the Company, (ii) an
Associate or Affiliate of the Company who within the two-year period preceding
the date of the transaction in question was the beneficial owner of 10% or
more of the outstanding voting securities of the Company, or (iii) under
certain circumstances, an assignee of any of the foregoing persons. A person
is a "beneficial owner" of any capital stock of the Company (a) which such
person or any of its Affiliates or Associates beneficially owns, directly or
indirectly, (b) which such person or any of its Affiliates or Associates has,
directly or indirectly, (i) the right to acquire (whether such right is
exercisable immediately or subject only to the passage of time), pursuant to
any agreement, arrangement or understanding or upon the exercise of conversion
rights, exchange rights, warrants or options, or otherwise, or (ii) the right
to vote pursuant to any agreement, arrangement or understanding, or
70
<PAGE>
(c) which are beneficially owned, directly or indirectly, by any other person
with which such person or any of its Affiliates or Associates has any
agreement, arrangement or understanding for the purpose of acquiring, holding,
voting or disposing of any shares of capital stock.
The foregoing provisions of the Restated Certificate of Incorporation and
Restated Bylaws of the Company may deter any potential unfriendly offers or
other efforts to obtain control of the Company that are not approved by the
Board of Directors and could thereby deprive the stockholders of opportunities
to realize a premium on their Common Stock and could make removal of incumbent
directors more difficult. At the same time, these provisions may have the
effect of inducing any persons seeking control of the Company or a business
combination with the Company to negotiate terms acceptable to the Board of
Directors. Such provisions of the Company's Restated Certificate of
Incorporation and Restated Bylaws can be changed or amended only by the
affirmative vote of the holders of at least 66 2/3% of the Company's then
outstanding voting stock.
Following the completion of the offering, the Company's present directors
(including the director emeritus) and executive officers and their respective
affiliates will beneficially own approximately 53.0% of the outstanding Common
Stock, giving them veto power with respect to any stockholder action or
approval requiring a majority vote.
TRANSFER AGENT AND REGISTRAR
The Company has appointed American Stock Transfer & Trust Company as its
transfer agent and registrar of the Common Stock.
71
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
GENERAL
Upon the completion of this offering, the Company will have outstanding an
aggregate of 28,392,597 shares of Common Stock, based upon the number of
shares outstanding as of June 30, 1996. Of these shares, all of the shares
sold in this offering will be freely tradeable without restriction or further
registration under the Securities Act, unless such shares are purchased by
"affiliates" of the Company, as that term is defined in Rule 144 under the
Securities Act ("Affiliates"). The remaining 23,727,597 shares of Common Stock
held by existing stockholders (the "Restricted Shares") are "restricted
securities" as that term is defined in Rule 144 under the Securities Act.
Restricted Shares may be sold in the public market only if registered or if
they qualify for an exemption from registration under Rule 144 or Rule 701
promulgated under the Securities Act. As a result of contractual restrictions
and the provisions of Rule 144 and Rule 701, additional shares will be
available for sale in the public market as follows: (i) approximately 933,060
Restricted Shares will be eligible for immediate sale on the date of this
Prospectus; (ii) approximately 569,820 Restricted Shares will be eligible for
sale 90 days after the date of this Prospectus; (iii) approximately 12,627,450
Restricted Shares will be eligible for sale upon expiration of the lock-up
agreements 180 days after the date of this Prospectus; and (iv) the remainder
of the Restricted Shares will be eligible for sale from time to time
thereafter upon expiration of their respective two-year holding periods.
The Company, its officers and directors, all of the Selling Stockholders and
certain other stockholders, representing in the aggregate approximately
22,032,717 shares of Common Stock and options to purchase approximately
4,950,840 shares of Common Stock, have agreed pursuant to lock-up agreements,
subject to certain limited exceptions, not to sell or offer to sell or
otherwise dispose of any of such shares and options for a period of 180 days
after the date of this Prospectus (the "Lock-Up Period") without the prior
consent of Robertson, Stephens & Company.
The Company has reserved 4,000,000 shares of Common Stock for issuance under
the Company's 1996 Stock Incentive Plan, none of which are outstanding. In
addition, the Company has outstanding options to purchase 5,619,840 shares,
which options were granted under the Company's 1996 Stock Incentive Plan 1993
Stock Option Plan and 1983 Employee Incentive Stock Option Plan. Following the
offering, the Company intends to file a registration statement under the
Securities Act to register 4,000,000 shares of Common Stock issuable upon the
exercise of stock options granted under the Company's 1996 Stock Incentive
Plan, options to purchase 54,000 shares of which were outstanding as of June
30, 1996, and 5,565,840 shares issuable upon exercise of stock options granted
under the 1993 Stock Option Plan and 1983 Employee Incentive Stock Option
Plan. Shares issued upon the exercise of stock options after the effective
date of such registration statement or previously issued on exercise,
generally will be available for sale in the open market subject to Rule 144
volume limitations applicable to affiliates and the lock-up agreements with
Robertson, Stephens & Company described above. The Company also intends to
file a registration statement under the Securities Act to register 650,000
shares of Common Stock for issuance under the Company's 1996 Stock Purchase
Plan.
In general, under Rule 144 as currently in effect, beginning 90 days after
the completion of this offering, a person (or persons whose shares are
aggregated) who, together with any previous holder who is not an affiliate of
the Company, has beneficially owned restricted shares of at least two years,
including persons who may be deemed "affiliates" of the Company, will be
entitled to sell in any three-month period a number of shares that does not
exceed the greater of (i) 1% of the then outstanding shares of Common Stock
(approximately 284,000 shares immediately after this offering) or (ii) the
average weekly trading volume of the Common Stock during the four calendar
weeks immediately preceding the date on which notice of the sale is filed with
the SEC. Sales pursuant to Rule 144 are also subject to certain other
requirements relating to manner of sale, notice and availability of current
public information about the Company. A person (or persons whose shares are
aggregated) who is not deemed to have been an affiliate of the Company at any
time during the three months immediately preceding the sale, and who, together
with any previous holder
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<PAGE>
who is not an affiliate of the Company, has beneficially owned restricted
shares for at least three years, would be entitled to sell such shares
pursuant to Rule 144(k) without regard to the limitations described above.
An employee, officer or director of or consultant to the Company who
purchased or was awarded shares or options to purchase shares pursuant to a
written compensatory plan or contract is entitled to rely on the resale
provisions of Rule 701 under the Securities Act, which permits affiliates and
non-affiliates to sell their Rule 701 shares without having to comply with
Rule 144's holding period restrictions, in each case commencing 90 days after
the date of this Prospectus. In addition, non-affiliates may sell Rule 701
shares without complying with the public information, volume and notice
provisions of Rule 144.
Prior to this offering, there has been no public market for the Company's
Common Stock, and there can be no assurance that an active public market for
the Common Stock will develop or will continue after this offering or that the
market price of the Common Stock will not decline below the initial public
offering price. Future sales of substantial amounts of Common Stock in the
public market could adversely affect market prices prevailing from time to
time. As described herein, only a limited number of shares will be available
for sale shortly after this offering because of certain contractual and legal
restrictions on resale. Sales of substantial amounts of Common Stock of the
Company in the public market after the restrictions lapse could adversely
affect the prevailing market price and the ability of the Company to raise
equity capital in the future. See "Risk Factors--Shares Eligible for Future
Sale."
REGISTRATION RIGHTS
Pursuant to an agreement between the Company and the holders (or their
permitted transferees) of approximately 13,663,560 shares of Common Stock and
Preferred Stock ("Holders") (which Preferred Stock will automatically be
converted into Common Stock upon the completion of this offering), the Holders
are entitled to certain rights with respect to the registration of such shares
under the Securities Act. If the Company proposes to register its Common Stock
in any public offering subsequent to this offering, subject to certain
exceptions, under the Securities Act, the Holders are entitled to notice of
the registration and are entitled at the Company's expense, subject to certain
limitations, to include such shares therein, provided that the managing
underwriters have the right to limit the number of such shares included in the
registration. In addition, certain of the Holders may require the Company, at
its expense, subject to certain limitations, on no more than on five occasions
in the aggregate, to file a registration statement under the Securities Act
with respect to their shares of Common Stock. Such rights may not be exercised
until 90 days after the completion of a subsequent offering.
73
<PAGE>
UNDERWRITING
The Underwriters named below, acting through their representatives,
Robertson, Stephens & Company LLC, Hambrecht & Quist LLC and Deutsche Morgan
Grenfell/C. J. Lawrence Inc. (the "Representatives"), have severally agreed
with the Company and the Selling Stockholders, subject to the terms and
conditions of the Underwriting Agreement, to purchase the numbers of shares of
Common Stock set forth opposite their respective names below. The Underwriters
are committed to purchase and pay for all such shares if any are purchased.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
Robertson, Stephens & Company LLC..................................
Hambrecht & Quist LLC..............................................
Deutsche Morgan Grenfell/C. J. Lawrence Inc........................
---------
Total............................................................ 4,665,000
=========
</TABLE>
The Representatives have advised the Company and the Selling Stockholders
that the Underwriters initially propose to offer shares of the Common Stock to
the public at the initial public offering price set forth on the cover page of
this Prospectus and to certain dealers at such price less a concession of not
more than $ per share, of which $ may be reallowed to other dealers.
After the initial public offering, the public offering price, concession and
reallowance to dealers may be reduced by the Representatives. No such
reduction shall change the amount of proceeds to be received by the Company as
set forth on the cover page of this Prospectus.
The Company and a Selling Stockholder have granted to the Underwriters an
option, exercisable during the 30-day period after the date of this
Prospectus, to purchase up to 459,750 and 240,000 additional shares of Common
Stock, respectively, at the same price per share as will be paid for the
4,665,000 shares that the Underwriters have agreed to purchase. To the extent
that the Underwriters exercise such option, each of the Underwriters will have
a firm commitment to purchase approximately the same percentage of such
additional shares that the number of shares of Common Stock to be purchased by
it shown in the above table represents as a percentage of the 4,665,000 shares
offered hereby. If purchased, such additional shares will be sold by the
Underwriters on the same terms as those on which the 4,665,000 shares are
being sold.
The Underwriting Agreement contains covenants of indemnity among the
Underwriters, the Company and the Selling Stockholders against certain civil
liabilities, including liabilities under the Securities Act and liabilities
arising from breaches of representations and warranties contained in the
Underwriting Agreement. The Company has been advised by the SEC that, in the
SEC's view, indemnification for liabilities arising under the Securities Act
is contrary to the federal securities laws and, therefore, unenforceable.
Each officer and director who hold shares of the Company and holders of
22,032,717 shares of Common Stock (including such officers and directors) have
agreed with the Representatives, for the Lock-Up Period, subject to certain
exceptions, not to offer to sell, contract to sell, or otherwise sell, dispose
of, or grant any rights with respect to any shares of Common Stock, any
options or warrants to purchase any shares of Common Stock, or any securities
convertible into or exchangeable for shares of Common Stock owned as of the
date of this Prospectus or thereafter acquired directly by such holders or
with respect to which they have or hereafter acquire the power of disposition,
without the prior written consent of Robertson, Stephens & Company LLC.
However, Robertson, Stephens & Company LLC may, in its sole discretion and at
any time without notice, release all or any portion of the securities subject
to lock-up agreements. There are no
74
<PAGE>
agreements between the Representatives and any of the Company's stockholders
providing consent by the Representatives to the sale of shares prior to the
expiration of the Lock-Up Period. In addition, the Company has agreed that,
during the Lock-Up Period, the Company will not, subject to certain
exceptions, without the prior written consent of Robertson, Stephens & Company
LLC, issue, sell, contract to sell, or otherwise dispose of, any shares of
Common Stock, any options or warrants to purchase any shares of Common Stock
or any securities convertible into, exercisable for or exchangeable for shares
of Common Stock, other than the Company's sale of shares in this offering, the
issuance of Common Stock upon the exercise of outstanding options, and the
Company's issuance of options and shares under existing stock option and stock
purchase plans. See "Shares Eligible for Future Sale."
The Representatives have advised the Company and the Selling Stockholders
that they do not intend to confirm sales to any accounts over which they
exercise discretionary authority.
Prior to this offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price for the Common
Stock offered hereby will be determined through negotiations among the
Company, representatives of the Selling Stockholders and the Representatives.
Among the factors to be considered in such negotiations are prevailing market
conditions, certain financial information of the Company, market valuations of
other companies that the Company and the Representatives believe to be
comparable to the Company, estimates of the business potential of the Company,
the present state of the Company's development and other factors deemed
relevant.
SUBSEQUENT RESTRICTIONS
Securities industry regulations prohibit an NASD member firm, after the
completion of a distribution of securities of its parent to the public, from
effecting any transaction (except on an unsolicited basis) for the account of
any customer in, or making any recommendation with respect to, any such
security. Thus, following this offering, E*TRADE Securities and the Company's
other subsidiaries will not be permitted to make recommendations regarding the
purchase or sale of the Company's Common Stock.
Pursuant to the bylaws of the NASD, if any employee of E*TRADE Securities,
any person associated (as defined in such bylaws) with E*TRADE Securities or
any of the Company's other subsidiaries, or any immediate family member of any
such employee or associated person purchases any of the shares offered hereby,
such person may not sell, transfer, assign, pledge or hypothecate such shares
for a period of five months following the effective date of the offering.
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<PAGE>
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Brobeck, Phleger & Harrison LLP, San Francisco, California. Certain
legal matters in connection with this offering will be passed upon for the
Underwriters by Cooley Godward Castro Huddleson & Tatum, San Francisco,
California. Thomas A. Bevilacqua, a partner at Brobeck, Phleger & Harrison
LLP, holds options to purchase certain shares of Common Stock. See
"Management--Associate Benefit Plans."
EXPERTS
The consolidated financial statements as of September 30, 1995 and 1994 and
for each of the three years in the period ended September 30, 1995, included
in this Prospectus, have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing herein. Such consolidated
financial statements have been included herein in reliance upon the report of
such firm given upon their authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the SEC a registration statement (together with
all amendments and exhibits thereto, the "Registration Statement") under the
Act with respect to the Common Stock offered hereby. This Prospectus does not
contain all of the information set forth in the Registration Statement,
certain parts of which are omitted in accordance with the Rules and
Regulations of the SEC. For further information with respect to the Company
and the Common Stock offered hereby, reference is made to the Registration
Statement and to the exhibits and schedules filed therewith. Statements
contained in this Prospectus as to the contents of any contract or other
document are not necessarily complete, and in each instance reference is made
to the copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference. Copies of the Registration Statement and the exhibits and
schedules thereto may be inspected, without charge, at the offices of the SEC,
or obtained at prescribed rates from the Public Reference Section of the SEC
at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the SEC's regional offices located at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and at Seven World Trade Center
(13th Floor), New York, New York 10019. The SEC also makes electronic filings
publicly available on the Internet within 24 hours of acceptance. The SEC's
Internet address is http://www.sec.gov. The SEC Web site also contains
reports, proxy and information statements, and other information regarding
registrants that file electronically with the SEC.
76
<PAGE>
E*TRADE GROUP, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report............................................. F-2
Consolidated Balance Sheets as of September 30, 1994 and 1995 and June
30, 1996 (Unaudited) and Pro forma June 30, 1996 (Unaudited)............ F-3
Consolidated Statements of Operations for the Years Ended September 30,
1993, 1994 and 1995 and for the Nine Months Ended June 30, 1995 and 1996
(Unaudited)............................................................. F-4
Consolidated Statements of Stockholders' Equity (Deficiency) for the
Years Ended September 30, 1993, 1994 and 1995 and for the Nine Months
Ended June 30, 1995 and 1996 (Unaudited)................................ F-5
Consolidated Statements of Cash Flows for the Years Ended September 30,
1993, 1994 and 1995 and for the Nine Months Ended June 30, 1995 and 1996
(Unaudited)............................................................. F-6
Notes to Consolidated Financial Statements............................... F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of E*TRADE Group, Inc.:
We have audited the accompanying consolidated balance sheets of E*TRADE
Group, Inc. and subsidiaries (the "Company") as of September 30, 1995 and
1994, and the related consolidated statements of operations, stockholders'
equity (deficiency) and cash flows for each of the three years in the period
ended September 30, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of E*TRADE Group, Inc. and
subsidiaries at September 30, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period
ended September 30, 1995 in conformity with generally accepted accounting
principles.
San Francisco, California
November 20, 1995
( as to Note 10)
----------------
The accompanying consolidated financial statements give effect to the
reincorporation of the Company in Delaware, an increase in the number of
authorized shares to 50,000,000 and the related exchange of each share of
common stock of the Company for 60 shares of common stock of the Delaware
Corporation in July 1996. The above opinion is in the form which will be
signed by Deloitte & Touche LLP upon completion of such exchange of the
Company's outstanding common stock described in Note 10 to the consolidated
financial statements and assuming that from July 19, 1996 to the date of such
completion, no other material events have occurred that would affect the
accompanying consolidated financial statements or required disclosure therein.
DELOITTE & TOUCHE LLP
San Francisco, California
July 19, 1996
F-2
<PAGE>
E*TRADE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
SEPTEMBER 30, JUNE 30,
------------------------ JUNE 30, 1996
1994 1995 1996 (NOTE 1)
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and equivalents...... $ 691,897 $ 9,624,219 $15,408,710
Brokerage receivables..... 498,728 1,935,513 3,091,551
Accounts receivable....... 36,500 115,700 140,500
Income taxes receivable... -- -- 817,008
Deferred tax asset........ 588,821 285,863 1,134,196
Other assets.............. 34,211 68,391 506,268
----------- ----------- -----------
Total current assets..... 1,850,157 12,029,686 21,098,233
Property and equipment--
net....................... 313,189 1,458,152 5,983,175
Deposits with clearing
organizations............. -- -- 1,110,000
Investment................. -- 675,726 809,448
Other assets............... -- -- 684,328
----------- ----------- -----------
TOTAL...................... $ 2,163,346 $14,163,564 $29,685,184
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and
accrued liabilities...... $ 429,777 $ 1,428,353 $ 3,830,060
Accrued compensation and
benefits................. -- 557,804 587,634
Litigation settlement
payable.................. 350,000 -- --
Provision for claims...... 64,928 360,744 504,960
Income taxes payable...... 8,944 602,275 --
Current portion of notes
payable.................. 1,314,268 -- 500,000
Current portion of capital
leases................... 23,199 21,870 22,805
----------- ----------- -----------
Total current
liabilities............. 2,191,116 2,971,046 5,445,459
Long-term portion of
capital leases............ 64,439 44,551 27,032
Long-term notes payable.... -- -- 1,833,333
----------- ----------- -----------
Total liabilities........ 2,255,555 3,015,597 7,305,824
----------- ----------- -----------
COMMITMENTS AND
CONTINGENCIES (NOTES 7 AND
8)
STOCKHOLDERS' EQUITY (DEFI-
CIENCY):
Preferred stock, $.01 par:
shares authorized,
1,000,000; Series A:
800,000 shares designated;
shares issued and out-
standing: 1994, none;
1995, 100,000; 1996,
131,516 (pro forma 1996,
none)..................... -- 1,000 1,315 $ --
Common stock, $.01 par:
shares authorized,
50,000,000; shares issued
and outstanding: 1994,
14,954,400; 1995,
14,890,980;
1996, 16,501,637 (pro
forma 1996, 24,392,597)... 149,544 148,910 165,016 243,926
Additional paid-in capital. 1,240,560 9,899,373 22,448,331 22,370,736
Retained earnings (defi-
cit)...................... (1,482,313) 1,098,684 (235,302) (235,302)
----------- ----------- ----------- -----------
Total stockholders' eq-
uity (deficiency)....... (92,209) 11,147,967 22,379,360 $22,379,360
----------- ----------- ----------- ===========
TOTAL...................... $ 2,163,346 $14,163,564 $29,685,184
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
E*TRADE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
SEPTEMBER 30, JUNE 30,
----------------------------------- ------------------------
1993 1994 1995 1995 1996
---------- ----------- ----------- ----------- ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
REVENUES:
Transaction revenues... $2,158,064 $ 9,547,688 $20,834,586 $13,591,794 $ 30,207,651
Computer services...... 709,226 953,228 1,425,536 911,067 1,793,673
Interest and other..... 106,668 404,098 1,080,416 646,322 2,481,549
---------- ----------- ----------- ----------- ------------
Total revenues...... 2,973,958 10,905,014 23,340,538 15,149,183 34,482,873
---------- ----------- ----------- ----------- ------------
COST OF SERVICES:
Cost of services....... 1,972,627 6,795,808 12,678,339 8,011,232 21,104,935
Self-clearing start-up
costs................. -- -- 141,185 84,687 1,843,952
---------- ----------- ----------- ----------- ------------
Total cost of serv-
ices............... 1,972,627 6,795,808 12,819,524 8,095,919 22,948,887
---------- ----------- ----------- ----------- ------------
OPERATING EXPENSES:
Selling and marketing.. 282,324 997,703 2,466,429 1,538,761 5,748,650
Technology development. 215,737 335,371 942,500 538,156 1,322,539
General and
administrative........ 400,573 2,532,361 2,802,724 1,385,969 6,686,982
---------- ----------- ----------- ----------- ------------
Total operating ex-
penses............. 898,634 3,865,435 6,211,653 3,462,886 13,758,171
---------- ----------- ----------- ----------- ------------
Total cost of
services and
operating expenses. 2,871,261 10,661,243 19,031,177 11,558,805 36,707,058
---------- ----------- ----------- ----------- ------------
PRE-TAX INCOME (LOSS)... 102,697 243,771 4,309,361 3,590,378 (2,224,185)
INCOME TAX EXPENSE
(BENEFIT).............. 3,607 (541,474) 1,728,364 1,440,000 (890,199)
---------- ----------- ----------- ----------- ------------
NET INCOME (LOSS)....... $ 99,090 $ 785,245 $ 2,580,997 $ 2,150,378 $ (1,333,986)
========== =========== =========== =========== ============
Net income (loss) per
share.................. $ -- $ .03 $ .10 $ .08 $ (.05)
========== =========== =========== =========== ============
Shares used to compute
per share data......... 26,803,000 26,312,000 26,608,000 25,577,000 28,550,000
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
E*TRADE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
TOTAL
PREFERRED STOCK COMMON STOCK ADDITIONAL RETAINED STOCKHOLDERS'
---------------- -------------------- PAID-IN EARNINGS EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) (DEFICIENCY)
-------- ------- ---------- -------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, OCTOBER 1,
1992................... 14,700,180 $147,002 $ 1,112,321 $(2,366,648) $(1,107,325)
Net income............. 99,090 99,090
Issuance of common
stock................. 798,000 7,980 212,680 220,660
---------- -------- ----------- ----------- -----------
BALANCE, SEPTEMBER 30,
1993................... 15,498,180 154,982 1,325,001 (2,267,558) (787,575)
Net income............. 785,245 785,245
Issuance of common
stock................. 380,520 3,805 159,018 162,823
Exercise of stock
warrants.............. 1,235,940 12,359 (12,153) 206
Repurchase of common
stock................. (2,160,240) (21,602) (231,306) (252,908)
---------- -------- ----------- ----------- -----------
BALANCE, SEPTEMBER 30,
1994................... 14,954,400 149,544 1,240,560 (1,482,313) (92,209)
Net income............. 2,580,997 2,580,997
Issuance of Series A
preferred stock....... 100,000 $1,000 12,299,000 12,300,000
Exercise of stock
warrants.............. 1,293,120 12,931 (271) 12,660
Exercise of stock
options............... 497,100 4,971 141,510 146,481
Repurchase of common
stock................. (1,853,640) (18,536) (3,781,426) (3,799,962)
-------- ------- ---------- -------- ----------- ----------- -----------
BALANCE, SEPTEMBER 30,
1995................... 100,000 1,000 14,890,980 148,910 9,899,373 1,098,684 11,147,967
Net loss*.............. (1,333,986) (1,333,986)
Issuance of Series B
preferred stock, net
of issuance costs*.... 20,336 203 2,837,237 2,837,440
Issuance of Series C
preferred stock, net
of issuance costs*.... 11,180 112 8,949,788 8,949,900
Exercise of stock
warrants, including
tax benefit*.......... 403,080 4,031 285,628 289,659
Exercise of stock
options, including tax
benefit*.............. 1,200,060 12,000 456,880 468,880
Issuance of common
stock for services*... 7,517 75 19,425 19,500
-------- ------- ---------- -------- ----------- ----------- -----------
BALANCE, JUNE 30, 1996*. 131,516 $ 1,315 16,501,637 $165,016 $22,448,331 $ (235,302) $22,379,360
======== ======= ========== ======== =========== =========== ===========
</TABLE>
* Unaudited
See notes to consolidated financial statements.
F-5
<PAGE>
E*TRADE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
SEPTEMBER 30, JUNE 30,
--------------------------------- -----------------------
1993 1994 1995 1995 1996
--------- --------- ----------- ---------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income (loss)..... $ 99,090 $ 785,245 $ 2,580,997 $2,150,378 $(1,333,986)
Adjustments to
reconcile net income
(loss) to net cash
provided by (used in)
operating activities:
Deferred income taxes. (588,821) 302,958 588,821 (848,333)
Issuance of common
stock for services... 19,500
Depreciation and
amortization......... 15,077 64,991 229,807 95,700 477,678
Equity income from
investment........... (352,817) (77,912) (541,907)
Interest converted to
long-term notes
payable.............. 81,070 87,217 67,047 56,190
Net effect of changes
in:
Brokerage
receivables......... (243,544) (203,222) (1,436,785) (1,218,961) (1,156,038)
Accounts receivable.. (73,249) 86,555 (79,200) (39,200) (24,800)
Deposits with
clearing
organizations....... (1,110,000)
Other assets......... (27,262) 10,369 (34,180) (24,293) (1,122,205)
Accounts payable and
accrued expenses.... 36,463 639,784 1,502,196 751,850 2,575,753
Income taxes......... 8,944 593,331 789,479 (1,066,866)
--------- --------- ----------- ---------- -----------
Net cash provided by
(used in) operating
activities......... (112,355) 891,062 3,373,354 3,072,052 (4,131,204)
--------- --------- ----------- ---------- -----------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Purchase of office
facilities,
equipment, and
leasehold
improvements......... (114,376) (123,956) (1,374,770) (765,825) (2,502,701)
Purchase of
investment........... (504,000) (504,000)
Distributions received
from investment...... 181,091 408,185
--------- --------- ----------- ---------- -----------
Net cash used in
investing
activities......... (114,376) (123,956) (1,697,679) (1,269,825) (2,094,516)
--------- --------- ----------- ---------- -----------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Proceeds from issuance
of Series A preferred
stock................ 12,300,000
Proceeds from issuance
of Series B preferred
stock................ 2,837,440
Proceeds from issuance
of Series C preferred
stock................ 8,949,900
Proceeds from issuance
of common stock...... 220,660 162,823
Proceeds from exercise
of stock options..... 146,481 63,188 293,550
Proceeds from exercise
of stock warrants.... 206 12,660 200 112,572
Repurchase of common
stock................ (252,908) (3,799,962)
Repayment of long-term
notes payable........ (1,381,315) (750,000) (166,667)
Repayment of capital
leases............... (5,813) (21,592) (21,217) (16,273) (16,584)
--------- --------- ----------- ---------- -----------
Net cash provided by
(used in) financing
activities......... 214,847 (111,471) 7,256,647 (702,885) 12,010,211
--------- --------- ----------- ---------- -----------
INCREASE (DECREASE) IN
CASH AND EQUIVALENTS.. (11,884) 655,635 8,932,322 1,099,342 5,784,491
CASH AND EQUIVALENTS--
Beginning of period... 48,146 36,262 691,897 691,897 9,624,219
--------- --------- ----------- ---------- -----------
CASH AND EQUIVALENTS--
End of period......... $ 36,262 $ 691,897 $ 9,624,219 $1,791,239 $15,408,710
========= ========= =========== ========== ===========
SUPPLEMENTAL
DISCLOSURES:
Cash paid for
interest............. $ 13,158 $ 18,347 $ 398,601 $ 381,873 $ 60,324
========= ========= =========== ========== ===========
Cash paid for income
taxes................ $ 3,607 $ 41,000 $ 830,000 $ 70,000 $ 1,025,000
========= ========= =========== ========== ===========
Noncash investing and
financing activities:
Capital expenditures
financed with capital
leases............... $ 70,215 $ 26,070
Tax benefit on
exercise of non-
qualified stock
warrants............. $ 177,087
Tax benefit on
exercise of stock
options.............. $ 175,330
Capital expenditures
financed with note
payable.............. $ 2,500,000
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
E*TRADE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AT JUNE 30, 1996 AND FOR THE NINE MONTHS ENDED JUNE 30, 1995 AND
1996 IS UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation--The consolidated financial statements include E*TRADE
Group, Inc. and its subsidiaries (collectively, the "Company") E*TRADE
Securities, Inc. ("E*TRADE Securities"), and E*TRADE Capital, Inc. (formerly,
ET Execution Services, Inc.), securities broker-dealers. All intercompany
balances and transactions have been eliminated.
As discussed in Notes 5 and 10, the convertible Preferred Stock will be
automatically converted upon the closing of the public offering contemplated
herein. The accompanying pro forma balance sheet gives effect to this
conversion as if such events had occurred on June 30, 1996.
Transaction Revenues--The Company derives revenues on a discount brokerage
basis from commissions and payments from other broker-dealers for order flow
related to customer transactions in equity and debt securities, options, and
mutual funds. Securities transactions are recorded on a trade date basis and
are executed by independent broker-dealers. Through June 30, 1996, the Company
did not receive or hold customers' securities or funds. The Company
implemented self-clearing operations in July 1996.
Computer services revenues represent connect time charges for interactive
online computer services provided to networks for distribution to customers.
Such revenues are recorded as earned.
Interest revenues represent the Company's participation in the interest
differential on its customer debit and credit balances through a contractual
agreement with its principal clearing broker, and fees on its customer assets
invested in money market accounts.
Depreciation and Amortization--Office facilities and equipment generally are
depreciated on a straight-line basis over their estimated useful lives of
three to seven years. Leasehold improvements are amortized over the lesser of
their useful lives or the life of the lease.
Technology Development Costs--Technology development costs are charged to
operations as incurred. Technology development costs include costs incurred in
the development and enhancement of software used in the Company's product
offerings. The costs to develop such software have not been capitalized as the
Company believes its current software development process is essentially
completed concurrent with the establishment of technological feasibility of
the software.
Cash and Equivalents--For purposes of reporting cash flows, the Company
considers all highly liquid investments with original maturities of three
months or less to be cash equivalents.
Investment represents the Company's March 1995 investment in a limited
liability company, Roundtable Partners LLC ("Roundtable"), which is accounted
for using the equity method. The Company's return on its investment in
Roundtable is included in other revenues. Roundtable is a consortium of
broker-dealers.
Estimated Fair-Value of Financial Instruments--The Company believes the
amounts presented for financial instruments on the consolidated balance sheet
consisting of cash equivalents and long-term notes payable to be reasonable
estimates of fair-value.
Use of Estimates--The preparation of the Company's consolidated financial
statements in conformity with generally accepted accounting principles
necessarily requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the consolidated balance sheet dates and the
reported amounts of revenues and expenses for the periods presented.
Income Taxes--The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 109--Accounting for
Income Taxes. SFAS 109 requires the recognition of deferred tax liabilities
and assets at tax rates expected to be in effect when these balances reverse.
Future
F-7
<PAGE>
E*TRADE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT JUNE 30, 1996 AND FOR THE NINE MONTHS ENDED JUNE 30, 1995 AND
1996 IS UNAUDITED)
tax benefits attributable to temporary differences are recognized currently to
the extent that realization of such benefits is more likely than not.
Earnings Per Share--Earnings per share is based on the weighted average
number of common and common equivalent shares outstanding during the period.
Pursuant to rules of the Securities and Exchange Commission, all common and
common equivalent shares issued and options, warrants and other rights to
acquire shares of common stock at a price less than the initial public
offering price granted by the Company during the 12 months preceding the
offering date (using the treasury stock method until shares are issued) have
been included in the computation of common and common equivalent shares
outstanding for all periods presented.
Recently Issued Accounting Standards--The Company is required to adopt SFAS
No. 123, Accounting for Stock-Based Compensation, in fiscal 1997. SFAS No. 123
establishes accounting and disclosure requirements using a fair-value based
method of accounting for stock based employee compensation plans. Under SFAS
No. 123, the Company may either adopt the new fair-value based accounting
method or continue the intrinsic value based method and provide pro forma
disclosures of net income and earnings per share as if the accounting
provisions of SFAS No. 123 had been adopted. The Company plans to adopt only
the disclosure requirements of SFAS No. 123; therefore, such adoption will
have no effect on the Company's consolidated net income or cash flows.
The Company is also required to adopt SFAS No. 121, Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
in fiscal 1997. SFAS No. 121 establishes the accounting and reporting
requirements for recognizing and measuring impairment of long-lived assets to
be either held and used or held for disposal. The Company does not expect SFAS
No. 121 to have a material effect on its consolidated financial statements.
Unaudited Interim Information--The consolidated financial information as of
June 30, 1996 and for the nine months ended June 30, 1995 and 1996 is
unaudited. In the opinion of management, such information contains all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the results of such period. The results of operations for
the nine months ended June 30, 1996 are not necessarily indicative of the
results to be expected for the full year.
Reclassifications--Certain items in prior years' financial statements have
been reclassified to conform to the fiscal 1995 presentation.
2. PROPERTY AND EQUIPMENT--NET
Property and equipment--net consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------- JUNE 30,
1994 1995 1996
---------- ---------- -----------
(Unaudited)
<S> <C> <C> <C>
Furniture and fixtures..................... $ 96,066 $ 206,385 $ 651,942
Equipment.................................. 947,991 2,199,193 4,996,762
Leasehold improvements..................... 38,327 51,576 1,811,150
---------- ---------- ----------
1,082,384 2,457,154 7,459,854
Less: Accumulated depreciation............. 769,195 999,002 1,476,679
---------- ---------- ----------
Total...................................... $ 313,189 $1,458,152 $5,983,175
========== ========== ==========
</TABLE>
F-8
<PAGE>
E*TRADE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT JUNE 30, 1996 AND FOR THE NINE MONTHS ENDED JUNE 30, 1995 AND
1996 IS UNAUDITED)
3. LONG-TERM NOTES PAYABLE
In September 1990, the Company entered into a restructuring agreement with
its long-term creditors. In connection with the restructuring agreement, all
royalty obligations due and long-term debt were converted to promissory notes
of $999,508 bearing interest at 7% per annum as well as warrants to purchase
2,626,140 shares of the Company's common stock for an aggregate exercise price
of $438 ("the Restructuring Warrants"). The promissory notes were
uncollateralized and subordinated to all other debt, and principal and
interest was to be paid at the sole discretion of the Board of Directors of
the Company. No principal or interest had been paid on the notes prior to
1995, when the notes, including accrued interest, were paid in full.
In February 1996, the Company obtained $2.5 million in equipment financing
through a term loan agreement with Merrill Lynch Business Financial Services,
Inc. This term loan was used to finance the purchase of equipment and
leasehold improvements. Interest is accrued at the per annum rate equal to the
sum of 2.70% over the 30-Day Commercial Paper Rate as defined. The terms of
such financing provide for the repayment of the term loan in 60 consecutive
monthly installments. The term loan is collateralized by a first lien on all
business assets of the parent company.
4. INCOME TAXES
The components of income tax expense (benefit) for the years ended September
30 are as follows:
<TABLE>
<CAPTION>
1993 1994 1995
------ --------- ----------
<S> <C> <C> <C>
Current:
Federal....................................... $ -- $ 10,752 $1,030,253
State......................................... 3,607 36,595 395,153
------ --------- ----------
Total current............................... 3,607 47,347 1,425,406
------ --------- ----------
Deferred:
Federal....................................... -- (562,594) 301,574
State......................................... -- (26,227) 1,384
------ --------- ----------
Total deferred.............................. -- (588,821) 302,958
------ --------- ----------
Total tax expense (benefit)..................... $3,607 $(541,474) $1,728,364
====== ========= ==========
</TABLE>
Deferred income taxes are recorded when revenues and expenses are recognized
in different periods for financial statement and tax return purposes. The
temporary differences and tax carryforwards which created deferred tax assets
at September 30 are detailed below:
<TABLE>
<CAPTION>
1993 1994 1995
--------- -------- --------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards............. $ 645,176 $558,279 $ --
Reserves and allowances...................... 6,823 26,061 144,795
Other........................................ 544 4,481 141,068
--------- -------- --------
Total deferred tax assets.................. 652,543 588,821 285,863
Valuation allowance............................ (652,543) -- --
--------- -------- --------
Net deferred tax asset......................... $ -- $588,821 $285,863
========= ======== ========
</TABLE>
F-9
<PAGE>
E*TRADE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT JUNE 30, 1996 AND FOR THE NINE MONTHS ENDED JUNE 30, 1995 AND
1996 IS UNAUDITED)
The effective tax rate differs from the federal statutory rate as follows:
<TABLE>
<CAPTION>
1993 1994 1995
----- ------ ----
<S> <C> <C> <C>
Tax expense at federal statutory rate............ 34.0 % 34.0 % 35.0%
State income taxes, net of federal tax benefit... 2.3 2.8 6.1
Decrease in federal income tax asset valuation
allowance....................................... (34.1) (260.4) --
Other............................................ 1.3 1.5 (1.0)
----- ------ ----
Effective tax rate............................... 3.5 % (222.1)% 40.1%
===== ====== ====
</TABLE>
5. STOCKHOLDERS' EQUITY
On September 28, 1995, the Company sold 100,000 shares of Series A Preferred
Stock to General Atlantic Partners for $12,300,000. The Company used
approximately $3,800,000 of the proceeds to repurchase and retire outstanding
common stock from existing stockholders.
Each share of Series A Preferred Stock is convertible, at the option of the
stockholder, into 60 shares of common stock (subject to adjustment for events
of dilution). Conversion of the Preferred Stock into common stock is automatic
upon the closing of an underwritten public offering under the Securities Act
of 1933, the proceeds of which exceed $7,500,000. The Preferred stockholders
have voting rights equal to the common shares they would have upon conversion.
Upon liquidation, holders of the Preferred Stock are entitled to receive a
preferential amount equal to their original per share purchase price plus any
declared and unpaid dividends before any distributions to common stockholders.
F-10
<PAGE>
E*TRADE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT JUNE 30, 1996 AND FOR THE NINE MONTHS ENDED JUNE 30, 1995 AND
1996 IS UNAUDITED)
The Company's stock option plans provide for granting of nonqualified or
incentive stock options to officers, directors, key employees and consultants
for the purchase of shares of common stock at the prevailing price of the
Company's stock as determined by the Board of Directors at the date the option
is granted. The options are generally exercisable ratably over a five-year
period from the date the option is granted and expire within ten years from
the date of grant. A summary of stock option activity follows:
<TABLE>
<CAPTION>
NUMBER OPTION PRICE
OF SHARES PER SHARE
---------- ------------
<S> <C> <C>
Outstanding at October 1, 1992...................... 840,000 $.13
Granted........................................... 2,370,000 $.13-$.28
---------- ------------
Outstanding at September 30, 1993................... 3,210,000 $.13-$.28
Granted........................................... 90,000 $.28
---------- ------------
Outstanding at September 30, 1994................... 3,300,000 $.13-$.28
Granted........................................... 1,776,000 $.28-$.50
Cancelled......................................... (876,000) $.28-$.42
Exercised......................................... (497,100) $.13-$.50
---------- ------------
Outstanding at September 30, 1995................... 3,702,900 $.13-$.50
Granted........................................... 3,273,000 $2.05-$13.42
Cancelled......................................... (156,000) $.28-$2.05
Exercised......................................... (1,200,060) $.13-$.50
---------- ------------
Outstanding at June 30, 1996........................ 5,619,840 $.13-$13.42
========== ============
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------------
1993 1994 1995
------- --------- ---------
<S> <C> <C> <C>
Options available for grant...................... 690,000 1,800,000 900,000
Options exercisable.............................. 588,000 1,230,000 1,490,000
</TABLE>
In April 1993, the Company's stockholders approved the 1993 Stock Option
Plan (the "1993 Plan") which authorized 1,800,000 shares of the Company's
common stock as available for the granting of options. The 1993 Plan was the
successor plan to the 1983 Employee Incentive Stock Option Plan which expired
in March 1993. In 1994, the number of authorized shares under the 1993 Plan
was increased to 3,000,000. 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.
During 1994 and 1995, Restructuring Warrants (see Note 3) 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 1995, a consultant was granted a warrant to purchase
300,000 shares of the Company's common stock at $.42 per share, of which
29,880 were exercised in fiscal 1995 and the remainder in the nine months
ended June 30, 1996.
6. REGULATORY REQUIREMENTS
E*TRADE Securities is subject to the Uniform Net Capital Rule (the "Rule")
under the Securities Exchange Act of 1934. E*TRADE Securities computes net
capital under the aggregate indebtedness method of the Rule, which, at
September 30, 1995, requires the maintenance of minimum net capital of the
greater
F-11
<PAGE>
E*TRADE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT JUNE 30, 1996 AND FOR THE NINE MONTHS ENDED JUNE 30, 1995 AND
1996 IS UNAUDITED)
of six and two-thirds percent (6 2/3%) of aggregate indebtedness or $100,000
and requires that the ratio of aggregate indebtedness to net capital, both as
defined, shall not exceed 15 to 1. E*TRADE Securities may not repay
subordinated borrowings, pay cash dividends, or make any unsecured advances or
loans to its parent or employees if such payment would result in aggregate
indebtedness exceeding 1000% of net capital or in net capital of less than
120% of the minimum net capital requirement. At September 30, 1995, E*TRADE
Securities had net capital of $7,062,000, which was $6,951,000 in excess of
its required net capital of $111,000. E*TRADE Securities' ratio of aggregate
indebtedness to net capital was .24 to 1 at September 30, 1995. Effective May
31, 1996, 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 June 30, 1996,
E*TRADE Securities had net capital of $13,879,596, which was $13,629,596 in
excess of its required net capital of $250,000.
7. LEASE ARRANGEMENTS
The Company leases equipment under capital leases expiring through fiscal
1999. Future minimum lease payments under capital leases as of September 30,
1995 are as follows:
<TABLE>
<S> <C>
Year ending September 30:
1996............................................................. $ 30,249
1997............................................................. 26,826
1998............................................................. 20,137
1999............................................................. 2,473
--------
Total minimum lease payments....................................... 79,685
Less: Amount representing interest ................................ 13,264
--------
Present value of minimum lease payments............................ $ 66,421
========
</TABLE>
The Company also has two noncancelable operating leases for office
facilities through 2002. Future minimum rental commitments under these leases
at September 30, 1995 are as follows:
<TABLE>
<S> <C>
Year ending September 30:
1996........................................................... $ 790,900
1997........................................................... 1,123,700
1998........................................................... 1,191,100
1999........................................................... 1,258,800
2000........................................................... 1,281,100
Thereafter..................................................... 1,634,600
</TABLE>
Rent expense for the years ended September 30, 1993, 1994 and 1995 was
approximately $100,500, $168,800 and $344,100, respectively.
8. COMMITMENTS, CONTINGENT LIABILITIES AND OTHER
The Company is a defendant in civil actions arising from the normal course
of business. In the opinion of management, these actions are expected to be
resolved with no material effect on the Company's financial position or
results of operations. During the year ended September 30, 1994, the Company
settled claims made by its former clearing broker. The total amount of this
settlement was $850,000 and is included in
F-12
<PAGE>
E*TRADE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT JUNE 30, 1996 AND FOR THE NINE MONTHS ENDED JUNE 30, 1995 AND
1996 IS UNAUDITED)
general and administrative expenses. In connection with the settlement
agreement, the Company repurchased all shares of its common stock owned by its
former clearing broker at the date of the settlement for $252,908, which
represented their estimated fair market value.
In March 1996, the Company entered into a five-year employment agreement
with a key executive officer. The employment agreement provides for, among
other things, an annual base salary which is subject 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.
9. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET CREDIT RISK AND CONCENTRATIONS
OF CREDIT RISK
As a securities broker, E*TRADE Securities' transactions are executed with
and on behalf of customers. E*TRADE Securities introduces these transactions
for clearance to its clearing brokers on a fully disclosed basis.
In the normal course of business, E*TRADE Securities' customer activities
involve the execution of securities transactions and settlement by its
clearing brokers. As the agreements between E*TRADE Securities and its
clearing brokers provide that E*TRADE Securities is obligated to assume any
exposure related to nonperformance by its customers, these activities may
expose E*TRADE Securities to off-balance-sheet credit risk in the event a
customer is unable to fulfill its contracted obligations. In the event a
customer fails to satisfy its obligations, E*TRADE Securities may be required
to purchase or sell financial instruments at prevailing market prices in order
to fulfill such customer's obligations.
The Company seeks to control off-balance-sheet credit risk by monitoring its
customer transactions and reviewing information it receives from its clearing
brokers on a daily basis and reserving for doubtful accounts when necessary.
10. SUBSEQUENT EVENTS
Effective January 18, 1996, the stockholders of the Company approved a
change in its name from Trade*Plus, Inc. to E*TRADE Group, Inc.
On April 10, 1996, the Company sold 20,336 shares of Series B Preferred
Stock ("Series B") for $2,847,040 and incurred issuance costs of $9,600. On
June 6, 1996, the Company sold 11,180 shares of Series C Preferred Stock
("Series C") to SOFTBANK Holdings Inc. for $8,999,900 and incurred issuance
costs of $50,000. Each share of Series B and Series C Preferred Stock is
convertible, at the option of the stockholder, into 60 shares of common stock.
Conversion of the Preferred Stock into common stock is automatic upon the
closing of an underwritten public offering under the Securities Act of 1933,
the proceeds of which exceed $7,500,000. The Series B and Series C Preferred
Stock have rights and privileges comparable to the Series A Preferred Stock
(see Note 5), except that Series B and C have no anti-dilution provisions.
In May 1996, the Company obtained $100 million in committed lines of
financing to provide collateral financing of customer securities upon the
conversion to self-clearing.
In July 1996, the stockholders of the Company approved the following:
. 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
F-13
<PAGE>
E*TRADE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT JUNE 30, 1996 AND FOR THE NINE MONTHS ENDED JUNE 30, 1995 AND
1996 IS UNAUDITED)
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.
. The 1996 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 reincorporation of the Company in Delaware, an increase in the
number of authorized shares of common stock to 50,000,000 and the
related exchange of each share of common stock of the Company into 60
shares of common stock of the Delaware corporation. Such reincorporation
and share exchange will be consummated in July 1996. All references in
the consolidated financial statements to numbers of shares, per share
amounts and prices of the Company's common stock have been retroactively
restated to reflect the increased number of common shares outstanding.
F-14
<PAGE>
E*TRADE: EMPOWERING CONSUMERS THROUGH TECHNOLOGY
E*TRADE uses information technology to provide value-added commercial
transaction processing services. In 1992, the Company formed E*TRADE Securities
and began offering consumers online brokerage services available 24 hours a
day, seven days a week. E*TRADE empowers its customers to take control of their
own financial transactions.
Cost-effective Services.
Services are offered unbundled, so that customers can choose just the services
they want.
User-friendly Web Trading Interface.
E*TRADE has made online trading simple, fast and fun.
Secure Operations.
By offering highly secure services through encrypted transmissions, E*TRADE has
achieved industry recognition for its leadership in the secure provision of
online brokerage services.
Personalized Environments.
Customers can customize their user interfaces to enhance their personal trading
experiences.
Customers are able to trade through a broad range of electronic access points,
including the Internet, direct modem link, America Online, CompuServe and
touch-tone telephone.
[Graphical depiction of E*TRADE order screen]
[Graphical depiction of E*TRADE Web page]
[Photo of person at computer]
ACCESS
ANY TIME
ANYWHERE
<PAGE>
JOIN THE
ELECTRONIC
TRADING
REVOLUTION
[Graphic of globe with circling rings in palm]
www.etrade.com
[COMPANY LOGO]
INFORMATION CONTAINED IN THE COMPANY'S WEB SITE
SHALL NOT BE DEEMED TO BE PART OF THIS
PROSPECTUS.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses payable by the
Registrant in connection with the sale of Common Stock being registered. All
amounts are estimates except the registration fee, the NASD fee and the Nasdaq
National Market fee.
<TABLE>
<CAPTION>
AMOUNT
TO
BE PAID
----------
<S> <C>
Registration fee.................................................... $ 35,056
NASD fee............................................................ 10,666
Nasdaq National Market fee.......................................... 50,000
Printing and engraving.............................................. 160,000
Legal fees and expenses............................................. 400,000
Accounting fees and expenses........................................ 400,000
Blue sky fees and expenses.......................................... 15,000
Transfer agent fees................................................. 2,000
Director and officer insurance premiums............................. 425,000
Miscellaneous....................................................... 247,278
----------
Total............................................................. $1,745,000
==========
</TABLE>
The Selling Stockholders will bear their pro rata portion of underwriting
discounts and commissions, based on the number of shares offered by such
holders. All of the other costs and expenses of the Selling Stockholders will
be borne by the Registrant.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of the state of Delaware (the
"Delaware Law") empowers a Delaware corporation to indemnify any persons who
are, or are threatened to be made, parties to any threatened, pending or
completed legal action, suit or proceedings, whether civil, criminal,
administrative or investigative (other than action by or in the right of such
corporation), by reason of the fact that such person was an officer or
director of such corporation, or is or was serving at the request of such
corporation as a director, officer, employee or agent of another corporation
or enterprise. The indemnity may include expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding,
provided that such officer or director acted in good faith and in a manner he
reasonably believed to be in or not opposed to the corporation's best
interests, and, for criminal proceedings, had no reasonable cause to believe
his conduct was illegal. A Delaware corporation may indemnify officers and
directors in an action by or in the right of the corporation under the same
conditions, except that no indemnification is permitted without judicial
approval if the officer or director is adjudged to be liable to the
corporation in the performance of his duty. Where an officer or director is
successful on the merits or otherwise in the defense of any action referred to
above, the corporation must indemnify him against the expenses which such
officer or director actually and reasonably incurred.
In accordance with the Delaware Law, the Restated Certificate of
Incorporation of the Company contains a provision to limit the personal
liability of the directors of the Registrant for violations of their fiduciary
duty. This provision eliminates each director's liability to the Registrant or
its stockholders for monetary damages except (i) for any breach of the
director's duty of loyalty to the Registrant or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law, (iii) under
II-1
<PAGE>
Section 174 of the Delaware Law providing for liability of directors for
unlawful payment of dividends or unlawful stock purchases or redemptions, or
(iv) for any transaction from which a director derived an improper personal
benefit. The effect of this provision is to eliminate the personal liability
of directors for monetary damages for actions involving a breach of their
fiduciary duty of care, including any such actions involving gross negligence.
Article 5 of the Restated Bylaws of the Registrant provide for
indemnification of the officers and directors of the Registrant to the fullest
extent permitted by applicable law.
In connection with the incorporation of the Registrant into the State of
Delaware, the Registrant entered into indemnification agreements with each
director and certain officers, a form of which is attached as Exhibit 10.1
hereto and incorporated herein by reference. The Indemnification Agreements
provide indemnification to such directors and officers under certain
circumstances for acts or omissions which may not be covered by directors' and
officers' liability insurance. Reference is also made to Section 8 of the
Underwriting Agreement contained in Exhibit 1.1 hereto, indemnifying officers
and directors of the Registrant against certain liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since June 30, 1993, the Registrant has sold and issued the following
unregistered securities:
(1) During the period June 30, 1993 through June 30, 1996 the Registrant
granted stock options to employees, directors and consultants under its 1993
Stock Option Plan and 1996 Stock Incentive Plan, covering an aggregate of
6,249,000 shares of the Company's Common Stock at an average exercise price of
$2.15 per share. Of these, options covering an aggregate of 1,032,000 were
cancelled without being exercised. During the same period, the Registrant sold
an aggregate of 1,697,160 shares of its Common Stock to employees, directors
and consultants for cash consideration in the aggregate amount of $431,701
upon the exercise of outstanding stock options.
(2) On October 29, 1993, the Registrant sold 125,640 shares of Common Stock
to RKS Financial Group, Inc. ("RKS") for $35,598 in cash as a result of
antidilution provisions in the RKS Stock Purchase Agreement dated October 21,
1991. On May 17, 1994, the Registrant sold an additional 34,620 shares to RKS
for $17,310 in cash as a result of antidilution provisions.
(3) On March 30, 1994, the Registrant sold 220,860 shares of Common Stock to
Robert Graham, Roberta Colin, Tracy Henderson and Steve Herrick for $110,430
in cash.
(4) On May 17, 1994, the Registrant sold 44,116 shares of Common Stock to 17
early stockholders of the Registrant, including co-founders William A. Porter
and Bernard A. Newcomb, for an aggregate price of $441.16 pursuant to the
exercise of warrants.
(5) On September 28, 1995, the Registrant sold 100,000 shares of Series A
Preferred Stock to General Atlantic Partners II, L.P. and GAP Coinvestment
Partners, L.P. for $12,300,000 in cash.
(6) On September 28, 1995, the Registrant sold 29,880 shares of its Common
Stock to an employee for $12,450 in cash upon the exercise of a warrant, and
on January 31, 1996 sold the remaining 270,120 shares exercisable under the
warrant for $112,550 in cash.
(7) On April 10, 1996, the Registrant sold 20,336 shares of Series B
Preferred Stock to Christos M. Cotsakos and affiliates, Richard S. Braddock,
General Atlantic Partners II, L.P. and GAP Coinvestment Partners, L.P. for
$2,847,040 in cash.
II-2
<PAGE>
(8) On March 31, 1996 and June 7, 1996 the Registrant issued 6,096 and 1,421
shares of Common Stock, respectively, to George Hayter, a director of the
Company, for consulting services.
(9) On June 6, 1996, the Registrant sold 11,180 shares of Series C Preferred
Stock to SOFTBANK Holdings Inc. for $9.0 million in cash.
The sales and issuances of securities in the transactions described in
paragraph (1) above were deemed to be exempt from registration under the
Securities Act by virtue of Rule 701 promulgated thereunder in that they were
offered and sold either pursuant to a written compensatory benefit plan or
pursuant to a written contract relating to compensation, as provided by Rule
701.
The sale and issuance of securities in the transaction described in
paragraphs (2) through (9) were deemed to be exempt from registration under
the Securities Act by virtue of Section 4(2) and/or Regulation D promulgated
thereunder as transactions not involving any public offering. The purchasers
in each case represented their intention to acquire the securities for
investment only and not with a view to the distribution thereof. Appropriate
legends are affixed to the stock certificates issued in such transactions. All
recipients either received adequate information about the Registrant or had
access, through employment or other relationships, to such information.
In May 1996, E*TRADE Group, Inc., a Delaware corporation ("E*TRADE
Delaware") was formed and 100 shares of Common Stock were issued to E*TRADE
Group, Inc., a California corporation ("E*TRADE California") for a de minimis
dollar amount. The sale and issuance was deemed to be exempt from registration
under the Securities Act by virtue of Section 4(2) as a transaction not
involving any public offering.
In July 1996, E*TRADE California will merge with and into E*TRADE Delaware.
In connection with the merger, E*TRADE Delaware will issue an aggregate of
16,073,357 shares of Common Stock to the holders of common stock of E*TRADE
California (assuming shares outstanding at June 30, 1996), such that holders
of common stock of E*TRADE California will receive a proportionate interest in
E*TRADE Delaware Common Stock, without giving effect to the offering.
Likewise, E*TRADE Delaware will issue 100,000 shares of Series A Preferred
Stock, 20,336 shares of Series B Preferred Stock and 11,180 shares of Series C
Preferred Stock to the holders of Series A Preferred Stock, Series B Preferred
Stock and Series C Preferred Stock, respectively. The issues of securities
will not be registered under the Securities Act due to the exemption from
registration thereunder provided by Section 3(a)(9) thereof.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------- --------------------
<C> <S>
1.1 Form of Underwriting Agreement.
*3.1 Certificate of Incorporation of the Registrant.
*3.2 Bylaws of the Registrant.
3.3 Restated Certificate of Incorporation of the Registrant to be
effective prior to the offering.
3.4 Restated Bylaws of the Registrant to be effective prior to the
offering.
4.1 Specimen of Common Stock Certificate.
4.2 Reference is hereby made to Exhibits 3.1 to 3.4.
5.1 Opinion of Brobeck, Phleger & Harrison LLP.
*10.1 Form of Indemnification Agreement to be entered into between the
Registrant and its directors and certain officers.
*10.2 1983 Employee Incentive Stock Option Plan.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------- --------------------
<C> <S>
*10.3 1993 Stock Option Plan.
10.4 1996 Stock Incentive Plan.
10.5 Not used.
10.6 Not used.
10.7 Not used.
*10.8 401(k) Plan.
10.9 1996 Stock Purchase Plan.
*10.10 Employee Bonus Plan.
*10.11 Lease of premises at Four Embarcadero Place, 2400 Geng Road, Palo
Alto, California.
10.12 Lease of premises at 10951 White Rock Road, Rancho Cordova,
California.
10.13 Employment Agreement dated March 15, 1996, by and between Christos M.
Cotsakos and the Registrant.
*10.14 Clearing Agreement between E*TRADE Securities, Inc. and Herzog,
Heine, Geduld, Inc. dated May 11, 1994.
*10.15 Guarantee by the Registrant to Herzog, Heine, Geduld, Inc.
+10.16 BETAHOST Master Subscription Agreement between E*TRADE Securities,
Inc. and BETA Systems Inc. dated June 27, 1996.
10.17 Stock Purchase Agreement among the Registrant, General Atlantic
Partners II, L.P. and GAP Coinvestment Partners, L.P. dated September
28, 1995.
10.18 Stock Purchase Agreement among the Registrant, General Atlantic
Partners II, L.P., GAP Coinvestment Partners, L.P., Richard S.
Braddock and the Cotsakos Group dated April 10, 1996.
10.19 Stock Purchase Agreement between the Registrant and SOFTBANK Holdings
Inc. dated
June 6, 1996.
10.20 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").
10.21 Supplement No. 1 to Stockholders Agreement dated as of April 10,
1996.
10.22 Stockholders Agreement Supplement and Amendment dated as of June 6,
1996.
10.23 Consulting Agreement between the Registrant and George Hayter dated
as of June 7, 1996.
11.1 Statement regarding computation of per share earnings.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Independent Auditors.
23.2 Consent of Counsel (included in Exhibit 5.1).
*24.1 Power of Attorney.
*27.1 Financial Data Schedule as of and for the six months ended March 31,
1996 and as of and for the year ended September 30, 1995.
27.2 Financial Data Schedule as of and for the nine months ended June 30,
1996 and as of and for the year ended September 30, 1995.
</TABLE>
- --------
*Previously filed.
+Confidential treatment has been requested with respect to certain portions of
this exhibit.
(B) FINANCIAL STATEMENT SCHEDULES
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
financial statements or notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
II-4
<PAGE>
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the Delaware General Corporation Law, the Restated
Certificate of Incorporation or the Restated Bylaws of Registrant,
Indemnification Agreements entered into between the Registrant and its
directors and certain of its officers, Underwriting Agreement, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act, and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer, or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered hereunder, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall he
deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Palo
Alto, State of California on this 19th day of July 1996.
E*TRADE Group, Inc.
/s/ Christos M. Cotsakos
By___________________________________
Christos M. Cotsakos
President
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to Registration Statement has been signed by the following persons in
the capacities and on the dates indicated:
SIGNATURE TITLE DATE
* William A. Porter Chairman of the July 19, 1996
- ------------------------------------- Board
William A. Porter
/s/ Christos M. Cotsakos President and Chief
- ------------------------------------ Executive Officer
Christos M. Cotsakos (principal
executive officer)
* Stephen C. Richards Chief Financial July 19, 1996
- ------------------------------------- Officer (principal
Stephen C. Richards financial and
accounting officer)
* Richard S. Braddock Director July 19, 1996
- -------------------------------------
Richard S. Braddock
* William E. Ford Director July 19, 1996
- -------------------------------------
William E. Ford
* George Hayter Director July 19, 1996
- -------------------------------------
George Hayter
II-6
<PAGE>
SIGNATURE TITLE DATE
* Keith Petty Director July 19, 1996
- -------------------------------------
Keith Petty
* Lewis E. Randall Director July 19, 1996
- -------------------------------------
Lewis E. Randall
* Lester C. Thurow Director July 19, 1996
- -------------------------------------
Lester C. Thurow
/s/ Christos M. Cotsakos
*By ____________________________
Christos M. Cotsakos
(Attorney-in-fact)
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------- --------------------
<C> <S>
1.1 Form of Underwriting Agreement.
*3.1 Certificate of Incorporation of the Registrant.
*3.2 Bylaws of the Registrant.
3.3 Restated Certificate of Incorporation of the Registrant to be
effective prior to the offering.
3.4 Restated Bylaws of the Registrant to be effective prior to the
offering.
4.1 Specimen of Common Stock Certificate.
4.2 Reference is hereby made to Exhibits 3.1 to 3.4.
5.1 Opinion of Brobeck, Phleger & Harrison LLP.
*10.1 Form of Indemnification Agreement to be entered into between
the Registrant and its directors and certain officers.
*10.2 1983 Employee Incentive Stock Option Plan.
*10.3 1993 Stock Option Plan.
10.4 1996 Stock Incentive Plan.
10.5 Not used.
10.6 Not used.
10.7 Not used.
*10.8 401(k) Plan.
10.9 1996 Stock Purchase Plan.
*10.10 Employee Bonus Plan.
*10.11 Lease of premises at Four Embarcadero Place, 2400 Geng Road,
Palo Alto, California.
10.12 Lease of premises at 10951 White Rock Road, Rancho Cordova,
California.
10.13 Employment Agreement dated March 15, 1996, by and between
Christos M. Cotsakos and the Registrant.
*10.14 Clearing Agreement between E*TRADE Securities, Inc. and Herzog,
Heine, Geduld, Inc. dated May 11, 1994.
*10.15 Guarantee by the Registrant to Herzog, Heine, Geduld, Inc.
+10.16 BETAHOST Master Subscription Agreement between E*TRADE
Securities, Inc. and BETA Systems Inc. dated June 27, 1996.
10.17 Stock Purchase Agreement among the Registrant, General Atlantic
Partners II, L.P. and GAP Coinvestment Partners, L.P. dated
September 28, 1995.
10.18 Stock Purchase Agreement among the Registrant, General Atlantic
Partners II, L.P., GAP Coinvestment Partners, L.P., Richard S.
Braddock and the Cotsakos Group dated April 10, 1996.
10.19 Stock Purchase Agreement between the Registrant and SOFTBANK
Holdings Inc. dated
June 6, 1996.
10.20 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").
10.21 Supplement No. 1 to Stockholders Agreement dated as of April
10, 1996.
10.22 Stockholders Agreement Supplement and Amendment dated as of
June 6, 1996.
10.23 Consulting Agreement between the Registrant and George Hayter
dated as of June 7, 1996.
11.1 Statement regarding computation of per share earnings.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Independent Auditors.
23.2 Consent of Counsel (included in Exhibit 5.1).
*24.1 Power of Attorney.
*27.1 Financial Data Schedule as of and for the six months ended
March 31, 1996 and as of and for the year ended September 30,
1995.
27.2 Financial Data Schedule as of and for the nine months ended
June 30, 1996 and as of and for the year ended September 30,
1995.
</TABLE>
- -------
*Previously filed.
+Confidential treatment has been requested with respect to certain portions of
this exhibit.
<PAGE>
EXHIBIT 1.1
6,915,000 SHARES/1/
E*TRADE GROUP, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
____________, 1996
Robertson, Stephens & Company LLC
Hambrecht & Quist LLC
Deutsche Morgan Grenfell
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
6,250,000 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 6,250,000 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 1,037,250 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."
- -------------------
/1/ Plus an option to purchase up to 1,037,250 additional shares from the
Company and a certain stockholder of the Company to cover over-allotments.
1.
<PAGE>
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:
(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 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
2.
<PAGE>
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 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 material 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; and neither the Company nor any of its
subsidiaries is in material 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. 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, and
E*TRADE Online Ventures, Inc., a California corporation (each, a "Subsidiary"
and collectively, the "Subsidiaries").
3.
<PAGE>
(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 of the Company's knowledge, 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
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
4.
<PAGE>
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 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,
(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 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
5.
<PAGE>
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 of Company's knowledge, no labor disturbance by the
employees of the Company or any of its subsidiaries exists or is imminent; and
the Company is not 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 Company's employees and, to the best of the Company's
knowledge, 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 expiration of any patents, patent rights, trade secrets,
trademarks, service marks, trade names or copyrights 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 has not received any notice of, and has no 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; and the Company
has not received any notice of, and has no 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.
6.
<PAGE>
(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.
(s) Each officer and director of the Company, each Selling Stockholder
and the beneficial owners of [90.15]% of the outstanding shares of Common Stock
(assuming conversion of all outstanding shares of 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
7.
<PAGE>
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 Registration Statement and
the Prospectus, (iii) 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. (S) 9601, et seq.), or otherwise
designated as a contaminated site under applicable state or local law.
(u) The Company and each of its subsidiaries maintain 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 "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
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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 Stockholder. Such prohibited hedging or other transactions would
including, 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
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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.
(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, and each
Underwriter agrees, severally and not jointly, to purchase from the Company and
the Selling Stockholders, respectively, at a purchase price of
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$_____ 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 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.
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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 $_____ 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 and seventh paragraphs 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 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
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writing, subject, however, to compliance with the Act and the Rules and
Regulations and the provisions of this Agreement.
(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 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
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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 (A) 25 days after the date of the Prospectus and (B) 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, 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 the sale of the Firm Company
Shares and the Option Shares to be sold by the Company hereunder and the
Company's issuance of options or Common Stock under the Company's presently
authorized option plans (the "Option Plans").
(m) During a period of ninety (90) days from the effective date of the
Registration Statement, the Company will not file a registration statement
registering shares under the Option Plan or other employee benefit plan.
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
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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 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.
(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
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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 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
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to own or lease its properties and conduct its business as described
in the Registration Statement and Prospectus;
(ii) Each of the Subsidiaries of the Company 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) The Company and each Subsidiary is duly qualified to do
business as a foreign corporation and is in good standing in each
jurisdiction, 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, operations or business of the Company and its
subsidiaries considered as one enterprise. To such counsel's
knowledge, the Company does not own or control, directly or
indirectly, any corporation, association or other entity other than
E*TRADE Securities, Inc., E*TRADE Capital, 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 and 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 to be issued and sold by it hereunder;
(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 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;
(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 filed as an exhibit to the Registration Statement, and no
consent, approval, authorization or order of or qualification with any
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
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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 description in the Registration Statement and the
Prospectus of the charter and bylaws of the Company and of statutes
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 and are not
so described, nor is there any statute, regulation, contract or other
document to which the Company is subject or a party that is known to
such counsel that is required 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) To such counsel's knowledge, neither the Company nor any
of its subsidiaries is presently (a) in material violation of its
respective charter or bylaws or (b) in material breach of any
applicable statute, rule or regulation known to such counsel or, to
such counsel's knowledge, any order, writ or decree of any court or
governmental agency or body having jurisdiction over the Company or
any of its subsidiaries, or over any of their properties or
operations;
(xiv) 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;
(xv) 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;
(xvi) To such counsel's knowledge, each Selling Stockholder that
is not a natural person has full right, power and authority to enter
into and to perform its obligations under the Power of 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
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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
under the Act, as to which such counsel need express no opinion;
(xvii) To such counsel's knowledge, each of the Selling
Stockholders has full 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;
(xviii) 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
(xix) 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, 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 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,
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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 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 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
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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 or will have 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 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 [90.15]% of the
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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 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 1,037,250 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
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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 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 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.
23.
<PAGE>
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 (including, without limitation, in its
capacity as an Underwriter or as a "qualified independent underwriter" within
the meaning of Schedule E of the Bylaws of the NASD), 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 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
(including, without limitation, in its capacity as an Underwriter or as a
"qualified independent underwriter" within the meaning of Schedule E or the
Bylaws of the NASD) 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
24.
<PAGE>
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 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. 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
25.
<PAGE>
legal or other expenses subsequently incurred by 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
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 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. 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
26.
<PAGE>
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
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.
27.
<PAGE>
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 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 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,
28.
<PAGE>
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.
29.
<PAGE>
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 shall constitute a
binding agreement among the Company, the Selling Stockholders and the several
Underwriters.
Very truly yours,
E*TRADE GROUP, INC.
By:
--------------------------------------
SELLING STOCKHOLDERS
By:
--------------------------------------
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
On their behalf and on behalf of each of the
several Underwriters named in Schedule A hereto.
By Robertson, Stephens & Company LLC
By Robertson, Stephens & Company Group, L.L.P.
By:
--------------------------------------
Authorized Signatory
30.
<PAGE>
SCHEDULE A
NUMBER OF
FIRM SHARES
TO BE
UNDERWRITERS PURCHASED
Robertson, Stephens & Company LLC..............................
Hambrecht & Quist LLC..........................................
Deutsche Morgan Grenfell.......................................
-----------
Total..................................................... 6,915,000
===========
<PAGE>
SCHEDULE B
<TABLE>
<CAPTION>
NUMBER OF FIRM NUMBER OF OPTION
COMPANY SHARES TO BE SOLD SHARES TO BE SOLD
<S> <C> <C>
_________ _______
Total...................... 6,250,000 797,250
========= =======
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF FIRM NUMBER OF OPTION
NAME OF SELLING STOCKHOLDER SHARES TO BE SOLD SHARES TO BE SOLD
<S> <C> <C>
_______ _______
Total.................... 665,000 240,000
======= =======
</TABLE>
<PAGE>
EXHIBIT 3.3
RESTATED CERTIFICATE OF INCORPORATION
OF
E*TRADE GROUP, INC.
FIRST. The name of the corporation is E*TRADE Group, Inc. (the
``Corporation'').
SECOND. The address of its registered office in the State of Delaware is
1013 Centre Road, in the City of Wilmington, County of New Castle. The name of
its registered agent at such address is The Prentice-Hall Corporation System,
Inc.
THIRD. The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of Delaware.
FOURTH. (a) The Corporation is authorized to issue two classes of stock
to be designated, respectively, ``Common Stock'' and ``Preferred Stock.'' The
total number of shares that the corporation is authorized to issue is Fifty-One
Million (51,000,000) shares. Fifty Million (50,000,000) shares shall be Common
Stock, $0.01 par value per share. One Million (1,000,000) shares shall be
Preferred Stock, $0.01 par value per share, of which 100,000 shares shall be
designated Series A Preferred Stock, 20,336 shares shall be designated Series B
Preferred Stock and 11,180 shares shall be designated Series C Preferred Stock.
The Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock
and such other series of Preferred Stock as shall be designated are collectively
referred to as ``Preferred Stock.''
(b) The Preferred Stock may be issued from time to time in one or
more series. The Board of Directors is expressly authorized, in the resolution
or resolutions providing for the issuance of any wholly unissued series of
Preferred Stock, to fix, state and express the powers, rights, designations,
preferences, qualifications, limitations and restrictions thereof, including
without limitation: the rate of dividends upon which and the times at which
dividends on shares of such series shall be payable and the preference, if any,
which such dividends shall have relative to dividends on shares of any other
class or classes or any other series of stock of the Corporation; whether such
dividends shall be cumulative or noncumulative, and if cumulative, the date or
dates from which dividends on shares of such series shall be cumulative; the
voting rights, if any, to be provided for shares of such series; the rights, if
any, which the holders of shares of such series shall have in the event of any
voluntary or involuntary liquidation, dissolution or winding up of the affairs
of the Corporation; the rights, if any, which the holders of shares of such
series shall have to convert such shares into or exchange such shares for shares
of stock of the Corporation, and the terms and conditions, including price and
rate of exchange of such conversion or exchange; and the redemption rights
(including sinking fund provisions), if any, for shares of such series; and such
other powers, rights, designations, preferences, qualifications, limitations and
restrictions as the Board of Directors may desire to so fix. The Board of
1.
<PAGE>
Directors is also expressly authorized to fix the number of shares constituting
such series and to increase or decrease the number of shares of any series prior
to the issuance of shares of that series and to increase or decrease the number
of shares of any series subsequent to the issuance of shares of that series, but
not to decrease such number below the number of shares of such series then
outstanding. In case the number of shares of any series shall be so decreased,
the shares constituting such decrease shall resume the status which they had
prior to the adoption of the resolution originally fixing the number of shares
of such series.
(c) A statement of the rights, preferences, privileges and
restrictions granted to or imposed on the Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock and the holders thereof is as
follows:
1. Dividends. The Series A Preferred Stock, Series B Preferred Stock
---------
and Series C Preferred Stock shall not be entitled to any annual or other
dividend, except and to the extent that if any cash dividend is declared and
paid on the Common Stock after the date on which a share of a series of
Preferred Stock was first issued (the ``Original Issue Date''), each share of
Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock
will be entitled to receive a cash dividend equivalent to that paid on the
Common Stock on an as-if-converted basis as described in Subsection 3 below.
2. Voting Rights; Directors. Each holder of shares of the Series A
------------------------
Preferred Stock, Series B Preferred Stock or Series C Preferred Stock shall be
entitled to the number of votes equal to the number of shares of Common Stock
into which such shares of Series A Preferred Stock, Series B Preferred Stock or
Series C Preferred Stock could be converted on the record date for the vote or
consent of stockholders and shall have voting rights and powers equal to the
voting rights and powers of the holders of Common Stock. The holder of each
share of Series A Preferred Stock, Series B Preferred Stock or Series C
Preferred Stock shall be entitled to notice of any stockholders' meeting in
accordance with the Bylaws of the Corporation and shall vote with holders of the
Common Stock upon any matter submitted to a vote of stockholders, except those
matters required by law or these Restated Articles of Incorporation to be
submitted to a class vote. Fractional votes by the holders of Series A
Preferred Stock, Series B Preferred Stock or Series C Preferred Stock shall not,
however, be permitted.
3. Conversion.
----------
(a) Right to Convert. The holders of Series A Preferred Stock,
----------------
Series B Preferred Stock and Series C Preferred Stock shall have conversion
rights as follows:
(i) Series A Preferred Stock. Each share of Series A Preferred
------------------------
Stock shall be convertible, at the option of the holder thereof, at any
time after the date of issuance of such share at the office of the
Corporation or any transfer agent for such stock, into such number of fully
paid and nonassessable shares of Common Stock as is determined by dividing
$123.00 by the Series A Conversion Price,
2.
<PAGE>
determined as hereinafter provided, in effect on the date the certificate
is surrendered for conversion. The price at which shares of Common Stock
shall be deliverable upon conversion of shares of the Series A Preferred
Stock (the ``Series A Conversion Price'') shall initially be $2.05 per
share of Common Stock. The initial Series A Conversion Price shall be
adjusted as hereinafter provided.
(ii) Series B Preferred Stock. Each share of Series B Preferred
------------------------
Stock shall be convertible, at the option of the holder thereof, at any
time after the date of issuance of such share at the office of the
Corporation or any transfer agent for such stock, into such number of fully
paid and nonassessable shares of Common Stock as is determined by dividing
$140.00 by the Series B Conversion Price, determined as hereinafter
provided, in effect on the date the certificate is surrendered for
conversion. The price at which shares of Common Stock shall be deliverable
upon conversion of shares of the Series B Preferred Stock (the "Series B
Conversion Price") shall initially be $2.3333333 per share of Common Stock.
The initial Series B Conversion Price shall be adjusted as hereinafter
provided.
(iii) Series C Preferred Stock. Each share of Series C
------------------------
Preferred Stock shall be convertible, at the option of the holder thereof,
at any time after the date of issuance of such share at the office of the
Corporation or any transfer agent for such stock, into such number of fully
paid and nonassessable shares of Common Stock as is determined by dividing
$805.00 by the Series C Conversion Price, determined as hereinafter
provided, in effect on the date the certificate is surrendered for
conversion. The price at which shares of Common Stock shall be deliverable
upon conversion of shares of the Series C Preferred Stock (the "Series C
Conversion Price") shall initially be $13.4166666 per share of Common
Stock. The initial Series C Conversion Price shall be adjusted as
hereinafter provided.
(b) Automatic Conversion. Each share of Series A Preferred Stock
--------------------
shall automatically be converted into fully paid and nonassessable shares
of Common Stock at the then-effective Series A Conversion Price, each share
of Series B Preferred Stock shall automatically be converted into fully
paid and nonassessable shares of Common Stock at the then-effective Series
B Conversion Price and each share of Series C Preferred Stock shall
automatically be converted into fully paid and nonassessable shares of
Common Stock at the then-effective Series C Conversion Price, immediately
upon the earlier of (A) receipt by the Corporation of the written consent
to or request for such conversion from holders of at least a majority of
the shares of Series A Preferred Stock, Series B Preferred Stock or Series
C Preferred Stock, respectively, then outstanding, or (B) the closing of
the sale of the Corporation's Common Stock in a firm commitment,
underwritten public offering registered under the Securities Act of 1933,
as amended (the "Securities Act"), which offering results in the Company
and its Common Stock being listed on the National Association of Securities
Dealers National Market System, the American Stock Exchange or the New York
Stock Exchange, other than a registration relating solely
3.
<PAGE>
to a transaction under Rule 145 under such Act (or any successor thereto)
or to an employee benefit plan of the Corporation, the aggregate proceeds
to the Corporation and/or any selling stockholders (after deduction of
underwriters' discounts and expenses relating to the issuance, including
without limitation fees of the Corporation's counsel) of which exceed
$7,500,000 (a ``Qualified initial Public Offering'').
(c) Mechanics of Conversion.
-----------------------
(i) Before any holder of Series A Preferred Stock, Series B
Preferred Stock or Series C Preferred Stock shall be entitled to convert
the same into shares of Common Stock, he or she shall surrender the
certificate or certificates therefor, duly endorsed, at the office of the
Corporation or of any transfer agent for such stock, and shall give written
notice to the Corporation at such office that he or she elects to convert
the same, the number of shares of Series A Preferred Stock, Series B
Preferred Stock or Series C Preferred Stock which he or she wishes to
convert, and shall state therein the name or names in which he or she
wishes the certificate or certificates of shares for Common Stock to be
issued. The Corporation shall, as soon as practicable thereafter, issue
and deliver at such office to such holder of Series A Preferred Stock,
Series B Preferred Stock or Series C Preferred Stock, a certificate or
certificates for the number of shares of Common Stock to which he or she
shall be entitled as aforesaid, and, if less than all of the shares of
Series A Preferred Stock, Series B Preferred Stock or Series C Preferred
Stock represented by such certificate or certificates surrendered to the
Corporation are to be converted, a certificate for the number of
unconverted shares of Preferred Stock. Such conversion shall be deemed to
have been made immediately prior to the close of business on the date of
surrender of the shares of Series A Preferred Stock, Series B Preferred
Stock or Series C Preferred Stock to be converted, and the person or
persons entitled to receive the shares of Common Stock issuable upon such
conversion shall be treated for all purposes as the record holder or
holders of such shares of Common Stock on such date.
(ii) If the conversion is in connection with an underwritten
offering of securities pursuant to the Securities Act, the conversion may,
at the option of any holder tendering shares of Series A Preferred Stock,
Series B Preferred Stock or Series C Preferred Stock for conversion, be
conditioned upon the closing with the underwriters of the sale of
securities pursuant to such offering, in which event the person(s) entitled
to receive the Common Stock upon conversion of the Series A Preferred
Stock, Series B Preferred Stock or Series C Preferred Stock shall not be
deemed to have converted such Series A Preferred Stock, Series B Preferred
Stock or Series C Preferred Stock until immediately prior to the closing of
such sale of securities.
4.
<PAGE>
(d) Adjustments to Series A Conversion Price, Series B Conversion
-------------------------------------------------------------
Price and Series C Conversion Price for Stock Dividends and for
---------------------------------------------------------------
Combinations or Subdivisions of Common Stock. In the event this
--------------------------------------------
Corporation at any time or from time to time after the Original Issue Date
shall declare or pay, without consideration, any dividend on the Common
Stock payable in Common Stock or in any right to acquire Common Stock for
no consideration, or shall effect a subdivision of the outstanding shares
of Common Stock into a greater number of shares of Common Stock (by stock
split, reclassification or otherwise than by payment of a dividend in
Common Stock or in any right to acquire Common Stock), or in the event the
outstanding shares of Common Stock shall be combined or consolidated, by
reclassification or otherwise, into a lesser number of shares of Common
Stock, then the Series A Conversion Price, Series B Conversion Price and
Series C Conversion Price in effect immediately prior to such event shall,
concurrently with the effectiveness of such event, be proportionately
decreased or increased, as appropriate. In the event that this Corporation
shall declare or pay, without consideration, any dividend on the Common
Stock payable in any right to acquire Common Stock for no consideration,
then the Corporation shall be deemed to have made a dividend payable in
Common Stock in an amount of shares equal to the maximum number of shares
issuable upon exercise of such rights to acquire Common Stock.
(e) Adjustments for Reclassification and Reorganization. If the
---------------------------------------------------
Common Stock issuable upon conversion of the Series A Preferred Stock,
Series B Preferred Stock or Series C Preferred Stock shall be changed into
the same or a different number of shares of any other class or classes of
stock, whether by capital reorganization, reclassification or otherwise
(other than a subdivision or combination of shares provided for in
Subsection 3(d) above or a merger or other reorganization referred to in
Subsection 4(c) below), the Series A Conversion Price, Series B Conversion
Price or Series C Conversion Price then in effect shall, concurrently with
the effectiveness of such reorganization or reclassification, be
proportionately adjusted so that the Series A Preferred Stock, Series B
Preferred Stock or Series C Preferred Stock shall be convertible into, in
lieu of the number of shares of Common Stock which the holders would
otherwise have been entitled to receive, a number of shares of such other
class or classes of stock equivalent to the number of shares of Common
Stock that would have been subject to receipt by the holders upon
conversion of the Series A Preferred Stock, Series B Preferred Stock or
Series C Preferred Stock immediately before that change.
(f) Certificates as to Adjustments. Upon the occurrence of each
------------------------------
adjustment or readjustment of the Series A Conversion Price, Series B
Conversion Price or Series C Conversion Price pursuant to this Subsection
3, the Corporation shall promptly furnish or cause to be furnished to each
holder of Series A Preferred Stock, Series B Preferred Stock or Series C
Preferred Stock a certificate executed by the Corporation's President or
Chief Financial Officer setting forth such adjustment
5.
<PAGE>
or readjustment and showing in detail the facts upon which such adjustment
or readjustment is based and the number of shares of Common Stock and the
amount, if any, of other property which at the time would be received upon
the conversion of the Series A Preferred Stock, Series B Preferred Stock or
Series C Preferred Stock.
(g) Issue Taxes. The Corporation shall pay any and all issue and
-----------
other taxes that may be payable in respect of any issue or delivery of
shares of Common Stock on conversion of Series A Preferred Stock, Series B
Preferred Stock or Series C Preferred Stock pursuant hereto; provided,
however, that the Corporation shall not be obligated to pay any transfer
taxes resulting from any transfer requested by any holder in connection
with any such conversion.
(h) Reservation of Stock Issuable Upon Conversion. The Corporation
---------------------------------------------
shall at all times reserve and keep available out of its authorized but
unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the shares of the Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock, such number of its shares of
Common Stock as shall from time to time be sufficient to effect the
conversion of all outstanding shares of the Series A Preferred Stock,
Series B Preferred Stock and Series C Preferred Stock; and if at any time
the number of authorized but unissued shares of Common Stock shall not be
sufficient to effect the conversion of all then outstanding shares of the
Series A Preferred Stock, Series B Preferred Stock and Series C Preferred
Stock, the Corporation will take such corporate action as may, in the
opinion of its counsel, be necessary to increase the number of shares of
its authorized but unissued shares of Common Stock to such number of shares
as shall be sufficient for such purpose, including, without limitation,
engaging in best efforts to obtain the requisite stockholder approval of
any necessary amendment to this Certificate of Incorporation.
(i) Fractional Shares. No fractional share shall be issued upon the
-----------------
conversion of any share or shares of Series A Preferred Stock, Series B
Preferred Stock or Series C Preferred Stock. All shares of Common Stock
(including fractions thereof) issuable upon conversion of more than one
share of Series A Preferred Stock, Series B Preferred Stock or Series C
Preferred Stock by a holder thereof shall be aggregated for purposes of
determining whether the conversion would result in the issuance of any
fractional share. If, after the aforementioned aggregation, the conversion
would result in the issuance of a fraction of a share of Common Stock, the
Corporation shall, in lieu of issuing any fractional share, pay the holder
otherwise entitled to such fraction a sum in cash equal to the fair market
value of such fraction on the date of conversion (as determined in good
faith by the Board of Directors).
6.
<PAGE>
(j) Notices.
-------
(i) In the event that this Corporation shall propose at any
time:
(A) to declare any dividend or distribution upon its Common
Stock, whether in cash, property, stock or other securities,
whether or not a regular cash dividend and whether or not out of
earnings or earned surplus;
(B) to offer for subscription pro rata to the holders of
any class or series of its stock any additional shares of stock
of any class or series or other rights;
(C) to effect any reclassification or recapitalization of
its Common Stock outstanding involving a change in the Common
Stock; or
(D) to merge or consolidate with or into any other
corporation, or sell, lease or convey all or substantially all
its property, assets or business, or to liquidate, dissolve or
wind up;
then, in connection with such event, the Corporation shall send
to the holders of the Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock:
(1) at least ten (10) days' prior written notice of the
date on which a record shall be taken for such dividend, distribution
or subscription rights (and specifying the date on which the holders
of Common Stock shall be entitled thereto) or for determining rights
to vote in respect of the matters referred to in Subsection 3(j)(i)(C)
or (D) above; and
(2) in the case of the matters referred to in Subsection
3(j)(i)(C) and (D) above, at least twenty (20) days' prior written
notice of the date when the same shall take place (and specifying the
date on which the holders of Common Stock shall be entitled to
exchange their Common Stock for securities, cash or other property
deliverable upon the occurrence of such event or such earlier date, if
any, on which a record shall be taken of the holders of Common Stock
who shall be entitled to exchange their Common Stock).
(ii) Any notice required by the provisions of this Subsection 3 to
the holders of shares of Series A Preferred Stock, Series B Preferred Stock
or Series C Preferred Stock shall be deemed given if deposited in the
United States mail, postage
7.
<PAGE>
prepaid, and addressed to each holder of record at the address appearing on
the books of the Corporation.
4. Liquidation Preference.
----------------------
(a) In the event of any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, the holders of the Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and the
holders of any other series of Preferred Stock shall be entitled to
receive, prior and in preference to any distribution of any of the assets
or surplus funds of the Corporation to the holders of the Common Stock by
reason of their ownership thereof, with respect to the holders of (i)
Series A Preferred Stock, an amount equal to $123.00 per share, (ii) Series
B Preferred Stock, an amount equal to $140.00 per share, (iii) Series C
Preferred Stock, an amount equal to $805.00 per share, and (iv) any other
series of Preferred Stock, an amount equal to the price at which a share of
such series of Preferred Stock was first issued (the ``Original Issue
Price'') per share (as adjusted for any stock dividends, combinations or
splits with respect to such shares), for each share of such series of
Preferred Stock then held by them. If upon the occurrence of such event,
the assets and funds thus distributed among the holders of the Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and the
holders of any other series of Preferred Stock shall be insufficient to
permit the payment to such holders of the full aforesaid preferential
amount, then the entire assets and funds of the Corporation legally
available for distribution shall be distributed ratably among the holders
of the Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock and the holders of any other series of Preferred Stock in
proportion to the preferential amount each such holder is otherwise
entitled to receive.
(b) After payment to the holders of the Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock and the holders of any
other series of Preferred Stock of the amounts set forth in Subsection 4(a)
above, the entire remaining assets and funds of the Corporation legally
available for distribution, if any, shall be distributed among the holders
of the Common Stock in proportion to the shares of Common Stock then held
by them.
(c) Any acquisition of the Corporation by means of merger or other
form of corporate reorganization in which outstanding shares of the
Corporation are exchanged for securities or other consideration issued, or
caused to be issued, by the acquiring corporation or an affiliate thereof
(other than a mere reincorporation transaction), or a sale of all or
substantially all of the assets of the Corporation or a transaction or
series of related transactions (other than a public offering of the
Corporation's securities or the sale of its Preferred Stock) in which the
Corporation issues shares representing more than 50 percent of the voting
power of the Corporation immediately after giving effect to such
transaction (any such transaction
8.
<PAGE>
a ``Transaction''), shall be treated as a liquidation, dissolution or
winding up for purposes of this Subsection 4. Any securities to be
delivered to the holders of the Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock and Common Stock pursuant to such
a Transaction shall be valued as follows:
(i) Securities not subject to lock-up or other similar
restrictions on free marketability:
(A) If traded on a securities exchange or reported on a
national inter-dealer quotation system, the value shall be deemed
to be the average of the closing prices of the securities on such
exchange over the 30 day period ending three (3) days prior to
the closing of the Transaction;
(B) If actively traded over the counter and not reported on
a national inter-dealer quotation system, the value shall be
deemed to be the average of the closing bid prices over the 30
day period ending three (3) days prior to the closing of the
Transaction;
(C) If there is no active public market, the value shall be
the fair market value thereof, as mutually determined in good
faith by the Board of Directors of the Corporation and the
holders of at least a majority of the then outstanding shares of
Series A Preferred Stock, within ten (10) days after the Board of
Directors gives notice to such holders that such determination is
required; and
(D) If the fair market value cannot be determined pursuant
to, and within the time specified in Subsection 4(c)(i)(C) above
(such event, a ``Failure to Agree''), then the fair market value
shall be determined as follows:
(1) The Board of Directors and the holders of at least
a majority of the then outstanding shares of Series A
Preferred Stock, shall each, within ten (10) days of a
Failure to Agree, appoint one independent appraiser. If
either party fails to timely select an appraiser, then the
fair market value shall be deemed to equal the appraisal
made by the appraiser selected by the other party, which
shall be made within twenty (20) days following the
appointment of such appraiser.
(2) If both appraisers are timely selected, such two
appraisers shall in turn, no later than ten (10) days
following the appointment of the second appraiser, select a
third appraiser, which group of three appraisers shall then
determine
9.
<PAGE>
the fair market value, within twenty (20) days following the
appointment of the third appraiser. The fair market value
shall be conclusively deemed to equal the average of the
three appraisals. If any one appraiser fails to make a
determination of fair market value within the applicable
time period set forth herein, the fair market value shall be
deemed to equal the average of the other two timely
appraisals; or, if two appraisers fail to make a
determination of fair market value within the applicable
time period set forth herein, the fair market value shall be
deemed to equal the sole timely appraisal.
(3) If the appraiser or appraisers selected pursuant
to this Subsection 4(c)(i)(D) shall fail to make a
determination of fair market value within the applicable
time period set forth herein, the Board of Directors shall
have the authority to proceed with the closing of the
Transaction, subject to the later determination of fair
market value pursuant to this Subsection 4(c)(i)(D).
(ii) The method of valuation of securities subject to lock-up or
other restrictions on free marketability shall be to make an
appropriate discount from the market value determined as above in
Subsection 4(c)(i)(A), (B) or (C) above to reflect the approximate
fair market value thereof, as mutually determined in good faith by the
Board of Directors of the Corporation and the holders of at least a
majority of the then outstanding shares of Series A Preferred Stock
or, if applicable, shall be in accordance with Subsection 4(c)(i)(D),
giving appropriate weight, if any, to such restrictions.
5. No Reissuance of Series A Preferred Stock, Series B Preferred
-------------------------------------------------------------
Stock or Series C Preferred Stock. No share or shares of Series A Preferred
- ---------------------------------
Stock, Series B Preferred Stock or Series C Preferred Stock acquired by the
Corporation by reason of purchase, conversion or otherwise shall be reissued,
and all such shares shall be canceled, retired and eliminated from the shares
which the Corporation shall be authorized to issue. The Corporation may, from
time to time, take such appropriate corporate action as may be necessary to
reduce the authorized number of shares of the Series A Preferred Stock, Series B
Preferred Stock or Series C Preferred Stock.
6. Restrictions and Limitations. So long as shares of the Series A
----------------------------
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or shares of
any other series of Preferred Stock, as the Certificate of Incorporation may
provide, are outstanding, the corporation shall not without first obtaining
approval of holders of a majority of the outstanding Series A Preferred Stock,
Series B Preferred Stock and Series C Preferred Stock, voting separately as a
series, and, if the Certificate of Incorporation so provide, of holders of a
majority of such other series of Preferred Stock then outstanding:
10.
<PAGE>
(a) Effect the sale, merger or liquidation of the Corporation, or the
sale, lease or other disposition of all or substantially all of the
Corporation's assets;
(b) Effect any change in material accounting methods or policies of the
Corporation; or
(c) Effect any material amendment to the Certificate of Incorporation or
the Bylaws of the Corporation, or any amendment of this Subsection 6.
FIFTH. In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is authorized to make, alter or repeal any or
all of the Bylaws of the Corporation; provided, however, that any Bylaw
amendment adopted by the Board of Directors increasing or reducing the
authorized number of Directors shall require the affirmative vote of two-thirds
of the total number of Directors which the Corporation would have if there were
no vacancies. In addition, new Bylaws may be adopted or the Bylaws may be
amended or repealed by the affirmative vote of at least 66-2/3 percent of the
combined voting power of all shares of the Corporation entitled to vote
generally in the election of directors, voting together as a single class.
Notwithstanding anything contained in this Certificate of Incorporation to the
contrary, the affirmative vote of the holders of at least 66-2/3 percent of the
combined voting power of all shares of the Corporation entitled to vote
generally in the election of directors, voting together as a single class, shall
be required to alter, change, amend, repeal or adopt any provision inconsistent
with, this Article FIFTH.
SIXTH. (a) Any action required or permitted to be taken by the
stockholders of the Corporation must be effected at an annual or special meeting
of stockholders of the Corporation and may not be effected by any consent in
writing of such stockholders.
(b) Special meetings of stockholders of the Corporation may be
called only by the (i) Chairman of the Board of Directors, (ii) President, (iii)
Chairman or the Secretary at the written request of a majority of the total
number of Directors which the Corporation would have if there were no vacancies
upon not fewer than 10 or more than 60 days' written notice, or (iv) holders of
shares entitled to cast not less than 10 percent of the votes at such special
meeting upon not fewer than 10 nor more than 60 days' written notice. Any
request for a special meeting of stockholders shall be sent to the Chairman and
the Secretary and shall state the purposes of the proposed meeting. Special
meetings of holders of the outstanding Preferred Stock may be called in the
manner and for the purposes provided in the resolutions of the Board of
Directors providing for the issue of such stock. Business transacted at special
meetings shall be confined to the purpose or purposes stated in the notice of
meeting.
(c) Notwithstanding anything contained in this Certificate of
Incorporation to the contrary, the affirmative vote of the holders of at least
66-2/3% of the combined voting power of all shares of the Corporation entitled
to vote generally in the
11.
<PAGE>
election of directors, voting together as a single class, shall be required to
alter, change, amend, repeal or adopt any provision inconsistent with, this
Article SIXTH.
SEVENTH. (a) The number of Directors which shall constitute the whole
Board of Directors of this corporation shall be as specified in the Bylaws of
this corporation, subject to this Article SEVENTH.
(b) The Directors shall be classified with respect to the time
for which they severally hold office into three classes designated Class I,
Class II and Class III, as nearly equal in number as possible, as shall be
provided in the manner specified in the Bylaws of the Corporation. Each Director
shall serve for a term ending on the date of the third annual meeting of
stockholders following the annual meeting at which the Director was elected;
provided, however, that each initial Director in Class I shall hold office until
the annual meeting of stockholders in 1999, each initial Director in Class II
shall hold office until the annual meeting of stockholders in 1998, and each
initial Director in Class III shall hold office until the annual meeting of
stockholders in 1997. Notwithstanding the foregoing provisions of this Article
SEVENTH, each Director shall serve until his successor is duly elected and
qualified or until his death, resignation or removal.
(c) In the event of any increase or decrease in the authorized
number of Directors, (i) each Director then serving as such shall nevertheless
continue as a Director of the class of which he is a member until the expiration
of his current term, or his early resignation, removal from office or death, and
(ii) the newly created or eliminated directorship resulting from such increase
or decrease shall be apportioned by the Board of Directors among the three
classes of Directors so as to maintain such classes as nearly equally as
possible.
(d) Any Director or the entire Board of Directors may be removed
by the affirmative vote of the holders of at least 66-2/3 percent of the
combined voting power of all shares of the Corporation entitled to vote
generally in the election of directors, voting together as a single class.
(e) Notwithstanding anything contained in this Certificate of
Incorporation to the contrary, the affirmative vote of the holders of at least
66-2/3% of the combined voting power of all shares of the Corporation entitled
to vote generally in the election of directors, voting together as a single
class, shall be required to alter, change, amend, repeal or adopt any provision
inconsistent with, this Article SEVENTH.
EIGHTH. (a) 1. In addition to any affirmative vote required by law,
any Business Combination (as hereinafter defined) shall require the affirmative
vote of at least 66-2/3% of the combined voting power of all shares of the
Corporation entitled to vote generally in the election of directors, voting
together as a single class (for purposes of this Article EIGHTH, the ``Voting
Shares''). Such affirmative vote shall be required notwith-
12.
<PAGE>
standing the fact that no vote may be required, or that some lesser percentage
may be specified by law or in any agreement with any national securities
exchange or otherwise.
2. The term ``Business Combination'' as used in this Article EIGHTH
shall mean any transaction which is referred to in any one or more of the
following clauses (A) through (E):
(A) any merger or consolidation of the Corporation or any
Subsidiary (as hereinafter defined) with or into (i) any Interested Stockholder
(as hereinafter defined) or (ii) any other corporation (whether or not itself an
Interested Stockholder) which is, or after such merger or consolidation would
be, an Affiliate (as hereinafter defined) or Associate (as hereinafter defined)
of an Interested Stockholder; or
(B) any sale, lease, exchange, mortgage, pledge, transfer or
other disposition (in one transaction or a series of related transactions) to or
with, or proposed by or on behalf of, any Interested Stockholder or any
Affiliate or Associate of any Interested Stockholder, of any assets of the
Corporation or any Subsidiary constituting not less than five percent of the
total assets of the Corporation, as reported in the consolidated balance sheet
of the Corporation as of the end of the most recent quarter with respect to
which such balance sheet has been prepared; or
(C) the issuance or transfer by the Corporation or any Subsidiary
(in one transaction or a series of related transactions) of any securities of
the Corporation or any Subsidiary to, or proposed by or on behalf of, any
Interested Stockholder or any Affiliate or Associate of any Interested
Stockholder in exchange for cash, securities or other property (or a combination
thereof) constituting not less than five percent of the total assets of the
Corporation, as reported in the consolidated balance sheet of the Corporation as
of the end of the most recent quarter with respect to which such balance sheet
has been prepared; or
(D) the adoption of any plan or proposal for the liquidation or
dissolution of the Corporation, or any spin-off or split-up of any kind of the
Corporation or any Subsidiary, proposed by or on behalf of an Interested
Stockholder or any Affiliate or Associate of any Interested Stockholder; or
(E) any reclassification of securities (including any reverse
stock split), or recapitalization of the Corporation, or any merger or
consolidation of the Corporation with any of its Subsidiaries or any similar
transaction (whether or not with or into or otherwise involving an Interested
Stockholder) which has the effect, directly or indirectly, of increasing the
percentage of the outstanding shares of (i) any class of equity securities of
the Corporation or any Subsidiary or (ii) any class of securities of the
Corporation or any Subsidiary convertible into equity securities of the
Corporation or any Subsidiary, represented by securities of such class which are
directly or indirectly owned by any Interested Stockholder or any Affiliate or
Associate of any Interested Stockholder.
13.
<PAGE>
(b) The provisions of section (a) of this Article EIGHTH shall not be
applicable to any particular Business Combination, and such Business Combination
shall require only such affirmative vote as is required by law and any other
provision of this Certificate of Incorporation, if such Business Combination
has been approved by two-thirds of the whole Board of Directors.
(c) For the purposes of this Article EIGHTH:
1. A ``person'' shall mean any individual, firm,
corporation or other entity.
2. ``Interested Stockholder'' shall mean, in respect of
any Business Combination, any person (other than the Corporation or any
Subsidiary) who or which, as of the record date for the determination of
stockholders entitled to notice of and to vote on such Business Combination, or
immediately prior to the consummation of any such transaction
(A) is or was, at any time within two years prior
thereto, the beneficial owner, directly or indirectly, of 10 percent or more of
the then outstanding Voting Shares, or
(B) is an Affiliate or Associate of the Corporation
and at any time within two years prior thereto was the beneficial owner,
directly or indirectly, of 10 percent or more of the then outstanding Voting
Shares, or
(C) is an assignee of or has otherwise succeeded to
any shares of capital stock of the Corporation which were at any time within two
years prior thereto beneficially owned by any Interested Stockholder, if such
assignment or succession shall have occurred in the course of a transaction, or
series of transactions, not involving a public offering within the meaning of
the Securities Act of 1933, as amended.
3. A ``person'' shall be the ``beneficial owner'' of any
Voting Shares
(A) which such person or any of its Affiliates and
Associates (as hereinafter defined) beneficially own, directly or indirectly, or
(B) which such person or any of its Affiliates or
Associates has (i) the right to acquire (whether such right is exercisable
immediately or only after the passage of time), pursuant to any agreement,
arrangement or understanding or upon the exercise of conversion rights, exchange
rights, warrants or options, or otherwise, or (ii) the right to vote pursuant to
any agreement, arrangement or understanding, or
14.
<PAGE>
(C) which are beneficially owned, directly or
indirectly, by any other person with which such first mentioned person or any of
its Affiliates or Associates has any agreement, arrangement or understanding for
the purposes of acquiring, holding, voting or disposing of any shares of capital
stock of the Corporation.
4. The outstanding Voting Shares shall include shares
deemed owned through application of paragraph 3 above but shall not include any
other Voting Shares which may be issuable pursuant to any agreement, or upon
exercise of conversion rights, warrants or options, or otherwise.
5. ``Affiliate'' and ``Associate'' shall have the
respective meanings given those terms in Rule 12b-2 of the General Rules and
Regulations under the Securities Exchange Act of 1934, as in effect on the date
of adoption of this Certificate of Incorporation (the ``Exchange Act'').
6. ``Subsidiary'' shall mean any corporation of which a
majority of any class of equity security (as defined in Rule 3a11-1 of the
General Rules and Regulations under the Exchange Act) is owned, directly or
indirectly, by the Corporation; provided, however, that for the purposes of the
-----------------
definition of Interested Stockholder set forth in paragraph 2 of this section
(c) the term ``Subsidiary'' shall mean only a corporation of which a majority of
each class of equity security is owned, directly or indirectly, by the
Corporation.
(d) A majority of the directors shall have the power and duty to
determine for the purposes of this Article EIGHTH on the basis of information
known to them, (1) whether a person is an Interested Stockholder, (2) the number
of Voting Shares beneficially owned by any person, (3) whether a person is an
Affiliate or Associate of another, (4) whether a person has an agreement,
arrangement or understanding with another as to the matters referred to in
paragraph 3 of section (c), or (5) whether the assets subject to any Business
Combination or the consideration received for the issuance or transfer of
securities by the Corporation or any Subsidiary constitutes not less than five
percent of the total assets of the Corporation.
(e) Nothing contained in this Article EIGHTH shall be construed to
relieve any Interested Stockholder from any fiduciary obligation imposed by law.
(f) Notwithstanding anything contained in this Certificate of
Incorporation to the contrary, the affirmative vote of the holders of at least
66-2/3 percent of the combined voting power of all shares of the Corporation
entitled to vote generally in the election of directors, voting together as a
single class, shall be required to alter, change, amend, repeal or adopt any
provision inconsistent with, this Article EIGHTH.
NINTH. This Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter
15.
<PAGE>
prescribed by statute, and all rights conferred on stockholders herein are
granted subject to this reservation.
TENTH. A Director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a Director, except for liability (1) for any breach of the Director's
duty of loyalty to the Corporation or its stockholders, (2) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (3) under Section 174 of the General Corporation Law of
Delaware, or (4) for any transaction from which the Director derived any
improper personal benefit. If the General Corporation Law of Delaware is
hereafter amended to authorize, with the approval of a corporation's
stockholders, further reductions in the liability of a corporation's directors
for breach of fiduciary duty, then a Director of the Corporation shall not be
liable for any such breach to the fullest extent permitted by the General
Corporation Law of Delaware as so amended. Any repeal or modification of the
foregoing provisions of this Article ELEVENTH by the stockholders of the
Corporation shall not adversely affect any right or protection of a Director of
the Corporation existing at the time of such repeal or modification.
16.
<PAGE>
EXHIBIT 3.4
RESTATED BYLAWS
OF
E*TRADE GROUP, INC.
(A DELAWARE CORPORATION)
ARTICLE 1 - STOCKHOLDERS
------------------------
1.1 Place of Meetings. All meetings of stockholders shall be held at
-----------------
such place within or without the State of Delaware as may be designated from
time to time by the Board of Directors or the President or, if not so
designated, at the registered office of the corporation.
1.2 Annual Meeting. The annual meeting of stockholders for the
--------------
election of directors and for the transaction of such other business as may
properly be brought before the meeting shall be held each year beginning in the
calendar year 1997 on such date and at such time as the Board of Directors
determines. If this date shall fall upon a legal holiday at the place of the
meeting, then such meeting shall be held on the next succeeding business day at
the same hour. If no annual meeting is held in accordance with the foregoing
provisions, the Board of Directors shall cause the meeting to be held as soon
thereafter as convenient.
1.3 Special Meetings. Special meetings of stockholders may be called
----------------
only in accordance with Article SIXTH of the Certificate of Incorporation as it
may be amended from time to time (the ``Certificate of Incorporation'').
1.4 Notice of Meetings. Except as otherwise provided by law, written
------------------
notice of each meeting of stockholders, whether annual or special, shall be
given not less than 10 nor more than 60 days before the date of the meeting to
each stockholder entitled to vote at such meeting. The notices of all meetings
shall state the place, date and hour of the meeting. The notice of a special
meeting shall state, in addition, the purpose or purposes for which the meeting
is called. If mailed, notice is given when deposited in the United States mail,
postage prepaid, directed to the stockholder at his address as it appears on the
records of the corporation.
1.5 Voting List. The officer who has charge of the stock ledger of
-----------
the corporation shall prepare, at least 10 days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
10 days prior to the meeting, at a place within the city where the meeting is to
be held. The list shall also be produced and kept at the time and place of the
meeting during the whole time of the meeting, and may be inspected by any
stockholder who is present.
1.
<PAGE>
1.6 Quorum. Except as otherwise provided by law, the Certificate of
------
Incorporation or these Bylaws, the holders of a majority of the shares of the
capital stock of the corporation issued and outstanding and entitled to vote at
the meeting, present in person or represented by proxy, shall constitute a
quorum for the transaction of business.
1.7 Adjournments. Any meeting of stockholders may be adjourned to
------------
another time and to any other place at which a meeting of stockholders may be
held under these Bylaws by the stockholders present or represented at the
meeting and entitled to vote, although less than a quorum, or, if no stockholder
is present, by any officer entitled to preside at or to act as Secretary of such
meeting. It shall not be necessary to notify any stockholder of any adjournment
of less than 30 days if the time and place of the adjourned meeting are
announced at the meeting at which adjournment is taken, unless after the
adjournment a new record date is fixed for the adjourned meeting. At the
adjourned meeting, the corporation may transact any business which might have
been transacted at the original meeting.
1.8 Voting and Proxies. Each stockholder shall have one vote for
------------------
each share of stock entitled to vote held of record by such stockholder and a
proportionate vote for each fractional share so held, unless otherwise provided
in the Certificate of Incorporation. Each stockholder of record entitled to
vote at a meeting of stockholders may vote in person or may authorize another
person or persons to vote or act for him by written proxy executed by the
stockholder or his authorized agent and delivered to the Secretary of the
corporation. No such proxy shall be voted or acted upon after three years from
the date of its execution, unless the proxy expressly provides for a longer
period.
1.9 Action at Meeting. In all matters other than the election of
-----------------
directors, when a quorum is present at any meeting, the holders of a majority of
the stock present or represented and entitled to vote on the subject matter (or
if there are two or more classes of stock entitled to vote as separate classes,
then in the case of each such class, the holders of a majority of the stock of
that class present or represented and entitled to vote on the subject matter)
shall decide any matter to be voted upon by the stockholders at such meeting,
except when a different vote is required by express provision of law, the
Certificate of Incorporation or these Bylaws. Any election of directors by
stockholders shall be determined by a plurality of the votes cast by the
stockholders entitled to vote at the election.
1.10 Advance Notice of Stockholder Nominees and Stockholder Business.
---------------------------------------------------------------
(a) At an annual meeting of the stockholders, only such business shall be
conducted as shall have been properly brought before the meeting. To be
properly brought before an annual meeting, business must be: (A) specified in
the notice of meeting (or any supplement thereto) given by or at the direction
of the Board of Directors, (B) otherwise properly brought before the meeting by
or at the direction of the Board of Directors, or (C) otherwise properly brought
before the meeting by a stockholder. For business to be properly brought before
an annual meeting by a stockholder, the stockholder must have
2.
<PAGE>
given timely notice thereof in writing to the Secretary of the corporation. To
be timely, a stockholder's notice must be delivered to or mailed and received at
the principal executive offices of the corporation not later than the close of
business on the sixtieth (60th) day nor earlier than the close of business on
the ninetieth (90th) day prior to the first anniversary of the preceding year's
annual meeting; provided, however, that in the event that no annual meeting was
held in the previous year or the date of the annual meeting has been changed by
more than thirty (30) days from the date contemplated at the time of the
previous year's proxy statement, notice by the stockholder to be timely must be
so received not earlier than the close of business on the ninetieth (90th) day
prior to such annual meeting and not later than the close of business on the
later of the sixtieth (60th) day prior to such annual meeting or, in the event
public announcement of the date of such annual meeting is first made by the
corporation fewer than seventy (70) days prior to the date of such annual
meeting, the close of business on the tenth (10th) day following the day on
which public announcement of the date of such meeting is first made by the
corporation. A stockholder's notice to the Secretary shall set forth as to each
matter the stockholder proposes to bring before the annual meeting: (i) a brief
description of the business desired to be brought before the annual meeting and
the reasons for conducting such business at the annual meeting, (ii) the name
and address, as they appear on the corporation's books, of the stockholder
proposing such business, (iii) the class and number of shares of the corporation
which are beneficially owned by the stockholder, (iv) any material interest of
the stockholder in such business and (v) any other information that is required
to be provided by the stockholder pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended (the ``1934 Act''), in his or her
capacity as a proponent to a stockholder proposal. Notwithstanding the
foregoing, in order to include information with respect to a stockholder
proposal in the proxy statement and form of proxy for a stockholder's meeting,
stockholders must provide notice as required by the regulations promulgated
under the 1934 Act. Notwithstanding anything in these Bylaws to the contrary,
no business shall be conducted at any annual meeting except in accordance with
the procedures set forth in this paragraph (a). The chairman of the annual
meeting shall, if the facts warrant, determine and declare at the meeting that
business was not properly brought before the meeting and in accordance with the
provisions of this paragraph (a), and, if he or she should so determine, such
chairman shall so declare at the meeting that any such business not properly
brought before the meeting shall not be transacted.
(b) Only persons who are nominated in accordance with the procedures set
forth in this paragraph (b) shall be eligible for election as directors.
Nominations of persons for election to the Board of Directors of the corporation
may be made at a meeting of stockholders by or at the direction of the Board of
Directors or by any stockholder of the corporation entitled to vote in the
election of directors at the meeting who complies with the notice procedures set
forth in this paragraph (b). Such nominations, other than those made by or at
the direction of the Board of Directors, shall be made pursuant to timely notice
(as set forth in paragraph (a) of this Section 1.10) in writing to the Secretary
of the corporation in accordance with the provisions of paragraph (b) of this
Section 1.10. Such stockholder's notice shall set forth (i) as to each person,
if any, whom the stockholder
3.
<PAGE>
proposes to nominate for election or re-election as a director: (A) the name,
age, business address and residence address of such person, (B) the principal
occupation or employment of such person, (C) the class and number of shares of
the corporation which are beneficially owned by such person, (D) a description
of all arrangements or understandings between the stockholder and each nominee
and any other person or persons (naming such person or persons) pursuant to
which the nominations are to be made by the stockholder, and (E) any other
information relating to such person that is required to be disclosed in
solicitations of proxies for election of directors, or is otherwise required, in
each case pursuant to Regulation 14A under the 1934 Act (including without
limitation such person's written consent to being named in the proxy statement,
if any, as a nominee and to serving as a director if elected), and (ii) as to
such stockholder giving notice, the information required to be provided pursuant
to paragraph (a) of this Section 1.10. At the request of the Board of
Directors, any person nominated by a stockholder for election as a director
shall furnish to the Secretary of the corporation that information required to
be set forth in the stockholder's notice of nomination which pertains to the
nominee. No person shall be eligible for election as a director of the
corporation unless nominated in accordance with the procedures set forth in this
paragraph (b). The chairman of the meeting shall, if the facts warrant,
determine and declare at the meeting that a nomination was not made in
accordance with the procedures prescribed by these Bylaws, and if he or she
should so determine, such chairman shall so declare at the meeting, and the
defective nomination shall be disregarded.
(c) For purposes of this Section 1.10, ``public announcement'' shall mean
disclosure in a press release reported by the Dow Jones News Service, Associated
Press or comparable national news service or in a document publicly filed by the
corporation with the Securities and Exchange Commission pursuant to Section 13,
14 or 15(d) of the 1934 Act.
ARTICLE 2 - DIRECTORS
---------------------
2.1 General Powers. The business and affairs of the corporation
--------------
shall be managed by or under the direction of a Board of Directors, who may
exercise all of the powers of the corporation except as otherwise provided by
law, the Certificate of Incorporation or these Bylaws. In the event of a
vacancy in the Board of Directors, the remaining directors, except as otherwise
provided by law, may exercise the powers of the full Board of Directors until
the vacancy is filled.
2.2 Number; Election; Tenure and Qualification. The number of
------------------------------------------
Directors of the Corporation shall be eight (8), subject to amendment in
accordance with Article FIFTH of the Certificate of Incorporation. The
Directors shall be classified and their successors elected in accordance with
Article SEVENTH of the Certificate of Incorporation. Subject to the requirement
of the Certificate of Incorporation that the classes be as nearly equal in
number as possible, the size of each class of Directors shall be as determined
from
4.
<PAGE>
time to time by resolution adopted by a majority of the Board of Directors. Any
reduction in the size of any class of Directors shall not shorten the term of
office of any incumbent Director. Directors need not be stockholders of the
corporation.
2.3 Enlargement of the Board of Directors. The authorized number of
-------------------------------------
directors on the Board of Directors may be increased in accordance with Article
FIFTH of the Certificate of Incorporation.
2.4 Vacancies. Unless and until filled by the stockholders, any
---------
vacancy in the Board of Directors, however occurring, including a vacancy
resulting from an enlargement of the Board of Directors, may be filled by vote
of a majority of the directors then in office, although less than a quorum, or
by a sole remaining director; provided, however, a vacancy created by the
removal of a director by the vote of the stockholders or by court order may be
filled only by the affirmative vote of a majority of the shares represented and
voting at a duly held meeting at which a quorum is present (which shares voting
affirmatively also constitute a majority of the required quorum). Any director
elected in accordance with the preceding sentence shall hold office for the
remainder of the full term of the class of directors in which the new
directorship was created or the vacancy occurred and until such director's
successor shall have been elected and qualified, or until such director's
earlier death, resignation or removal.
2.5 Resignation. Any director may resign by delivering his written
-----------
resignation to the corporation at its principal office or to the President or
Secretary. Such resignation shall be effective upon receipt unless it is
specified to be effective at some other time or upon the happening of some other
event.
2.6 Removal. Any director or the entire Board of Directors may be
-------
removed, only as permitted by applicable law and Article SEVENTH of the
Certificate of Incorporation.
2.7 Regular Meetings. Regular meetings of the Board of Directors may
----------------
be held without notice at such time and place, within or without the State of
Delaware, as shall be determined from time to time by the Board of Directors;
provided that any director who is absent when such a determination is made shall
be given notice of the determination. A regular meeting of the Board of
Directors may be held without notice immediately after and at the same place as
the annual meeting of stockholders.
2.8 Special Meetings. Special meetings of the Board of Directors may
----------------
be held at any time and place, within or without the State of Delaware,
designated in a call by the Chairman of the Board, Vice Chairman of the Board,
two or more directors, President or the Secretary.
2.9 Notice of Special Meetings. Notice of any special meeting of
--------------------------
directors shall be given to each director by the Secretary or by the officer or
one of the directors
5.
<PAGE>
calling the meeting. Notice shall be given to each director in person, by
telephone, by facsimile transmission or by telegram sent to his business or home
address at least 48 hours in advance of the meeting, or by written notice mailed
to his business or home address at least 72 hours in advance of the meeting. A
notice or waiver of notice of a meeting of the Board of Directors need not
specify the purposes of the meeting.
2.10 Meetings by Telephone Conference Calls. Directors or any
--------------------------------------
members of any committee designated by the directors may participate in a
meeting of the Board of Directors or such committee by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and participation by such
means shall constitute presence in person at such meeting.
2.11 Quorum. A majority of the number of directors fixed pursuant to
------
Section 2.2 shall constitute a quorum at all meetings of the Board of Directors.
In the event one or more of the directors shall be disqualified to vote at any
meeting, then the required quorum shall be reduced by one for each such director
so disqualified; provided, however, that in no case shall less than one-third
(1/3) of the number so fixed constitute a quorum. In the absence of a quorum at
any such meeting, a majority of the directors present may adjourn the meeting
from time to time without further notice other than announcement at the meeting,
until a quorum shall be present.
2.12 Action at Meeting. At any meeting of the Board of Directors at
-----------------
which a quorum is present, the vote of a majority of those present shall be
sufficient to take any action, unless a different vote is specified by law, the
Certificate of Incorporation or these Bylaws.
2.13 Action by Consent. Any action required or permitted to be taken
-----------------
at any meeting of the Board of Directors or of any committee of the Board of
Directors may be taken without a meeting, if all members of the Board of
Directors or committee, as the case may be, consent to the action in writing,
and the written consents are filed with the minutes of proceedings of the Board
of Directors or committee.
2.14 Committees. The Board of Directors may, by resolution passed by
----------
a majority of the whole Board of Directors, designate one or more committees,
each committee to consist of one or more of the directors of the corporation.
The Board of Directors may designate one or more directors as alternate members
of any committee, who may replace any absent or disqualified member at any
meeting of the committee. In the absence or disqualification of a member of a
committee, the member or members of the committee present at any meeting and not
disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member. Any such
committee, to the extent provided in the resolution of the Board of Directors
and subject to the provisions of the General Corporation Law of Delaware, shall
have and may exercise all the powers and authority of the Board of Directors in
the management of the
6.
<PAGE>
business and affairs of the corporation and may authorize the seal of the
corporation to be affixed to all papers which may require it. Each such
committee shall keep minutes and make such reports as the Board of Directors may
from time to time request. Except as the Board of Directors may otherwise
determine, any committee may make rules for the conduct of its business, but
unless otherwise provided by the directors or in such rules, its business shall
be conducted as nearly as possible in the same manner as is provided in these
Bylaws for the Board of Directors.
2.15 Compensation for Directors. Directors may be paid such
--------------------------
compensation for their services and such reimbursement for expenses of
attendance at meetings as the Board of Directors may from time to time
determine. No such payment shall preclude any director from serving the
corporation or any of its parent or subsidiary corporations in any other
capacity and receiving compensation for such service.
ARTICLE 3 - OFFICERS
--------------------
3.1 Enumeration. The officers of the corporation shall consist of a
-----------
President, a Secretary, a Treasurer and such other officers with such other
titles as the Board of Directors shall determine, including a Chairman of the
Board, a Vice Chairman of the Board, and one or more Vice Presidents, Assistant
Treasurers, and Assistant Secretaries. The Board of Directors may appoint such
other officers as it may deem appropriate.
3.2 Election. The President, Treasurer and Secretary shall be
--------
elected by the Board of Directors at its first meeting following the annual
meeting of stockholders. Other officers may be appointed by the Board of
Directors at such meeting or at any other meeting.
3.3 Qualification. The Chairman must be an officer of the
-------------
corporation. The President need not be a director. No officer need be a
stockholder. Any two or more offices may be held by the same person.
3.4 Tenure. Except as otherwise provided by law, by the Certificate
------
of Incorporation or by these Bylaws, each officer shall hold office until his
successor is elected and qualified, unless a different term is specified in the
vote choosing or appointing him, or until his earlier death, resignation or
removal.
3.5 Resignation and Removal. Any officer may resign by delivering
-----------------------
his written resignation to the corporation at its principal office or to the
President or Secretary. Such resignation shall be effective upon receipt unless
it is specified to be effective at some other time or upon the happening of some
other event.
7.
<PAGE>
The Board of Directors, or a committee duly authorized to do so,
may remove any officer with or without cause. Except as the Board of Directors
may otherwise determine, no officer who resigns or is removed shall have any
right to any compensation as an officer for any period following his resignation
or removal, or any right to damages on account of such removal, whether his
compensation be by the month or by the year or otherwise, unless such
compensation is expressly provided in a duly authorized written agreement with
the corporation.
3.6 Vacancies. The Board of Directors may fill any vacancy occurring
---------
in any office for any reason and may, in its discretion, leave unfilled for such
period as it may determine any offices other than those of President, Treasurer
and Secretary. Each such successor shall hold office for the unexpired term of
his predecessor and until his successor is elected and qualified, or until his
earlier death, resignation or removal.
3.7 Chairman of the Board and Vice Chairman of the Board. If the
----------------------------------------------------
Board of Directors appoints a Chairman of the Board, he shall, when present,
preside at all meetings of the Board of Directors. He shall perform such duties
and possess such powers as are usually vested in the office of the Chairman of
the Board or as may be vested in him by the Board of Directors. If the Board of
Directors appoints a Vice Chairman of the Board, he shall, in the absence or
disability of the Chairman of the Board, perform the duties and exercise the
powers of the Chairman of the Board and shall perform such other duties and
possess such other powers as may from time to time be vested in him by the Board
of Directors.
3.8 President. The President shall be the chief operating officer of
---------
the corporation. He shall also be the chief executive officer of the
corporation unless such title is assigned to a Chairman of the Board. The
President shall, subject to the direction of the Board of Directors, have
general supervision and control of the business of the corporation. Unless
otherwise provided by the directors, he shall preside at all meetings of the
stockholders and of the Board of Directors (except as provided in Section 3.7
above). The President shall perform such other duties and shall have such other
powers as the Board of Directors may from time to time prescribe.
3.9 Vice Presidents. Any Vice President shall perform such duties
---------------
and possess such powers as the Board of Directors or the President may from time
to time prescribe. In the event of the absence, inability or refusal to act of
the President, the Vice President (or if there shall be more than one, the Vice
Presidents in the order determined by the Board of Directors) shall perform the
duties of the President and when so performing shall have all the powers of and
be subject to all the restrictions upon the President. The Board of Directors
may assign to any Vice President the title of Executive Vice President, Senior
Vice President or any other title selected by the Board of Directors.
3.10 Secretary and Assistant Secretary. The Secretary shall perform
---------------------------------
such duties and shall have such powers as the Board of Directors or the
President may from time
8.
<PAGE>
to time prescribe. In addition, the Secretary shall perform such duties and
have such powers as are incident to the office of the secretary, including
without limitation the duty and power to give notices of all meetings of
stockholders and special meetings of the Board of Directors, to attend all
meetings of stockholders and the Board of Directors and keep a record of the
proceedings, to maintain a stock ledger and prepare lists of stockholders and
their addresses as required, to be custodian of corporate records and the
corporate seal and to affix and attest to the same on documents.
Any Assistant Secretary shall perform such duties and possess
such powers as the Board of Directors, the President or the Secretary may from
time to time prescribe. In the event of the absence, inability or refusal to act
of the Secretary, the Assistant Secretary (or if there shall be more than one,
the Assistant Secretaries in the order determined by the Board of Directors)
shall perform the duties and exercise the powers of the Secretary.
In the absence of the Secretary or any Assistant Secretary at
any meeting of stockholders or directors, the person presiding at the meeting
shall designate a temporary secretary to keep a record of the meeting.
3.11 Treasurer and Assistant Treasurer. The Treasurer shall be the
---------------------------------
chief financial officer and the chief accounting officer of the corporation.
The Treasurer shall perform such duties and shall have such powers as may from
time to time be assigned to him by the Board of Directors or the President. In
addition, the Treasurer shall perform such duties and have such powers as are
incident to the office of treasurer, including without limitation the duty and
power to keep and be responsible for all funds and securities of the
corporation, to deposit funds of the corporation in depositories selected in
accordance with these Bylaws, to disburse such funds as ordered by the Board of
Directors, to make proper accounts of such funds, and to render as required by
the Board of Directors statements of all such transactions and of the financial
condition of the corporation.
Any Assistant Treasurers shall perform such duties and possess
such powers as the Board of Directors, the President or the Treasurer may from
time to time prescribe. In the event of the absence, inability or refusal to act
of the Treasurer, the Assistant Treasurer (or if there shall be more than one,
the Assistant Treasurers in the order determined by the Board of Directors)
shall perform the duties and exercise the powers of the Treasurer.
3.12 Bonded Officers. The Board of Directors may require any officer
---------------
to give the corporation a bond in such sum and with such surety or sureties as
shall be satisfactory to the Board of Directors upon such terms and conditions
as the Board of Directors may specify, including without limitation a bond for
the faithful performance of his duties and for the restoration to the
corporation of all property in his possession or under his control belonging to
the corporation.
9.
<PAGE>
3.13 Salaries. Officers of the corporation shall be entitled to such
--------
salaries, compensation or reimbursement as shall be fixed or allowed from time
to time by the Board of Directors.
ARTICLE 4 - CAPITAL STOCK
-------------------------
4.1 Issuance of Stock. Unless otherwise voted by the stockholders
-----------------
and subject to the provisions of the Certificate of Incorporation, the whole or
any part of any unissued balance of the authorized capital stock of the
corporation held in its treasury may be issued, sold, transferred or otherwise
disposed of by vote of the Board of Directors in such manner, for such
consideration and on such terms as the Board of Directors may determine.
4.2 Certificates of Stock. Every holder of stock of the corporation
---------------------
shall be entitled to have a certificate, in such form as may be prescribed by
law and by the Board of Directors, certifying the number and class of shares
owned by him in the corporation. Each such certificate shall be signed by, or
in the name of the corporation by, the Chairman or Vice Chairman, if any, of the
Board of Directors, or the President or a Vice President, and by the Treasurer
or an Assistant Treasurer, or the Secretary or an Assistant Secretary of the
corporation. Any or all of the signatures on the certificate may be a
facsimile.
Each certificate for shares of stock which are subject to any
restriction on transfer pursuant to the Certificate of Incorporation, the
Bylaws, applicable securities laws or any agreement among any number of
stockholders or among such holders and the corporation shall have conspicuously
noted on the face or back of the certificate either the full text of the
restriction or a statement of the existence of such restriction.
4.3 Transfers. Subject to the restrictions, if any, stated or noted
---------
on the stock certificates, shares of stock may be transferred on the books of
the corporation by the surrender to the corporation or its transfer agent of the
certificate representing such shares properly endorsed or accompanied by a
written assignment or power of attorney properly executed, and with such proof
of authority or the authenticity of signature as the corporation or its transfer
agent may reasonably require. Except as may be otherwise required by law, by
the Certificate of Incorporation or by these Bylaws, the corporation shall be
entitled to treat the record holder of stock as shown on its books as the owner
of such stock for all purposes, including the payment of dividends and the right
to vote with respect to such stock, regardless of any transfer, pledge or other
disposition of such stock until the shares have been transferred on the books of
the corporation in accordance with the requirements of these Bylaws.
4.4 Lost, Stolen or Destroyed Certificates. The corporation may
--------------------------------------
issue a new certificate of stock in place of any previously issued certificate
alleged to have been lost, stolen, or destroyed, upon such terms and conditions
as the Board of Directors may
10.
<PAGE>
prescribe, including the presentation of reasonable evidence of such loss, theft
or destruction and the giving of such indemnity as the Board of Directors may
require for the protection of the corporation or any transfer agent or
registrar.
4.5 Record Date. The Board of Directors may fix in advance a date as
-----------
a record date for the determination of the stockholders entitled to notice of or
to vote at any meeting of stockholders or to express consent (or dissent) to
corporate action in writing without a meeting, or entitled to receive payment of
any dividend or other distribution or allotment of any rights in respect of any
change, conversion or exchange of stock, or for the purpose of any other lawful
action. Such record date shall not be more than 60 nor less than 10 days before
the date of such meeting, nor more than 60 days prior to any other action to
which such record date relates.
If no record date is fixed, the record date for determining
stockholders entitled to notice of or to vote at a meeting of stockholders shall
be the close of business on the day before the day on which notice is given, or,
if notice is waived, at the close of business on the day before the day on which
the meeting is held. The record date for determining stockholders entitled to
express consent to corporate action in writing without a meeting, when no prior
action by the Board of Directors is necessary, shall be the day on which the
first written consent is expressed. The record date for determining
stockholders for any other purpose shall be at the close of business on the day
on which the Board of Directors adopts the resolution relating to such purpose.
A determination of stockholders of record entitled to notice of
or to vote at a meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, that the Board of Directors may fix a new record
date for the adjourned meeting.
ARTICLE 5 - INDEMNIFICATION
---------------------------
The corporation shall, to the fullest extent permitted by Section 145
of the General Corporation Law of Delaware, as that Section may be amended and
supplemented from time to time, indemnify any director or officer which it shall
have power to indemnify under the Section against any expenses, liabilities or
other matters referred to in or covered by that Section. The indemnification
provided for in this Article: (i) shall not be deemed exclusive of any other
rights to which those indemnified may be entitled under any bylaw, agreement or
vote of stockholders or disinterested directors or otherwise, both as to action
in their official capacities and as to action in another capacity while holding
such office; (ii) shall continue as to a person who has ceased to be a director
or officer; and (iii) shall inure to the benefit of the heirs, executors and
administrators of such a person. The corporation's obligation to provide
indemnification under this Article shall be offset to the extent of any other
source of indemnification or any otherwise applicable insurance coverage under a
policy maintained by the corporation or any other person.
11.
<PAGE>
Expenses incurred by a director of the corporation in defending a
civil or criminal action, suit or proceeding by reason of the fact that he is or
was a director of the corporation (or was serving at the corporation's request
as a director or officer of another corporation) shall be paid by the
corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such director to
repay such amount if it shall ultimately be determined that he is not entitled
to be indemnified by the corporation as authorized by relevant sections of the
General Corpora tion Law of Delaware.
To assure indemnification under this Article of all such persons who
are determined by the corporation or otherwise to be or to have been
``fiduciaries'' of any employee benefit plan of the corporation which may exist
from time to time, such Sec tion 145 shall, for the purposes of this Article, be
interpreted as follows: an ``other enterprise'' shall be deemed to include such
an employee benefit plan, including, without limitation, any plan of the
corporation which is governed by the Act of Congress entitled ``Employee
Retirement Income Security Act of 1974,'' as amended from time to time; the
corporation shall be deemed to have requested a person to serve an employee
benefit plan where the performance by such person of his duties to the
corporation also imposes duties on, or otherwise involves services by, such
person to the plan or participants or beneficiaries of the plan; excise taxes
assessed on a person with respect to an employee benefit plan pursuant to such
Act of Congress shall be deemed ``fines''; and action taken or omitted by a
person with respect to an employee benefit plan in the performance of such
person's duties for a purpose reasonably believed by such person to be in the
interest of the participants and beneficiaries of the plan shall be deemed to be
for a purpose which is not opposed to the best interests of the corporation.
ARTICLE 6 - GENERAL PROVISIONS
------------------------------
6.1 Fiscal Year. Except as from time to time otherwise designated by
-----------
the Board of Directors, the fiscal year of the corporation shall end on
September 30.
6.2 Corporate Seal. The corporate seal shall be in such form as
--------------
shall be approved by the Board of Directors.
6.3 Execution of Instruments. The President, the Chief Executive
------------------------
Officer, any Vice President, the Secretary or the Treasurer shall have power to
execute and deliver on behalf and in the name of the corporation any instrument
requiring the signature of an officer of the corporation, except as otherwise
provided in these Bylaws, or where the execution and delivery of such an
instrument shall be expressly delegated by the Board of Directors to some other
officer or agent of the corporation.
6.4 Waiver of Notice. Whenever any notice whatsoever is required to
----------------
be given by law, by the Certificate of Incorporation or by these Bylaws, a
waiver of such notice
12.
<PAGE>
either in writing signed by the person entitled to such notice or such person's
duly authorized attorney, or by telegraph, cable or any other available method,
whether before, at or after the time stated in such waiver, or the appearance of
such person or persons at such meeting in person or by proxy, shall be deemed
equivalent to such notice.
6.5 Voting of Securities. Except as the directors may otherwise
--------------------
designate, the President, the Chief Executive Officer, any Vice President, the
Secretary or Treasurer may waive notice of, and act as, or appoint any person or
persons to act as, proxy or attorney-in-fact for this corporation (with or
without power of substitution) at, any meeting of stockholders or shareholders
of any other corporation or organization, the securities of which may be held by
this corporation.
6.6 Evidence of Authority. A certificate by the Secretary, or an
---------------------
Assistant Secretary, or a temporary Secretary, as to any action taken by the
stockholders, directors, a committee or any officer or representative of the
corporation shall as to all persons who rely on the certificate in good faith be
conclusive evidence of such action.
6.7 Certificate of Incorporation. All references in these Bylaws to
----------------------------
the Certificate of Incorporation shall be deemed to refer to the Certificate of
Incorporation of the corporation, as amended and in effect from time to time.
These Bylaws are subject to the provisions of the Certificate of Incorporation
and applicable law.
6.8 Transactions with Interested Parties. No contract or transaction
------------------------------------
between the corporation and one or more of the directors or officers, or between
the corporation and any other corporation, partnership, association, or other
organization in which one or more of the directors or officers are directors or
officers, or have a financial interest, shall be void or voidable solely for
this reason, or solely because the director or officer is present at or
participates in the meeting of the Board of Directors or a committee of the
Board of Directors which authorizes the contract or transaction or solely
because his or their votes are counted for such purpose, if:
(a) The material facts as to his relationship or interest and
as to the contract or transaction are disclosed or are known to the Board of
Directors or the committee, and the Board of Directors or committee in good
faith authorizes the contract or transaction by the affirmative votes of a
majority of the disinterested directors, even though the disinterested directors
be less than a quorum;
(b) The material facts as to his relationship or interest and
as to the contract or transaction are disclosed or are known to the stockholders
entitled to vote thereon, and the contract or transaction is specifically
approved in good faith by vote of the stockholders; or
13.
<PAGE>
(c) The contract or transaction is fair as to the corporation as
of the time it is authorized, approved or ratified, by the Board of Directors, a
committee of the Board of Directors, or the stockholders.
Common or interested directors may be counted in determining the
presence of a quorum at a meeting of the Board of Directors or of a committee
which authorizes the contract or transaction.
6.9 Severability. Any determination that any provision of these
------------
Bylaws is for any reason inapplicable, illegal or ineffective shall not affect
or invalidate any other provision of these Bylaws.
6.10 Pronouns. All pronouns used in these Bylaws shall be deemed to
--------
refer to the masculine, feminine or neuter, singular or plural, as the identity
of the person or persons may require.
ARTICLE 7 - AMENDMENTS
----------------------
7.1 By the Board of Directors. Subject to the provisions of the
-------------------------
Certificate of Incorporation, these Bylaws may be altered, amended or repealed
or new Bylaws may be adopted by the affirmative vote of a majority of the
directors present at any regular or special meeting of the Board of Directors at
which a quorum is present.
7.2 By the Stockholders. Subject to the provisions of the
-------------------
Certificate of Incorporation, these Bylaws may be altered, amended or repealed
or new Bylaws may be adopted by the affirmative vote of the holders of at least
66-2/3% of the shares of the capital stock of the corporation issued and
outstanding and entitled to vote at any regular meeting of stockholders, or at
any special meeting of stockholders, provided notice of such alteration,
amendment, repeal or adoption of new bylaws shall have been stated in the notice
of such special meeting.
14.
<PAGE>
EXHIBIT 4.1
[STOCK CERTIFICATE FRONT]
[E*TRADE Logo]
COMMON STOCK
[Graphic of globe]
NUMBER
SHARES
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
SEE REVERSE FOR CERTAIN DEFINITIONS AND A STATEMENT AS TO THE RIGHTS,
PREFERENCES, PRIVILEGES AND RESTRICTIONS OF SHARES
CUSIP 269246 10 4
THIS CERTIFIES THAT
IS THE RECORD HOLDER OF
[Seal copy:] E*TRADE Group, Inc.
MAY 30
1996
DELAWARE
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK PAR VALUE OF $0.01 PER
SHARE OF
E*TRADE GROUP, INC.
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this Certificate properly
endorsed. This Certificate is not valid until countersigned and registered by
the Transfer Agent and Registrar. WITNESS the facsimile seal of the Corporation
and the facsimile signatures of its duly authorized officers.
Dated:
[Signatures:] Stephen Richards Christos M. Cotsakos W. A. Porter
TREASURER PRESIDENT AND CEO CHAIRMAN
COUNTERSIGNED AND REGISTERED: AMERICAN STOCK TRANSFER & TRUST COMPANY TRANSFER
AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
<PAGE>
[STOCK CERTIFICATE BACK]
A statement of the powers, designations, preferences, and relative,
participating, optional or other rights of each class of stock or series
thereof, if any, and the qualifications, limitations or restrictions thereof, if
any, as established from time to time, by the Certificate of Incorporation or by
any certificate of determination of preferences, and the number of shares
constituting each series or class, and the designations thereof, may be obtained
by any stockholder of the Corporation upon request and without charge from the
Secretary of the Corporation at the principal office of the Corporation.
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with rights of survivorship and not as tenants in
common
COM PROP - as community property
UNIF GIFT MIN ACT - Custodian
(Cust) (Minor)
under Uniform Gift to Minors Act
(State)
UNIF TRF MIN ACT - Custodian (until age )
(Cust)
under Uniform Transfers
(Minor)
to Minor Act
(State)
Additional abbreviates may also be used though not in the above list.
For Value Received, hereby sell(s), assign(s) and transfer(s) unto
PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
shares of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
Attorney to transfer the said stock on the books of the within named Corporation
with full power of substitution in the premises.
Dated
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS
WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION
OR ENLARGEMENT OR ANY CHANGE WHATSOEVER.
Signature(s) Guaranteed:
<PAGE>
By
-----------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMEBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO
S.E.C. RULE 17Ad-15.
<PAGE>
[Brobeck, Phleger & Harrison LLP Letterhead]
July 19, 1996
EXHIBIT 5.1
E*TRADE Group, Inc.
Four Embarcadero Place
2400 Geng Road
Palo Alto, CA 94303
Ladies and Gentlemen:
We have acted as counsel to E*TRADE Group, Inc., a Delaware corporation
(the "Company"), in connection with the registration of 5,364,750 shares of
Common Stock (the "Shares") (including an over-allotment of 699,750 shares),
up to 4,459,750 shares (the "Company Shares") of which are being offered by the
Company and up to 905,000 shares (the "Selling Stockholder Shares") of which are
being offered by certain stockholders of the Company (the "Selling
Stockholders") all as described in the Company's Registration Statement on Form
S-1 (No. 33-05525), filed with the Securities and Exchange Commission under the
Securities Act of 1933, as amended (the "Registration Statement"). The Shares
are to be sold pursuant to an Underwriting Agreement to be entered into among
the Company, Robertson, Stephens & Company LLC, Hambrecht & Quist LLC, and
Deutche Morgan Grenfell/C. J. Lawrence Inc., as representatives of the several
underwriters (the "Representatives") named in such Underwriting Agreement (the
"Underwriting Agreement").
In connection with this opinion, we have (i) examined and relied upon the
Registration Statement and related Prospectus, the Company's Restated
Certificate of Incorporation filed with the Secretary of State of the State of
Delaware, the Company's Restated Bylaws and the originals or copies certified to
our satisfaction of such records, documents, certificates, memorandum or other
instruments as in our judgment are necessary or appropriate to enable us to
render the opinion expressed below and (ii) assumed that the Shares will be sold
by the underwriters at a price determined through negotiations among the
Company, representatives of the Selling Stockholders and the Representatives.
On the basis of the foregoing, and in reliance thereon, we are of the
opinion that (i) the Selling Stockholder Shares have been duly authorized and
validly issued and are fully paid and nonassessable and (ii) the Company Shares
have been duly
<PAGE>
authorized, and when sold and issued by the Company in accordance with the terms
of the Underwriting Agreement, will be validly issued, fully paid and
nonassessable.
We consent to the filing of this opinion as Exhibit 5.1 to the Registration
Statement and to the reference to this firm under the caption "Legal Matters"
in the Prospectus which is part of the Registration Statement.
It is understood that this opinion is to be used only in connection with
the offer and sale of the Shares while the Registration Statement is in effect.
Very truly yours,
/s/ Brobeck, Phleger & Harrison
BROBECK, PHLEGER & HARRISON LLP
<PAGE>
EXHIBIT 10.4
E*TRADE GROUP, INC.
1996 STOCK INCENTIVE PLAN
-------------------------
ARTICLE ONE
GENERAL PROVISIONS
------------------
I. PURPOSE OF THE PLAN
This 1996 Stock Incentive Plan is intended to promote the interests of
E*TRADE Group, Inc., a Delaware corporation, by providing eligible persons with
the opportunity to acquire a proprietary interest, or otherwise increase their
proprietary interest, in the Corporation as an incentive for them to remain in
the service of the Corporation.
Capitalized terms shall have the meanings assigned to such terms in
the attached Appendix.
II. STRUCTURE OF THE PLAN
A. The Plan shall be divided into three separate equity programs:
- the Discretionary Option Grant Program under which eligible
persons may, at the discretion of the Plan Administrator, be granted options
to purchase shares of Common Stock,
- the Stock Issuance Program under which eligible persons may, at
the discretion of the Plan Administrator, be issued
shares of Common Stock directly, either through the immediate purchase of such
shares or as a bonus for services rendered the Corporation (or any Parent or
Subsidiary), and
- the Automatic Option Grant Program under which eligible
non-employee Board members shall automatically receive option grants at periodic
intervals to purchase shares of Common Stock.
B. The provisions of Articles One and Five shall apply to all equity
programs under the Plan and shall govern the interests of all persons under the
Plan.
III. ADMINISTRATION OF THE PLAN
A. Prior to the Section 12 Registration Date, the Discretionary
Option Grant and Stock Issuance Programs shall be administered by the Board.
Beginning with the Section 12 Registration Date, the Primary Committee shall
have sole and exclusive authority
<PAGE>
to administer the Discretionary Option Grant and Stock Issuance Programs with
respect to Section 16 Insiders. No non-employee Board member shall be eligible
to serve on the Primary Committee if such individual has, during the twelve
(12)-month period immediately preceding the date of his or her appointment to
the Committee or (if shorter) the period commencing with the Section 12(g)
Registration Date and ending with the date of his or her appointment to the
Primary Committee, received an option grant or direct stock issuance under the
Plan or any other stock option, stock appreciation, stock bonus or other stock
plan of the Corporation (or any Parent or Subsidiary), other than pursuant to
the Automatic Option Grant Program.
B. Administration of the Discretionary Option Grant and Stock
Issuance Programs with respect to all other persons eligible to participate in
those programs may, at the Board's discretion, be vested in the Primary
Committee or a Secondary Committee, or the Board may retain the power to
administer those programs with respect to all such persons. The members of the
Secondary Committee may be Board members who are Associates eligible to receive
discretionary option grants or direct stock issuances under the Plan or any
other stock option, stock appreciation, stock bonus or other stock plan of the
Corporation (or any Parent or Subsidiary).
C. Members of the Primary Committee or any Secondary Committee shall
serve for such period of time as the Board may determine and may be removed by
the Board at any time. The Board may also at any time terminate the functions
of any Secondary Committee and reassume all powers and authority previously
delegated to such committee.
D. Each Plan Administrator shall, within the scope of its
administrative functions under the Plan, have full power and authority (subject
to the provisions of the Plan) to establish such rules and regulations as it may
deem appropriate for proper administration of the Discretionary Option Grant and
Stock Issuance Programs and to make such determinations under, and issue such
interpretations of, the provisions of such programs and any outstanding options
or stock issuances thereunder as it may deem necessary or advisable. Decisions
of the Plan Administrator within the scope of its administrative functions under
the Plan shall be final and binding on all parties who have an interest in the
Discretionary Option Grant and Stock Issuance Programs under its jurisdiction or
any option or stock issuance thereunder.
E. Service on the Primary Committee or the Secondary Committee shall
constitute service as a Board member, and members of each such committee shall
accordingly be entitled to full indemnification and reimbursement as Board
members for their service on such committee. No member of the Primary Committee
or the Secondary Committee shall be liable for any act or omission made in good
faith with respect to the Plan or any option grants or stock issuances under the
Plan.
2.
<PAGE>
F. Administration of the Automatic Option Grant Program shall be
self-executing in accordance with the terms of that program, and no Plan
Administrator shall exercise any discretionary functions with respect to any
option grants or stock issuances made under those programs.
IV. ELIGIBILITY
A. The persons eligible to participate in the Discretionary Option
Grant and Stock Issuance Programs are as follows:
(i) Associates,
(ii) non-employee members of the Board (other than those serving
as members of the Primary Committee) or the board of directors of any
Parent or Subsidiary, and
(iii) consultants and other independent advisors who provide
services to the Corporation (or any Parent or Subsidiary).
B. Each Plan Administrator shall, within the scope of its
administrative jurisdiction under the Plan, have full authority to determine,
(i) with respect to the option grants under the Discretionary Option Grant
Program, which eligible persons are to receive option grants, the time or times
when such option grants are to be made, the number of shares to be covered by
each such grant, the status of the granted option as either an Incentive Option
or a Non-Statutory Option, the time or times when each option is to become
exercisable, the vesting schedule (if any) applicable to the option shares and
the maximum term for which the option is to remain outstanding and (ii) with
respect to stock issuances under the Stock Issuance Program, which eligible
persons are to receive stock issuances, the time or times when such issuances
are to be made, the number of shares to be issued to each Participant, the
vesting schedule (if any) applicable to the issued shares and the consideration
for such shares.
C. The Plan Administrator shall have the absolute discretion either
to grant options in accordance with the Discretionary Option Grant Program or to
effect stock issuances in accordance with the Stock Issuance Program.
D. The individuals who shall be eligible to participate in the
Automatic Option Grant Program shall be limited to (i) those individuals serving
as non-employee Board members on the Underwriting Date who have not previously
received a stock option grant from the Corporation, (ii) those individuals who
first become non-employee Board members after the Underwriting Date, whether
through appointment by the Board or election by the Corporation's stockholders,
and (iii) those individuals who continue to serve as non-employee Board members
at one or more Annual Stockholders Meetings held after the Underwriting Date. A
non-employee Board member who has previously been in the
3.
<PAGE>
employ of the Corporation (or any Parent or Subsidiary) shall not be eligible to
receive an option grant under the Automatic Option Grant Program at the time he
or she first becomes a non-employee Board member, but shall be eligible to
receive periodic option grants under the Automatic Option Grant Program while he
or she continues to serve as a non-employee Board member.
V. STOCK SUBJECT TO THE PLAN
A. The stock issuable under the Plan shall be shares of authorized
but unissued or reacquired Common Stock, including shares repurchased by the
Corporation on the open market. The maximum number of shares of Common Stock
initially reserved for issuance over the term of the Plan shall not exceed
9,994,120 shares. Such authorized share reserve is comprised of (i) the shares
subject to the outstanding options under the Predecessor Plan which will be
incorporated into the Plan/1/, plus (ii) an additional increase of 4,000,000
shares authorized by the Board but subject to stockholder approval prior to the
Section 12 Registration Date.
B. No one person participating in the Plan may receive options,
separately exercisable stock appreciation rights and direct stock issuances for
more than 500,000 shares of Common Stock in the aggregate per calendar year,
beginning with the 1996 calendar year.
C. Shares of Common Stock subject to outstanding options (including
options incorporated into this Plan from the Predecessor Plan) shall be
available for subsequent issuance under the Plan to the extent those options
expire or terminate for any reason prior to exercise in full. Unvested shares
issued under the Plan and subsequently cancelled or repurchased by the
Corporation, at the original issue price paid per share, pursuant to the
Corporation's repurchase rights under the Plan shall be added back to the number
of shares of Common Stock reserved for issuance under the Plan and shall
accordingly be available for reissuance through one or more subsequent option
grants or direct stock issuances under the Plan. However, should the exercise
price of an option under the Plan be paid with shares of Common Stock or should
shares of Common Stock otherwise issuable under the Plan be withheld by the
Corporation in satisfaction of the withholding taxes incurred in connection with
the exercise of an option or the vesting of a stock issuance under the Plan,
then the number of shares of Common Stock available for issuance under the Plan
shall be reduced by the gross number of shares for which the option is exercised
or which vest under the stock issuance, and not by the net number of shares of
Common Stock issued to the holder of such option or stock issuance.
D. If any change is made to the Common Stock by reason of any stock
split, stock dividend, recapitalization, combination of shares, exchange of
shares or other change affecting the outstanding Common Stock as a class without
the Corporation's receipt
- ----------
/1/ Estimated to be 5,994,120 shares of Common Stock as of May 31, 1996.
4.
<PAGE>
of consideration, appropriate adjustments shall be made to (i) the maximum
number and/or class of securities issuable under the Plan, (ii) the number
and/or class of securities for which any one person may be granted stock
options, separately exercisable stock appreciation rights and direct stock
issuances under this Plan per calendar year, (iii) the number and/or class of
securities for which grants are subsequently to be made under the Automatic
Option Grant Program to new and continuing non-employee Board members, (iv) the
number and/or class of securities and the exercise price per share in effect
under each outstanding option under the Plan and (v) the number and/or class of
securities and price per share in effect under each outstanding option
incorporated into this Plan from the Predecessor Plan. Such adjustments to the
outstanding options are to be effected in a manner which shall preclude the
enlargement or dilution of rights and benefits under such options. The
adjustments determined by the Plan Administrator shall be final, binding and
conclusive.
5.
<PAGE>
ARTICLE TWO
DISCRETIONARY OPTION GRANT PROGRAM
----------------------------------
I. OPTION TERMS
Each option shall be evidenced by one or more documents in the form
approved by the Plan Administrator; provided, however, that each such document
--------
shall comply with the terms specified below. Each document evidencing an
Incentive Option shall, in addition, be subject to the provisions of the Plan
applicable to such options.
A. EXERCISE PRICE.
--------------
1. The exercise price per share shall be fixed by the Plan
Administrator but shall not be less than one hundred percent (100%) of the Fair
Market Value per share of Common Stock on the option grant date.
2. The exercise price shall become immediately due upon
exercise of the option and shall, subject to the provisions of Section I of
Article Five and the documents evidencing the option, be payable in one or more
of the forms specified below:
(i) cash or check made payable to the Corporation,
(ii) shares of Common Stock held for the requisite period
necessary to avoid a charge to the Corporation's earnings for financial
reporting purposes and valued at Fair Market Value on the Exercise Date, or
(iii) to the extent the option is exercised for vested shares,
through a special sale and remittance procedure pursuant to which the
Optionee shall concurrently provide irrevocable written instructions to (a)
a Corporation-designated brokerage firm to effect the immediate sale of the
purchased shares and remit to the Corporation, out of the sale proceeds
available on the settlement date, sufficient funds to cover the aggregate
exercise price payable for the purchased shares plus all applicable
Federal, state and local income and employment taxes required to be
withheld by the Corporation by reason of such exercise and (b) the
Corporation to deliver the certificates for the purchased shares directly
to such brokerage firm in order to complete the sale.
Except to the extent such sale and remittance procedure is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.
6.
<PAGE>
B. EXERCISE AND TERM OF OPTIONS. Each option shall be exercisable at
----------------------------
such time or times, during such period and for such number of shares as shall be
determined by the Plan Administrator and set forth in the documents evidencing
the option. However, no option shall have a term in excess of ten (10) years
measured from the option grant date.
C. EFFECT OF TERMINATION OF SERVICE.
--------------------------------
1. The following provisions shall govern the exercise of any
options held by the Optionee at the time of cessation of Service or death:
(i) Any option outstanding at the time of the Optionee's
cessation of Service for any reason shall remain exercisable for such
period of time thereafter as shall be determined by the Plan Administrator
and set forth in the documents evidencing the option, but no such option
shall be exercisable after the expiration of the option term.
(ii) Any option exercisable in whole or in part by the Optionee
at the time of death may be subsequently exercised by the personal
representative of the Optionee's estate or by the person or persons to whom
the option is transferred pursuant to the Optionee's will or in accordance
with the laws of descent and distribution.
(iii) Should the Optionee's Service be terminated for
Misconduct, then all outstanding options held by the Optionee shall
terminate immediately and cease to be outstanding.
(iv) During the applicable post-Service exercise period, the
option may not be exercised in the aggregate for more than the number of
vested shares for which the option is exercisable on the date of the
Optionee's cessation of Service. Upon the expiration of the applicable
exercise period or (if earlier) upon the expiration of the option term, the
option shall terminate and cease to be outstanding for any vested shares
for which the option has not been exercised. However, the option shall,
immediately upon the Optionee's cessation of Service, terminate and cease
to be outstanding to the extent the option is not otherwise at that time
exercisable for vested shares.
2. The Plan Administrator shall have complete discretion,
exercisable either at the time an option is granted or at any time while the
option remains outstanding, to:
(i) extend the period of time for which the option is to remain
exercisable following the Optionee's cessation of Service from the limited
exercise period otherwise in effect for that option to such greater
7.
<PAGE>
period of time as the Plan Administrator shall deem appropriate, but in no
event beyond the expiration of the option term, and/or
(ii) permit the option to be exercised, during the applicable
post-Service exercise period, not only with respect to the number of vested
shares of Common Stock for which such option is exercisable at the time of
the Optionee's cessation of Service but also with respect to one or more
additional installments in which the Optionee would have vested had the
Optionee continued in Service.
D. STOCKHOLDER RIGHTS. The holder of an option shall have no
------------------
stockholder rights with respect to the shares subject to the option until such
person shall have exercised the option, paid the exercise price and become a
holder of record of the purchased shares.
E. REPURCHASE RIGHTS. The Plan Administrator shall have the
-----------------
discretion to grant options which are exercisable for unvested shares of Common
Stock. Should the Optionee cease Service while holding such unvested shares,
the Corporation shall have the right to repurchase, at the exercise price paid
per share, any or all of those unvested shares. The terms upon which such
repurchase right shall be exercisable (including the period and procedure for
exercise and the appropriate vesting schedule for the purchased shares) shall be
established by the Plan Administrator and set forth in the document evidencing
such repurchase right.
F. LIMITED TRANSFERABILITY OF OPTIONS. During the lifetime of the
----------------------------------
Optionee, the option shall be exercisable only by the Optionee and shall not be
assignable or transferable other than by will or by the laws of descent and
distribution following the Optionee's death. However, a Non-Statutory Option
may be assigned in whole or in part during the Optionee's lifetime in accordance
with the terms of a Qualified Domestic Relations Order. The assigned portion
may only be exercised by the person or persons who acquire a proprietary
interest in the option pursuant to such Qualified Domestic Relations Order. The
terms applicable to the assigned portion shall be the same as those in effect
for the option immediately prior to such assignment and shall be set forth in
such documents issued to the assignee as the Plan Administrator may deem
appropriate.
II. INCENTIVE OPTIONS
The terms specified below shall be applicable to all Incentive
Options. Except as modified by the provisions of this Section II, all the
provisions of Articles One, Two and Seven shall be applicable to Incentive
Options. Options which are specifically designated as Non-Qualified Options
when issued under the Plan shall not be subject to the terms of this Section II.
---
A. ELIGIBILITY. Incentive Options may only be granted to
-----------
Associates.
8.
<PAGE>
B. DOLLAR LIMITATION. The aggregate Fair Market Value of the shares
-----------------
of Common Stock (determined as of the respective date or dates of grant) for
which one or more options granted to any Associate under the Plan (or any other
option plan of the Corporation or any Parent or Subsidiary) may for the first
time become exercisable as Incentive Options during any one calendar year shall
not exceed the sum of One Hundred Thousand Dollars ($100,000). To the extent
the Associate holds two (2) or more such options which become exercisable for
the first time in the same calendar year, the foregoing limitation on the
exercisability of such options as Incentive Options shall be applied on the
basis of the order in which such options are granted.
C. 10% STOCKHOLDER. If any Associate to whom an Incentive Option is
---------------
granted is a 10% Stockholder, then the exercise price per share shall not be
less than one hundred ten percent (110%) of the Fair Market Value per share of
Common Stock on the option grant date, and the option term shall not exceed five
(5) years measured from the option grant date.
III. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. In the event of any Corporate Transaction, each outstanding
option shall automatically accelerate so that each such option shall,
immediately prior to the effective date of the Corporate Transaction, become
fully exercisable with respect to the total number of shares of Common Stock at
the time subject to such option and may be exercised for any or all of those
shares as fully-vested shares of Common Stock. However, an outstanding option
shall not so accelerate if and to the extent: (i) such option is, in connection
with the Corporate Transaction, either to be assumed by the successor
corporation (or parent thereof) or to be replaced with a comparable option to
purchase shares of the capital stock of the successor corporation (or parent
thereof), (ii) such option is to be replaced with a cash incentive program of
the successor corporation which preserves the spread existing on the unvested
option shares at the time of the Corporate Transaction and provides for
subsequent payout in accordance with the same vesting schedule applicable to
such option or (iii) the acceleration of such option is subject to other
limitations imposed by the Plan Administrator at the time of the option grant.
The determination of option comparability under clause (i) above shall be made
by the Plan Administrator, and its determination shall be final, binding and
conclusive.
B. All outstanding repurchase rights shall also terminate
automatically, and the shares of Common Stock subject to those terminated rights
shall immediately vest in full, in the event of any Corporate Transaction,
except to the extent: (i) those repurchase rights are to be assigned to the
successor corporation (or parent thereof) in connection with such Corporate
Transaction or (ii) such accelerated vesting is precluded by other limitations
imposed by the Plan Administrator at the time the repurchase right is issued.
9.
<PAGE>
C. Immediately following the consummation of the Corporate
Transaction, all outstanding options shall terminate and cease to be
outstanding, except to the extent assumed by the successor corporation (or
parent thereof).
D. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments to reflect such Corporate Transaction shall also be made
to (i) the exercise price payable per share under each outstanding option,
provided the aggregate exercise price payable for such securities shall remain
- --------
the same, (ii) the maximum number and/or class of securities available for
issuance over the remaining term of the Plan and (iii) the maximum number and/or
class of securities for which any one person may be granted stock options,
separately exercisable stock appreciation rights and direct stock issuances
under the Plan per calendar year.
E. The Plan Administrator shall have full power and authority to
grant options under the Discretionary Option Grant Program which will
automatically accelerate in the event the Optionee's Service subsequently
terminates by reason of an Involuntary Termination within a designated period
(not to exceed eighteen (18) months) following the effective date of any
Corporate Transaction in which those options are assumed or replaced and do not
otherwise accelerate. Any options so accelerated shall remain exercisable for
fully-vested shares until the earlier of (i) the expiration of the option term
-------
or (ii) the expiration of the one (1)-year period measured from the effective
date of the Involuntary Termination. In addition, the Plan Administrator may
provide that one or more of the Corporation's outstanding repurchase rights with
respect to shares held by the Optionee at the time of such Involuntary
Termination shall immediately terminate, and the shares subject to those
terminated repurchase rights shall accordingly vest in full.
F. The Plan Administrator shall have full power and authority to
grant options under the Discretionary Option Grant Program which will
automatically accelerate in the event the Optionee's Service subsequently
terminates by reason of an Involuntary Termination within a designated period
(not to exceed eighteen (18) months) following the effective date of any Change
in Control. Each option so accelerated shall remain exercisable for fully-
vested shares until the earlier of (i) the expiration of the option term or (ii)
-------
the expiration of the one (1)-year period measured from the effective date of
the Involuntary Termination. In addition, the Plan Administrator may provide
that one or more of the Corporation's outstanding repurchase rights with respect
to shares held by the Optionee at the time of such Involuntary Termination shall
immediately terminate, and the shares subject to those terminated repurchase
rights shall accordingly vest in full.
G. The portion of any Incentive Option accelerated in connection
with a Corporate Transaction or Change in Control shall remain exercisable as an
Incentive Option only to the extent the applicable One Hundred Thousand Dollar
limitation is not exceeded.
10.
<PAGE>
To the extent such dollar limitation is exceeded, the accelerated portion of
such option shall be exercisable as a Non-Qualified Option under the Federal tax
laws.
H. The outstanding options shall in no way affect the right of the
Corporation to adjust, reclassify, reorganize or otherwise change its capital or
business structure or to merge, consolidate, dissolve, liquidate or sell or
transfer all or any part of its business or assets.
IV. CANCELLATION AND REGRANT OF OPTIONS
The Plan Administrator shall have the authority to effect, at any time
and from time to time, with the consent of the affected option holders, the
cancellation of any or all outstanding options under the Discretionary Option
Grant Program (including outstanding options incorporated from the Predecessor
Plan) and to grant in substitution new options covering the same or different
number of shares of Common Stock but with an exercise price per share based on
the Fair Market Value per share of Common Stock on the new grant date.
V. STOCK APPRECIATION RIGHTS
A. The Plan Administrator shall have full power and authority to
grant to selected Optionees tandem stock appreciation rights and/or limited
stock appreciation rights.
B. The following terms shall govern the grant and exercise of tandem
stock appreciation rights:
(i) One or more Optionees may be granted the right, exercisable
upon such terms as the Plan Administrator may establish, to elect between
the exercise of the underlying option for shares of Common Stock and the
surrender of that option in exchange for a distribution from the
Corporation in an amount equal to the excess of (a) the Fair Market Value
(on the option surrender date) of the number of shares in which the
Optionee is at the time vested under the surrendered option (or surrendered
portion thereof) over (b) the aggregate exercise price payable for such
shares.
(ii) No such option surrender shall be effective unless it is
approved by the Plan Administrator. If the surrender is so approved, then
the distribution to which the Optionee shall be entitled may be made in
shares of Common Stock valued at Fair Market Value on the option surrender
date, in cash, or partly in shares and partly in cash, as the Plan
Administrator shall in its sole discretion deem appropriate.
11.
<PAGE>
(iii) If the surrender of an option is rejected by the Plan
Administrator, then the Optionee shall retain whatever rights the Optionee
had under the surrendered option (or surrendered portion thereof) on the
option surrender date and may exercise such rights at any time prior to the
later of (a) five (5) business days after the receipt of the rejection
-----
notice or (b) the last day on which the option is otherwise exercisable in
accordance with the terms of the documents evidencing such option, but in
no event may such rights be exercised more than ten (10) years after the
option grant date.
C. The following terms shall govern the grant and exercise of
limited stock appreciation rights:
(i) One or more Section 16 Insiders may be granted limited stock
appreciation rights with respect to their outstanding options.
(ii) Upon the occurrence of a Hostile Take-Over, each individual
holding one or more options with such a limited stock appreciation right in
effect for at least six (6) months shall have the unconditional right
(exercisable for a thirty (30)-day period following such Hostile Take-Over)
to surrender each such option to the Corporation, to the extent the option
is at the time exercisable for vested shares of Common Stock. In return
for the surrendered option, the Optionee shall receive a cash distribution
from the Corporation in an amount equal to the excess of (A) the Take-Over
Price of the shares of Common Stock which are at the time vested under each
surrendered option (or surrendered portion thereof) over (B) the aggregate
exercise price payable for such shares. Such cash distribution shall be
paid within five (5) days following the option surrender date.
(iii) Neither the approval of the Plan Administrator nor the
consent of the Board shall be required in connection with such option
surrender and cash distribution.
(iv) The balance of the option (if any) shall continue in full
force and effect in accordance with the documents evidencing such option.
12.
<PAGE>
ARTICLE THREE
STOCK ISSUANCE PROGRAM
----------------------
I. STOCK ISSUANCE TERMS
Shares of Common Stock may be issued under the Stock Issuance Program
through direct and immediate issuances without any intervening option grants.
Each such stock issuance shall be evidenced by a Stock Issuance Agreement which
complies with the terms specified below.
A. PURCHASE PRICE.
--------------
1. The purchase price per share shall be fixed by the Plan
Administrator, but shall not be less than one hundred percent (100%) of the Fair
Market Value per share of Common Stock on the issuance date.
2. Subject to the provisions of Section I of Article Seven, shares of
Common Stock may be issued under the Stock Issuance Program for any of the
following items of consideration which the Plan Administrator may deem
appropriate in each individual instance:
(i) cash or check made payable to the Corporation, or
(ii) past services rendered to the Corporation (or any
Parent or Subsidiary).
B. VESTING PROVISIONS.
------------------
1. Shares of Common Stock issued under the Stock Issuance Program
may, in the discretion of the Plan Administrator, be fully and immediately
vested upon issuance or may vest in one or more installments over the
Participant's period of Service or upon attainment of specified performance
objectives. The elements of the vesting schedule applicable to any unvested
shares of Common Stock issued under the Stock Issuance Program, namely:
(i) the Service period to be completed by the Participant or the
performance objectives to be attained,
(ii) the number of installments in which the shares are to vest,
13.
<PAGE>
(iii) the interval or intervals (if any) which are to lapse
between installments, and
(iv) the effect which death, Permanent Disability or other event
designated by the Plan Administrator is to have upon the vesting schedule,
shall be determined by the Plan Administrator and incorporated into the Stock
Issuance Agreement.
2. Any new, substituted or additional securities or other property
(including money paid other than as a regular cash dividend) which the
Participant may have the right to receive with respect to the Participant's
unvested shares of Common Stock by reason of any stock dividend, stock split,
recapitalization, combination of shares, exchange of shares or other change
affecting the outstanding Common Stock as a class without the Corporation's
receipt of consideration shall be issued subject to (i) the same vesting
requirements applicable to the Participant's unvested shares of Common Stock and
(ii) such escrow arrangements as the Plan Administrator shall deem appropriate.
3. The Participant shall have full stockholder rights with respect to
any shares of Common Stock issued to the Participant under the Stock Issuance
Program, whether or not the Participant's interest in those shares is vested.
Accordingly, the Participant shall have the right to vote such shares and to
receive any regular cash dividends paid on such shares.
4. Should the Participant cease to remain in Service while holding
one or more unvested shares of Common Stock issued under the Stock Issuance
Program or should the performance objectives not be attained with respect to one
or more such unvested shares of Common Stock, then those shares shall be
immediately surrendered to the Corporation for cancellation, and the Participant
shall have no further stockholder rights with respect to those shares. To the
extent the surrendered shares were previously issued to the Participant for
consideration paid in cash or cash equivalent (including the Participant's
purchase-money indebtedness), the Corporation shall repay to the Participant the
cash consideration paid for the surrendered shares and shall cancel the unpaid
principal balance of any outstanding purchase-money note of the Participant
attributable to the surrendered shares.
5. The Plan Administrator may in its discretion waive the surrender
and cancellation of one or more unvested shares of Common Stock (or other assets
attributable thereto) which would otherwise occur upon the cessation of the
Participant's Service or the non-attainment of the performance objectives
applicable to those shares. Such waiver shall result in the immediate vesting
of the Participant's interest in the shares of Common Stock as to which the
waiver applies. Such waiver may be effected at any time,
14.
<PAGE>
whether before or after the Participant's cessation of Service or the attainment
or non-attainment of the applicable performance objectives.
II. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. All of the Corporation's outstanding repurchase/cancellation
rights under the Stock Issuance Program shall terminate automatically, and all
the shares of Common Stock subject to those terminated rights shall immediately
vest in full, in the event of any Corporate Transaction, except to the extent
(i) those repurchase/cancellation rights are to be assigned to the successor
corporation (or parent thereof) in connection with such Corporate Transaction or
(ii) such accelerated vesting is precluded by other limitations imposed in the
Stock Issuance Agreement.
B. The Plan Administrator shall have the discretionary authority,
exercisable either at the time the unvested shares are issued or any time while
the Corporation's repurchase/cancellation rights remain outstanding under the
Stock Issuance Program, to provide that those rights shall automatically
terminate in whole or in part, and the shares of Common Stock subject to those
terminated rights shall immediately vest, in the event the Participant's Service
should subsequently terminate by reason of an Involuntary Termination within a
designated period (not to exceed eighteen (18) months) following the effective
date of any Corporate Transaction in which those repurchase/cancellation rights
are assigned to the successor corporation (or parent thereof).
C. The Plan Administrator shall have the discretionary authority,
exercisable either at the time the unvested shares are issued or any time while
the Corporation's repurchase/cancellation rights remain outstanding under the
Stock Issuance Program, to provide that those rights shall automatically
terminate in whole or in part, and the shares of Common Stock subject to those
terminated rights shall immediately vest, in the event the Participant's Service
should subsequently terminate by reason of an Involuntary Termination within a
designated period (not to exceed eighteen (18) months) following the effective
date of any Change in Control.
III. SHARE ESCROW/LEGENDS
Unvested shares may, in the Plan Administrator's discretion, be held
in escrow by the Corporation until the Participant's interest in such shares
vests or may be issued directly to the Participant with restrictive legends on
the certificates evidencing those unvested shares.
15.
<PAGE>
ARTICLE FOUR
AUTOMATIC OPTION GRANT PROGRAM
------------------------------
I. OPTION TERMS
A. GRANT DATES. Option grants shall be made on the dates specified
-----------
below:
1. Each individual serving as a non-employee Board member on the
Underwriting Date shall automatically be granted at that time a Non-Statutory
Option to purchase 20,000 shares of Common Stock, provided that individual has
not previously been in the employ of the Corporation or any Parent or Subsidiary
and has not previously received a stock option grant from the Corporation.
2. Each individual who is first elected or appointed as a non-
employee Board member at any time after the Underwriting Date shall
automatically be granted, on the date of such initial election or appointment, a
Non-Statutory Option to purchase 20,000 shares of Common Stock, provided that
individual has not previously been in the employ of the Corporation or any
Parent or Subsidiary.
3. On the date of each Annual Stockholders Meeting held after
the Underwriting Date, each individual who is to continue to serve as an
Eligible Director, whether or not that individual is standing for re-election to
the Board at that particular Annual Meeting, shall automatically be granted a
Non-Statutory Option to purchase 5,000 shares of Common Stock, provided such
individual has served as a non-employee Board member for at least six (6)
months. There shall be no limit on the number of such 5,000-share option grants
any one Eligible Director may receive over his or her period of Board service,
and non-employee Board members who have previously been in the employ of the
Corporation (or any Parent or Subsidiary) or who have otherwise received a stock
option grant from the Corporation prior to the Underwriting Date shall be
eligible to receive one or more such annual option grants over their period of
continued Board service.
B. EXERCISE PRICE.
--------------
1. The exercise price per share shall be equal to one hundred
percent (100%) of the Fair Market Value per share of Common Stock on the option
grant date.
2. The exercise price shall be payable in one or more of the
alternative forms authorized under the Discretionary Option Grant Program.
Except to the extent the sale and remittance procedure specified thereunder is
utilized, payment of the exercise price for the purchased shares must be made on
the Exercise Date.
16.
<PAGE>
C. OPTION TERM. Each option shall have a term of ten (10) years
-----------
measured from the option grant date.
D. EXERCISE AND VESTING OF OPTIONS. Each option shall be
-------------------------------
immediately exercisable for any or all of the option shares. However, any
shares purchased under the option shall be subject to repurchase by the
Corporation, at the exercise price paid per share, upon the Optionee's cessation
of Board service prior to vesting in those shares. Each initial 20,000-share
grant shall vest, and the Corporation's repurchase right shall lapse, in a
series of four (4) successive equal annual installments over the Optionee's
period of continued service as a Board member, with the first such installment
to vest upon the Optionee's completion of one (1) year of Board service measured
from the option grant date. Each annual 5,000-share grant shall vest, and the
Corporation's repurchase right shall lapse, upon the Optionee's completion of
two (2) years of Board service measured from the option grant date.
E. TERMINATION OF BOARD SERVICE. The following provisions shall
----------------------------
govern the exercise of any options held by the Optionee at the time the Optionee
ceases to serve as a Board member:
(i) The Optionee (or, in the event of Optionee's death, the
personal representative of the Optionee's estate or the person or persons
to whom the option is transferred pursuant to the Optionee's will or in
accordance with the laws of descent and distribution) shall have a twelve
(12)-month period following the date of such cessation of Board service in
which to exercise each such option.
(ii) During the twelve (12)-month exercise period, the option may
not be exercised in the aggregate for more than the number of vested shares
of Common Stock for which the option is exercisable at the time of the
Optionee's cessation of Board service.
(iii) Should the Optionee cease to serve as a Board member by
reason of death or Permanent Disability, then all shares at the time
subject to the option shall immediately vest so that such option may,
during the twelve (12)-month exercise period following such cessation of
Board service, be exercised for all or any portion of those shares as
fully-vested shares of Common Stock.
(iv) In no event shall the option remain exercisable after the
expiration of the option term. Upon the expiration of the twelve (12)-
month exercise period or (if earlier) upon the expiration of the option
term, the option shall terminate and cease to be outstanding for any vested
shares for which the option has not been exercised. However, the option
shall, immediately upon the Optionee's cessation of Board service for any
17.
<PAGE>
reason other than death or Permanent Disability, terminate and cease to be
outstanding to the extent the option is not otherwise at that time
exercisable for vested shares.
II. CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. In the event of any Corporate Transaction, the shares of Common
Stock at the time subject to each outstanding option but not otherwise vested
shall automatically vest in full so that each such option shall, immediately
prior to the effective date of the Corporate Transaction, become fully
exercisable for all of the shares of Common Stock at the time subject to such
option and may be exercised for all or any portion of those shares as fully-
vested shares of Common Stock. Immediately following the consummation of the
Corporate Transaction, each automatic option grant shall terminate and cease to
be outstanding, except to the extent assumed by the successor corporation (or
parent thereof).
B. In connection with any Change in Control, the shares of Common
Stock at the time subject to each outstanding option but not otherwise vested
shall automatically vest in full so that each such option shall, immediately
prior to the effective date of the Change in Control, become fully exercisable
for all of the shares of Common Stock at the time subject to such option and may
be exercised for all or any portion of those shares as fully-vested shares of
Common Stock. Each such option shall remain exercisable for such fully-vested
option shares until the expiration or sooner termination of the option term or
the surrender of the option in connection with a Hostile Take-Over.
C. Upon the occurrence of a Hostile Take-Over, the Optionee shall
have a thirty (30)-day period in which to surrender to the Corporation each
automatic option held by him or her for a period of at least six (6) months.
The Optionee shall in return be entitled to a cash distribution from the
Corporation in an amount equal to the excess of (i) the Take-Over Price of the
shares of Common Stock at the time subject to the surrendered option (whether or
not the Optionee is otherwise at the time vested in those shares) over (ii) the
aggregate exercise price payable for such shares. Such cash distribution shall
be paid within five (5) days following the surrender of the option to the
Corporation. No approval or consent of the Board or any Plan Administrator
shall be required in connection with such option surrender and cash
distribution.
D. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments shall also be made to the exercise price payable per
share under each outstanding option, provided the aggregate exercise price
--------
payable for such securities shall remain the same.
18.
<PAGE>
E. The grant of options under the Automatic Option Grant Program
shall in no way affect the right of the Corporation to adjust, reclassify,
reorganize or otherwise change its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of its
business or assets.
III. AMENDMENT OF THE AUTOMATIC OPTION GRANT PROGRAM
The provisions of this Automatic Option Grant Program, together with
the option grants outstanding thereunder, may not be amended at intervals more
frequently than once every six (6) months, other than to the extent necessary to
comply with applicable Federal income tax laws and regulations.
IV. REMAINING TERMS
The remaining terms of each option granted under the Automatic Option
Grant Program shall be the same as the terms in effect for option grants made
under the Discretionary Option Grant Program.
19.
<PAGE>
ARTICLE FIVE
MISCELLANEOUS
-------------
I. FINANCING
The Plan Administrator may permit any Optionee or Participant to pay
the option exercise price under the Discretionary Option Grant Program or the
purchase price of shares issued under the Stock Issuance Program by delivering a
full-recourse, interest bearing promissory note payable in one or more
installments. The terms of any such promissory note (including the interest
rate and the terms of repayment) shall be established by the Plan Administrator
in its sole discretion. In no event may the maximum credit available to the
Optionee or Participant exceed the sum of (i) the aggregate option exercise
price or purchase price payable for the purchased shares plus (ii) any Federal,
state and local income and employment tax liability incurred by the Optionee or
the Participant in connection with the option exercise or share purchase.
II. TAX WITHHOLDING
A. The Corporation's obligation to deliver shares of Common Stock
upon the exercise of options or the issuance or vesting of such shares under the
Plan shall be subject to the satisfaction of all applicable Federal, state and
local income and employment tax withholding requirements.
B. The Plan Administrator may, in its discretion, provide any or all
holders of Non-Statutory Options or unvested shares of Common Stock under the
Plan (other than the options granted or the shares issued under the Automatic
Option Grant Program) with the right to use shares of Common Stock in
satisfaction of all or part of the Taxes incurred by such holders in connection
with the exercise of their options or the vesting of their shares. Such right
may be provided to any such holder in either or both of the following formats:
Stock Withholding: The election to have the Corporation withhold,
-----------------
from the shares of Common Stock otherwise issuable upon the exercise of such
Non-Statutory Option or the vesting of such shares, a portion of those shares
with an aggregate Fair Market Value equal to the percentage of the Taxes (not to
exceed one hundred percent (100%)) designated by the holder.
Stock Delivery: The election to deliver to the Corporation, at the
--------------
time the Non-Statutory Option is exercised or the shares vest, one or more
shares of Common Stock previously acquired by such holder (other than in
connection with the option exercise or share vesting triggering the Taxes) with
an aggregate Fair Market Value equal to the percentage of the Taxes (not to
exceed one hundred percent (100%)) designated by the holder.
20.
<PAGE>
III. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan shall become effective with respect to the Discretionary
Option Grant and the Stock Issuance Programs immediately upon the Plan Effective
Date. The Automatic Option Grant Program shall become effective on the
Underwriting Date. Options may be granted under the Discretionary Option Grant
Program at any time on or after the Plan Effective Date, and the initial options
under the Automatic Option Grant Program shall be made on the Underwriting Date
to each Eligible Director at that time. However, no options granted under the
Plan may be exercised, and no shares shall be issued under the Plan, until the
Plan is approved by the Corporation's stockholders. If such stockholder
approval is not obtained within twelve (12) months after the Plan Effective
Date, then all options previously granted under this Plan shall terminate and
cease to be outstanding, and no further options shall be granted and no shares
shall be issued under the Plan.
B. The Plan shall serve as the successor to the Predecessor Plan,
and no further option grants or direct stock issuances shall be made under the
Predecessor Plan after the Section 12(g) Registration Date. All options
outstanding under the Predecessor Plan on the Section 12(g) Registration Date
shall be incorporated into the Plan at that time and shall be treated as
outstanding options under the Plan. However, each outstanding option so
incorporated shall continue to be governed solely by the terms of the documents
evidencing such option, and no provision of the Plan shall be deemed to affect
or otherwise modify the rights or obligations of the holders of such
incorporated options with respect to their acquisition of shares of Common
Stock.
C. One or more provisions of the Plan, including (without
limitation) the option/vesting acceleration provisions of Article Two relating
to Corporate Transactions and Changes in Control, may, in the Plan
Administrator's discretion, be extended to one or more options incorporated from
the Predecessor Plan which do not otherwise contain such provisions.
D. The Plan shall terminate upon the earliest of (i) May 30, 2006,
--------
(ii) the date on which all shares available for issuance under the Plan shall
have been issued as fully-vested shares or (iii) the termination of all
outstanding options in connection with a Corporate Transaction. Upon such plan
termination, all outstanding option grants and unvested stock issuances shall
thereafter continue to have force and effect in accordance with the provisions
of the documents evidencing such grants or issuances.
IV. AMENDMENT OF THE PLAN
A. The Board shall have complete and exclusive power and authority
to amend or modify the Plan in any or all respects. However, (i) no such
amendment or modification shall adversely affect the rights and obligations with
respect to stock options or unvested stock issuances at the time outstanding
under the Plan unless the Optionee or
21.
<PAGE>
the Participant consents to such amendment or modification and (ii) any
amendment made to the Automatic Option Grant Program (or any stock option or
stock issuances outstanding thereunder) shall be in compliance with the
applicable limitations of those programs. In addition, the Board shall not,
without the approval of the Corporation's stockholders, (i) materially increase
the maximum number of shares issuable under the Plan or the maximum number of
shares for which any one person may be granted stock options, separately
exercisable stock appreciation rights and direct stock issuances in the
aggregate under this Plan during any one calendar year, except for permissible
adjustments in the event of certain changes in the Corporation's capitalization,
(ii) materially modify the eligibility requirements for participation or (iii)
materially increase the benefits accruing to participants.
B. Options to purchase shares of Common Stock may be granted under
the Discretionary Option Grant Program and shares of Common Stock may be issued
under the Stock Issuance Program that are in each instance in excess of the
number of shares then available for issuance under the Plan, provided any excess
shares actually issued under those programs shall be held in escrow until there
is obtained stockholder approval of an amendment sufficiently increasing the
number of shares of Common Stock available for issuance under the Plan. If such
stockholder approval is not obtained within twelve (12) months after the date
the first such excess issuances are made, then (i) any unexercised options
granted on the basis of such excess shares shall terminate and cease to be
outstanding and (ii) the Corporation shall promptly refund to the Optionees and
the Participants the exercise or purchase price paid for any excess shares
issued under the Plan and held in escrow, together with interest (at the
applicable Short Term Federal Rate) for the period the shares were held in
escrow, and such shares shall thereupon be automatically cancelled and cease to
be outstanding.
V. USE OF PROCEEDS
Any cash proceeds received by the Corporation from the sale of shares
of Common Stock under the Plan shall be used for general corporate purposes.
VI. REGULATORY APPROVALS
A. The implementation of the Plan, the granting of any stock option
under the Plan and the issuance of any shares of Common Stock (i) upon the
exercise of any granted option or (ii) under the Stock Issuance Program shall be
subject to the Corporation's procurement of all approvals and permits required
by regulatory authorities having jurisdiction over the Plan, the stock options
granted under it and the shares of Common Stock issued pursuant to it.
22.
<PAGE>
B. No shares of Common Stock or other assets shall be issued or
delivered under the Plan unless and until there shall have been compliance with
all applicable requirements of Federal and state securities laws, including the
filing and effectiveness of the Form S-8 registration statement for the shares
of Common Stock issuable under the Plan, and all applicable listing requirements
of any stock exchange (or the Nasdaq National Market, if applicable) on which
Common Stock is then listed for trading.
VII. NO EMPLOYMENT/SERVICE RIGHTS
Nothing in the Plan shall confer upon the Optionee or the Participant
any right to continue in Service for any period of specific duration or
interfere with or otherwise restrict in any way the rights of the Corporation
(or any Parent or Subsidiary employing or retaining such person) or of the
Optionee or the Participant, which rights are hereby expressly reserved by each,
to terminate such person's Service at any time for any reason, with or without
cause.
23.
<PAGE>
APPENDIX
--------
The following definitions shall be in effect under the Plan:
A. ASSOCIATE shall mean an individual who is in the employ of the
---------
Corporation (or any Parent or Subsidiary), subject to the control and direction
of the employer entity as to both the work to be performed and the manner and
method of performance.
B. AUTOMATIC OPTION GRANT PROGRAM shall mean the automatic option grant
------------------------------
program in effect under the Plan.
C. BOARD shall mean the Corporation's Board of Directors.
-----
D. CHANGE IN CONTROL shall mean a change in ownership or control of the
-----------------
Corporation effected through either of the following transactions:
(i) the acquisition, directly or indirectly by any person or
related group of persons (other than the Corporation or a person that
directly or indirectly controls, is controlled by, or is under common
control with, the Corporation), of beneficial ownership (within the meaning
of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty
percent (50%) of the total combined voting power of the Corporation's
outstanding securities pursuant to a tender or exchange offer made directly
to the Corporation's stockholders which the Board does not recommend such
stockholders to accept, or
(ii) a change in the composition of the Board over a period of
thirty-six (36) consecutive months or less such that a majority of the
Board members ceases, by reason of one or more contested elections for
Board membership, to be comprised of individuals who either (A) have been
Board members continuously since the beginning of such period or (B) have
been elected or nominated for election as Board members during such period
by at least a majority of the Board members described in clause (A) who
were still in office at the time the Board approved such election or
nomination.
E. CODE shall mean the Internal Revenue Code of 1986, as amended.
----
F. COMMON STOCK shall mean the Corporation's common stock.
------------
G. CORPORATE TRANSACTION shall mean either of the following stockholder-
---------------------
approved transactions to which the Corporation is a party:
A-1.
<PAGE>
(i) a merger or consolidation in which securities possessing more
than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities are transferred to a person or persons
different from the persons holding those securities immediately prior to
such transaction, or
(ii) the sale, transfer or other disposition of all or
substantially all of the Corporation's assets in complete liquidation or
dissolution of the Corporation.
H. CORPORATION shall mean E*TRADE Group, Inc. and any corporate successor
-----------
to all or substantially all of the assets or voting stock of E*TRADE Group, Inc.
which shall by appropriate action adopt the Plan.
I. DISCRETIONARY OPTION GRANT PROGRAM shall mean the discretionary option
----------------------------------
grant program in effect under the Plan.
J. DOMESTIC RELATIONS ORDER shall mean any judgment, decree or order
------------------------
(including approval of a property settlement agreement) which provides or
otherwise conveys, pursuant to applicable State domestic relations laws
(including community property laws), marital property rights to any spouse or
former spouse of the Optionee.
K. ELIGIBLE DIRECTOR shall mean a non-employee Board member eligible to
-----------------
participate in the Automatic Option Grant Program in accordance with the
eligibility provisions of Article One.
L. EXERCISE DATE shall mean the date on which the Corporation shall have
-------------
received written notice of the option exercise.
M. FAIR MARKET VALUE per share of Common Stock on any relevant date shall
-----------------
be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the Nasdaq
National Market, then the Fair Market Value shall be the average of the
high and low selling prices per share of Common Stock on the date in
question, as such prices are reported by the National Association of
Securities Dealers on the Nasdaq National Market or any successor system.
If there are no high or low selling prices for the Common Stock on the date
in question, then the Fair Market Value shall be the average of the high
and low selling prices on the last preceding date for which such quotations
exist.
(ii) If the Common Stock is at the time listed on any Stock
Exchange, then the Fair Market Value shall be the average of the high and
low selling prices per share of Common Stock on the date in question on the
A-2.
<PAGE>
Stock Exchange determined by the Plan Administrator to be the primary
market for the Common Stock, as such prices are officially quoted in the
composite tape of transactions on such exchange. If there are no high and
low selling prices for the Common Stock on the date in question, then the
Fair Market Value shall be the average of the high and low selling prices
on the last preceding date for which such quotations exist.
(iii) For purposes of any option grants made on the Underwriting
Date, the Fair Market Value shall be deemed to be equal to the price per
share at which the Common Stock is to be sold in the initial public
offering pursuant to the Underwriting Agreement.
(iv) For purposes of any option grants made prior to the
Underwriting Date, the Fair Market Value shall be determined by the Plan
Administrator, after taking into account such factors as it deems
appropriate.
N. HOSTILE TAKE-OVER shall mean a change in ownership of the Corporation
-----------------
effected through the following transaction:
(i) the acquisition, directly or indirectly, by any person or
related group of persons (other than the Corporation or a person that
directly or indirectly controls, is controlled by, or is under common
control with, the Corporation) of beneficial ownership (within the meaning
of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty
percent (50%) of the total combined voting power of the Corporation's
outstanding securities pursuant to a tender or exchange offer made
directly to the Corporation's stockholders which the Board does not
recommend such stockholders to accept, and
---
(ii) more than fifty percent (50%) of the securities so acquired
are accepted from persons other than Section 16 Insiders.
O. INCENTIVE OPTION shall mean an option which satisfies the requirements
----------------
of Code Section 422.
P. INVOLUNTARY TERMINATION shall mean the termination of the Service of
-----------------------
any individual which occurs by reason of:
(i) such individual's involuntary dismissal or discharge by the
Corporation for reasons other than Misconduct, or
(ii) such individual's voluntary resignation following (A) a
change in his or her position with the Corporation which materially reduces
his or her level of responsibility, (B) a reduction in his or her level of
A-3.
<PAGE>
compensation (including base salary, fringe benefits and participation in
any corporate-performance based bonus or incentive programs) by more than
fifteen percent (15%) or (C) a relocation of such individual's place of
employment by more than fifty (50) miles, provided and only if such change,
reduction or relocation is effected by the Corporation without the
individual's consent.
Q. MISCONDUCT shall mean the commission of any act of fraud, embezzlement
----------
or dishonesty by the Optionee or Participant, any unauthorized use or disclosure
by such person of confidential information or trade secrets of the Corporation
(or any Parent or Subsidiary), or any other intentional misconduct by such
person adversely affecting the business or affairs of the Corporation (or any
Parent or Subsidiary) in a material manner. The foregoing definition shall not
be deemed to be inclusive of all the acts or omissions which the Corporation (or
any Parent or Subsidiary) may consider as grounds for the dismissal or discharge
of any Optionee, Participant or other person in the Service of the Corporation
(or any Parent or Subsidiary).
R. 1934 ACT shall mean the Securities Exchange Act of 1934, as amended.
--------
S. NON-STATUTORY OPTION shall mean an option not intended to satisfy the
--------------------
requirements of Code Section 422.
T. OPTIONEE shall mean any person to whom an option is granted under the
--------
Discretionary Option Grant or Automatic Option Grant Program.
U. PARENT shall mean any corporation (other than the Corporation) in an
------
unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.
V. PARTICIPANT shall mean any person who is issued shares of Common Stock
-----------
under the Stock Issuance Program.
W. PERMANENT DISABILITY OR PERMANENTLY DISABLED shall mean the inability
--------------------------------------------
of the Optionee or the Participant to engage in any substantial gainful activity
by reason of any medically determinable physical or mental impairment expected
to result in death or to be of continuous duration of twelve (12) months or
more. However, solely for purposes of the Automatic Option Grant Program,
Permanent Disability or Permanently Disabled shall mean the inability of the
non-employee Board member to perform his or her usual duties as a Board member
by reason of any medically determinable physical or mental impairment expected
to result in death or to be of continuous duration of twelve (12) months or
more.
A-4.
<PAGE>
X. PLAN shall mean the Corporation's 1996 Stock Incentive Plan, as set
----
forth in this document.
Y. PLAN ADMINISTRATOR shall mean the particular entity, whether the
------------------
Primary Committee, the Board or the Secondary Committee, which is authorized to
administer the Discretionary Option Grant and Stock Issuance Programs with
respect to one or more classes of eligible persons, to the extent such entity is
carrying out its administrative functions under those programs with respect to
the persons under its jurisdiction.
Z. PLAN EFFECTIVE DATE shall mean May 31, 1996, the date on which the Plan
-------------------
was adopted by the Board.
AA. PREDECESSOR PLAN shall mean the Corporation's pre-existing 1993 Stock
----------------
Option Plan (which is the successor to the 1983 Employee Incentive Stock Option
Plan) in effect immediately prior to the Plan Effective Date hereunder.
AB. PRIMARY COMMITTEE shall mean the committee of two (2) or more non-
-----------------
employee Board members appointed by the Board to administer the Discretionary
Option Grant and Stock Issuance Programs with respect to Section 16 Insiders.
AC. QUALIFIED DOMESTIC RELATIONS ORDER shall mean a Domestic Relations
----------------------------------
Order which substantially complies with the requirements of Code Section 414(p).
The Plan Administrator shall have the sole discretion to determine whether a
Domestic Relations Order is a Qualified Domestic Relations Order.
AD. SECONDARY COMMITTEE shall mean a committee of two (2) or more Board
-------------------
members appointed by the Board to administer the Discretionary Option Grant and
Stock Issuance Programs with respect to eligible persons other than Section 16
Insiders.
AE. SECTION 12 REGISTRATION DATE shall mean the date on which the Common
----------------------------
Stock is first registered under Section 12(g) of Section 16 of the 1934 Act.
AF. SECTION 16 INSIDER shall mean an officer or director of the
------------------
Corporation subject to the short-swing profit liabilities of Section 16 of the
1934 Act.
AG. SERVICE shall mean the performance of services for the Corporation (or
-------
any Parent or Subsidiary) by a person in the capacity of an Associate, a non-
employee member of the board of directors or a consultant or independent
advisor, except to the extent otherwise specifically provided in the documents
evidencing the option grant or stock issuance.
AH. STOCK EXCHANGE shall mean either the American Stock Exchange or the
--------------
New York Stock Exchange.
A-5.
<PAGE>
AI. STOCK ISSUANCE AGREEMENT shall mean the agreement entered into by the
------------------------
Corporation and the Participant at the time of issuance of shares of Common
Stock under the Stock Issuance Program.
AJ. STOCK ISSUANCE PROGRAM shall mean the stock issuance program in effect
----------------------
under the Plan.
AK. SUBSIDIARY shall mean any corporation (other than the Corporation) in
----------
an unbroken chain of corporations beginning with the Corporation, provided each
corporation (other than the last corporation) in the unbroken chain owns, at the
time of the determination, stock possessing fifty percent (50%) or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.
AL. TAKE-OVER PRICE shall mean the greater of (i) the Fair Market Value
--------------- -------
per share of Common Stock on the date the option is surrendered to the
Corporation in connection with a Hostile Take-Over or (ii) the highest reported
price per share of Common Stock paid by the tender offeror in effecting such
Hostile Take-Over. However, if the surrendered option is an Incentive Option,
the Take-Over Price shall not exceed the clause (i) price per share.
AM. TAXES shall mean the Federal, state and local income and employment
-----
tax liabilities incurred by the holder of Non-Statutory Options or unvested
shares of Common Stock in connection with the exercise of those options or the
vesting of those shares.
AN. 10% STOCKHOLDER shall mean the owner of stock (as determined under
---------------
Code Section 424(d)) possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Corporation (or any Parent
or Subsidiary).
AO. UNDERWRITING AGREEMENT shall mean the agreement between the
----------------------
Corporation and the underwriter or underwriters managing the initial public
offering of the Common Stock.
AP. UNDERWRITING DATE shall mean the date on which the Underwriting
-----------------
Agreement is executed and priced in connection with an initial public offering
of the Common Stock.
A-6.
<PAGE>
EXHIBIT 10.9
E*TRADE GROUP, INC.
STOCK PURCHASE PLAN
-------------------
I. PURPOSE OF THE PLAN
This Stock Purchase Plan is intended to promote the interests of
E*TRADE Group, Inc. by providing eligible associates with the opportunity to
acquire a proprietary interest in the Corporation through participation in a
payroll-deduction based employee stock purchase plan designed to qualify under
Section 423 of the Code.
Capitalized terms herein shall have the meanings assigned to such
terms in the attached Appendix.
II. ADMINISTRATION OF THE PLAN
The Plan Administrator shall have full authority to interpret and
construe any provision of the Plan and to adopt such rules and regulations for
administering the Plan as it may deem necessary in order to comply with the
requirements of Code Section 423. Decisions of the Plan Administrator shall be
final and binding on all parties having an interest in the Plan.
III. STOCK SUBJECT TO PLAN
A. The stock purchasable under the Plan shall be shares of authorized
but unissued or reacquired Common Stock, including shares of Common Stock
purchased on the open market. The maximum number of shares of Common Stock
which may be issued over the term of the Plan shall not exceed Six Hundred Fifty
Thousand (650,000) shares.
B. Should any change be made to the Common Stock by reason of any
stock split, stock dividend, recapitalization, combination of shares, exchange
of shares or other change affecting the outstanding Common Stock as a class
without the Corporation's receipt of consideration, appropriate adjustments
shall be made to (i) the maximum number and class of securities issuable under
the Plan, (ii) the maximum number and class of securities purchasable per
Participant on any one Purchase Date and (iii) the number and class of
securities and the price per share in effect under each outstanding purchase
right in order to prevent the dilution or enlargement of benefits thereunder.
IV. OFFERING PERIODS
A. Shares of Common Stock shall be offered for purchase under the
Plan through a series of successive offering periods until such time as (i) the
maximum number of shares of Common Stock available for issuance under the Plan
shall have been purchased or (ii) the Plan shall have been sooner terminated.
<PAGE>
B. Each offering period shall be of such duration (not to exceed
twenty-four (24) months) as determined by the Plan Administrator prior to the
start date. The initial offering period shall commence at the Effective Time
and terminate on the last business day in July 1998. The next offering period
shall commence on the first business day in August 1998, and subsequent offering
periods shall commence as designated by the Plan Administrator.
C. Each offering period shall be comprised of a series of one or more
successive Purchase Intervals. Purchase Intervals shall run from the first
business day in February each year to the last business day in July of the same
year and from the first business day in August each year to the last business
day in January of the following year. Accordingly, the first Purchase Interval
in effect under the initial offering period shall commence at the Effective Time
and terminate on the last business day in January 1997.
D. Should the Fair Market Value per share of Common Stock on any
Purchase Date within an offering period be less than the Fair Market Value per
share of Common Stock on the start date of that offering period, then that
offering period shall automatically terminate immediately after the purchase of
shares of Common Stock on such Purchase Date, and a new offering period shall
commence on the next business day following such Purchase Date. The new
offering period shall have a duration of twenty four (24) months, unless a
shorter duration is established by the Plan Administrator within five (5)
business days following the start date of that offering period.
V. ELIGIBILITY
A. Each individual who is an Eligible Associate on the start date of
any offering period under the Plan may enter that offering period on such start
date or on any subsequent Semi-Annual Entry Date within that offering period,
provided he or she remains an Eligible Associate.
B. Each individual who first becomes an Eligible Associate after the
start date of an offering period may enter that offering period on any
subsequent Semi-Annual Entry Date within that offering period on which he or she
is an Eligible Associate.
C. The date an individual enters an offering period shall be
designated his or her Entry Date for purposes of that offering period.
D. To participate in the Plan for a particular offering period, the
Eligible Associate must complete the enrollment forms prescribed by the Plan
Administrator (including a stock purchase agreement and a payroll deduction
authorization) and file such forms with the Plan Administrator (or its
designate) on or before his or her scheduled Entry Date.
2.
<PAGE>
VI. PAYROLL DEDUCTIONS
A. The payroll deduction authorized by the Participant for purposes
of acquiring shares of Common Stock during an offering period may be any
multiple of one percent (1%) of the Base Salary paid to the Participant during
each Purchase Interval within that offering period, up to a maximum of ten
percent (10%). The deduction rate so authorized shall continue in effect
throughout the offering period, except to the extent such rate is changed in
accordance with the following guidelines:
(i) The Participant may, at any time during the offering period,
reduce his or her rate of payroll deduction to become effective as soon as
possible after filing the appropriate form with the Plan Administrator.
The Participant may not, however, effect more than one (1) such reduction
per Purchase Interval.
(ii) The Participant may, prior to the commencement of any new
Purchase Interval within the offering period, increase the rate of his or
her payroll deduction by filing the appropriate form with the Plan
Administrator. The new rate (which may not exceed the ten percent (10%)
maximum) shall become effective on the start date of the first Purchase
Interval following the filing of such form.
B. Payroll deductions shall begin on the first pay day following the
Participant's Entry Date into the offering period and shall (unless sooner
terminated by the Participant) continue through the pay day ending with or
immediately prior to the last day of that offering period. The amounts so
collected shall be credited to the Participant's book account under the Plan,
but no interest shall be paid on the balance from time to time outstanding in
such account. The amounts collected from the Participant shall not be held in
any segregated account or trust fund and may be commingled with the general
assets of the Corporation and used for general corporate purposes.
C. Payroll deductions shall automatically cease upon the termination
of the Participant's purchase right in accordance with the provisions of the
Plan.
D. The Participant's acquisition of Common Stock under the Plan on
any Purchase Date shall neither limit nor require the Participant's acquisition
of Common Stock on any subsequent Purchase Date, whether within the same or a
different offering period.
VII. PURCHASE RIGHTS
A. GRANT OF PURCHASE RIGHT. A Participant shall be granted a
-----------------------
separate purchase right for each offering period in which he or she
participates. The purchase right shall be granted on the Participant's Entry
Date into the offering period and shall provide the Participant with the right
to purchase shares of Common Stock, in a series of successive
3.
<PAGE>
installments over the remainder of such offering period, upon the terms set
forth below. The Participant shall execute a stock purchase agreement embodying
such terms and such other provisions (not inconsistent with the Plan) as the
Plan Administrator may deem advisable.
Under no circumstances shall purchase rights be granted under the Plan
to any Eligible Associate if such individual would, immediately after the grant,
own (within the meaning of Code Section 424(d)) or hold outstanding options or
other rights to purchase, stock possessing five percent (5%) or more of the
total combined voting power or value of all classes of stock of the Corporation
or any Corporate Affiliate.
B. EXERCISE OF THE PURCHASE RIGHT. Each purchase right shall be
------------------------------
automatically exercised in installments on each successive Purchase Date within
the offering period, and shares of Common Stock shall accordingly be purchased
on behalf of each Participant (other than Participants whose payroll deductions
have previously been refunded pursuant to the Termination of Purchase Right
provisions below) on each such Purchase Date. The purchase shall be effected by
applying the Participant's payroll deductions for the Purchase Interval ending
on such Purchase Date to the purchase of whole shares of Common Stock at the
purchase price in effect for the Participant for that Purchase Date.
C. PURCHASE PRICE. The purchase price per share at which Common
--------------
Stock will be purchased on the Participant's behalf on each Purchase Date within
the offering period shall not be less than eighty-five percent (85%) of the
lower of (i) the Fair Market Value per share of Common Stock on the
- -----
Participant's Entry Date into that offering period or (ii) the Fair Market Value
per share of Common Stock on that Purchase Date. However, for each Participant
whose Entry Date is other than the start date of the offering period, the clause
(i) amount shall in no event be less than the Fair Market Value per share of
Common Stock on the start date of that offering period.
D. NUMBER OF PURCHASABLE SHARES. The number of shares of Common
----------------------------
Stock purchasable by a Participant on each Purchase Date during the offering
period shall be the number of whole shares obtained by dividing the amount
collected from the Participant through payroll deductions during the Purchase
Interval ending with that Purchase Date by the purchase price in effect for the
Participant for that Purchase Date. However, the maximum number of shares of
Common Stock purchasable per Participant on any one Purchase Date shall not
exceed seven hundred fifty (750) shares, subject to periodic adjustments in the
event of certain changes in the Corporation's capitalization.
E. EXCESS PAYROLL DEDUCTIONS. Any payroll deductions not applied to
-------------------------
the purchase of shares of Common Stock on any Purchase Date because they are
not sufficient to purchase a whole share of Common Stock shall be held for the
purchase of Common Stock on the next Purchase Date. However, any payroll
deductions not applied to the purchase of Common Stock by reason of the
limitation on the maximum number of shares purchasable by the Participant on the
Purchase Date shall be promptly refunded.
4.
<PAGE>
F. TERMINATION OF PURCHASE RIGHT. The following provisions shall
-----------------------------
govern the termination of outstanding purchase rights:
(i) A Participant may, at any time prior to the next scheduled
Purchase Date in the offering period, terminate his or her outstanding
purchase right by filing the appropriate form with the Plan Administrator
(or its designate), and no further payroll deductions shall be collected
from the Participant with respect to the terminated purchase right. Any
payroll deductions collected during the Purchase Interval in which such
termination occurs shall, at the Participant's election, be immediately
refunded or held for the purchase of shares on the next Purchase Date. If
no such election is made at the time such purchase right is terminated,
then the payroll deductions collected with respect to the terminated right
shall be refunded as soon as possible.
(ii) The termination of such purchase right shall be irrevocable,
and the Participant may not subsequently rejoin the offering period for
which the terminated purchase right was granted. In order to resume
participation in any subsequent offering period, such individual must re-
enroll in the Plan (by making a timely filing of the prescribed enrollment
forms) on or before his or her scheduled Entry Date into that offering
period.
(iii) Should the Participant cease to remain an Eligible
Associate for any reason (including death, disability or change in status)
while his or her purchase right remains outstanding, then that purchase
right shall immediately terminate, and all of the Participant's payroll
deductions for the Purchase Interval in which the purchase right so
terminates shall be immediately refunded. However, should the Participant
cease to remain in active service by reason of an approved unpaid leave of
absence, then the Participant shall have the right, exercisable up until
the last business day of the Purchase Interval in which such leave
commences, to (a) withdraw all the payroll deductions collected to date on
his or her behalf for that Purchase Interval or (b) have such funds held
for the purchase of shares on his or her behalf on the next scheduled
Purchase Date. In no event, however, shall any further payroll deductions
be collected on the Participant's behalf during such leave. Upon the
Participant's return to active service, his or her payroll deductions under
the Plan shall automatically resume at the rate in effect at the time the
leave began, unless the Participant withdraws from the Plan prior to his or
her return.
G. CORPORATE TRANSACTION. Each outstanding purchase right shall
---------------------
automatically be exercised, immediately prior to the effective date of any
Corporate Transaction, by applying the payroll deductions of each Participant
for the Purchase Interval
5.
<PAGE>
in which such Corporate Transaction occurs to the purchase of whole shares of
Common Stock at a purchase price per share not less than eighty-five percent
(85%) of the lower of (i) the Fair Market Value per share of Common Stock on the
-----
Participant's Entry Date into the offering period in which such Corporate
Transaction occurs or (ii) the Fair Market Value per share of Common Stock
immediately prior to the effective date of such Corporate Transaction. However,
the applicable limitation on the number of shares of Common Stock purchasable
per Participant shall continue to apply to any such purchase, and the clause (i)
amount above shall not, for any Participant whose Entry Date for the offering
period is other than the start date of that offering period, be less than the
Fair Market Value per share of Common Stock on that start date.
The Corporation shall use its best efforts to provide at least ten
(10)-days prior written notice of the occurrence of any Corporate Transaction,
and Participants shall, following the receipt of such notice, have the right to
terminate their outstanding purchase rights prior to the effective date of the
Corporate Transaction.
H. PRORATION OF PURCHASE RIGHTS. Should the total number of shares
----------------------------
of Common Stock to be purchased pursuant to outstanding purchase rights on any
particular date exceed the number of shares then available for issuance under
the Plan, the Plan Administrator shall make a pro rata allocation of the
available shares on a uniform and nondiscriminatory basis, and the payroll
deductions of each Participant, to the extent in excess of the aggregate
purchase price payable for the Common Stock prorated to such individual, shall
be refunded.
I. ASSIGNABILITY. The purchase right shall be exercisable only by
-------------
the Participant and shall not be assignable or transferable by the Participant.
J. STOCKHOLDER RIGHTS. A Participant shall have no stockholder
------------------
rights with respect to the shares subject to his or her outstanding purchase
right until the shares are purchased on the Participant's behalf in accordance
with the provisions of the Plan and the Participant has become a holder of
record of the purchased shares.
VIII. ACCRUAL LIMITATIONS
A. No Participant shall be entitled to accrue rights to acquire
Common Stock pursuant to any purchase right outstanding under this Plan if and
to the extent such accrual, when aggregated with (i) rights to purchase Common
Stock accrued under any other purchase right granted under this Plan and (ii)
similar rights accrued under other employee stock purchase plans (within the
meaning of Code Section 423) of the Corporation or any Corporate Affiliate,
would otherwise permit such Participant to purchase more than Twenty-Five
Thousand Dollars ($25,000) worth of stock of the Corporation or any Corporate
Affiliate (determined on the basis of the Fair Market Value per share on the
date or dates such rights are granted) for each calendar year such rights are at
any time outstanding.
6.
<PAGE>
B. For purposes of applying such accrual limitations to the purchase
rights granted under the Plan, the following provisions shall be in effect:
(i) The right to acquire Common Stock under each outstanding
purchase right shall accrue in a series of installments on each successive
Purchase Date during the offering period on which such right remains
outstanding.
(ii) No right to acquire Common Stock under any outstanding
purchase right shall accrue to the extent the Participant has already
accrued in the same calendar year the right to acquire Common Stock under
one (1) or more other purchase rights at a rate equal to Twenty-Five
Thousand Dollars ($25,000) worth of Common Stock (determined on the basis
of the Fair Market Value per share on the date or dates of grant) for each
calendar year such rights were at any time outstanding.
C. If by reason of such accrual limitations, any purchase right of a
Participant does not accrue for a particular Purchase Interval, then the payroll
deductions which the Participant made during that Purchase Interval with respect
to such purchase right shall be promptly refunded.
D. In the event there is any conflict between the provisions of this
Article and one or more provisions of the Plan or any instrument issued
thereunder, the provisions of this Article shall be controlling.
IX. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan was adopted by the Board on May 31, 1996 and shall
become effective at the Effective Time, provided no purchase rights granted
--------
under the Plan shall be exercised, and no shares of Common Stock shall be issued
hereunder, until (i) the Plan shall have been approved by the stockholders of
the Corporation and (ii) the Corporation shall have complied with all applicable
requirements of the 1933 Act (including the registration of the shares of Common
Stock issuable under the Plan on a Form S-8 registration statement filed with
the Securities and Exchange Commission), all applicable listing requirements of
any stock exchange (or the Nasdaq National Market, if applicable) on which the
Common Stock is listed for trading and all other applicable requirements
established by law or regulation. In the event such stockholder approval is not
obtained, or such compliance is not effected, within twelve (12) months after
the date on which the Plan is adopted by the Board, the Plan shall terminate and
have no further force or effect, and all sums collected from Participants during
the initial offering period hereunder shall be refunded.
B. Unless sooner terminated by the Board, the Plan shall terminate
upon the earliest of (i) the last business day in July 2006, (ii) the date on
--------
which all shares
7.
<PAGE>
available for issuance under the Plan shall have been sold pursuant to purchase
rights exercised under the Plan or (iii) the date on which all purchase rights
are exercised in connection with a Corporate Transaction. No further purchase
rights shall be granted or exercised, and no further payroll deductions shall be
collected, under the Plan following such termination.
X. AMENDMENT OF THE PLAN
The Board may alter, amend, suspend or discontinue the Plan at any
time to become effective immediately following the close of any Purchase
Interval. However, the Board may not, without the approval of the Corporation's
stockholders, (i) materially increase the number of shares of Common Stock
issuable under the Plan or the maximum number of shares purchasable per
Participant on any one Purchase Date, except for permissible adjustments in the
event of certain changes in the Corporation's capitalization, (ii) alter the
purchase price formula so as to reduce the purchase price payable for the shares
of Common Stock purchasable under the Plan or (iii) materially increase the
benefits accruing to Participants under the Plan or materially modify the
requirements for eligibility to participate in the Plan.
XI. GENERAL PROVISIONS
A. All costs and expenses incurred in the administration of the Plan
shall be paid by the Corporation.
B. Nothing in the Plan shall confer upon the Participant any right
to continue in the employ of the Corporation or any Corporate Affiliate for any
period of specific duration or interfere with or otherwise restrict in any way
the rights of the Corporation (or any Corporate Affiliate employing such person)
or of the Participant, which rights are hereby expressly reserved by each, to
terminate such person's employment at any time for any reason, with or without
cause.
C. The provisions of the Plan shall be governed by the laws of the
State of California without resort to that State's conflict-of-laws rules.
8.
<PAGE>
SCHEDULE A
----------
CORPORATIONS PARTICIPATING IN
ASSOCIATE STOCK PURCHASE PLAN
AS OF THE EFFECTIVE TIME
------------------------
E*TRADE Group, Inc.
E*TRADE Securities, Inc.
<PAGE>
APPENDIX
--------
The following definitions shall be in effect under the Plan:
A. BASE SALARY shall mean the (i) regular base salary paid to a
-----------
Participant by one or more Participating Companies during such individual's
period of participation in one or more offering periods under the Plan plus (ii)
any pre-tax contributions made by the Participant to any Code Section 401(k)
salary deferral plan or any Code Section 125 cafeteria benefit program now or
hereafter established by the Corporation or any Corporate Affiliate. The
following items of compensation shall NOT be included in Base Salary: (i) all
overtime payments, bonuses, commissions (other than those functioning as base
salary equivalents), profit-sharing distributions and other incentive-type
payments and (ii) any and all contributions (other than Code Section 401(k) or
Code Section 125 contributions) made on the Participant's behalf by the
Corporation or any Corporate Affiliate under any employee benefit or welfare
plan now or hereafter established.
B. BOARD shall mean the Corporation's Board of Directors.
-----
C. CODE shall mean the Internal Revenue Code of 1986, as amended.
----
D. COMMON STOCK shall mean the Corporation's common stock.
------------
E. CORPORATE AFFILIATE shall mean any parent or subsidiary
-------------------
corporation of the Corporation (as determined in accordance with Code Section
424), whether now existing or subsequently established.
F. CORPORATE TRANSACTION shall mean either of the following
---------------------
stockholder-approved transactions to which the Corporation is a party:
(i) a merger or consolidation in which securities possessing more
than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities are transferred to a person or persons
different from the persons holding those securities immediately prior to
such transaction, or
(ii) the sale, transfer or other disposition of all or
substantially all of the assets of the Corporation in complete liquidation
or dissolution of the Corporation.
G. CORPORATION shall mean E*TRADE Group, Inc., a Delaware
-----------
corporation, and any corporate successor to all or substantially all of the
assets or voting stock of E*TRADE Group, Inc. which shall by appropriate action
adopt the Plan.
A-1.
<PAGE>
H. EFFECTIVE TIME shall mean the time at which the Underwriting
--------------
Agreement is executed and finally priced. Any Corporate Affiliate which becomes
a Participating Corporation after such Effective Time shall designate a
subsequent Effective Time with respect to its associate-Participants.
I. ELIGIBLE ASSOCIATE shall mean any person who is employed by a
------------------
Participating Corporation on a basis under which he or she is regularly expected
to render more than twenty (20) hours of service per week for more than five (5)
months per calendar year for earnings considered wages under Code Section
3401(a).
J. ENTRY DATE shall mean the date an Eligible Associate first
----------
commences participation in the offering period in effect under the Plan. The
earliest Entry Date under the Plan shall be the Effective Time.
K. FAIR MARKET VALUE per share of Common Stock on any relevant date
-----------------
shall be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the Nasdaq
National Market, then the Fair Market Value shall be the closing selling
price per share of Common Stock on the date in question, as such price is
reported by the National Association of Securities Dealers on the Nasdaq
National Market or any successor system. If there is no closing selling
price for the Common Stock on the date in question, then the Fair Market
Value shall be the closing selling price on the last preceding date for
which such quotation exists.
(ii) If the Common Stock is at the time listed on any Stock
Exchange, then the Fair Market Value shall be the closing selling price per
share of Common Stock on the date in question on the Stock Exchange
determined by the Plan Administrator to be the primary market for the
Common Stock, as such price is officially quoted in the composite tape of
transactions on such exchange. If there is no closing selling price for
the Common Stock on the date in question, then the Fair Market Value shall
be the closing selling price on the last preceding date for which such
quotation exists.
(iii) For purposes of the initial offering period which begins
at the Effective Time, the Fair Market Value shall be deemed to be equal to
the price per share at which the Common Stock is sold in the initial public
offering pursuant to the Underwriting Agreement.
L. 1933 ACT shall mean the Securities Act of 1933, as amended.
--------
A-2.
<PAGE>
M. PARTICIPANT shall mean any Eligible Associate of a Participating
-----------
Corporation who is actively participating in the Plan.
N. PARTICIPATING CORPORATION shall mean the Corporation and such
-------------------------
Corporate Affiliate or Affiliates as may be authorized from time to time by the
Board to extend the benefits of the Plan to their Eligible Associates. The
Participating Corporations in the Plan as of the Effective Time are listed in
attached Schedule A.
O. PLAN shall mean the Corporation's Stock Purchase Plan, as set
----
forth in this document.
P. PLAN ADMINISTRATOR shall mean the committee of two (2) or more
------------------
Board members appointed by the Board to administer the Plan.
Q. PURCHASE DATE shall mean the last business day of each Purchase
-------------
Interval. The initial Purchase Date shall be January 30, 1997.
R. PURCHASE INTERVAL shall mean each successive six (6)-month period
-----------------
within the offering period at the end of which there shall be purchased shares
of Common Stock on behalf of each Participant.
S. SEMI-ANNUAL ENTRY DATE shall mean the first business day in
----------------------
February and August each year on which an Eligible Associate may first enter an
offering period.
T. STOCK EXCHANGE shall mean either the American Stock Exchange or
--------------
the New York Stock Exchange.
U. UNDERWRITING AGREEMENT shall mean the agreement between the
----------------------
Corporation and the underwriter or underwriters managing the initial public
offering of the Common Stock.
A-3.
<PAGE>
EXHIBIT 10.12
LEASE
BY AND BETWEEN
PROSPECT GREEN PARTNERS,
a California Joint Venture
as "Landlord"
AND
E*TRADE GROUP, INC.,
a California corporation
as "Tenant"
<PAGE>
LEASE
-----
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
1. TERMS AND DEFINITIONS; SCHEDULES.................................... 1
--------------------------------
2. PREMISES............................................................ 6
--------
4. IMPROVEMENTS BY LANDLORD; POSSESSION................................ 23
------------------------------------
5. PROJECT SERVICES.................................................... 24
----------------
6. TENANT'S COVENANTS.................................................. 26
------------------
7. LANDLORD'S RESERVED RIGHTS.......................................... 37
--------------------------
8. CASUALTY AND UNTENANTABILITY........................................ 38
----------------------------
9. CONDEMNATION........................................................ 42
------------
10. INDEMNITY, SUBROGATION AND WAIVER................................... 43
----------------------------------------
11. TENANT'S DEFAULT AND LANDLORD'S REMEDIES............................ 45
----------------------------------------
12. TERMINATION......................................................... 49
----------------------------------------
13. MISCELLANEOUS....................................................... 51
----------------------------------------
</TABLE>
Schedule 1 Description of the Premises
and Floor Plan
Schedule 2 Rules and Regulations
Schedule 3 Prospect Green Business Park Common
Area Charges
Schedule 4 Intentionally Deleted
Schedule 5 Work Letter Agreement
Schedule 5-A Construction Schedule
Schedule 6 Certificate of Acceptance
Schedule 7 Base Rent and Management Fee
Schedule 8 Parking
-i-
<PAGE>
LEASE
-----
This Lease is made the 21st day of June, 1996, by and between PROSPECT
GREEN PARTNERS, a California Joint Venture ("Landlord"), and E*TRADE GROUP,
INC., a California corporation ("Tenant") on the terms, covenants and conditions
set forth below.
1. TERMS AND DEFINITIONS; SCHEDULES.
--------------------------------
1.1 Terms and Definitions.
---------------------
1.1.1 "Leased Premises" shall mean the entirety of the Building (as
hereinafter defined) and as more fully described in the drawing attached hereto
as Schedule 1.
1.1.2 "Building" shall mean the two-story office building located at
10951 White Rock Road, Rancho Cordova, California, 95670.
1.1.3 "Project" shall mean, collectively, (i) the Building; (ii) the
parcel of real property on which the Building is situated (the "Land"); (iii)
the other improvements on the Land, including, without limitation, a parking
lot, driveways, lighting and landscaping, which Building, Land and other
improvements are commonly known as Prospect Green II, in the multi-building
project known as Prospect Green Business Park, Rancho Cordova, California; and
(iv) the pro rata share attributed to Prospect Green II for the common area
charges of Prospect Green Business Park (which charges are more particularly
described in Schedule 3 attached) and which pro rata share is thirty-five and
54/100 percent (35.54%)(but which share shall be reduced as and when additional
buildings are developed in Prospect Green Business Park).
-1-
<PAGE>
1.1.4 "Tenant's Square Footage" shall mean the total Rentable square
footage in the Leased Premises for which Base Rent shall be payable, and shall,
for the first twelve (12) months of the Lease Term, consist of only that area of
the Leased Premises which has been built-out by Tenant in accordance with
Schedule 5 attached and shown as Areas 1A, 1B and 2 on the drawing attached
herto as Schedule 1 (the "Initial Space"), but to be not less than Thirty-five
Thousand (35,000) Rentable square feet (which Rentable square footage number
represents approximately Thirty-one Thousand Nine Hundred Ninety-two (31,992)
Useable square feet). Such number is subject to change in accordance with
Subparagraph 2.4 below, dealing with Tenant's Expansion Obligation and Tenant's
Accelerated Timing Option, the final result of which obligation shall be that as
of not later than the commencement of the thirteenth (13th) month of the Lease
Term, Tenant's Square Footage shall equal the Total Rentable Square Footage of
the Building. The actual Rentable area will be calculated by Landlord's
representative (and certified by Tenant upon execution, pursuant to Subparagraph
4.2 hereof, of the Certificate of Acceptance in form attached as Schedule 6)
using the method for determining Rentable Area as set forth in the "Method for
Measuring Floor Area in Office Buildings," published by the Building Owners and
Managers Association International, approved July 31, 1980 ("BOMA Method").
"Total Rentable Square Footage of the Building" shall mean the actual Rentable
area of the Building using the BOMA Method, consisting of Seventy Thousand and
Sixty-five (70,065) Rentable square feet. The Total Rentable Square Footage of
the Building may be adjusted pursuant to Subparagraph 7.1(c) below. Landlord
shall certify to Tenant, using
-2-
<PAGE>
the "as built" plan of Landlord's architects, the actual Total Rentable Square
Footage of the Building and Tenant's Square Footage.
1.1.5 "Lease Commencement Date" shall mean June 24, 1996. "Lease
Expiration Date" shall mean June 23, 2006. "Lease Term" shall mean the one
hundred twenty (120) month period between Lease Commencement Date and Lease
Expiration Date.
1.1.6 "Renewal Options" shall mean Tenant's right to renew this
Lease for two (2) additional successive periods of sixty (60) months each. Each
such sixty (60) month period shall constitute a "Renewal Term", and shall be
entered into on the terms and conditions set forth in Subparagraph 2.3 below. In
addition to the Renewal Options, which are exercisable at Tenant's election,
Tenant shall have certain obligations to extend the term of this Lease in the
event that Tenant exercises its rights under that certain Annex Expansion Option
entered into by and between Landlord and Tenant of even date herewith, as more
particularly described in Subparagraph 2.5 below.
1.1.7 "Base Rent" shall refer to the basic rental payments payable
by Tenant to Landlord pursuant to Schedule 7 attached, and initially shall mean
One and 17/100 Dollars ($1.17) per square foot of Tenant's Square Footage per
month or approximately Forty Thousand Nine Hundred Fifty and No/100 Dollars
($40,950) per month for the Initial Space, and shall be adjusted as set forth on
Schedule 7 attached hereto. An "Adjustment Date" is a date on which Base Rent
shall be adjusted as provided in Schedule 7.
-3-
<PAGE>
1.1.8 "Tenant's Share" shall mean one hundred percent (100%).
"Additional Operating Costs" shall mean those Operating Costs (as defined in
Subparagraph 3.4 below) which are not paid directly by Tenant to the supplier,
vendor or provider thereof, in accordance with the terms hereof, but which shall
be reimbursed by Tenant to Landlord as set forth in Section 3 below.
1.1.9 "Security Deposit" shall mean an amount equal to the amount
of the first installment of Base Rent due and payable hereunder or approximately
Forty Thousand Nine Hundred Fifty and no/100 Dollars ($40,950). The Security
Deposit shall be tendered by Tenant upon execution of this Lease and shall be
held by Landlord as security for the faithful performance by Tenant of all of
the terms, covenants and conditions of this Lease. If there occurs an uncured
Event of Default (as defined in Subparagraph 11.1 below), Landlord may (but
shall not be obligated to) retain, use or apply such Security Deposit for the
payment of Rent or any other sum in default, or for payment of any amount which
Landlord may spend or become obligated to spend by reason of Tenant's default,
or to compensate Landlord for any loss or damage which Landlord may suffer by
reason of Tenant's default. In any such event, then, upon written notice from
Landlord, Tenant shall deposit with Landlord sufficient cash to restore the
Security Deposit to its original sum, and Tenant's failure to do so within ten
(10) days after the effective date of such written notice shall constitute an
Event of Default.
1.1.10 "Permitted Purpose" means that Tenant may use the Leased
Premises for general office and computer operations and any lawful purpose
incidental thereto. Landlord hereby acknowledges
-4-
<PAGE>
that such purpose is permitted under the development agreement currently
applicable to the Project.
1.1.11 "Permitted Parking" shall mean four (4) parking spaces
provided to Tenant for each one thousand (1,000) Rentable square feet of the
Leased Premises, or two hundred eighty (280) spaces. Landlord agrees that,
despite the phased build-out of the Leased Premises, Tenant shall be entitled to
use of all of the parking spaces allocated to the Building, effective as of the
Lease Commencement Date. Tenant's Permitted Parking shall be on the terms and
conditions set forth in Schedule 8. Landlord reserves the right to reduce the
number of parking spaces allocated to Tenant due to the adoption of any local
ordinance or regulation imposing air quality/auto emissions restrictions upon
employers of more then forty (40) employees.
1.1.12 "Managing Agent" shall mean Lankford & Associates, Inc., 3100
Zinfandel Drive, Suite 160, Rancho Cordova, California 95670, or any other agent
specified in writing by Landlord pursuant to the provisions for Notice in this
Lease.
1.1.13 Landlord's mailing address: 3100 Zinfandel Drive, Suite 160,
Rancho Cordova, California 95670.
1.1.14 Tenant's mailing address: Four Embarcadero Place, 2400 Geng
Road, Palo Alto, California 94303-3317, with a copy to the Leased Premises.
1.2 Schedules. The schedules and exhibits listed below are incorporated
---------
into this Lease by reference unless stated to be Intentionally Deleted. The
terms of schedules, exhibits and typewritten addenda, if any, attached or added
hereto shall control over any inconsistent provisions in the paragraphs of this
Lease.
-5-
<PAGE>
(a) Schedule 1: Description of Leased Premises and Floor Plan.
(b) Schedule 2: Rules and Regulations.
(c) Schedule 3: Prospect Green Business Park Common Area Charges.
(d) Schedule 4: Intentionally Deleted.
(e) Schedule 5: Work Letter Agreement.
(f) Schedule 5-A: Construction Schedule.
(g) Schedule 6: Certificate of Acceptance.
(h) Schedule 7: Base Rent and Management Fee
(i) Schedule 8: Parking.
2. PREMISES.
--------
2.1 Lease of Premises. In consideration of the Rent (as such term is
-----------------
defined in Subparagraph 3.1 hereof) and the provisions of this Lease, Landlord
leases to Tenant and Tenant accepts from Landlord the Leased Premises, subject
to the terms, covenants and conditions set forth herein.
2.2 Prior Occupancy. Except as provided in the Work Letter Agreement
---------------
attached hereto as Schedule 5, Tenant shall not occupy the Leased Premises prior
to the Lease Commencement Date except with the express prior written consent of
Landlord. If Tenant occupies the Leased Premises (to conduct Tenant's business
as opposed to occupying or entering to perform work required to make the Leased
Premises ready for occupancy pursuant to Schedule 5 hereof, including testing
and training procedures that may involve actual accounts but shall not be
construed to be the performance of business) prior to such Date with Landlord's
consent, Tenant shall pay Landlord for the period from the first (1st) day of
such
-6-
<PAGE>
occupancy to the Lease Commencement Date, Base Rent in the amount of the first
installment of Base Rent due and payable by Tenant. A prorated monthly
installment shall be paid for the fraction of the month if Tenant's occupancy of
the Leased Premises commences on any day other than the first (1st) day of the
month. If Tenant shall occupy the Leased Premises prior to the Lease
Commencement Date, all covenants and conditions of this Lease shall be binding
on the parties commencing upon the date of such prior occupancy.
2.3 Renewal Options.
---------------
2.3.1 Grant of Options. Landlord hereby grants to Tenant two (2)
----------------
successive Renewal Options for a term of sixty (60) months each. During each
such Renewal Term, all covenants and conditions applicable to the immediately
preceding Lease Term or Renewal Term (as appropriate) shall apply, except as
otherwise set forth herein.
2.3.2 Exercise of Options. As long as there does not exist an
-------------------
uncured Event of Default (as defined in Subparagraph 11.1 below), the Renewal
Options may be exercised by Tenant's delivery to Landlord of a written notice of
Tenant's intention to exercise its Renewal Option, delivered not later than six
(6) months prior to the expiration of the Lease Term or immediately preceding
Renewal Term, as applicable ("Notice of Exercise"). The failure of Tenant to
exercise the first Renewal Option as required by this Subparagraph 2.3.2 shall
constitute Tenant's election to terminate this Lease at the end of the original
Lease Term, the second Renewal Option shall terminate and be of no further force
and effect, and Landlord's acceptance of any Rent (as such term is defined in
Subparagraph 3.1 hereof) subsequent to the expiration of
-7-
<PAGE>
such Lease Term shall not constitute a waiver by Landlord of the requirement
that Tenant timely exercise the Renewal Option in writing.
2.4 Expansion Obligation/Accelerated Timing Option.
-----------------------------------------------
2.4.1 Expansion Obligation. The parties acknowledge and agree that, as
---------------------
of the date of execution of this Lease, Tenant has not yet completed its space
plan for the entire Leased Premises. The parties have agreed that Tenant shall
be entitled to build out and utilize the Leased Premises on a phased basis but
shall be obligated to pay Base Rent for the entirety of the Leased Premises by
the first day of the thirteenth (13th) month of the Lease Term (the "Expansion
Obligation"), as follows: (i) for the first twelve months of the Lease Term,
Tenant shall pay Base Rent for not less than Thirty-five Thousand (35,000)
Rentable square feet of space (the "Initial Space"); and (ii) it shall pay Base
Rent for the remainder of the Leased Premises (the "Secondary Space"), up to the
total of Seventy Thousand Sixty-five (70,065) Rentable square feet commencing
not later than the first day of the thirteenth (13th) month of the Lease Term.
The Initial Space and the Secondary Space are as described more fully on
Schedule 1 attached hereto. Tenant hereby agrees that, by virtue of the
Expansion Obligation, effective as of the first day of the thirteenth (13th)
month of the Lease Term, the Leased Premises shall be deemed to be Seventy
Thousand Sixty-five (70,065) Rentable square feet. Except for payment of Base
Rent, which shall commence on the first day of the thirteenth (13th) month of
the Lease Term, all terms and conditions of this Lease shall be applicable to
the Secondary Space, including the Lease Expiration Date and the per square foot
allowance for
-8-
<PAGE>
tenant improvements; provided that such allowance shall be paid in periodic
advances at the direction of Landlord, during the course of construction of the
tenant improvements for the Secondary Space (as hereinafter provided) or, if
construction has not yet commenced on the first day of the thirteenth month of
hte Lease Term, then such funds shall be placed in an interest-bearing escrow
account designated by Landlord, with instructions that they shall be released
only upon the signature of Landlord, following verification of invoices for
improvements performed to or for the benefit of the Secondary Space. In the
event that not all of such funds are utilized by Tenant for improvements to the
Secondary Space, the excess shall be returned to Landlord, along with all
interest accrued on said escrowed funds from the date of deposit to the date of
withdrawl. Notwithstanding the fact that Tenant shall be responsible for
construction of the tenant improvements to the Initial Space in accordance with
Schedule 5 attached, Tenant shall be responsible for constuction of the
improvements to the Secondary Space but will enter into an agreement with
Landlord (as a part of the Work Letter to be executed by and between the parties
in connection with the build-out of such Secondary Space, as described in
Subparagraph 2.4.2 below) whereby Landlord as owner of the Project shall perform
such work for a fee. Such agreement with Landlord shall be on the following
basic economic terms: (i) Landlord shall receive a fee of five percent (5%) (of
the total cost of the work to be performed), and Landlord's general conditions
shall be four percent (4%); (ii) Landlord shall competitively bid all major
trades and will permit Tenant to review and approve such bids (which approval
shall not be unreasonably
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<PAGE>
withheld or delayed); and (iii) Tenant shall be responsible for all increases in
the cost of the work caused by overruns, change orders, and other causes beyond
the reasonable control of Landlord.
2.4.2 Accelerated Timing Option. The foregoing notwithstanding,
-------------------------
the parties acknowledge that while the Expansion Obligation provides for
Tenant's occupancy of the Secondary Space on or before the commencement of the
thirteenth (13th) month of the Lease Term, Tenant shall be entitled to cause the
tenant improvements to be performed and occupy such space prior to the
thirteenth (13th) month (the "Accelerated Timing Option"). In the event Tenant
exercises such Accelerated Timing Option, Tenant's obligation for payment of
Base Rent as to such space shall not commence until the first day of the
thirteenth (13th) month of the Lease Term; however, all other sums due and
payable hereunder as to such space shall commence on the actual date of
occupancy. The Secondary Space shall be built-out - whether by exercise of the
Accelerated Timing Option or otherwise - by Tenant's delivery to Landlord of
written notice pursuant to the terms hereof of Tenant's desire to commence
construction of improvements for the Secondary Space. The parties shall, within
a reasonable period of time, not to exceed fifteen (15) days thereafter, execute
(i) an addendum to this Lease confirming the terms and conditions upon which the
Secondary Space, shall be leased to Tenant, including, without limitation, the
date upon which Tenant's occupancy of such space shall commence (the "Expansion
Commencement Date"), the dollar amount for Base Rent, Tenant's Square Footage
and other variables affected by such expansion; and (ii) a Work Letter Agreement
in the
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<PAGE>
form of Schedule 5 attached, covering Leasehold Improvements to be performed in
such space, which are mutually agreeable to Landlord and Tenant, and including
the terms on which Landlord shall construct such improvements, as described
above. The Expansion Commencement Date shall be the earlier to occur of (i)
Tenant's actual conduct of business in such space, or (ii) the date of
Substantial Completion of such space, as determined in accordance with the Work
Letter Agreement executed by the parties in connection with such space, as
provided above, but in no event later that the first day of the thirteenth
(13th) month, of the Lease Term. Tenant's obligation for payment of Base Rent
for the entire Building shall begin on such date regardless of whether
Substantial Completion has yet been achieved, and regardless of whether Tenant
has delivered written notice of its desire to build out such space.
2.5 Annex Expansion Option. Concurrently with the execution of this
----------------------
Lease, the parties are entering into that certain Annex Expansion Option,
whereby the parties have made separate arrangements for addressing the possible
future expansion needs of Tenant by way of a companion building to be located on
real property adjacent to the Building which is owned by Landlord. In the event
of an assignment or other transfer of Landlord's interest in this Lease, or a
permitted transfer of Tenant's interest in this Lease, the Annex Expansion
Option shall not be transferred therewith, it being understood that the parties'
---
agreements thereunder are separate and distinct from this Lease. Notwithstanding
the separate nature of the Annex Expansion Option, it shall be a condition of
exercise of such option that the initial
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<PAGE>
Lease Term of this Lease shall and must be automatically extended to be co-
terminous with the lease to be entered into by the parties for such annex
building. Such extended period shall be referred to herein as the "Annex
Extension Period" and shall be on the same terms and conditions as this Lease;
provided that the Base Rent for such Annex Extension Period shall be increased
to ninety-five percent (95%) of Fair Market Rental in accordance with the
procedure for determining Fair Market Rental set forth in Subparagraph 3.3
below. Such increase shall be calculated as of that date on which the Lease Term
would have expired had the Annex Expansion Option not been exercised by Tenant;
provided, however, that notwithstanding such Fair Market Rental calculation, in
no event shall Base Rent for such Annex Expansion Period be less than the Base
Rent in effect as of the effective date of such calculation.
3. PAYMENT OF RENT AND OPERATING COSTS.
-----------------------------------
3.1 Lease Term Rent.
---------------
3.1.2 Base Rent. Each monthly installment of Base Rent in the
---------
amount set forth in Schedule 7 shall be payable no later than the first (1st)
calendar day of each month, together with each monthly installment of Tenant's
Share of Additional Operating Costs. Monthly installments for any fractional
calendar month, at the beginning or end of the Lease Term or any Renewal Term,
shall be prorated based on the number of days in such month. Base Rent and
Tenant's Share of Additional Operating Costs, together with all other amounts
payable by Tenant to Landlord under this Lease, shall be sometimes referred to
collectively as "Rent."
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<PAGE>
Tenant shall pay all Rent, without deduction or set off, to Landlord or Managing
Agent at a place specified by Landlord.
3.1.3 Late Charge. Rent not paid on or before the expiration of
-----------
four (4) business days following the date that such sums are due, shall be
subject to a late charge until paid equal to one and one-half percent (1-1/2%)
per month from such fourth (4th) business day following the date when due, until
paid, but in no event greater than that rate which is permitted under applicable
laws prohibiting the charging or collection of usurious interest. Tenant
acknowledges that late payment of Rent will cause Landlord to incur costs not
contemplated by this Lease, the exact amount of which is extremely difficult and
impracticable to ascertain at this time. Accordingly, the parties agree that
the foregoing late charge represents a reasonable estimate of the loss and
expense to be suffered by Landlord by reason of Tenant's late payment.
3.2 Base Rent Adjustment. Base Rent shall be subject to adjustment as
--------------------
provided on Schedule 7 attached.
3.3 Renewal Term Rent. During the first Renewal Term, the Base Rent shall
-----------------
be ninety-five percent (95%) of the fair market rental ("Fair Market Rental")
for the Leased Premises as of the end of the just expired Lease Term. During
the second Renewal Term, the Base Rent shall be ninety-five percent (95%) of the
Fair Market Rental for the Leased Premises as of the end of the just expired
first Renewal Term.
3.3.1 Fair Market Rental Defined. As used herein, Fair Market
--------------------------
Rental shall mean the annual amount per square foot that a willing comparable
entity, non-renewal, non-expiration new tenant would pay and a willing,
comparable Landlord of a similar class
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<PAGE>
building which is situated along the Interstate Highway 50 corridor between Watt
Avenue and Sunrise Boulevard, in Sacramento County, California, would accept at
arm's length, giving appropriate consideration to annual rental rate per square
foot, types of escalation clauses, abatement provisions reflecting free rent
and/or no rent during a lease term, brokerage commissions, if any, length of
lease term, size and location of premises, building standard work letter and/or
tenant improvement allowances, and other generally applicable terms and
conditions of tenancy.
3.3.2 Procedure for Determining Fair Market Rental.
--------------------------------------------
(a) The Fair Market Rental shall be determined by Landlord
and Tenant within thirty (30) days after Landlord receives Tenant's Notice of
Exercise. If the parties are unable to agree on such Rental, they shall select
an appraiser within ten (10) days after the expiration of such thirty (30) days
following the Notice of Exercise. If they are unable to select a single
appraiser, each party shall select its own appraiser within ten (10) days
thereafter, and the two (2) appraisers shall meet promptly and attempt to
determine the Fair Market Rental. If the two (2) appraisers are able to agree,
within thirty (30) days after their selection, on a Fair Market Rental that
varies five percent (5%) or less (among the two (2) appraisers), their values
shall be averaged to arrive at Fair Market Rental. If the two (2) appraisers are
unable to agree, within thirty (30) days after their selection, on a Fair Market
Rental that varies five percent (5%) or less (as among the two (2) appraisers),
the two (2) appraisers shall select a third (3rd) appraiser within ten (10) days
following expiration of the thirty (30) days. The third (3rd) appraiser shall in
all
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<PAGE>
events be a person who has not previously acted in any capacity for either
Landlord or Tenant. If the two (2) appraisers are unable to agree on a third
(3rd) appraiser (or if either party should within the time specified fail to
appoint its appraiser), then either party, upon written application with ten
(10) days' prior written notice to the other, may request such appointment be
made by the then presiding judge of the Superior Court of the County of
Sacramento acting pursuant to Code of Civil Procedure Section 1281.6.
(b) The determination of a majority of the appraisers shall
be binding upon the parties and shall be made not later than thirty (30) days
following selection of the third (3rd) appraiser. If a majority of the
appraisers are unable to set the Fair Market Rental within the stipulated period
of time, the three (3) appraisals shall be added together and their totals
divided by three (3); the resulting quotient shall be such Rental; provided,
however, if the low appraisal and/or the high appraisal are/is more than seven
percent (7%) lower and/or higher than the middle appraisal, the low and/or high
appraisal shall be disregarded. If only one (1) appraisal is disregarded, the
remaining two (2) appraisals shall be added together and their total divided by
two (2); the resulting quotient shall be the Fair Market Rental. If both the low
appraisal and the high appraisal are disregarded, the middle appraisal shall be
the Fair Market Rental. Each party shall bear the cost of the appraisers
selected by it; the expenses of the third (3rd) appraiser shall be borne one-
half (1/2) by Landlord and one-half (1/2) by Tenant.
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<PAGE>
3.3.3 Qualifications of Appraiser. Any person selected as an
---------------------------
appraiser under this Subparagraph 3.3 shall be a member in good standing of the
American Institute of Real Estate Appraisers or successor organizations and
shall have had at least five (5) years experience in appraising commercial real
estate similar to the Building in the same general location.
3.3.4 Redecorating Allowance. Upon Tenant's exercise of either the
----------------------
first or both of the Renewal Options, Landlord shall provide Tenant (upon each
such exercise) an allowance of Five and No/100 Dollars ($5.00) per Rentable
square foot of space in the Leased Premises, to be used by Tenant solely for
redecorating the Leased Premises in accordance with plans and specifications
subject to the prior written approval of Landlord, and, if all of such allowance
is not utilized for redecorating, then the remainder may be utilized by Tenant
for other improvements to the Leased Premises in accordance with plans and
specifications approved by Landlord. Furthermore, as to such allowance for the
first Renewal Term, if all of such allowance is not utilized, then Tenant shall
be entitled to carry it forward to be applied to the second Renewal Term, should
the second Renewal Option be exercised by Tenant.
3.4 Operating Costs. The parties acknowledge and agree that this Lease is
---------------
what is commonly known as a "triple net lease" or a "net, net, net lease".
Throughout the entire term hereof, the Base Rent is intended to be and shall be
paid to Landlord absolutely net of all impositions, taxes (except as otherwise
provided herein), liens, charges, mortgages (with the exception of mortgages
initiated by and securing financial obligations of Landlord), costs
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<PAGE>
or expenses (with the exception of certain maintenance costs specifically
provided in Subparagraph 5.1.2.1 below) of any nature whatsoever in connection
with the ownership and operation of the Project. Each of the foregoing costs and
charges to be paid by Tenant shall be part of Operating Costs as hereinafter
defined, and shall be paid in one of three ways, as follows: (1) directly by
Tenant to the supplier, vendor or provider thereof ("Tenant's Direct Costs");
(2) monthly payment from Tenant to Landlord of Tenant's Share - in this case,
one hundred percent (100%) - of certain of the Additional Operating Costs,
calculated by Landlord on an annual basis and billed 1/12 per month ("Monthly
Additional Operating Costs"); and (3) Additional Operating Costs payable upon
demand from Landlord to Tenant ("Demand Additional Operating Costs"). The
Operating Costs are defined below, along with a more specific description of the
manner of payment of the same, as follows:
3.4.1 Definition. "Operating Costs" shall mean all expenses
----------
relating to the Leased Premises or the Project, including, but not limited to:
real estate taxes and assessments (including debt service payments on amortizing
bonds); gross rents, sales, use, business, corporation or other taxes (except
net income taxes other than taxes levied or assessed in substitution for any
other tax constituting an Operating Cost); any fees or charges (for example,
traffic, parking or air quality mitigation, child care, low income housing, or
other such fees) imposed by governmental authorities having jurisdiction over
the Project; utilities; costs attributable to the Project for utilization of the
common area of Prospect Green Business Park (as more fully described in Schedule
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<PAGE>
3 attached); insurance premiums and (to the extent used) deductibles for all
insurance being carried by Landlord against the Project or its operation;
maintenance, repairs and replacements; refurbishing and repainting; cleaning,
janitorial and other services, equipment, tools, materials and supplies; air
conditioning, heating and elevator service; property management fees in the
amounts set forth on Schedule 7 attached; security; resurfacing and restripping
of walks, drives and parking areas; signs, directories and markers; exterior
cleaning of the Building; landscaping; and snow and rubbish removal. Operating
Costs shall not include expenses for legal services, real estate brokerage and
leasing commissions, Landlord's net income taxes, income tax accounting,
interest, depreciation, general corporate overhead, or capital improvements to
the Building or Project except for capital improvements installed for the
purpose of reducing or controlling expenses (and, in such case, to the extent of
such savings or reduction in expenses; provided, however, that Landlord's
statement as to such reduction or savings shall be presumed contolling on the
issue and Tenant shall have the burden of disproving such statement), or
required by any governmental or other authority having jurisdiction over the
Project, which shall be amortized by Landlord in accordance with Generally
Accepted Accounting Principles. In computing Additional Operating Costs for
purposes of Subparagraph 3.4.2 below, Landlord's estimate of Operating Costs
shall be used, and for purposes of Subparagraph 3.4.3 below, Landlord's actual
Operating Costs for any calendar year shall be used.
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<PAGE>
3.4.2 Payment of Monthly Additional Operating Costs. Tenant shall
---------------------------------------------
pay, in equal monthly installments, beginning on the first day of the first
month of this Lease, Tenant's Share of any Additional Operating Costs for each
calendar year which falls (in whole or in part) during the Lease Term (prorated
for any partial calendar year at the beginning or end of the Lease Term), in the
following categories: landscaping (including utilities not billed on the same
meter as the Leased Premises which shall be paid directly by Tenant as provided
below), parking lot maintenance and refurbishment (including utilities not
billed on the same meter as the Leased Premises, which shall be paid directly by
Tenant as provided below); common area charges for Prospect Green Business Park;
management fees; Project sign, directory and marker maintenance; and any other
Operating Costs not paid directly by Tenant or billed separately by Landlord to
Tenant in accordance with the procedures set forth below. Annually, or from
time to time, based on actual and projected Operating Costs data, Landlord may
adjust its estimate of Monthly Additional Operating Costs upward or downward.
All monthly installments of Monthly Additional Operating Costs payable after
notice to Tenant of a revised estimate of Operating Costs shall be paid in equal
monthly amounts sufficient to pay in full the unpaid balance of Tenant's Share
of any Monthly Additional Operating Costs by the end of the calendar year in
which such adjustment is made, and thereafter Monthly Additional Operating Costs
shall be paid in equal monthly amounts sufficient to pay in full Tenant's Share
of any Monthly Additional Operating Costs by the end of each succeeding calendar
year.
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<PAGE>
3.4.3 Actual Operating Cost Adjustment. As soon as possible each
--------------------------------
year, Landlord shall compute the actual Additional Operating Costs for the prior
calendar year, and shall give notice thereof to Tenant. Within thirty (30) days
after receipt of such notice, Tenant shall pay any deficiency in Tenant's Share
of any Monthly Additional Operating Costs for the prior calendar year (prorated
for any partial calendar year prior to or at the beginning or end of the Lease
or Renewal Term). In the event of overpayment by Tenant, Landlord shall apply
the excess to the next payment of Rent when due, until such excess is exhausted
or until no further payments of Rent are due, in which case Landlord shall pay
to Tenant the balance of such excess within thirty (30) days thereafter.
3.4.4 Demand Additional Operating Costs. The parties acknowledge
---------------------------------
and agree that certain Additional Operating Costs shall be periodically billed
to Tenant by Landlord in addition to the Monthly Additional Operating Cost
calculation, and shall be payable by Tenant upon demand, as follows:
(i) all real property taxes and assessments (including debt
service on amortizing bonds);
(ii) insurance premiums and deductibles (to the extent used);
(iii) fees and other charges (such as traffic, parking or air quality
mitigation charges and child care fees) imposed by governmental authorities
having or asserting jurisdiction over the Project; and
(iv) any and all taxes payable (a) upon, measured by or reasonably
attributable to the cost or value of Tenant's equipment,
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<PAGE>
fixtures and other personal property located in the Leased Premises or by the
cost or value of any leasehold improvements made in or to the Leased Premises by
Tenant, regardless of whether title to such improvements is in Tenant or
Landlord; (b) upon or measured by the monthly Rental payable hereunder,
including, without limitation, any gross receipts tax or excise tax, unless paid
as an Operating Cost; (c) upon or with respect to the possession, leasing,
operating, management, maintenance, alteration, repair, use or occupancy by
Tenant of the Leased Premises or any portion thereof; and (d) upon this
transaction or any document to which Tenant is a party creating or transferring
an interest or an estate in the Leased Premises.
Each of the foregoing shall be additional Rent hereunder and, unless this Lease
provides otherwise, shall be due and payable not later than thirty (30) days
after demand therefor.
3.4.5 Tenant's Direct Operating Costs. The parties
-------------------------------
acknowledge and agree that, in addition to Tenant's responsibility for payment
of the foregoing Additional Operating Costs, Tenant shall be responsible for
directly paying to the supplier, vendor or provider thereof, certain Operating
Costs (some of which are also articulated in Subparagraph 5 below, dealing with
Tenant's responsibility for payment and performance of certain maintenance
obligations), as follows:
(i) janitorial services for the Leased Premises in accordance with
specifications (both as to frequency and scope of service) commensurate with
similar class A buildings in the same
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<PAGE>
vacinity as the Building and approved by Landlord in its reasonable discretion;
(ii) electrical, gas, water and other utility charges for provision
of light, general electrical power and water supplied to the Leased Premises
(including sewer and waste removal), which shall be separately metered and
billed to Tenant, at Tenant's sole cost and expense;
(iii) telephone installation and service supplied to the Leased
Premises;
(iv) routine, periodic elevator maintenance service and HVAC systems
service in accordance with specifications (both as to scope and frequency)
commensurate with similar Class A buildings in the vacinity of the Building, and
approved by Landlord in its reasonable discretion; and
(v) routine, periodic pest control service in accordance with
specifications (both as to frequency and scope of service) commensurate with
similar Class A buildings in the vacinity of the Building, and approved by
Landlord in its reasonable discretion. If the foregoing costs are not timely
paid by Tenant and Landlord is required to pay them, they shall be additional
Rent hereunder. Should Tenant fail to provide adequate janitorial, pest control,
elevator or HVAC systems services and/or timely pay for such services or those
utility charges separately billed to Tenant, then, in addition to Landlord's
remedies hereunder for an Event of Default by Tenant, Landlord shall have the
right to assume responsibility for such costs (including the right to make
arrangements for janitorial, pest control, elevator and/or HVAC
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systems services to the Leased Premises) and to charge Tenant for the same.
4. IMPROVEMENTS BY LANDLORD; POSSESSION.
------------------------------------
4.1 Construction Conditions. Tenant shall construct the improvements
-----------------------
described in the Work Letter Agreement attached hereto as Schedule 5 and
Schedule 5-B (the "Leasehold Improvements"). The expenses to be incurred as
between Landlord and Tenant for construction of the Leasehold Improvements are
specified in Schedule 5.
4.2 Commencement of Possession. If the Leased Premises are not
--------------------------
Substantially Complete (as defined in Schedule 5 attached), by the scheduled
Lease Commencement Date, subject only to items which do not materially affect
the use thereof, then the Lease Commencement Date shall be extended to the date
on which Substantial Completion shall have been achieved; provided, however,
that in no event shall the Lease Commencement Date be extended beyond October 1,
1996. If Tenant fails to cause the Leased Premises to be ready for occupancy at
the time of the scheduled Lease Commencement Date, the Lease Term shall
nevertheless commence effective as of the scheduled Lease Commencement Date),
and neither Landlord nor Landlord's agents, officers, employees or contractors
shall be liable for any damage, loss, liability or expense caused thereby; nor
shall this Lease become void or voidable unless such failure continues for more
than one hundred eighty (180) days, in which case, Landlord, only, shall have
the right to terminate this Lease upon twenty (20) days' prior written notice to
Tenant; provided that the time for Tenant to perform shall be extended by any
delay caused by Landlord and force majeure events. As soon as
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<PAGE>
possible following the establishment of the Lease Commencement Date in
accordance with the terms of this subparagraph 4.2, Tenant shall execute and
deliver to Landlord a letter in the form attached as Schedule 6, acknowledging
the Lease Commencement Date and certifying that the Leasehold Improvements have
been substantially completed and that Tenant has examined and accepted the
Leased Premises. Tenant hereby authorizes an officer of Tenant who receives the
keys, cardkeys, or other security devices to the Leased Premises on behalf of
Tenant to execute and deliver such letter in Tenant's name. If Tenant fails to
deliver such letter, Tenant shall conclusively be deemed to have made such
acknowledgment and certification effective as of the date of Substantial
Completion, as certified by Landlord's architect, in accordance with Schedule 5
attached.
5. PROJECT SERVICES.
----------------
5.1 Project Services. Tenant and Landlord shall furnish services to the
----------------
Project, as follows:
5.1.1 Utility Services. Tenant shall arrange for and pay directly
-----------------
to the supplier thereof, all utility services to the Project, as set forth in
Subparagraph 3.6 above (the "Utility Services").
5.1.2 Maintenance Services.
---------------------
5.1.2.1 Landlord's Maintenance. Landlord, at its cost,
----------------------
shall be obligated to maintain, repair, and replace the following: (a) the
structural parts of the Building, which structural parts include only the
foundations, bearing and exterior walls (excluding glass and doors),
subflooring and roof; and (b) the unexposed electrical, plumbing and
sewage systems (but not in
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<PAGE>
the tenant improvements), including, without limitation, those portions of the
systems lying outside the Building. All of the foregoing shall be at the expense
of Landlord unless the need for such maintenance and/or repair is caused in part
or in whole by the act, neglect fault or omission of any duty of Tenant, its
agents, employees or invitees, in which case Tenant shall pay Landlord the
reasonable cost of such maintenance and/or repairs, within twenty (20) days
following Landlord's demand therefor. Landlord shall also maintain the parking
area and the other portions of the Land, including the landscaped portions
thereof; however, the cost of such maintenance shall be included by Landlord as
an Operating Cost for purposes of computing Additional Operating Costs as
provided in Subparagraph 3.4 above.
5.1.2.2 Tenant's Maintenance. Tenant, at its sole cost and
--------------------
expense, shall be responsible for repair, maintenance and replacement of all
portions of the Leased Premises for which Landlord is not expressly obligated
hereunder to maintain and repair, including, without limitation, the following:
(a) the Leasehold Improvements; (b) Tenant's personal property and signs; (c)
the plate glass and windows of the Leased Premises; (d) the exposed electrical,
plumbing and sewage systems of the Leased Premises (and any unexposed portions
within the tenant improvements); (e) the floor covering, wall covering and
interior non-structural fixtures of the Building; (f) the heating, ventilating
and air conditioning equipment serving the Building (the "HVAC Equipment"); and
(g) the elevator. The parties specifically agree the Tenant shall, at its cost,
engage a maintenance firm reasonably acceptable to Landlord, to perform
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preventative maintenance services on the HVAC Equipment and the elevator, and
Landlord shall be entitled to reasonably approve the nature and extent of such
maintenance services. All of the foregoing shall be at the cost and expense of
Tenant unless the need for such repair and/or maintenance is caused in whole or
in part by the act, neglect, fault or omission of any duty by Landlord, its
agents, employees or invitees, in which case Landlord shall to Tenant the
reasonable cost of the same within twenty (20) days of Landlord' approval of
such costs.
5.1.2.3 Remedies. Should either party fail to commence and
--------
diligently persue performance of the foregoing respective maintenance
obligations, within twenty (20) days after notice from the other party (except
for an emergency or hazardous situation, in which case the performance shall be
immediate), then the other party shall be entitled to perform the same. In such
case, the cost of any such performance shall be due and payable by the party
failing to perform the same, within twenty (20) days following demand therefor
by the other party.
5.1.3 Project Services. Utility Services and Maintenance Services,
----------------
described above, shall be collectively referred to as "Project Services."
6. TENANT'S COVENANTS.
------------------
6.1 Use of Leased Premises. Tenant agrees to:
----------------------
6.1.1 Permitted Usage. Use the Leased Premises for the Permitted
---------------
Purpose only and for no other purposes.
6.1.2 Compliance With Laws. Comply with the pro visions of all
----------------------
recorded covenants, conditions and restrictions (including, without limitation,
any applicable to the Prospect
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<PAGE>
Green Business Park, of which the Project is a part) and all building, zoning,
fire and other governmental laws, ordinances, rules or regulations applicable to
the Leased Premises and all requirements of the carriers of insurance covering
the Project. Landlord shall provide Tenant with a copy of any notice it
receives from an insurance carrier pertaining to the Leased Premises insofar as
such notice sets forth an alleged failure to meet the carrier's requirements,
and Tenant shall have ten (10) days thereafter to remedy any failure to so
comply; provided, however, that such compliance shall not increase Tenant's
insurance requirements hereunder.
6.1.3 Nuisances or Waste.
------------------
(a) Not do or permit anything to be done in or about the
Leased Premises, or bring or keep anything in the Leased Premises that may
increase Landlord's fire and extended coverage insurance premium, damage the
Building or the Project, constitute waste, constitute an immoral purpose, or be
a nuisance, public or private, or menace or other disturbance to tenants of
adjoining premises or anyone else, or use or store any toxic chemicals, wastes,
elements or substances in the Leased Premises, unless such toxic chemicals,
waste, elements or substances are used or stored in full compliance with any
local, state or federal laws, ordinances, rules and regulations presently in
effect or hereafter enacted pertaining to such use or storage and then only if
used or stored in connection with Tenant's ordinary and usual business
operations (that is, for example, white-out correction fluid and photocopy
toner). This Subparagraph 6.1.3. is in addition to those provisions set forth in
Subparagraph 13.13 below.
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(b) Tenant further agrees to defend, indemnify and hold
harmless Landlord, or any partner, officer or director of Landlord, against any
and all claims, demands, liabilities, costs and expenses (including without
limitation reasonable attorneys' fees and expenses, expert witness fees and
post-judgment collection costs) which Landlord may sustain at any time as a
result of, arising out of, or in any way connected with a breach of Subparagraph
6.1.3(a). Additionally, Tenant agrees to cease the activity which amounts to
such breach immediately upon receipt of written notice from Landlord or any
regulatory or governmental agency that, such activity is in violation of any
governmental laws, ordinances, regulations or rules. Tenant shall give notice to
Landlord of any hazardous substances that come to be located on the Leased
Premises pursuant to Health & Safety Code section 25359.7.
6.1.4 Alterations and Improvements. Make no alterations or
----------------------------
improvements to the Leased Premises the cost of which exceeds Fifteen Thousand
and No/100 Dollars ($15,000) or, notwithstanding the cost, the effect of which
is to modify the lobby or the existing mechanical, electrical and/or structural
systems of the Building, without the prior written approval of Landlord; and
make no alterations or improvements the cost of which is less than Fifteen
Thousand and No/100 Dollars ($15,000) without prior notice to Landlord
specifying the nature of such improvements. The foregoing right to make certain
alterations without Landlord's prior consent shall be subject to the terms and
conditions of the documents evidencing and securing the mortgage liens, if any,
against the Project. In the event of any such conflict, Landlord
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<PAGE>
shall prompty notify Tenant in accordance with the terms hereof. Any such
alterations or improvements by Tenant shall be done in a good and workmanlike
manner, at Tenant's expense, by a licensed contractor reasonably approved by
Landlord in conformity with plans and specifications reviewed by Landlord.
Tenant shall obtain all necessary governmental approvals and permits. On any
alterations or improvements requiring Landlord's prior written approval, at
Landlord's option, Tenant shall contract with Landlord for the construction of
such alterations or improvements, but only if Landlord's price for such work is
the lowest of the qualified written bids submitted to Tenant in a competitive
bid process. In the case of any alterations, whether or not Landlord's approval
is required hereunder, Tenant shall give Landlord no less than ten (10) business
days' notice prior to commencement of construction of any kind so that Landlord
may post a notice of nonresponsibility on the Leased Premises.
6.1.5 Liens. Keep the Leased Premises, the Building and the Project
-----
free from liens arising out of any work performed, materials furnished or
obligations incurred by or for Tenant. If requested by Landlord, Tenant shall
post a bond or other security reasonably satisfactory to Landlord to protect
Landlord against such liens. If, at any time, a lien or encumbrance is filed
against the Leased Premises, the Building or the Project as a result of Tenant's
work, materials or obligations, Tenant shall promptly discharge such lien or
encumbrance. If such lien or encumbrance has not been removed within sixty (60)
days from the date it is filed, Tenant agrees to post a bond in at least the
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amount prescribed by applicable California statute then in effect as security
for the lien being discharged.
6.1.6 Rules and Regulations. Observe, perform and abide by all the
---------------------
rules and regulations promulgated by Landlord from time to time on a reasonable
basis for the benefit of the Project and its tenants, including any such rules
and regulations with overall applicability to Prospect Green Business Park.
Schedule 2 sets forth Landlord's rules and regulations in effect on the date
hereof.
6.1.7 Signage. Obtain the prior approval of the Landlord before
-------
placing any sign or symbol in doors or windows or elsewhere in or about the
Leased Premises, or upon any other part of the Building or Project, including
building directories. The parties acknowledge and agree that Tenant shall have
the right to install exterior signage on the Building, so long as the location
and specifications (style, materials, etc.) of such signage have received the
prior written approval of Landlord and the County of Sacramento. Any signs or
symbols which have been placed without Landlord's approval may be removed by
Landlord. Upon expiration or termination of this Lease, all signs installed by
Tenant shall be removed and any damage resulting therefrom shall be promptly
repaired by Tenant, or such removal and repair may be done by Landlord and the
cost charged to Tenant as Rent.
6.2 Insurance.
---------
6.2.1 Insurance Obtained by Tenant. Tenant shall, at its own
----------------------------
expense, procure and maintain during the Lease Term commercial general liability
insurance with respect to the Leased Premises and Tenant's activities in the
Leased Premises and in the
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Project, providing bodily injury, broad form property damage with a maximum One
Thousand Dollar ($1,000.00) deductible, unless otherwise approved by Landlord,
as follows:
(a) One Million Dollars ($1,000,000) with respect to bodily
injury or death to any one (1) person;
(b) Three Million Dollars ($3,000,000) with respect to bodily
injury or death arising out of any one (1) occurrence;
(c) One Million Dollars ($1,000,000) with respect to
property damage or other loss arising out of any one (1) occurrence;
(d) Fire and extended casualty insurance covering Tenant's
trade fixtures, merchandise and other personal property in an amount not less
than one hundred percent (100%) of their actual replacement cost or highest
insurable value;
(e) Workers' compensation insurance in at least the statutory
amounts; and
(f) Business interruption insurance equal to all Rent and
other sums due hereunder for a period of not less than twelve (12) months.
Should Tenant be unable to procure such business interruption insurance at a
resonable cost, then Landlord shall be entitled to procure comparable coverage
and include the cost thereof as an Operating Cost.
6.2.2 Coverage Increase. Not more frequently than each three (3)
-----------------
years if, in the reasonable business judgment of Landlord, the amount of public
liability and property damage insurance coverage maintained by Tenant is at that
time not adequate, Tenant shall increase the insurance coverage to an amount
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which is determined to be adequate by Landlord in the exercise of reasonable
business judgment.
6.2.3 Blanket Policy. Nothing in this Subparagraph 6.2 shall prevent
--------------
Tenant from obtaining insurance of the kind and in the amounts provided for
under this Paragraph under a blanket insurance policy covering other properties
as well as the Leased Premises; provided, however, that any such policy of
blanket insurance (i) shall specify the amounts of the total insurance allocated
to the Leased Premises, which amounts shall not be less than the amounts
required by Subparagraphs 6.2.1(a) through (c) hereof, and (ii) such amounts so
specified shall be sufficient to prevent any one of the insureds from becoming a
co-insurer within the terms of the applicable policy, and (iii) shall, as to the
Leased Premises, otherwise comply as to endorsements and coverage with the
provisions of the Paragraph.
6.2.4 Acceptable Insurance. Tenant's insurance shall be with a
--------------------
Best's Insurance Reports A+ rated company (or A rated if Class XIII or larger).
Landlord and Landlord's mortgagee, if any, shall be named as "additional
insureds" under Tenant's general liability insurance (except as to the insurance
required by Subparagraph 6.2.1(d) above), and such Tenant's insurance shall be
primary and noncontributing with Landlord's insurance. Tenant's insurance
policies shall contain endorsements requiring thirty (30) days' notice to
Landlord and Landlord's mortgagee, if any, prior to any cancellation, lapse or
nonrenewal or any reduction in amount of coverage.
6.2.5 Evidence of Insurance. Tenant shall deliver to Landlord, as a
---------------------
condition precedent to its taking occupancy of the
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Leased Premises, a certificate or certificates evidencing such insurance.
6.3 Repairs. Subject to the obligation of Landlord to provide certain
-------
Maintenance Services as provided in Subparagraph 5.1.2.1 above, Tenant, at its
sole expense, agrees to maintain the interior of the Leased Premises in a neat,
clean and sanitary condition. If Tenant fails to maintain or keep the Leased
Premises in good repair and such failure continues for thirty (30) days after
receipt of written notice from Landlord, or if such failure results in a
nuisance or health or safety risk, Landlord may perform any such required
maintenance and repairs and the cost thereof shall be payable by Tenant as Rent
within ten (10) business days of receipt of an invoice from Landlord. Tenant
shall also pay to Landlord the costs of any repair to the Leased Premises,
Building or Project necessitated by any act or neglect of Tenant. Tenant waives
the provisions of Sections 1941 and 1942 of the Civil Code of the State of
California and any other statutes or laws permitting repairs by a tenant at the
expense of a landlord or termination of a lease by reason of the condition of
the Leased Premises.
6.4 Assignment and Subletting.
-------------------------
6.4.1 Landlord's Consent Required. Tenant shall not assign,
---------------------------
mortgage, pledge or encumber this Lease, or permit all or any part of the Leased
Premises to be subleased to another, without the prior written consent of
Landlord, which consent shall not be unreasonably withheld or delayed. Any
transfer of this Lease by merger, consolidation, reorganization or liquidation
of Tenant, or by operation of law, or change in the ownership of or power to
vote
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the majority of the outstanding voting stock of a corporate Tenant, or by change
in ownership of a controlling partnership interest in a partnership Tenant,
shall constitute an assignment for purposes of this Paragraph.
6.4.2 Basis for Withholding Consent. Landlord agrees that it will
-----------------------------
not unreasonably withhold its consent to Tenant's assigning this Lease or
subletting the Leased Premises. In addition to other reasonable bases, Tenant
hereby agrees that Landlord shall be deemed to be reasonable in withholding its
consent if (a) the proposed assignment or sublease is for a rental rate less
than seventy-five percent (75%) of the then current Fair Market Rental (as
defined in Subparagraph 3.3.1 hereof); or (b) for the first four (4) years of
the term, the proposed assignment or sublease is to any party who is then a
tenant of the Building or the Project, and thereafter only if Landlord has
comparable area available at that time, at a rental rate not less than seventy-
five percent (75%) of the then current Fair Market Rental; or (c) the proposed
sublease or assignment results in more than five (5) tenants in the Leased
Premises; or (d) there exists an Event of Default (as defined in Subparagraph
11.1 below) at the time of request for consent or on the effective date of such
subletting or assigning; or (e) the proposed subtenant or assignee is, in
Landlord's good faith judgment, incompatible with other tenants in the Building,
or seeks to use any portion of the Leased Premises for a use not consistent with
other uses in the Building, or is financially incapable of assuming the
obligations of this Lease (notwithstanding the fact that the Tenant as primary
obligee is not released). Tenant shall submit to Landlord the name of a
proposed
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<PAGE>
assignee or subtenant, the terms of the proposed assignment or subletting, the
nature of the proposed subtenant's or assignee's business, and such information
as to the assignee's or subtenant's financial responsibility and general
reputation as Landlord may reasonably require. Landlord may also consider the
amount of square feet of the Leased Premises proposed to be subleased and the
number of employees the subtenant anticipates it will utilize the subleased
premises.
6.4.3 No Release of Obligations. No subletting or assignment, even
-------------------------
with the consent of Landlord, shall relieve Tenant of its primary obligation to
pay the Rent and to perform all of the other obligations to be performed by
Tenant hereunder. The acceptance of Rent by Landlord from any other person
shall not be deemed to be a waiver by Landlord of any provision of this Lease or
to be a consent to any assignment, subletting or other transfer. Consent to one
assignment, subletting or other transfer shall not be deemed to constitute
consent to any subsequent assignment, subletting or other transfer.
6.4.5 Recapture. As material consideration for the execution of
---------
this Lease by Landlord, Tenant hereby agrees that whenever it delivers notice to
Landlord that it desires approval of a sublease or assignment, Landlord shall
have the right to review the terms and conditions of such proposed sublease or
assignment and, should the proposed assignment or sublease be for the remaining
Lease Term or the remainder of any Renewal Term then in effect, then Landlord
shall have a right for a period of fifteen (15) business days, to cancel this
Lease as to the portion of the Leased Premises to be assigned or subleased, and
enter into a
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<PAGE>
direct Lease with any prospective sublessee or assignee. Such fifteen (15) day
period shall commence upon Tenant's delivery to Landlord of written notice of
the terms of the proposed assignment or sublease and financial statements for
the proposed assignee or sublessee. If Landlord exercises its right to cancel
this Lease, Tenant shall surrender possession of all, or the applicable portion,
of the Leased Premises which is the subject of this right to cancel, as the case
may be, not later than the date on which the proposed sublease or assignment
term would commence. If this lease is cancelled as to a portion of the Premises
only, the Rent after the date of cancellation shall be reduced proportionately
on a square footage basis.
6.4.6 Proceeds of Sublease or Assignment. One-half ( 1/2) of any
----------------------------------
proceeds (net of any costs incurred by Tenant in subletting to subtenant) in
excess of Base Rent and Tenant's Share of Additional Operating Costs which is
received by Tenant pursuant to an assignment or subletting consented to by
Landlord shall be remitted to Landlord as extra Rent within ten (10) days of
receipt by Tenant net of any costs Tenant incurs in subletting space. For
purposes of this Paragraph, all money or value in whatever form received by
Tenant from or on account of any party as consideration for an assignment or
subletting shall be deemed to be proceeds received by Tenant pursuant to an
assignment or subletting.
6.5 Estoppel Certificate. From time to time and within ten (10) days
--------------------
after request by Landlord, Tenant shall execute and deliver a certificate to any
proposed lender or purchaser, or to Landlord, certifying, with any appropriate
exceptions, (a) that this Lease is in full force and effect without modification
except
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<PAGE>
as noted, (b) the amount, if any, of Prepaid Rent and Deposit paid by Tenant to
Landlord (and not returned to Tenant), (c) the nature and kind of concessions,
rental or otherwise, if any, which Tenant has received or is entitled to
receive, (d) that Landlord has performed all of its obligations due to be
performed under this Lease and that there are no defenses, counterclaims,
deductions or offsets outstanding or other excuses for Tenant's performance
under this Lease as of such date, and (e) any other fact reasonably requested by
Landlord or such proposed lender or purchaser. Should Tenant fail to deliver
such estoppel certificate within such ten (10)-day period, then (i) the truth of
the statements in the document submitted to Tenant for execution shall be
conclusively presumed, and (ii) Landlord shall have the right, at its option, to
immediately declare an Event of Default and pursue all remedies provided under
Subparagraph 11.2 below.
6.6 Brokerage Commissions. Each of Tenant and Landlord represents to the
---------------------
other that no broker or agent other than CB Commercial was instrumental in
procuring or negotiating or consummating this Lease, and each party agrees to
defend and indemnify the other party against any loss, expense or liability
incurred by the other party as a result of a claim by any broker or finder
claiming representation of the indemnifying party in connection with this Lease
or its negotiation.
7. LANDLORD'S RESERVED RIGHTS.
--------------------------
7.1 Additional Rights Reserved to Landlord. Without notice and without
--------------------------------------
liability to Tenant, or without effecting an eviction or disturbance of Tenant's
use or possession, Landlord shall have the right to (a) grant utility easements
or other easements in, or
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<PAGE>
replant, subdivide or make other changes in the legal status of the land
underlying the Leased Premises, the Building or the Project as Landlord shall
deem appropriate in its sole discretion; provided such changes do not materially
interfere with Tenant's use of the Leased Premises for the Permitted Purpose;
(b) enter the Leased Premises at reasonable times following twenty-four (24)
hours' prior notice to Tenant (or such shorter period as is reasonable under the
circumstances, giving Tenant sufficient opportunity to arrange for a
representative of Tenant to accompany Landlord), and at any time in the event of
an emergency, to inspect, alter or repair the Leased Premises or the Building
and to perform any acts related to the safety, protection, reletting, sale or
improvement of the Leased Premises or the Building; (c) add to or take away from
the Project any building or portion thereof, in which event Total Square Footage
of the Building shall be adjusted accordingly; (d) install and maintain signs on
and in the Building and the Project; and (e) make such rules and regulations as,
in the reasonable judgment of Landlord, may be needed from time to time for the
safety of the tenants, the care and cleanliness of the Leased Premises, the
Building and the Project and the preservation of good order therein.
8. CASUALTY AND UNTENANTABILITY.
----------------------------
8.1 Destruction Due To Risk Covered By Insurance. If the Leased Premises
--------------------------------------------
are made wholly or partially untenantable by a risk covered by insurance, and
the Leased Premises can, in the reasonable judgment of Landlord, be restored
within two hundred forty (240) days after the date of destruction, Landlord
shall restore the Leased Premises to substantially the same condition as
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<PAGE>
they were prior to the destruction; provided that Tenant shall assign to
Landlord all insurance proceeds applicable to personal property and/or
improvements for which Landlord shall have such restoration responsibility.
8.2 Destruction Due To Risk Not Covered By Insurance. If the Leased
------------------------------------------------
Premises are made partially (meaning for purposes of this Subparagraph 8.2, at
least ten percent (10%) of the replacement cost of the Building, as determined
by Landlord in its reasonable discretion) or wholly untenantable by a risk not
covered by insurance, Landlord shall have the election to either restore the
Leased Premises or terminate this Lease, effective as of the date of such
destruction. Such termination shall be made by Landlord's delivery to Tenant,
within sixty (60) days following the destruction, of notice of Landlord's
election to so terminate. Should Landlord elect to restore the Leased Premises,
Tenant shall assign to Landlord all insurance proceeds, if any, covering
Tenant's tenant improvements and personal property carried by Tenant under
Subparagraph 6.2.1 above, to the extent that Landlord shall be undertaking
restoration of the same. Tenant waives the provisions of Section 1932 of the
Civil Code of the State of California and any other statute or law permitting
Tenant to terminate this Lease in the event of casualty to the Leased Premises.
In the event of a damage or destruction as to which the Leased Premises are not
partially or wholly untenantable - that is, the damage is less than ten percent
(10%) of the replacement cost of the Building - then Landlord shall be obligated
to restore the Leased Premises. In any event that Landlord undertakes
restoration under this Subparagraph 8.2, whether by election or by requirement
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<PAGE>
hereunder, then Tenant shall be responsible for payment of one hundred percent
(100%) of all costs incurred by Landlord in connection with such restoration
(including, without limitation, all financing costs), until such time as the
amount incurred by Landlord is equal to ten percent (10%) of the replacement
cost of the Building, after which Landlord shall be responsible for payment of
all additional costs. All such amounts payable by Tenant shall be amortized by
Landlord and reimbursed by Tenant to Landlord over the shorter of (i) the useful
life of such restored improvements, or (ii) the remainder of the Lease Term or
Renewal Term then in effect.
8.3 Termination by Tenant. If the Landlord does not terminate this Lease
---------------------
as provided above, and Landlord fails within two hundred forty (240) days from
the date of such casualty, to restore the damaged areas, thereby eliminating
substantial interference with Tenant's use and occupancy of the Leased Premises,
Tenant may notify Landlord of its intention to terminate this Lease, and Tenant
shall have the right to so terminate as of the end of the aforementioned two
hundred forty (240) day period.
8.4 Rent; Prorations. In the event of termination of this Lease pursuant
----------------
to the immediately preceding Paragraph, Rent shall be prorated on a per diem
basis and paid to the date of the casualty, unless the Leased Premises shall be
tenantable, in which case Rent shall be payable to the date of the Lease
termination and if only partly tenantable, Tenant shall receive abatement to the
extent that portion is untenantable, commencing on the date of the casualty. If
the Leased Premises are wholly untenantable and this Lease is not terminated,
Rent shall abate on a per diem basis from
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<PAGE>
the date of the casualty until the Leased Premises are ready for occupancy by
Tenant. If part of the Leased Premises are untenantable, and this Lease is not
terminated, then as of the date of the casualty, Rent shall be prorated on a per
diem basis and partially abated in accordance with the part of the Leased
Premises which is usable by Tenant until the damaged part is ready for Tenant's
occupancy. Notwithstanding the foregoing, if any damage was proximately caused
by an act or omission of Tenant, its employees, agents, contractors, licensees
or invitees, then, in such event, Tenant agrees that (i) Rent shall not abate or
be diminished during the term of this Lease; (ii) Tenant shall have no right to
terminate this Lease in any case; and (iii) Tenant shall reimburse Landlord the
full cost of any repair and restoration, such sums to be Additional Rent
hereunder. Furthermore, in no case shall Landlord have any obligation to repair
and/or restore any improvements, alterations or additions made by or on behalf
of Tenant which are not improvements paid for by Landlord pursuant to any work
letter agreement entered into by the parties pursuant to this Lease.
8.5 Damage Near The End of The Lease Term. Notwithstanding anything to
-------------------------------------
the contrary, Landlord shall have no obligation to undertake any restoration
(i)during the next to last year of the Lease Term or any Renewal Term, as to any
destruction, the cost of restoration of which is greater than twenty percent
(20%) of the value of the Leased Premises; or (ii) during the last year of the
Lease Term, as to any destruction, regardless of the cost of restoration, unless
and until Tenant has agreed to extend the Lease
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<PAGE>
Term or Renewal Tterm then in effect, for an additional period of three (3)
years, on terms reasonably acceptable to both parties.
9. CONDEMNATION.
------------
9.1 Rent Abatement. If all or any part of the Leased Premises shall be
--------------
taken under power of eminent domain or sold under imminent threat to any public
authority or private entity having such power, this Lease shall terminate as to
the part of the Leased Premises so taken or sold, effective as of the date
possession is required to be delivered to such authority. In such event Base
Rent and Tenant's Share of Additional Operating Costs shall abate in the ratio
that the portion of Tenant's Square Footage taken or sold bears to Tenant's
Square Footage.
9.2 Lease Termination. If a partial taking or sale of the Leased
-----------------
Premises, the Building or the Project (a) substantially reduces the Tenant's
Square Footage, resulting in an inability of Tenant to reasonably use the Leased
Premises for the Permitted Purpose, or (b) renders the Building or the Project
commercially unviable to Landlord, in Landlord's sole opinion, either Tenant in
the case of (a), or Landlord in the case of (b), may terminate this Lease by
notice to the other party within thirty (30) days after the terminating party
receives written notice of the portion to be taken or sold. Such termination
shall be effective one hundred eighty (180) days after notice thereof, or when
the portion is taken or sold, whichever is sooner. All condemnation awards and
similar payments shall be paid and belong to Landlord, except for any amounts
awarded or paid specifically to Tenant by the acquiring agency for removal and
reinstallation of Tenant's trade fixtures and personal property, Tenant's moving
costs or Tenant's goodwill.
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10. INDEMNITY, SUBROGATION AND WAIVER.
---------------------------------
10.1 Indemnity. Tenant agrees to defend, indemnify and save harmless
---------
Landlord against and from any and all claims, demands, actions, damages,
liability and expense in connection with or for loss of or damage to property or
injury or death to any person from any cause whatsoever while in, upon or about
the Leased Premises, or from any such claim, demand or the like arising from or
out of any occurrence in, upon or at the Leased Premises, by or on behalf of any
person, firm or corporation arising from Tenant's use of the Leased Premises or
the conduct of its business or from any activity, work, or thing done, permitted
or suffered by Tenant, in or about the Leased Premises, and Tenant shall further
defend, indemnify and save Landlord harmless against and from any and all claims
arising from any breach or default on Tenant's part in the performance of any
covenant or agreement on Tenant's part to be performed, pursuant to the terms of
this Lease, or arising from any act or negligence of Tenant, or any of its
agents, contractors, servants, employees or licensees, and from and against all
costs, attorneys' fees, expenses and liabilities incurred in or arising from any
such claim or action or proceeding brought thereon; and in case any action or
proceeding is brought against Landlord by reason of any such claim, Tenant upon
notice from Landlord covenants to resist or defend at Tenant's expense such
action or proceeding by counsel reasonably satisfactory to Landlord. Tenant, as
a material part of the consideration to Landlord, hereby assumes all risk of
damage to property in, upon or about the Leased Premises, the Building or the
Project from any source and to whomever belonging, and Tenant hereby waives all
claims in respect thereof against
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Landlord, except to the extent such damage is caused by Landlord's gross
negligence or willful misconduct. The foregoing waiver shall inure only to the
benefit of Landlord and its agents, and the exception to such waiver for
Landlord's gross negligence or willful misconduct shall inure only to the
benefit of Tenant and its agents and to no other party.
10.2 Waiver of Subrogation. Tenant and Landlord release each other and
---------------------
waive any right of recovery against each other for any claims for loss or damage
to any person or the Leased Premises, which occurs on or about the Leased
Premises, the Building or the Project, whether due to the negligence of either
party, their agents, employees, officers, contractors, licensees, invitees or
otherwise, if such loss or damage is insured against under insurance policy
carried by the releasing party and in force at the time of such loss or damage,
and to the extent of the proceeds received from such policy. Tenant and
Landlord agree that all liability and extended casualty policies of insurance
obtained by either of them in connection with the Leased Premises shall contain
appropriate waiver of subrogation clauses. The provisions of this Subparagraph
10.2 shall survive the expiration or termination of this Lease with respect to
any claims or liability arising from events occurring prior to such expiration.
10.3 Limitation of Landlord's Liability. The obligations of Landlord
----------------------------------
under this Lease do not constitute personal obligations of the individual
partners, shareholders, directors, officers, employees, or agents of Landlord,
and Tenant shall look solely to Landlord's interest in the Leased Premises and
to no other assets of Landlord, for satisfaction of any liability in respect of
this
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<PAGE>
Lease. Tenant will not seek recourse against the individual partners,
shareholders, directors, officers, employees or agents of Landlord or any of
their personal assets for such satisfaction. Notwithstanding any other
provisions contained herein, Landlord shall not be liable to Tenant, its
contractors, agents or employees for any consequential damages or damages for
loss of profits, except and only to the extent of any amounts recovered by
Landlord from third parties which is directly attributed to and designated as
compensation for such consequential damages or lost profits of Tenant, which
amounts shall also be limited to Landlord's interest in the Leased Premises.
11. TENANT'S DEFAULT AND LANDLORD'S REMEDIES.
----------------------------------------
11.1 Tenant's Default. It shall be an "Event of Default" if Tenant shall
----------------
(a) fail to pay any monthly installment of Base Rent or of Tenant's Share of
Additional Operating Costs, or any other sum payable by Tenant to Landlord
hereunder, on or before the third (3rd) business day following the effective
date of written notice from Landlord to Tenant that any such monthly installment
of Base Rent or of Tenant's Share of Additional Operating Costs, or any other
sum has not been received when due; (b) violate or fail to perform any of the
other conditions, covenants or agreements herein made by Tenant, and such
violation or failure shall continue for thirty (30) days after written notice
thereof to Tenant by Landlord except that if within the thirty (30) day period
Tenant commences and thereafter proceeds diligently to remedy the violation or
failure, Tenant shall not be in default hereunder; provided, however, that in no
event shall such remedy extend beyond sixty (60) days from the effective date of
such notice from Landlord to
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<PAGE>
Tenant of such violation or failure; (c) make a general assignment for the
benefit of its creditors or file a petition for bankruptcy or other
reorganization, liquidation, dissolution or similar relief; (d) have a
proceeding filed against Tenant seeking any relief mentioned in (c) above which
is not discharged within ninety (90) days thereafter; (e) have a trustee,
receiver or liquidator appointed for Tenant or a substantial part of its
property; (f) abandon or vacate the Leased Premises for more than six (6)
consecutive months; or (g) default under any other space lease within the
Building or Project.
11.2 Remedies on Default. Landlord shall have the following remedies if
-------------------
Tenant commits an Event of Default. These remedies are not exclusive; they are
cumulative in addition to any remedies now or later allowed by law.
11.2.1 Continue Lease. Landlord may continue this Lease in full
--------------
force and effect. In such case, the Lease will continue in effect so long as
Landlord does not terminate Tenant's right to possession, and Landlord shall
have the right to collect Rent when due. During the period Tenant is in
Default, Landlord can enter the Leased Premises and relet them, or any part of
them, to third parties for Tenant's account. Tenant shall be liable immediately
to Landlord for all costs Landlord incurs in reletting the Leased Premises
including, without limitation, broker's commissions, expenses of remodeling the
Leased Premises required by the reletting, and like costs. Reletting can be for
a period shorter or longer than the remaining term of this Lease. Tenant shall
pay to Landlord the Rent due under this Lease on the date the Rent is due, less
the Rent Landlord receives from any reletting.
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<PAGE>
No act by Landlord allowed by this Paragraph shall terminate this Lease unless
Landlord notifies Tenant that Landlord elects to terminate this Lease. After
Tenant's Default and for as long as Landlord does not terminate Tenant's right
to possession of the Leased Premises, if Tenant obtains Landlord's consent
Tenant shall have the right to assign or sublet its interest in this Lease, but
Tenant shall not be released from liability.
11.2.2 Terminate Lease. Landlord can terminate Tenant's right to
---------------
possession of the Leased Premises at any time. No act by Landlord other than
giving notice to Tenant shall terminate this Lease. Acts of maintenance,
efforts to relet the Leased Premises or the appointment of a receiver on
Landlord's initiative to protect Landlord's interest under this Lease shall not
constitute a termination of Tenant's right to possession. On termination,
Landlord has the right to recover from Tenant:
(a) The worth, at the time of the award, of the unpaid
Rent that had been earned at the time of termination of this Lease;
(b) The worth, at the time of the award, of the amount
by which the unpaid Rent that would have been earned after the date of
termination of this Lease until the time of the award exceeds the amount of the
loss of Rent that Tenant proves could have been reasonably avoided;
(c) The worth, at the time of the award, of the amount
by which the unpaid Rent for the balance of the term after the time of the award
exceeds the amount of the loss of Rent that Tenant proves could have been
reasonably avoided;
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<PAGE>
(d) Any other amount, and court costs, necessary to
compensate Landlord for all detriment proximately caused by Tenant's Default,
including, without limitation, any unamortized brokerage commissions
attributable to this Lease, or any unamortized costs of tenant improvements as
set forth on Schedule 5 attached hereto.
"The worth, at the time of the award," as used in Subparagraph (a) and
(b) of this Subparagraph 11.2.2 is to be computed by allowing interest at the
maximum rate allowed by applicable usury law at that time. "The worth, at the
time of the award," as referred to in Subparagraph (c) of this Subparagraph
11.2.2 is to be computed by discounting the amount at the discount rate of the
Federal Reserve Bank of San Francisco at the time of the award, plus one percent
(1%).
11.2.3 Receiver. Landlord shall have the right to have a
--------
receiver appointed to collect Rent. Neither the filing of a petition for the
appointment of a receiver nor the appointment itself shall constitute an
election by Landlord to terminate this Lease.
11.2.4 Cost of Reletting Premises. In the event of Tenant's
--------------------------
Default and Landlord's reentering of the Premises, Tenant agrees to pay to
Landlord, as an additional item of damages, the cost of repairs, alterations,
redecorating (according to standards commensurate with those contemplated by
this Lease), lease commissions and Landlord's other expenses incurred in
reletting the Leased Premises to a new tenant, but not to be duplicative of
costs previously incurred by Landlord in connection with this Lease and fully
amortized during the Term hereof.
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<PAGE>
11.2.5 Waiver. Tenant hereby waives any right of redemption or
------
relief from forfeiture under California Code of Civil Procedure Sections 1174 or
1179, or under any other present or future law, if Tenant is evicted or Landlord
takes possession of the Leased Premises by reason of any Default by Tenant
hereunder.
12. TERMINATION.
-----------
12.1 Surrender of Leased Premises. On expiration of this Lease, if no
----------------------------
Event of Default exists, Tenant shall surrender the Leased Premises in the same
condition as when the Lease Term commenced, ordinary wear and tear excepted.
Except for furnishings, trade fixtures and other personal property installed at
Tenant's expense, all alterations, additions or improvements, whether temporary
or permanent in character, made in or upon the Leased Premises, either by
Landlord or Tenant, shall be Landlord's property and at the expiration or
earlier termination of the Lease or any Renewal Term shall remain on the Leased
Premises without compensation to Tenant; provided that, if Landlord requests in
writing at the time permission is given for the alteration, addition or
improvement, Tenant shall, at its expense and without delay, remove any
alterations, additions or improvements, that are made to the Leased Premises by
Tenant and designated by Landlord to be removed, and repair any damage to the
Leased Premises or the Building caused by such removal. If Tenant fails to
repair the Leased Premises, Landlord may complete such repairs and Tenant shall
reimburse Landlord for such repair and restoration. If Tenant fails to remove
such property as required under this Lease, Landlord may dispose of such
property in its sole discretion
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without any liability to Tenant, and further may charge the cost of any such
disposition to Tenant.
12.2 Hold Over Tenancy. If Tenant shall hold over after the Lease
-----------------
Expiration Date or at the end of any Renewal Term, Tenant shall be deemed, at
Landlord's option, to occupy the Leased Premises as a tenant from month to
month, which tenancy may be terminated by one (1) month's written notice.
During such tenancy, Tenant agrees to pay Landlord, monthly in advance, an
amount equal to one hundred twenty-five percent (125%) of all Rent which would
become due (based on Base Rent and Tenant's Share of Additional Operating Costs
payable for the last month of the Lease Term or Renewal Term as applicable,
together with all other amounts payable by Tenant to Landlord under this Lease),
and to be bound by all of the terms, covenants and conditions herein specified.
If Landlord relets the Leased Premises or any portion thereof to a new tenant
and the term of such new lease commences during the period for which Tenant
holds over, Landlord shall be entitled to recover from Tenant all costs and
expenses, reasonable attorneys' fees, post-judgment collection costs, damages
(including any reasonable relocation costs or other damages occasioned to such
new tenant and asserted against Landlord) and loss of profits incurred by
Landlord as a result of Tenant's failure to deliver possession of the Leased
Premises to Landlord when required under this Lease, together with any other
remedies provided to Landlord hereunder. If Tenant is holding over with
Landlord's consent, then Landlord shall give Tenant sixty (60) days' prior
written notice of Landlord's intention to terminate such permissible holdover,
and the foregoing costs and damages recoverable by Landlord for Tenant's failure
to
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<PAGE>
timely vacate, shall commence on the date specified in such sixty (60) day
notice.
13. MISCELLANEOUS.
-------------
13.1 Quiet Enjoyment. Subject to the rights of Landlord to enter into
---------------
the Leased Premises as provided in Subparagraph 7.1 hereof, if and so long as
Tenant pays all Rent and timely keeps and performs each and every term, covenant
and condition herein contained on the part of Tenant to be kept and performed,
Tenant shall quietly enjoy the Leased Premises without hindrance by Landlord.
13.2 Accord and Satisfaction. No receipt and retention by Landlord of
-----------------------
any payment tendered by Tenant in connection with this Lease shall constitute an
accord and satisfaction, or a compromise or other settlement, notwithstanding
any accompanying statement, instruction or other assertion to the contrary
unless Landlord expressly agrees to an accord and satisfaction, or a compromise
or other settlement, in a separate writing duly executed by Landlord. Landlord
will be entitled to treat any such payments as being received on account of any
item or items of Rent, interest, expense or damage due in connection herewith,
in such amounts and in such order as Landlord may reasonably determine, at its
sole option.
13.3 Severability. The parties intend this Lease to be legally valid and
------------
enforceable in accordance with all of its terms to the fullest extent permitted
by law. If any term hereof shall be stricken from this Lease to the extent
unenforceable, the same shall be as if it never had been contained herein. Such
invalidity or unenforceability shall not extend to any other term of this Lease,
and the remaining terms hereof shall continue in effect to
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the fullest extent permitted by law, the same as if such stricken term never had
been contained herein.
13.4 Subordination and Attornment. Tenant agrees, upon request of
------------------------------
Landlord, to subordinate this Lease and Tenant's rights hereunder to the lien of
any mortgage, deed of trust or other encumbrance, together with any conditions,
renewals, extensions or replacements thereof ("Superior Instruments"), now or
hereafter placed, charged or enforced against any interest of Landlord in this
Lease, in the leasehold estate thereby created or in the Leased Premises or the
Building or the Project, together with any improvements included therein. If
requested in writing by Landlord or any mortgagee, beneficiary or ground lessor
of Landlord, Tenant agrees to execute a subordination agreement required to
effect the provisions of this Paragraph; provided such party acquires and
accepts the Leased Premises subject to this Lease and that, so long as Tenant is
not in default under this Lease, the rights of Tenant hereunder shall not be
disturbed by reason of the terms of such Superior Instrument, and that such
party executes a written non-disturbance agreement to such effect. If Tenant
fails to execute and deliver any such documents or instruments within ten (10)
business days following request therefor by Landlord, Tenant irrevocably
constitutes and appoints Landlord as Tenant's special attorney-in-fact to
execute and deliver any such documents or instruments.
In the event of any transfer in lieu of foreclosure or termination of
a lease in which Landlord is lessee or the foreclosure of any Superior
Instrument, or sale of the Property pursuant to any Superior Instrument, Tenant
shall attorn to such
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<PAGE>
purchaser, transferee or lessor and recognize such party as landlord under this
Lease. The agreement of Tenant to attorn contained in the immediately preceding
sentence shall survive any such foreclosure sale, termination of Landlord's
interest, or transfer.
13.5 Applicable Law/Construction. This Lease shall be construed
---------------------------
according to the laws of the State of California and the provisions hereof shall
be construed in accordance with their fair meaning. Each of the parties has
agreed to the use of the particular language hereof (and in all attached
Schedules), and any questions of doubtful interpretation shall not be resolved
solely by any rule or interpretation providing for interpretation against the
party who causes the uncertainty to exist or against the draftsman. The subject
captions have been inserted for convenience only and shall not be used to alter
or interpret the content of this Lease.
13.6 Binding Effect. The covenants, conditions, warranties and
--------------
agreements contained in this Lease shall be binding upon and inure to the
benefit of the parties and their respective successors and permitted assigns.
13.7 Time. Time is of the essence of this Lease.
----
13.8 Entire Agreement. This Lease and the schedules attached set forth
----------------
all the covenants, promises, agreements, representations, conditions, statements
and understandings between Landlord and Tenant concerning the Leased Premises,
the Building and the Project, and there are no representations, either oral or
written between the parties other than those in this Lease. This Lease shall
not be amended or modified except in a writing signed
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by both parties. Failure to exercise any right in one or more instance shall
not be construed as a waiver of the right to strict performance or as an
amendment to or modification of this Lease.
13.9 Notices. All notices pursuant to this Lease shall be in writing and
-------
shall be effective on the earlier to occur of actual receipt or if mailed, three
(3) days after posting at a United States Post Office, when mailed by certified
mail or overnight mail, delivered (a) to Landlord or Tenant at the address
designated in Subparagraph 1.1 with a copy to the Managing Agent, or (b) to such
other address as may hereafter be designated by either party by written notice.
13.10 Force Majeure. Except as otherwise provided in this Lease, the
-------------
obligations of Tenant to pay Rent and perform all of the terms, covenants and
conditions on the part of Tenant to be performed hereunder shall in no way be
affected, impaired or excused because Landlord, due to Unavoidable Delay (as
defined below), (a) is unable to fulfill any of its obligations under this
Lease, or (b) is delayed in providing any service, equipment or fixtures
expressly or impliedly to be provided, or (c) is unable to make or is delayed in
making any repairs, replacements, additions, alterations or decorations.
Landlord shall in each instance exercise reasonable diligence to effect
performance when and as soon as possible. Landlord, however, shall not be
obligated to pay overtime labor rates.
"Unavoidable delay" shall mean any and all delay beyond Landlord's
reasonable control, including without limitation, delays caused by Tenant;
governmental restrictions, regulations, controls, preemptions or delays;
orders of civil, military or
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naval authorities; strikes, labor disputes, lock-outs, shortages of labor or
materials or reasonable substitutes therefor;
Acts of God; fire, earthquake, floods, explosions or other casualties; extreme
weather conditions or other actions of the elements; enemy action, civil
commotion, riot or insurrection.
13.11 Attorneys' Fees; Prejudgment Interest. If the services of an
-------------------------------------
attorney are required by any party to secure the performance hereof or otherwise
upon the breach or Default of another party to this Lease, or if any judicial
remedy or arbitration is necessary to enforce or interpret any provision of this
Lease, the prevailing party shall be entitled to reasonable attorneys' fees,
costs, expert witnesses fees, post-judgment collection costs, and other
expenses, in addition to any other relief to which such party may be entitled.
Any award of damages following judicial remedy or arbitration as a result of the
breach of this Lease or any of its provisions shall include an award of
prejudgment interest from the date of the breach at the maximum amount of
interest allowed by law.
13.12 Authority. Tenant warrants and represents that it has full
---------
authority to enter into this Lease; that this Lease constitutes a binding
obligation on behalf of Tenant, and that the individual signing on behalf of
Tenant is duly authorized to bind Tenant hereto.
13.13 Hazardous Materials.
-------------------
13.13.1 Landlord's Representations and Warranties. Landlord
-----------------------------------------
hereby warrants and represents to Tenant that Landlord has no knowledge of the
presence within the Leased Premises, the Building, or the Project, of any
asbestos, polychlorinated
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biphenyls or other hazardous substances. (As used in this Section 13.13, the
term "hazardous substances" shall mean those substances included within the
definition of "hazardous substances," "hazardous materials," "toxic substances"
or "solid waste" under applicable local, state or federal law (the
"Environmental Laws") or which are now regulated under the Environmental Laws,
including, without limitation, asbestos. Landlord hereby agrees to indemnify and
hold Tenant harmless from and against any claims, demands, actions, liabilities
and expenses incurred by Tenant as a direct result of Landlord's willful breach
of the foregoing representation and warranty.
13.13.2 Hazardous Substances Prohibited. Landlord and Tenant (in
-------------------------------
addition to the provisions of Subparagraph 6.1.3 above) each agrees that it
shall not, under any circumstances, cause or permit any hazardous substance to
be used, released, discharged, disposed of, handled, possessed or stored within
the Building, or any part or parts thereof, on the Project. The foregoing
covenant shall not apply to the use, handling, possession or storage of ordinary
office products such as, for example, "white-out" correction fluid and
photocopier toner (the "Permitted Products"), so long as such products are used,
handled, possessed, stored and disposed of in accordance with Environmental
Laws.
13.13.3 Notice. In the event that either Landlord or Tenant
------
discovers or is informed that a hazardous substance (other than the Permitted
Products) exists in the Leased Premises, in the Building, or any part or parts
thereof or in the Project, it shall immediately notify the other in writing of
such discovery or information.
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13.14 Building Directory. Landlord shall list the Tenant's name and the
------------------
designated names of the officers and personnel of Tenant on the Building
directory at Landlord's sole cost and expense.
13.15 Parties' Approvals. Except as otherwise herein expressly provided,
------------------
whenever consent or approval of either party is required, that party shall not
unreasonably withhold or delay such consent or approval.
13.16 Deviation From Project Rules and Regulations. Notwithstanding the
--------------------------------------------
Rules and Regulations attached hereto as Schedule 2, the parties agree as
follows:
13.16.1 Tenant anticipates that it shall install a special
security system for the Leased Premises. The parties shall coordinate the access
under such system and Landlord's rights hereunder to enter into the Leased
Premises in the event of after-hours and/or emergency access requirements.
13.16.2 Landlord and Tenant shall address Tenant's need for
special electrical systems during the process of approval of the Leasehold
Improvements provided by Schedule 5 attached.
13.16.3 Tenant's preliminary plans for the Leased Premises include
an emergency generator and a diesel storage tank, each of which is hereby
approved by Landlord subject to Tenant's obtaining all necessary governmental
permits and approvals, and subject to Landlord's approval of the final
placement/location of the same.
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<PAGE>
SUBMISSION OF THIS INSTRUMENT FOR EXAMINATION OR SIGNATURE BY TENANT
DOES NOT CONSTITUTE A RESERVATION OF OR OPTION FOR LEASE, AND IT IS NOT
EFFECTIVE AS A LEASE OR OTHERWISE UNTIL EXECUTION AND DELIVERY BY BOTH LANDLORD
AND TENANT.
This Lease is executed as of the 21st day of June, 1996.
LANDLORD:
PROSPECT GREEN PARTNERS, a
California Joint Venture
By: L&T PROSPECT PARTNERS, L.P., a
California limited partnership,
Managing Venturer
By: LANKFORD & ASSOCIATES, INC.,
a Colorado corporation,
General Partner
By: /s/ David S. Taylor
---------------------------
David S. Taylor,
Executive Vice President
TENANT:
E*TRADE GROUP, INC.,
a California corporation
By: /s/ Kathy Levinson
----------------------------
Kathy Levinson,
Senior Vice President
By: /s/ Stephens Richards
--------------------------------
Stephens Richards,
Senior Vice President and
Chief Financial Office
Where Tenant is a corporation, this Lease shall be signed by a President or Vice
President and Secretary or Assistant Secretary of Tenant. Any other signatories
shall require a certified corporate resolution.
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<PAGE>
SCHEDULE 1
DESCRIPTION OF THE PREMISES AND FLOOR PLAN
------------------------------------------
The Leased Premises is the entire Building, the floor plans for which
are as shown on the drawing attached hereto as a part of Schedule 1; however,
for purposes of calculating Base Rent, the Leased Premises shall initially
consist of the areas shown as Areas 1A, 1B and 2 on the drawing attached hereto,
the Rentable square footage of which shall be calculated as provided in
Subparagraph 1.1 of this Lease. The foregoing calculation notwithstanding, the
initial square footage for purposes of determining Base Rent shall be not less
than thirty-five thousand (35,000) Rentable square feet. Effective as of the
thirteenth (13th) month of the Lease Term, for purposes of determining Base
Rent, the Leased Premises shall, whether or not Tenant has built-out all of the
Building, be deemed to be the entire Rentable square footage of the Building, or
seventy thousand sixty-five (70,065) Rentable square feet, which shall be the
addition of the areas shown as areas 3 and 4 on the drawing attached hereto as a
part of Schedule 1.
<PAGE>
[ARTWORK OF PHASE 1B, PHASE 2, PHASE 3, PHASE 4]
<PAGE>
SCHEDULE 2
RULES AND REGULATIONS
---------------------
Except as otherwise provided in any provision of the Lease, as provided in
Subparagraph 1.2, the following Rules and Regulations shall apply:
1. The sidewalks, entrances, halls, corridors, elevators and stairways of
the Building and Project shall not be obstructed or used as a waiting or
lounging place by Tenants, and their agents, servants, employees, invitees,
licensees and visitors.
2. In case of invasion, riot, public excitement or other commotion,
Landlord reserves the right to prevent access to the Building during the
continuance of same. Landlord shall in no case be liable for damages for the
admission or exclusion of any person to or from the Building.
3. Tenant shall not alter any lock, or install new or additional locks or
bolts on any door without the prior written approval of Landlord. In the event
of such alteration or installation approved by Landlord, the Tenant making such
alteration shall supply Landlord with a key for any such lock or bolt. Each
Tenant, upon the expiration or termination of its tenancy, shall deliver to
Landlord all keys and access cards in any such Tenant's possession for all locks
and bolts in the Building.
4. Intentionally Deleted.
5. No iron safe or other heavy or bulky object shall be delivered to or
removed from the Building, except by experienced safe men, movers or riggers
approved in writing by Landlord. There shall not be used in any space, or in
the public halls of the Building, either by Tenant or by jobbers or others, in
the delivery or receipt of merchandise, any hand trucks, except those equipped
with rubber tires.
6. The walls, partitions, skylights, windows, doors and transoms that
reflect or admit light into passageways or into any other part of the Building
shall not be covered or obstructed.
7. The toilet rooms, toilets, urinals, wash bowls and water apparatus
shall not be used for any purposes other than for those for which they were
constructed or installed, and no sweepings, rubbish, chemicals, or other
unsuitable substances shall be thrown or placed therein. The expense of any
breakage, stoppage or damage resulting from violation(s) of this rule shall be
borne by Tenant.
8. No sign, name, placard, advertisement or notice shall be inscribed,
painted or affixed by Tenant on any part of the Building or Project without the
prior written approval of Landlord. All signs or letterings on doors, or
otherwise approved by Landlord shall be inscribed, painted or affixed at the
sole cost and expense of the Tenant, by a person approved by Landlord.
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<PAGE>
9. No signalling, telegraphic or telephonic instruments or devices, or
other wires, instruments or devices, shall be installed without the prior
written approval of Landlord. Such installations, and the boring or cutting for
wires, shall be made at the sole cost and expense of the Tenant and under
control and direction of Landlord. Landlord retains, in all cases, the right to
require (i) the installation and use of such electrical protecting devices that
prevent the transmission of excessive currents of electricity into or through
the Building, (ii) the changing of wires and of their installation and
arrangement underground or otherwise as Landlord may direct, and (iii)
compliance on the part of all using or seeking access to such wires with such
rules as Landlord may establish relating thereto. All such wires must be
clearly tagged at the distribution boards and junction boxes and elsewhere in
the Building, with the purpose for which said wires are used, and the name of
the company operating same.
10. Tenant, their agents, servants or employees, shall not (a) go on the
roof of the Building, (b) use any additional method of heating or air
conditioning in the Leased Premises, (c) bring in or keep in or about the Leased
Premises any vehicles or animals of any kind, (e) install any radio or
television antenna or any other devise or item on the roof, exterior walls,
windows or window sills of the Building (except in connection with the Tenant
Improvements approved by Landlord), (f) place objects against glass partitions,
doors or windows which would be unsightly from the exterior of the Building, (g)
use any Leased Premises: (1) for lodging or sleeping, (2) for a kitchen an/or
cooking area, except in compliance with all applicable law and all insurance
policies applicable to the Leased Premises), (3) for any manufacturing, storage
or sale of merchandise or property of any kind; and (h) cause or permit unusual
or objectionable odor to be produced or permeate from the Leased Premises,
including, without limitation, duplicating or printing equipment fumes. Tenant,
its agents, servants and employees, invitees, licensees, or visitors shall not
permit the operation of any musical or sound producing instruments or device
which may be heard outside the Leased Premises, Building or garage facility, or
which may emit electrical waves which will impair radio or television broadcast
or reception from or into the Building. Landlord acknowledges and agrees that
Tenant shall be entitled to operate a cafeteria for the use of its employees and
business guests.
11. Tenants shall not store or use in any Leased Premises any (a) other,
naphtha, phosphorous, benzol, gasoline, benzine, petroleum, crude or refined
earth or coal oils, flashlight power, kerosene or camphene, (b) any other
flammable, combustible, explosive or illuminating fluid, gas or material of any
kind, and (c) any other fluid, gas or material of any kind having an offensive
odor, without the prior written consent of Landlord.
12. No canvassing, soliciting, distribution of hand bills or other written
material, or peddling shall be permitted in the Building or the Project, and
Tenants shall reasonably cooperate with Landlord in prevention and elimination
of same.
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<PAGE>
13. Tenant shall give Landlord prompt notice of all accidents to or defects
in air conditioning equipment, plumbing, electrical facilities or any part of
appurtenances of Leased Premises.
14. Intentionally Deleted.
15. No curtains, blinds, shades, screens, awnings or other coverings or
projections of any nature shall be attached to or hung in, or used in connection
with any door, window or wall of the Building without the prior written consent
of the Landlord, which consent shall not be unreasonably withheld or delayed.
16. Landlord shall have the right to prohibit any advertising by Tenant at
the Project which, in Landlord's opinion, tends to impair the reputation of
Landlord or of the Building, or its desirability as an office building for
prospective tenants who require the highest standards of integrity and
respectability, and upon written notice from Landlord, Tenant shall refrain from
or discontinue such advertising.
17. Wherever the word "Tenant" occurs, it is understood and agreed that it
shall also mean Tenant's associates, employees, agents and any other person
entering the Building or Leased Premises under the express or implied invitation
of Tenant. Tenant shall cooperate with Landlord to assure compliance by all
such parties with rules and regulations.
18. Landlord reserves the right to make reasonable amendments,
modifications and additions to the rules and regulations heretofore set forth,
and to make additional reasonable rules and regulations, as in Landlord's sole
judgement may from time to time be needed for the safety, care, cleanliness and
preservation of good order of the Building.
19. Tenant shall not do anything in the Leased Premises, or bring or keep
anything herein, which will in any way increase or tend to increase the risk of
fire or rate of insurance, or which shall conflict with the Regulations of the
Fire Department or the fire laws or with any insurance policy on the Building or
any part thereof, or with any rules or ordinances established by Municipal
Authority.
20. The requirements of Tenant will be attended to only upon application at
Landlord's office. Employees of Landlord shall not perform any work or do
anything outside of their regular duties unless under special instruction from
Landlord, and no employee will admit any person (Tenant or otherwise) to any
office without specific instructions from Landlord.
21. Landlord shall have the right, exercisable without notice and without
liability to Tenant, to change the name and the street address of the Building
which the Premises are a part. Landlord will pay for all reasonable costs
incurred by Tenant as a result of changing the street address of the Building
unless the change is requested by an authorized governmental agency.
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<PAGE>
22. No Tenant shall obtain for use upon the Leased Premises ice, drinking
water, towel or other similar service or accept barbering or bootblacking
services on the Leased Premises, except from persons authorized by Landlord and
at the hours and under regulations fixed by Landlord. Notwithstanding the
foregoing, Tenant shall have the right to provide bottled water service of its
choice.
LANDLORD:
PROSPECT GREEN PARTNERS, a
California Joint Venture
By: L&T PROSPECT PARTNERS, L.P., a
California limited partnership,
Managing Venturer
By: LANKFORD & ASSOCIATES, INC.,
a Colorado corporation,
General Partner
By: /s/ David S. Taylor
---------------------------
David S. Taylor,
Executive Vice President
WITNESS:
__________________________
__________________________
TENANT:
E*TRADE GROUP, INC.,
a California corporation
WITNESS:
__________________________ By: /s/ Kathy Levinson
-----------------------------
Kathy Levinson,
__________________________ Senior Vice President
By: /s/ Stephen Richards
-----------------------------
Stephen Richards,
Senior Vice President and
Chief Financial Office
2-4
<PAGE>
SCHEDULE 3
PROSPECT GREEN BUSINESS PARK COMMON AREA CHARGES
------------------------------------------------
The common area charges for Prospect Green Business Park are comprised of
all costs relating to the common green and grove areas (including the
amphitheater), located in the area shown on the drawing attached hereto as a
part of Schedule 3 (the "Common Area"), as follows: landscaping; utilities
(including, without limitation, water for irrigation and electricity for outdoor
lighting); maintenance, repair and refurbishment of the walkways, sidewalks,
amphitheater, light fixtures and poles, and misting/fogging machines and
apparatuses; rubbish and snow removal; insurance (and deductibles, to the extent
utilized), real property taxes and assessments; equipment, tools, materials and
supplies; maintenance, repair and refurbishment of signs and markers; fees
imposed by governmental authorities having or asserting jurisdiction;
administrative fees incurred in operation and management of the Common Area;
and any other costs incurred in connection with the Common Area.
Tenant shall be deemed to have accepted as correct Landlord's annual notice
of Common Area charges (given by Landlord in accordance with Section 3.4 of the
attached Lease) unless, within ten (10) days following Tenant's receipt thereof,
Tenant shall notify Landlord (in accordance with the terms of the attached
Lease) of Tenant's desire to conduct an audit of the records supporting such
statement. Thereafter, Landlord and Tenant shall arrange a time, during regular
business hours, (within thirty (30) days following Tenant's said notice to
Landlord), at Landlord's (or Managing Agent's) office when Tenant may cause an
impartial, reputable certified public accountant (or other impartial
professional auditor or comparable individual or entity whose expertise includes
the audit contemplated hereby) who is reasonably acceptable to Landlord) to
audit the accounts and records supporting the annual statement in question
(which shall be restricted to records for Common Area charges, should such
statement include other matters). Such audit shall be restricted (a) to
verification that (i) such books and records are being maintained in accordance
with GAAP and (ii) the statements delivered to Tenant were prepared in
accordance with the terms of this Lease, and (b) to only the time period covered
by such statement (unless a problem is found, and then earlier years can be
reviewed as to that problem only). Tenant shall not be entitled to make
photocopies of any account ledgers or back-up documentation. Landlord's
employees shall cooperate with Tenant in providing books and records for on-
premises review; provided that such audit shall not exceed one (1) business day
in duration. The cost of such audit shall be borne by Tenant. Tenant shall,
during the pendency of such audit, pay the amounts specified in such statement.
Tenant hereby covenants to hold in confidence all information obtained from any
such audit. Should Tenant have any questions or concerns following such audit,
the parties shall meet and confer within a reasonable period of time and attempt
to resolve such concerns.
3-1
<PAGE>
[ARTWORK OF PROSPECT GREEN II]
<PAGE>
SCHEDULE 4
INTENTIONALLY DELETED
---------------------
4-1
<PAGE>
SCHEDULE 5
PROSPECT GREEN BUSINESS PARK
Sacramento, California
Date: June 21, 1996
WORK LETTER AGREEMENT
---------------------
E*TRADE GROUP, INC.
Four Embarcadero Center
2400 Geng Road
Palo Alto, California 94303-3317
Attention: Mr. Robert Clegg
Re: Suite 100, 10951 White Rock Road, Rancho Cordova, CA
Ladies and Gentlemen:
You (referred to as "Tenant"), and we (referred to as "Landlord") are
executing, simultaneously with this Work Letter Agreement, a written lease (the
"Lease") pertaining to the space referred to above (the "Leased Premises").
This Work Letter Agreement is attached to the Lease as Schedule 5 and made a
part hereof.
To induce Tenant and Landlord, each, to enter into the Lease (which is
hereby incorporated by reference to the extent that the provisions of this Work
Letter Agreement may apply thereto) and in consideration of the mutual covenants
hereinafter contained, Landlord and Tenant mutually agree as follows:
1. Definitions. The terms defined in this paragraph, for purposes of this
-----------
Work Letter Agreement, shall have the meanings specified herein, and in addition
to the terms defined herein, terms defined in the Lease shall, for the purposes
of this Work Letter Agreement, have the meanings specified therein.
1.1 "Base Tenant Improvements" means the Building Standard and other
mutually agreed upon Tenant Improvements (as defined in paragraph 1.2 below)
items set forth in Exhibit I attached which are supplied, installed and finished
by Tenant (in accordance with the construction schedule attached hereto as
Schedule 5-A), and which shall be paid for by Landlord as provided for in
paragraph 2.3 below. Landlord shall be responsible for payment of the maximum
amount of Twenty-eight and No/100 Dollars ($28.00) per Useable square foot of
Tenant's Square Footage for construction of the Base Tenant Improvements (the
Tenant Improvement Allowance). For the purposes hereof, Useable square footage
shall be determined in accordance with the BOMA method.
5-1
<PAGE>
1.2 "Building Standard" means the quantity and quality of materials,
finishing and workmanship specified by Tenant and approved by Landlord for the
Building, as set forth on Exhibit I attached hereto and made a part hereof.
1.3 "Construction Documents" means the construction drawings, plans
and specifications referred to in paragraphs 2.2 and 2.3 below, to be attached.
1.4 "Extraordinary Tenant Improvements" means any work Tenant requests
that it be permitted to do, or requests Landlord to do in connection with the
Leased Premises, the cost of which is in excess of the Tenant Improvement
Allowance.
1.5 "Leasehold Improvements" means the aggregate of Base Tenant
Improvements, as contemplated by the Construction Documents, and Extraordinary
Tenant Improvements, if any.
1.6 "Substantial Completion" means that the Leasehold Improvements
have been substantially completed according to the Construction Documents,
except for items which will not materially affect the use of the Leased Premises
and which customarily are deemed to be "punchlist work", as certified by
Landlord's architect.
2. Construction Documents; Payments.
--------------------------------
2.1 Tenant shall prepare and submit to Landlord for its approval a
preliminary floor plan for the Leased Premises, a copy of which shall be
attached to the Lease as part of Schedule 5-A (the "Preliminary Plan") in
accordance with the Construction Schedule attached as Schedule 5-A. Tenant
shall complete the Base Tenant Improvements in accordance with the Building
Standard, but Landlord, its agents, contractors and employees shall have the
ongoing, unfettered right to supervise all work being done by or for the the
benefit of Tenant in the Building. Tenant shall provide Landlord with a written
estimate of the cost of completing the Base Tenant Improvements according to the
Preliminary Plan (the "Estimate"). The Estimate represents Tenant's good faith
estimate of the cost of completing the Base Tenant Improvements. Landlord shall
have no liability if the Final Cost (as such term is defined in paragraph 2.3
below) of the Base Tenant Improvements is greater than the Estimate.
2.2 Tenant shall, within the timeframes set forth on the Construction
Schedule attached as Schedule 5-A, cause the Consultants (defined below) to
prepare and submit to Landlord for approval or disapproval all drawings, plans
and specifications necessary to construct the Leasehold Improvements. The
following companies shall prepare the drawings, plans and specifications which
are to comprise the Construction Documents:
Architectural: Columbus Architecture
Engineering: KPFF Engineering
5-2
<PAGE>
Electrical: Nutter Electric
Mechanical: AIRCO Mechanical
(collectively, the "Consultants"). All such consultants shall be acceptable to
Landlord in its reasonable discretion; and (iii) neither Tenant, nor such
consultant shall arrange or conduct any meetings (relevant to the Leased
Premises or the Tenant Improvements) with any governmental agencies having
jurisdiction over the Building without first notifying Landlord, and Landlord
shall have the absolute right to participate in all such meetings. The fees and
expenses of the Consultants for preparing the initial drawings, plans and
specifications which are to comprise the Construction Documents shall be
included in the Final Cost (defined in paragraph 2.3 below) and allocated
accordingly between Base Tenant Improvements and Extraordinary Tenant
Improvements.
2.3 Upon Landlord's approval of the final form of the drawings,
plans and specifications in accordance with the timeframes set forth on Schedule
5-A attached,, which when approved by Landlord shall constitute the Construction
Documents, Tenant shall cause to be prepared an analysis of the cost of
construction of the Leasehold Improvements according to the Construction
Documents (the "Final Cost"). An analysis of the cost of Extraordinary Tenant
Improvements shall be submitted to Landlord for its approval. That portion of
the Final Cost attributable to the Base Tenant Improvements shall be paid for by
Landlord (the "Landlord's Share") and that portion of the Final Cost
attributable to the construction of the Extraordinary Tenant Improvements shall
be paid for by Tenant (the "Tenant's Share"). Within ten (10) business days of
receipt of the statement of Final Cost, Landlord shall either approve or
disapprove the portion thereof attributed to Base Tenant Improvements, the sole
basis for disapproval of which shall be as to items representing a change in
specification or a change in cost from the original documents and estimates
approved by Landlord. However, if Landlord requires additional information
regarding the Final Cost, Tenant shall promptly supply same and Landlord shall
have a reasonable additional time period, not to exceed an additional five (5)
business days to approve the Final Cost. If Landlord does not approve the Final
Cost attributed to the Base Tenant Improvements, it shall promptly notify Tenant
thereof; in which case Tenant and Landlord shall use their best efforts to amend
the Construction Documents in a manner satisfactory to each. Tenant acknowledges
that Landlord's sole obligation is to pay the costs attributable to the
construction of the Base Tenant Improvements, and Tenant shall pay all other
costs of the construction of the Leasehold Improvements as the Tenant's Share.
If the Construction Documents require the construction or installation of
additional improvements beyond those regularly provided by Landlord in the core
of the building in which the Leased Premises are located (including, without
limitation, extra sprinklers, fire hose cabinets and other safety devices),
Tenant agrees to pay all costs and expenses arising from the construction and
installation of such additional improvements. All costs attributable to changes
and variations from the Construction Documents (including, without limitation,
fees and expenses of the
5-3
<PAGE>
Consultants and any increased costs of construction) shall be paid by Tenant.
Notwithstanding anything herein to the contrary, in no event shall Landlord be
obligated to advance any of the Tenant Improvement Allowance until such time as
Tenant has provided adequate conditional lien waivers or other documentation
reasonably requested by Landlord to insure that neither the Building nor the
Project is or shall be the subject of a lien claim.
3. Leasehold Improvements
----------------------
3.1 The following provisions shall apply to the construction of the
Leasehold Improvements:
(a) All work involved in the completion of the Leasehold \
Improvements shall be carried out by Tenant and its agents and contractors under
the supervision of Landlord (which supervision shall be at no cost to Tenant).
Tenant shall cooperate with Landlord and its agents and contractors to promote
the efficient and expeditious completion of the Leasehold Improvements; and
/s/ /s/
---------------------- ----------------------
Tenant Landlord
(b) Tenant agrees to construct the Base Tenant Improvements in
accordance with the Construction Documents, and in compliance with all the
applicable provisions of this Work Letter Agreement and the Lease, including,
the covenant to keep the Project free from all liens and encumbrances.
3.2 If Tenant requests any changes in the Leasehold Improvements from
the work as reflected in the Construction Documents, each such change must
receive the prior written approval of Landlord, and Tenant shall bear the cost
resulting from such changes.
3.3 Tenant shall have no authority to commence construction of any
work in the Leased Premises until (a) Landlord has approved the construction of
the Base Tenant Improvements as required by the provisions hereof, and (b)
Landlord shall have received evidence of Tenant's ability to pay Tenant's Share,
such evidence to be in form reasonably acceptable to Landlord.
4. Lease Commencement Date.
-----------------------
4.1 Tenant shall notify Landlord when it believes that Substantial
Completion has been achieved, and thereafter the Lease Commencement Date shall
be established as set forth in the Lease. Notwithstanding anything to the
contrary contained in the Lease or this Work Letter Agreement, the Lease
Commencement Date shall not be extended for any delay in Substantial Completion
to the extent that such delay is caused by any act or omission attributable to
Tenant, including without limitation:
5-4
<PAGE>
(a) Tenant's request for any Extraordinary Tenant Improvements
or for any changes in the work that is reflected in the final plans and
specifications for such Improvements;
(b) Tenant's failure to furnish promptly, information concerning
Tenant's requirements pertaining to construction of the Base Tenant Improvements
or any other information requested by the Consultants necessary or useful to
prepare the initial drawings, plans and specifications which are to comprise the
Construction Documents;
(c) Tenant's failure to approve the initial drawings, plans and
specifications, which are to comprise the Construction Documents within five (5)
days of receipt of said Construction Documents;
(d) Tenant's request for any changes in the Leasehold
Improvements from the work as reflected in the Construction Documents.
4.2 In any event, Rent payable under the Lease shall not abate by
reason of any delay, expense or other burden arising out of or incurred in
connection with the design or construction of the Leasehold Improvements to the
extent that such delay, expense or other burden is caused by any act or omission
attributable to Tenant (including, without limitation, the acts and omissions
referred to in subparagraphs (a) through (d) of paragraph 4.1 above).
5. Tenant's Access to Leased Premises.
----------------------------------
5.1 Landlord hereby grants Tenant and Tenant's agents or independent
contractors license to enter the Leased Premises prior to the scheduled Lease
Commencement Date in order that Tenant may (i) perform the work contemplated by
this Work Letter Agreement; and (ii) do other work as may be required by Tenant
to make the Leased Premises ready for Tenant's use and occupancy, including
training employees; provided that such prior occupancy is in accordance with
approvals by the County of Sacramento. As a condition to all such prior entry,
Tenant and Tenant's agents, contractors, workmen, mechanics, suppliers and
invitees shall not interfere with Landlord and its agents or with other tenants
and occupants of the Building or the Project. If at any time such entry shall
cause or threaten to cause disharmony or interference, or shall be in violation
of any regulations, permits or approvals of the County of Sacramento, Landlord,
in its sole discretion, shall have the right to withdraw and cancel such license
upon notice to Tenant. Tenant agrees that any such entry into the Leased
Premises shall be deemed to be under all of the terms, covenants, conditions and
provisions of the Lease, except the covenant to pay periodic Rent. Tenant
further agrees that, to the extent permitted by law, Landlord and its principals
shall not be liable in any way for any injury or death to any person or persons,
loss or damage to any of the Leasehold Improvements or installations made in the
Leased Premises or loss or damage to
5-5
<PAGE>
property placed therein or thereabout, the same being at Tenant's sole risk.
5.2 In addition to any other conditions or limitations on such
license to enter the Leased Premises prior to the Lease Commencement Date,
Tenant expressly agrees that none of its agents, contractors, workmen,
mechanics, suppliers or invitees shall enter the Leased Premises prior to the
Lease Commencement Date unless and until each of them shall furnish Landlord
with satisfactory evidence of insurance coverage, financial responsibility and
appropriate written releases of mechanic's or materialmen's lien claims.
6. Miscellaneous Provisions. Landlord and Tenant further agree as
------------------------
follows:
6.1 Except as may be provided in the Lease and as herein expressly set
forth with respect to the Leasehold Improvements, Landlord has no agreement with
Tenant and has no obligation to do any work with respect to the Leased Premises.
Any other work in the Leased Premises which may be permitted by Landlord
pursuant to the terms and conditions of the Lease, including any alterations or
improvements as contemplated by Subparagraph 6.1.4 of the Lease, shall be done
at Tenant's sole cost and expense and in accordance with the terms and
conditions of the Lease.
6.2 This Work Letter Agreement shall not be deemed applicable to:
(i) any additional space added to the original Leased Premises at any time,
whether by the exercise of any options under the Lease or otherwise, or (ii) any
portion of the original Leased Premises or any additions thereto in the event of
a renewal or extension of the original Lease Term, whether by exercise of any
options under the Lease or any amendment or supplement thereto. The construction
of any additions or improvements to the Leased Premises not contemplated by this
Work Letter Agreement shall be effected pursuant to a separate work letter
agreement, in the form then being used by Landlord and specifically addressing
the allo cations of costs relating to such construction.
6.3 Any person signing this Work Letter Agreement on behalf of Tenant
warrants and represents he/she has authority to do so.
6.4 This Work Letter Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective heirs, legal representatives,
successors and assigns.
5-6
<PAGE>
If the foregoing correctly sets forth our understanding, kindly
acknowledge your approval in the space provided below for that purpose and
return to us two signed counterparts of this Work Letter Agreement.
Very truly yours,
PROSPECT GREEN PARTNERS, a
California Joint Venture
By: L&T PROSPECT PARTNERS, L.P., a
California limited partnership,
Managing Venturer
By: LANKFORD & ASSOCIATES, INC.,
a Colorado corporation,
General Partner
By: /s/ David S. Taylor
-----------------------------------
David S. Taylor,
Executive Vice President
Agreed to and accepted the 21st day of June, 1996.
E*TRADE GROUP, INC.,
a California corporation
By: /s/ Kathy Levinson
-----------------------------
Kathy Levinson,
Senior Vice President
By: /s/ Stephen Richards
-----------------------------
Stephen Richards,
Senior Vice President and
Chief Financial Officer
5-7
<PAGE>
EXHIBIT I PROSPECT GREEN II
TYPICAL BUILDING STANDARDS
--------------------------
Partitions:
- ----------
A. Demising and Corridor Partition. 25 gauge, minimum 2-1/2" metal studs,
-------------------------------
24" o.c., between floor slab and structure above with R-7 insulation.
5/8" type "X" gypsum board on each face, painted with 2 coats of flat
latex paint and vinyl base on both sides.
B. Interior Partition. 25 gauge, 2-1/2" metal studs, 24" o.c., between
------------------
floor slab and suspended ceiling grid. No insulation. 5/8" type "C"
gypsum board on each face, painted with flat latex paint and vinyl base
on both sides.
Doors:
- -----
A. Building Entry Door. 16 gauge, pressed steel frame, welded one-piece
-------------------
unit, to accept 3'0" x 7'0" x 1-3/4" solid core rotary natural birch
door. Door to be finished with 2 coats of clear sealer/varnish. Brushed
chrome hardware - Schlage L-9000 Series hardware with closer, brushed
chrome finish.
B. Suite Interior Door. K.D. Metal to accept 3'0" x 9'" x 1-3/4" solid core
-------------------
birch veneer door. Door to be finished with 2 coats of sealer/varnish.
Schlage L-9000 Series hardware, brushed chrome finish.
Electric:
- --------
A. Fluorescent Lights. 2 x 4 Parabolic; Lithonia PM3 Series, GEB
------------------
(Electronic Ballast). Fixtures to be factory lamped with F.O. 32700
lamps - color w/w #3000K.
B. Convenience Outlets. Leviton #16242-W, or equal, 125-volt grounded
-------------------
duplex devices or equal.
C. Telephone Outlet. Standard junction box, cover plate, pull-string to top
----------------
of wall. Device cover plate and Teflon cabling furnished and installed by
Tenant's telephone vendor.
D. Light Switch. Leviton 5601-W, or equal, 277-volt standard rocker (line
------------
voltage) switch. Provide hi-low level switch as required by code.
Heating, Ventilating and Air Conditioning:
- ------------------------------------------
As required for building standard space. Does not include, for example,
air conditioning for computer rooms.
Ceiling System:
- --------------
5-8
<PAGE>
2 x 2 recessed grid acoustic tile or equal.
Carpet:
- ------
DESIGNWEAVE - New Sabre, or equal.
38 oz. cut pile, direct glue down. Choice of colors.
Window Coverings:
- ----------------
Levelor vertical blinds, or equal. 3-1/2" perforated slates.
Miscellaneous:
- -------------
Exit lights, smoke detectors and fire sprinklers as required by code.
5-9
<PAGE>
SCHEDULE 5-A
CONSTRUCTION SCHEDULE
---------------------
TENANT IMPROVEMENT CONSTRUCTION SCHEDULE
A. Design Development:
------------------
1. Preparation of Construction Documents (Tenant) 4/1/96
2. Preparation of Statement of Final Cost (Tenant) 5/1/96
3. Approval of Construction Documents and
Final Cost (Tenant and Landlord) 5/15/96
B. Construction:
-------------
1. Submit Application for Tenant Improvement 4/18/96
Permit
2. Commence Construction 4/22/96
3. Commence Tenant's Fixturing 6/13/96
4. Substantial Completion of Construction 6/18/96
5. Tenant Move-In 6/18/96
5A-1
<PAGE>
SCHEDULE 6
CERTIFICATE OF ACCEPTANCE
-------------------------
TENANT: ______________________________________
LOCATION: SUITE ______, PROSPECT GREEN II, PROSPECT GREEN BUSINESS PARK
This letter is to certify that:
1. The above referenced space has been accepted by the Tenant for
possession.
2. The subject space is substantially complete in accordance with the plans
and specifications used in construction of the demised premises.
3. The subject space can now be used for intended purposes.
Commencement Date ____________________, 19__.
Expiration Date ____________________, 19__.
Tenant's Total
Square Footage ____________________________
Executed this ____day of _______________, 19__.
"Tenant"
_______________________________
By:________________________________
Its:_____________________________
By:________________________________
Its:_____________________________
6-1
<PAGE>
SCHEDULE 7
BASE RENT
---------
Period Monthly * Annual *
------
Initial Term (Months) Base Rent Management Fee
- --------------------- --------- --------------
1 - 24 $1.17 $0.33
25 - 60 $1.22 $0.344
61 - 120 $1.27 $0.358
* Per Tenant's Total Rentable Square Feet
7-1
<PAGE>
SCHEDULE 8
PARKING
-------
Landlord hereby grants to Tenant a license to the use during the term of
this Lease the space described in Subparagraph 1.1.11. Tenant agrees to comply
with such reasonable rules and regulations as may be made by Landlord from time
to time in order to insure the proper operation of the parking facilities.
Tenant agrees not to overburden the parking facilities and agrees to cooperate
with Landlord and other tenants in the use of parking facilities. Landlord
reserves the right in its sole discretion to determine whether parking
facilities are becoming crowded, and in such event, to allocate specific parking
spaces among Tenant and other tenants or to take such other steps necessary to
correct such condition, including but not limited to policing and towing, and if
Tenant, its agents, officers, employees, contractors, licensees or invitees are
deemed by Landlord to be contributing to such condition, to charge to Tenant as
Rent that portion of the cost thereof which Landlord reasonably determines to be
caused thereby. Landlord may, in its sole discretion, change the location and
nature of the reserved parking spaces available to Tenant, if any, provided that
after such change, there shall be available to Tenant approximately the same
number of reserved spaces as available before such change. Each of Tenant's
non-reserved spaces shall be provided at no cost to Tenant.
Tenant acknowledges that a Sacramento County air quality ordinance is
pending and, when adopted would require Tenant to encourage on auto emissions
reduction by Tenant's employees, and may cause a reduction in the number of
parking spaces available to Tenant. Landlord shall provide a transportation
manager to assist Tenant in developing a transportation management plan to
comply with such ordinance.
<PAGE>
TENANT: LANDLORD:
E*TRADE GROUP, INC. PROSPECT GREEN PARTNERS, a
California Joint Venture
By: /s/ Kathy Levinson
--------------------------
Kathy Levinson
Senior Vice President By: L&T PROSPECT PARTNERS, L.P.,
a California limited
partnership, Managing
Venturer
By: /s/ Stephen Richards
--------------------------
Stephen Richards,
Senior Vice President and
Chief Financial Officer By: LANKFORD & ASSOCIATES, INC.,
a Colorado corporation,
General Partner
By: /s/ David S.Taylor
--------------------------
David S. Taylor,
Executive Vice President
<PAGE>
EXHIBIT A
SITE PLAN SHOWING ANNEX PROPERTY AND PROSPECT GREEN II
<PAGE>
ANNEX EXPANSION OPTION
This ANNEX EXPANSION OPTION (this "Option"), is entered into as of the 21st
day of June, 1996, by and between PROSPECT GREEN PARTNERS, a California joint
venture ("Landlord") and E*TRADE GROUP, INC., a California corporation
("Tenant").
RECITALS
A. Landlord currently owns that certain real property labelled as the
"Annex Parcel" on the site plan attached hereto as Exhibit A and made a part
hereof for all purposes, and described as Lot 2 of that certain Lot Line
Adjustment recorded December 26, 1995, in Book 95-12-26, Page 471, of the
Official Records of Sacramento County, California (the "Annex Property").
B. Contemporaneously with the execution of this Option, Landlord and Tenant
have entered into a lease (the "PGII Lease") whereby Landlord has agreed to
lease to Tenant and Tenant has agreed to lease from Landlord a portion of the
building known as Prospect Green II which is situated on that certain real
property adjacent to the Annex Property and labelled as the "PG II Parcel" on
Exhibit A attached hereto.
C. Tenant desires to obtain the right to negotiate for future development
of the Annex Property for purposes of meeting Tenant's future needs for
additional office space not available in Prospect Green II, and Landlord is
willing to afford Tenant such right, on the terms and conditions set forth
below.
AGREEMENT
In consideration of the foregoing, and other valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. So long as Tenant is not in default under the terms and conditions of
the PGII Lease, Landlord hereby agrees to negotiate in good faith to make
available the Annex Property for Tenant's future expansion needs, on the
following terms and conditions:
1.1 Annex Expansion Option.
----------------------
(1) Grant of Option. For the first thirty-six (36) months of the
---------------
Lease Term under the PGII Lease (the "Annex Option Period"), Tenant shall have
the option to lease (the "Annex Expansion Option") the Annex Property on
substantially the same terms and conditions of the PGII Lease
<PAGE>
including, without limitation, (i) a tenant improvement allowance in the maximum
amount of twenty-eight and no/100 per Useable square foot of area in the
building to be constructed on the Annex Property (the "Annex Building") and (ii)
a term of ten (10) years; provided, however, that initial Base Rent shall be
equal to an eleven percent (11%) return on the cost to Landlord to develop the
Annex Building, not to exceed One and 18/100 Dollars ($1.18) per Rentable square
foot per month (on a standard triple net basis), and such rental rate shall be
adjusted upward during the term to reflect then prevailing market adjustments.
(2) Exercise of Option. Tenant may elect to exercise the Annex
------------------
Expansion Option by delivering to Landlord written notice of its exercise of the
Annex Expansion Option (the "Notice of Exercise") on or before the expiration of
the Annex Option Period. As a condition of the effectiveness of the Notice of
Exercise, Tenant shall, no later than twelve (12) months prior to the expiration
of the Annex Option Period, deliver a written notice to Landlord of Tenant's
intention to exercise the Annex Expansion Option (the "Notice of Intent"). The
Notice of Intent shall set forth the amount of Rentable square feet of space in
the Annex Building that Tenant intends to lease - Tenant having the election of
a single story building containing approximately fifteen thousand (15,000)
square feet, or - subject to a special development permit or similar requirement
that Landlord hereby agrees to use its reasonable business efforts to obtain - a
two story building containing approximately thirty thousand (30,000) Rentable
square feet (the "Additional Premises"), the proposed configuration of the
building and other improvements to be constructed in the Additional Premises,
and the outside date by when the Additional Premises, with the improvements
substantially completed thereon, must be delivered to Tenant for occupancy,
which date shall be no sooner than ten (10) months following execution of the
Additional Premises Lease described below (the "Additional Premises Delivery
Date"). Within ten (10) days after Landlord's receipt of the Notice of Intent,
Landlord and Tenant shall meet and shall negotiate in good faith to agree to and
execute within thirty (30) days thereafter a letter of intent (the "Letter of
Intent") containing all of the material terms and conditions of a lease for the
Additional Premises (the "Additional Premises Lease") including, without
limitation, the rental rate for the Additional Premises, the configuration of
the Additional Premises, and the Additional Premises Delivery Date. Thereafter,
Tenant may, but is not obligated to, in its sole and absolute discretion,
deliver its Notice of Exercise to Landlord as described above.
(3) Additional Premises Lease. If Tenant delivers the Notice of
-------------------------
Exercise, Landlord and Tenant shall, within sixty (60) days after execution of
the Letter of Intent, execute and deliver to each other the Additional Premises
Lease which shall reflect the terms and conditions of the
<PAGE>
Letter of Intent. In addition, the Additional Premises Lease shall contain
substantially the same terms and conditions as provided in this Lease, including
without limitation, the representations and warranties as to environmental
matters. If Tenant fails to timely deliver the Notice of Exercise, Landlord
shall have the right to develop and lease the Annex Property to another party,
subject to the Annex First Right of Refusal described below.
1.2 Annex First Right of Refusal.
----------------------------
(1) Grant of First Right of Refusal. If at any time after the
-------------------------------
expiration of the Annex Option Period (and prior to the expiration or earlier
termination of the PGII Lease), a bona fide offer for the lease of the Annex
Property is made to Landlord, which offer Landlord in good faith intends to
accept (an "Offer"), then, provided there does not then exist an uncured Event
of Default under the PGII Lease, Landlord shall send Tenant notice (the "Offer
Notice") of such offer, and Tenant shall have the first right of refusal to
accept such Offer (the "Annex First Right of Refusal"). The Offer Notice shall
state the rent and other terms and conditions of the proposed transaction.
(2) Effect of Transfer Notice. Delivery of the Offer Notice to
-------------------------
Tenant shall be deemed to be an offer by Landlord to lease the Annex Property to
Tenant on the same terms and conditions as the Offer. The offer contained in the
Offer Notice may be accepted within five (5) working days following the date of
delivery of the Offer Notice to Tenant (the "Offer Period") and may not be
withdrawn by Landlord within the Offer Period. Pursuant to the offer, Tenant
shall have the right to lease the Annex Property on the terms and conditions
stated in the Offer Notice.
(3) Acceptance of Offer. On or before the last day of the Offer
-------------------
Period, Tenant shall deliver to Landlord notice of its acceptance or rejection
of the offer. Delivery of a notice of acceptance to Landlord by Tenant shall
create a binding contract between Landlord and Tenant. Tenant's failure to
timely deliver such notice shall be deemed a rejection of Landlord's offer.
(4) Lease. Within thirty (30) days following Tenant's acceptance
-----
of the Offer, the parties shall diligently and in good faith pursue negotiation
and execution of a lease agreement to reflect the terms of the Offer.
(5) Release of Annex Property. In the event that Tenant shall
-------------------------
not elect to lease the Annex Property pursuant to the Offer Notice, Landlord may
lease the Annex Property to the proposed transferee on the terms and conditions
contained in the Offer Notice, and the foregoing First Right of Refusal shall
not apply to future renewal negotiations of the lease
<PAGE>
with such transferee. If such lease is not consummated, the provisions of the
foregoing Annex First Right of Refusal shall again apply to any proposed lease
of the Annex Property. If Tenant exercises its rights hereunder and delivers a
notice of acceptance but fails to complete the lease of the Annex Property
solely due to Tenant's default, then Tenant's rights under the Annex First Right
of Refusal shall terminate.
1.3 Effect of Expansion on PGII Lease. In the event that Tenant exercises
---------------------------------
either of the foregoing Annex Expansion Option or Annex First Right of Refusal,
then Tenant shall be obligated to extend the term of the PGII Lease to be co-
terminous with the lease entered into by Landlord and Tenant in connection with
such expansion. Such extended term under the PG II Lease shall be at a Base Rent
equal to ninety-five percent (95%) of Fair Market Rental (as defined in the PG
II Lease), but not less than the Base Rent in effect as of that date on which
the initial Lease Term would have otherwise expired under the PG II Lease
(without regard to any renewal options therein).
2. Assignment. The covenants and agreements contained herein shall be
----------
binding upon and inure to the benefit of the successors and permitted assigns of
the respective parties hereto. The foregoing notwithstanding, the parties
acknowledge and agree that no transfer or other assignment of this Option by
Tenant shall be valid except in connection with an assignment of Tenant's
interest under the PGII Lease which has been approved by Landlord in accordance
with the terms and conditions of such lease. Landlord shall have the right to
assign this Option along with a transfer of the Annex Property; however, an
assignment or other transfer of Landlord's rights under the PGII Lease may be
made without regard to this Option. It is expressly agreed that an assignment by
Landlord of the PGII Lease does not necessarily constitute nor shall it be
construed to be an assignment of this Option; and the ownership of the Annex
Property may be separate and distinct from ownership of Prospect Green II.
3. Governing Law. This Option shall be governed by and, construed in
-------------
accordance with the laws of the State of California.
4. Attorney's Fees. In the event that any of the parties to this Option
---------------
undertakes any action to enforce the provisions of this Option against any
other party, the non-prevailing party shall reimburse the prevailing party for
all reasonable costs and expenses incurred in connection with such enforcement,
including reasonable attorneys' fees and paralegals' fees at the investigative,
pretrial, trial and appellate levels. Attorneys' fees and costs incurred in
enforcing any judgment or in connection with any appeal shall
<PAGE>
be recoverable separately from and in addition to any other amount included in
such judgment.
IN WITNESS WHEREOF, the Parties have executed this Option as of the date
first above written.
"LANDLORD"
PROSPECT GREEN PARTNERS,
a California joint venture
By: L&T PROSPECT PARTNERS, L.P.,
a California limited partnership,
Managing Venturer
By: Lankford & Associates, Inc.,
a colorado corporation,
Managing General Partner
By: /s/ David S. Taylor
-------------------------
David S. Taylor,
Executive Vice President
"TENANT"
E*TRADE GROUP, INC.,
a California corporation
By: /s/ Kathy Levinson
----------------------
Kathy Levinson,
Senior Vice President
By: /s/ Stephen Richards
----------------------
Stephen Richards,
Senior Vice President and
Chief Financial Officer
<PAGE>
EXHIBIT 10.13
EMPLOYMENT AGREEMENT
This Agreement is made effective this 15th day of March, 1996 (the
Effective Date"), by and between E*TRADE GROUP, INC., a California corporation
("Company") and CHRISTOS M. COTSAKOS, a resident of Florida ("Executive").
BACKGROUND
----------
Executive is serving as President and Chief Executive Officer of Company
pursuant to a letter agreement dated April 4, 1996 ("Letter Agreement"). The
parties desire to enter into a formal employment agreement with respect to the
continued employment of Executive by Company, which shall automatically become
effective as of the Effective Date.
TERMS AND CONDITIONS
--------------------
In consideration of the premises and the mutual covenants and agreements set
forth below, the parties agree as follows:
1. TERMINATION OF LETTER AGREEMENT. The Letter Agreement shall terminate
-------------------------------
and be of no further force and effect as of the execution of this Agreement.
2. EMPLOYMENT. Executive agrees to serve as President and Chief Executive
----------
Officer of Company, and as a member of the Company's Board of Directors, for the
term of this Agreement, subject to the terms set forth in this Agreement and the
provisions of the Bylaws of Company. Executive further shall serve as Chairman
(or in a similar capacity) of the Company's Board in the event the current
Chairman is no longer serving in that capacity. During his employment, Executive
shall devote his effort and attention on a full-time basis, to the performance
of the duties required of him as an executive of Company. Notwithstanding the
<PAGE>
foregoing, with the prior approval of the Board of Directors (which approval
shall not be unreasonably withheld), Executive shall be entitled to serve as
director on the governing boards of other for-profit or not-for-profit entities
and to retain any compensation and benefits resulting from such service, so long
as such service does not unduly interfere with his duties under this Agreement.
3. Compensation. As compensation for his services during the term of this
------------
Agreement Executive shall receive the amounts and benefits set forth in this
Section 3 all effective as of the Effective Date unless otherwise specified:
(a) An annual salary of $250,000 ("Base Salary") prorated for any
partial year of employment, subject to annual review for increases in the
light of the size and performance of Company at such time as Company
conducts salary reviews for its officers generally. Executive's salary
shall be payable semimonthly or in accordance with Company's regular
payroll practices in effect from time to time for officers of his level in
Company.
(b) Adjustments to the Base Salary as follows: If, at the end of any
fiscal quarter during the term of this Agreement, Company's annualized
revenues equal or exceed $75,000,000 (which shall be determined by
multiplying such fiscal quarter times four) and there is a positive net
income at the end of such quarter as reflected on Company's financial
statements prepared in the ordinary course of business according to
generally accepted accounting principles (but not including any
extraordinary income or expense items), the Base Salary will increase
automatically to an annualized basis of $320,000, effective on the first
day following the close of such quarter. If, at the end of any fiscal
quarter during the term of this Agreement, Company's annualized revenues
equal or exceed $100,000,000 and there is a positive net income at the end
of such quarter, the Base Salary will increase automatically to an
annualized basis of $390,000
-2-
<PAGE>
effective on the first day following the close of such quarter. The
adjusted Base Salary, as adjusted in accordance with this subsection (b),
shall remain in effect unless and until it is increased upward in
accordance with this subsection (b) or unless it is increased as provided
in subsection (a) of this Section 3.
(c) Participation as a Level A participant in Company's bonus plan
attached as Exhibit "A," with the participation effective date being March
18, 1996, and any subsequent bonus or incentive plans established by
Company for its executives (collectively "Bonus Plan"). Executive agrees to
assist the Board in developing new bonus or incentive plans for adoption by
Company, in which Executive and other management of Company shall be
entitled to participate.
(d) Participation in the employee benefit plans maintained by Company
and in other benefits provided by Company to senior executives, including
retirement (if and when established) and 401K plans, deferred compensation
medical and dental, annual vacation, paid holidays, a Fifty Five Percent
(55%) rebate on trading commissions for trades through E*Trade accounts,
sick leave, and similar benefits, which are subject to change from time to
time at the reasonable discretion of Company.
(e) Reimbursement of the dues and costs of appropriate club and
professional organization memberships, continuing professional education,
and financial counseling.
(f) An Incentive Stock Option pursuant to the Stock Option Plan
attached as Exhibit "B," the Stock Option Grant attached as Exhibit "C,"
and the Amendment to the Stock Option Grant attached as Exhibit "D."
Company agrees that there will be no change made in any Stock Option during
the term of Executive's employment hereunder which adversely affects
Executive's rights as established by the foregoing documents, without the
prior written consent of Executive. Company further agrees to grant
Executive an
-3-
<PAGE>
additional option of 8,000 Shares ("re-split"), effective May 15, 1996, at
the current fair market value (anticipated to be S420.00 per share). This
8,000 Share option shall have substantially the same terms as the existing
Stock Option Grant attached as Exhibit C, and with the same vesting
schedule as set forth on the Amendment attached as Exhibit D.
(g) A one-time payment of $50,000, in order to cover storage and
movement of household goods associated with accepting employment with
Company.
(h) Lease of automobile for company use, of a mutually agreeable make
and model, and reimbursement of reasonable operating expense.
(i) Reimbursement of all reasonable business-related expenses,
including without limitation business-class air travel (international) and
first-class air travel (domestic).
(j) Reimbursement of travel, hotel and meal expenses relating to
completion of Ph.D. program.
(k) "Gross-up" payments to cover taxes due in the event any of the
benefits described in subsections (e), (h), (i) and (j) above, or in
Section 5(c), are taxable to Executive.
4. Term. The term of this Agreement and the termination rights are as
----
follows:
(a) This Agreement and Executive's employment under this Agreement
shall be effective as of the Effective Date and shall continue for a term
ending on December 31, 2001 (the "Initial Term"). This Agreement and
Executive's employment shall
-4-
<PAGE>
automatically continue for successive one-year periods at the end of the
Initial Term, unless either party gives written notice to the other of its
intent to terminate this Agreement and Executive's employment not less than
180 days prior to the commencement of any such one-year renewal period. In
the event such notice to terminate is properly given, this Agreement and
Executive's employment shall terminate at the end of the Initial Term or
the one-year renewal period during which the notice is given.
(b) This Agreement and Executive's employment may be terminated by
either party prior to the end of the Initial Term (or any renewal period)
upon 30 days' prior written notice to the other party, provided, that, in
the event of such termination, Company shall be obligated to make the
payments and provide the benefits described in Section 5 below.
5. Termination Payments. Upon termination of Executive's employment,
--------------------
Company shall pay to Executive, within three business days after the end of the
30-day notice period provided in Section 4 above, a payment in cash determined
under subsection (a) or (b) of this Section 5 and shall for the period or at the
time specified provide the other benefits described in subsections (c) and (e)
of this Section 5:
(a) The payment shall be equal to five full years of Executive's
"Current Total Annual Compensation" as defined in subsection (d) of this
Section 5, if: (i) Executive's employment is terminated by Company, other
than for Cause, within three years after any "Change in Control" of Company
as defined in subsection (d) of this Section 5, or at the request of or
pursuant to an agreement with a third party who has taken steps reasonably
calculated to effect a Change in Control, or otherwise in connection with
or in anticipation of a Change in Control; or (ii) Executive elects to
terminate employment for Good Reason within three years after any Change in
Control of Company.
-5-
<PAGE>
(b) The payment shall be equal to four full years of Executive's
Current Total Annual Compensation, if: (i) Executive's employment is
terminated by Company, other than for Cause, and such termination is not
described in (a) above; or (ii) Executive elects to terminate his
employment for "Good Reason," as defined in subsection (d) of this Section
5, and such termination is not described in (a) above.
(c) In addition to the amount payable to Executive under subsection
(a) or (b) of this Section 5, Executive shall be entitled to the following
upon termination for any reason:
(i) The health care (including medical and dental) and life
insurance benefits coverage provided to Executive at his
date of termination shall be continued at the same level
and in the same manner as if his employment had not
terminated (subject to the customary changes in such
coverages if Executive reaches age 65 or similar events),
together with the benefits described in subsections (h),
(j) and (k) of Section 3 beginning on the date of such
termination and ending on the date forty-eight months from
the date of termination, followed by COBRA election rights.
Any additional coverages Executive had at termination,
including dependent coverage, will also be continued for
-6-
<PAGE>
such period on the same terms. Any costs Executive was
paying for such coverages at the time of termination shall
continue to be paid by Executive. If the terms of any
benefit plan referred to in this section do not permit
continued participation by Executive, then Company will
arrange for other coverage providing substantially similar
benefits at the same contribution level of Executive.
(ii) Reasonable relocation expenses for Executive and his
dependents to any location within the continental United
States incurred for the purpose of new employment on or
within eighteen months of the effective termination date of
this Agreement. Such expenses shall include without
limitation first-class airfare and other travel for
Executive and his family; moving and storage expenses; real
estate closing fees and costs upon the sale of his
residence and purchase of a new residence; all other
expenses reasonably incurred in relocating to a location
other than Palo Alto, California or environs; and an amount
-7-
<PAGE>
equal to Ten Percent (10%) of his Current Total Annual
Compensation to cover all incidental relocation expenses.
(iii) Outplacement and financial counseling services selected by
Executive, up to a maximum of S30,000 (net of tax, if any).
(iv) A mutually acceptable office, together with secretarial
assistance and customary office facilities and services,
located at Company (or in lieu thereof reimbursement for
same at another location), for up to twelve months
following the effective termination date of this Agreement,
for the purpose of facilitating Executive's search for new
employment.
(d) For purposes of this Agreement, the following definitions shall
apply:
(i) The "Board" shall mean the Board of Directors of Company.
(ii) "The Incumbent Board" shall mean the members of the Board
as of the date of this Agreement and any person becoming a
member of
-8-
<PAGE>
the Board hereafter whose election, or nomination for
election by Company's shareholders, was approved by a vote
of at least a majority of the directors then comprising the
Incumbent Board (other than an election or nomination of an
individual whose initial assumption of office is in
connection with an actual or threatened election contest
relating to the election of the directors of Company).
(iii) "Change in Control" shall mean:
(A) The acquisition (other than from Company) by any person, entity
or "group," within the meaning of Section 13(d)(3) or l4(d)(2) of the
Exchange Act (excluding, for this purpose, any employee benefit plan
of Company or its subsidiaries which acquires beneficial ownership of
voting securities of Company) of beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of 50% or
more of either the then outstanding shares of Common Stock or the
combined voting power of Company's then outstanding voting securities
entitled to vote generally in the election of directors: or
(B) The failure for any reason of individuals who constitute the
Incumbent Board to continue to constitute at least a majority of the
Board; or
(C) Approval by the stockholders of Company of a reorganization,
merger, consolidation, in each case, with respect to which the shares
of Company voting stock outstanding immediately prior to such
reorganization, merger or consolidation do not constitute or become
exchanged for or converted into more than 50% of the combined voting
power entitled to vote generally in the election of directors of the
reorganized, merged or consolidated company's then
-9-
<PAGE>
outstanding voting securities, or a liquidation or dissolution of
Company or of the sale of all or substantially all of the assets of
Company.
(iv) "Good Reason" shall mean:
(A) The assignment to Executive of any duties inconsistent
in any respect with Executive's position (including status,
offices, titles and reporting requirements), authority,
duties or responsibilities as contemplated by Section 2
above, or any other action by Company which results in a
diminution in such position, authority, duties or
responsibilities excluding for this purpose any action
taken with the consent of Executive and any isolated,
insubstantial and inadvertent action not taken in bad faith
and which is remedied by Company promptly after receipt of
notice of such action given by Executive;
(B) A reduction in the overall level of Executive's
compensation or benefits as provided in Section 3;
(C) Company's requiring Executive to be based at any
office or location other than Company's executive offices
either in Palo Alto, California or environs, or near
Executive's residence in North Palm Beach, Florida or
environs, except for travel reasonably required in the
performance of Executive's responsibilities;
(D) Any purported termination by Company of Executive's
employment otherwise than as expressly permitted by this
Agreement; or
-10-
<PAGE>
(E) Any failure by Company to comply with and satisfy
Section 6 below.
(F) The nomination by the Board of a Chairman (or person
serving in a similar capacity) of a person other than the
current Chairman or Executive.
For purposes of this Agreement, any good faith determination of "Good Reason"
made by Executive shall be conclusive.
(v) "Current Total Annual Compensation" shall be the total of
the following amounts: (A) the greater of (i) Executive's
Base Salary for the calendar year in which his employment
terminates or (ii) such salary for the calendar year prior
to the year of such termination; and (B) the greater of (i)
any total amount that became payable to Executive under the
Bonus Plan during the calendar year prior to the calendar
year in which his employment terminates, and (ii) the
maximum amount to which Executive would be paid for the
calendar year in which his employment terminates as if all
Plan criteria had been or are met, regardless of when such
amounts are actually to be paid. Any longer term Bonus Plan
payments are to be accelerated and included within the
meaning of this definition.
(vi) "Disability" shall mean the total and permanent inability
of Executive due to illness, accident or other physical or
mental incapacity to perform the usual duties of his
employment under this Agreement, as determined by a
physician selected by Company and
-11-
<PAGE>
acceptable to Executive or Executive's legal
representative (which agreement as to acceptability shall
not be unreasonably withheld).
(vii) The "Exchange Act" shall mean the Securities Exchange Act
of 1934, as amended
(viii) "Cause" shall be defined solely as (i) Executive's
defalcation or misappropriation of funds or property of
the Company, or the commission of any other illegal act in
the course of his employment with Company which, in the
reasonable judgment of the Board of Directors, has a
material adverse financial effect on the Company or on
Executive's ongoing abilities to carry out his duties
under this Agreement; (ii) Executive's conviction of a
felony or of any crime involving moral turpitude, and
affirmance of such conviction following the exhaustion of
any appeals; (iii) refusal of Executive to substantially
perform all of his duties and responsibilities, or
Executive's persistent neglect of duty or chronic
unapproved absenteeism (other than for a temporary or
permanent Disability), which remains uncured following
thirty days after written notice of such alleged Cause by
the Board of Directors; or (iv) any material and
substantial breach by Executive of other terms and
conditions of this Agreement, which, in the reasonable
judgment of the Board of Directors, has a material adverse
financial effect on the Company or on Executive's ongoing
abilities to carry out his duties under this Agreement and
which remains uncured following thirty days after written
notice of such alleged Cause by the Board of Directors.
-12-
<PAGE>
(e) In addition to the amounts payable under subsection (a), (b) or
(c) of this Section 5, Company shall pay Executive a tax equalization
payment in accordance with this subsection. The tax equalization payment
shall be in an amount which when added to the other amounts payable to
Executive under this Section 5 will place Executive in the same after-tax
position as if the excise tax penalty of Section 4999 of the Internal
Revenue Code of 1986, as amended (the "Code"), or any successor statute of
similar import, did not apply to any of the amounts payable under this
Section 5 including any amounts paid under this subsection (e). The amount
of this tax equalization payment shall be determined by Company's
independent accountants and shall be payable to Executive at the same time
as the payment under subsection (a) or (b) of this Section 5.
6. Assignment; Successors. Any assignment of this Agreement shall be in
----------------------
accordance with the following:
(a) The rights and benefits of Executive under this Agreement, other
than accrued and unpaid amounts due hereunder, are personal to him and
shall not be assignable by Executive, except with the prior written consent
of Company.
(b) Subject to the provisions of subsection (c) of this Section 6,
this Agreement shall not be assignable by Company, provided, that with the
consent of Executive, Company may assign this Agreement to another
corporation wholly owned by it either directly or through one or more
other corporations, or to any corporate successor of Company or any such
corporation.
(c) Any business entity succeeding to substantially all of the
business of Company by purchase, merger, consolidation, sale of assets or
otherwise, shall be bound by and shall adopt and assume this Agreement and
Company shall require the assumption
-13-
<PAGE>
of this Agreement by such successor as a condition to such purchase,
merger, consolidation, sale or assets or other similar transaction.
7. Notices. Any notice or other communications under this Agreement shall
-------
be in writing, signed by the party making the same, and shall be delivered
personally or sent by certified or registered mail, postage prepaid, addressed
as follows:
If to Executive; Mr. Christos M. Cotsakos
Old Port Cove Lake Point Tower
Unit 2053
100 Lakeshore Drive
North Palm Beach, Florida 33408
If to Company: The Board of Directors
Four Embarcadero Place
2400 Geng Road
Palo Alto, California 94303
or to such other address or agent as may hereafter be designated by either party
hereto. All such notices shall be deemed given on the date personally delivered
or mailed.
8. Full Settlement and Legal Expenses. Company's obligation to make the
---- -----------------------------
payments provided for in this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any set-off, counter-claim, recoupment,
defense or other claim, right or action which Company may have against Executive
or others. In no event shall Executive be obligated to seek other employment or
take any other action by way of mitigation of the amounts payable to Executive
under any of the provisions of this Agreement. The prevailing party shall be
entitled to recover all legal fees and expenses which such party may reasonably
incur as a result of any legal proceeding relating to the validity,
enforceability, or breach of, or liability under, any provision of this
Agreement or any guarantee of performance (including as a result of any contest
by Executive
-14-
<PAGE>
about the amount of any payment pursuant to Section 5 of this Agreement), plus
in each case interest at the applicable Federal Rate provided for in Section
7872(f)(2) of the Code.
9. Governing Law. This Agreement shall be interpreted and enforced in
-------------
accordance with the laws of the State of California, except that any
arbitration shall be governed by the Federal Arbitration Act.
10. Severability. Whenever possible, each provision of this Agreement
------------
shall be interpreted in such manner as to be effective and valid, but if any one
or more of the provisions contained in this Agreement shall be invalid, illegal
or unenforceable in any respect for any reason, the validity, legality and
enforceability of any such provisions in every other respect and of the
remaining provisions of this Agreement shall not be in any way impaired.
11. Entire Agreement. This Agreement (including all Exhibits) contains the
----------------
entire agreement of the parties with respect to the subject matter contained in
this Agreement. There are no restrictions, promises, covenants, or undertakings
between Company and Executive, other than those expressly set forth in this
Agreement. This Agreement supersedes all prior agreements and understandings
between the parties. This Agreement may not be amended or modified except in
writing executed by the parties.
12. Arbitration. Any controversy or claim arising out of or relating to
-----------
this Agreement shall be settled by arbitration in accordance with the Commercial
Arbitration Rules of the American Arbitration Association, and judgment upon the
award rendered by the arbitration panel, which shall consist of three members,
may be entered in any court having jurisdiction. Any arbitration shall be held
in Palo Alto, California, unless otherwise agreed in writing by the parties.
-15-
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
day and year first above written.
E*TRADE GROUP, INC.
(CORPORATE SEAL]
By: /s/ William A Porter
--------------------------------------
William A Porter, Founder and Chairman
Attest:
- --------------------------------------
Secretary
EXECUTIVE
/s/ Christos M. Cotsakos
--------------------------------------
Christos M. Cotsakos
Witnesseth:
- --------------------------------------
-16-
<PAGE>
EXHIBIT 10.16
BETAHOST
MASTER SUBSCRIPTION AGREEMENT
This Agreement is entered into by and between BETA Systems Inc. ("BETA
Systems"), 350 North Sunny Slope Road, Brookfield, WI 53005 and E*Trade
Securities, Inc., 2400 Geng Road, Palo Alto, CA 94303 this date of
----
, 1996.
- -----------------
WHEREAS, Subscriber desires to subscribe to a data processing service
called BETAHOST(R) offered by BETA Systems, and to have BETAHOST service
installed at certain offices of Subscriber;
NOW, THEREFORE, in consideration of the mutual promises and covenants
exchanged herein, BETA Systems and Subscriber agree as follows:
1. Purpose of Agreement. The purpose of this Agreement is to set forth
--------------------
the terms and conditions governing the mutual rights, duties and obligations of
the parties hereto.
2. Services Provided.
-----------------
(a) BETA Systems will provide Subscriber with the BETAHOST services
which are set forth, together with their charges, on Schedule A attached hereto
and incorporated herein by reference.
(b) BETAHOST service provided hereunder shall be available on each day
that the New York Stock Exchange is open for trading. On such days BETA Systems
shall make diligent efforts to provide all BETAHOST service hereunder from and
limited inquiry functions from [*] BETA Systems shall also make reasonable
efforts to provide limited inquiry functions on Saturdays and Sundays from [*]
except that BETA Systems reserves the right, upon not less than 48 hours notice,
to limit or curtail holiday or weekend availability when necessary for system
upgrades, adjustments, maintenance, or other operational considerations.
General enhancements to existing BETAHOST service provided
hereunder shall be made available to Subscriber at [*] but any new features
or services that may be developed by BETA Systems during the term of this
Agreement may, at BETA Systems' option, and subject to Subscribers' acceptance,
be made available to Subscriber at BETA Systems' then-current prices for such
new features or services, and upon
- ---------------
(R) BETAHOST is a registered servicemark of Beta Systems Inc. All rights
reserved.
[*] Confidential Treatment Requested
1
<PAGE>
such other terms as BETA Systems may reasonably deem appropriate. Enhancements
to existing BETAHOST services requested by Subscriber and which benefit less
than a majority of BETA Systems' Subscribers at the time such enhancements are
put into service may. at BETA Systems option, be billed to such benefiting
Subscribers at BETA Systems standard rates for programming. All enhancements to
the BETAHOST service, and any new features or services introduced by BETA
Systems, shall remain the exclusive proprietary property of BETA Systems. Prior
to Subscriber's conversion, BETA Systems will, [*] develop and incorporate into
the services to be provided to Subscriber the functionalities and features
identified on Schedule B attached hereto, in accordance with the terms and
conditions set forth thereon.
3. Initial Conversion and Training.
-------------------------------
(a) In connection with Subscriber's initial conversion to the use
of BETAHost under this Agreement, BETA Systems shall provide such on-site
training and other assistance as BETA Systems and Subscriber jointly deem
necessary to assure that Subscriber's personnel are able to make effective use
of BETAHOST. On-site training shall take place at such times and places as are
mutually agreeable to the parties hereto.
(b) BETA Systems will convert Subscriber's files as necessary to
make the same compatible with the services provided to Subscriber hereunder.
BETA Systems shall provide Subscriber with such support as BETA Systems and
Subscriber jointly deem necessary to effectuate the conversion, and Subscriber
will cooperate with BETA Systems in the conversion. BETAHOST service hereunder
shall not commence until BETA Systems and Subscriber jointly determine that the
conversion and training are sufficiently completed to permit the service to be
operational.
(c) All ordinary and necessary out-of-pocket expenses incurred by
BETA Systems in connection with the conversion will be borne [*]
Extraordinary out-of-pocket expenses incurred with Subscriber's prior approval
by BETA Systems as a result of Subscriber's requests for support will be paid
4. Equipment and Hardware. (a) Subscriber shall be responsible for
----------------------
obtaining, installing at its premises, and maintaining all equipment and
hardware, including telecommunications equipment, necessary for using
BETAHOST BETA Systems will assist Subscriber in developing an acceptable
equipment list, and
[*] Confidential Treatment Requested
2
<PAGE>
Subscriber shall, prior to installation, submit its equipment configuration to
BETA Systems for approval, which shall not be unreasonably withheld.
(b) Prior to conversion, Subscriber must exercise reasonable
efforts to develop and implement a communications "firewall" between all of
Subscriber's in-house networks and BETA Systems' network that is, to the extent
reasonably possible, capable of preventing all unauthorized access to BETA
Systems' network. Subscriber is liable to BETA Systems for all loss or damage
caused by any unauthorized access to BETA Systems' network through Subscriber's
network as a result of Subscriber's failure to act as required by this
subparagraph. BETA Systems may audit all firewall arrangements from time-to-time
upon reasonable notice to Subscriber, but no such audit, nor BETA Systems'
failure to audit, relieves Subscriber of its responsibilities or liabilities
under this paragraph.
5. Subscriber Date
(a) Subscriber will timely supply BETA Systems, in a form acceptable
to BETA Systems, with all data necessary for BETA Systems to Convert
Subscriber's data and perform the ongoing services to be provided hereunder. It
is the sole responsibility of Subscriber to insure the completeness and
accuracy of such data.
(b) BETA Systems acknowledges that all records, data, files and other
input material relating to Subscriber are confidential and shall take such steps
(i) to protect the confidentiality of such records, data, files and other
materials and (ii) to limit access to Subscriber's files and records to
Subscriber and other authorized parties, as it takes to protect its own similar
confidential information.
(c) BETA Systems will take such steps to protect against the loss
or alteration of Subscriber's flies, records and data retained by BETA Systems
as it takes to protect against the loss or alteration of its own similar data;
BETA Systems will maintain backup file(s) containing all of the data, files and
records related to Subscriber. Subscriber's file(s), records and data shall be
released to Subscriber upon termination of this Agreement or in the event of an
occurrence that renders BETA Systems unable to perform hereunder. Provided
Subscriber is current on all invoices, BETA Systems will cooperate reasonably in
Subscriber's transition to another service provider, and Subscriber will pay
such reasonable charges as BETA deconversion charges as set forth in Schedule A.
3
<PAGE>
(d) BETA Systems acknowledges that all records, data, files and
other input material relating to Subscriber are the exclusive property of the
Subscriber.
6. Charges and Payments.
--------------------
(a) General. In addition to reimbursements required elsewhere in this
-------
Agreement, Subscriber shall pay for BETAHOST service in accordance with Schedule
A attached hereto and as may be adjusted as provided herein. The charges for any
partial month of service shall be prorated on the basis of a 30-day month.
(b) Billing. BETA Systems shall invoice Subscriber monthly for all
-------
applicable charges. If payment is not received by BETA Systems [*] of
Subscribers receipt of the invoice, Subscriber agrees to pay BETA Systems
interest on the unpaid balance at the rate of [*] from the date that is [*]
after the date of the invoice until the invoice is paid in full. If payment in
full is not received within [*] of the date of the invoice, BETA Systems may,
at its option, terminate this Agreement upon [*] written notice. If Subscriber
disputes in good faith any item(s) on an invoice, it may withhold payment on
such item(s) until the dispute is resolved, but it shall promptly pay all
undisputed items as provided in this paragraph.
(c) Taxes, Utilities and Exclusions. All charges shall be exclusive
-------------------------------
of any federal, state or local sales, use, excise, ad valorem or personal
----------
property taxes levied, or any fines, forfeitures or penalties assessed in
connection therewith, as a result of this Agreement or the installation or use
of BETAHOST hereunder. Any such taxes which may be applicable will be paid by
Subscriber or by BETA Systems for Subscriber's account, in which case Subscriber
shall reimburse BETA Systems for amounts so paid. All electrical utility service
necessary to operate BETAHOST at Subscriber's offices shall be maintained in
Subscriber's own account with such utility or service, and all charges for such
services, including installation charges in connection therewith, shall be paid
by Subscriber. BETA Systems shall arrange for the installation of all
telecommunications services necessary for Subscriber's use of BETAHOST, which
will be maintained in BETA Systems' account for Subscriber's exclusive use.
Subscriber shall promptly remit payment to BETA Systems, at BETA Systems'
standard rates as listed in Schedule A Network Fees, for all charges in
connection with such installation and Subscriber's use thereof. BETA SYSTEMS
SHALL NOT BE LIABLE TO SUBSCRIBER FOR ANY FAILURE, FAULT, DELAY,
[*] Confidential Treatment Requested
4
<PAGE>
INTERRUPTION OR LOSS OF TELECOMMUNICATIONS SERVICES RESULTING FROM EVENTS OR
CONDITIONS OUTSIDE OF BETA SYSTEMS' REASONABLE CONTROL. BETA Systems will work
diligently to remedy any failure, fault, delay, interruption or loss of
telecommunications services resulting from conditions reasonably within its
control.
7. Term of Agreement.
-----------------
(a) This Agreement will be effective on the date first above written
and will terminate on the [*] of the date Subscriber first uses BETAHost
to process trades ("the Conversion Date"). BETA Systems or Subscriber shall give
the other party [*] written notice of its intent not to renew this
Agreement upon its expiration. If such notice is given less than [*] prior
to the expiration date, then this Agreement shall remain in effect for [*]
from the giving of such notice.
(b) Unless BETA Systems or Subscriber shall have given notice of non-
renewal as provided in Paragraph 7(a), in the event that no renewal,
continuation or successor agreement is signed by the parties prior to the
expiration of this Agreement, this Agreement may be extended automatically for
successive periods of [*] until a successor, renewal or continuation
agreement is signed by the parties or until Subscriber, upon [*] written
notice to BETA Systems, or BETA Systems, [*] written notice to
Subscriber, elects to terminate this Agreement. During any period of extension
described in this subparagraph 7(b). the charge for the services provided to
Subscriber hereunder may, at BETA Systems' option, [*] the current contract
rates paid by Subscriber.
8. Termination.
-----------
(a) Subscriber acknowledges that BETA Systems incurs substantial
initial costs in converting and training new subscribers. Subscriber therefore
agrees that if Subscriber cancels this Agreement prior to the Conversion Date,
Subscriber will pay to BETA Systems the sum of [*] incurred by
BETA Systems in connection with Subscriber's conversion since [*] in a
single payment due immediately upon Subscriber's receipt of BETA Systems'
invoice.
[*] Confidential Treatment Requested
5
<PAGE>
(b) Should Subscriber cancel this Agreement prior to its termination
pursuant to paragraph 7(a), except as otherwise authorized in this Agreement,
Subscriber shall pay to BETA Systems a cancellation charge in accordance with
the following schedule:
<TABLE>
<CAPTION>
Cancellation Date Charge
----------------- ------
<S> <C>
within [*] the Conversion Date [*]
on or after the [*]
of the Conversion Date [*]
on or after the [*]
of the Conversion Date [*]
on or after the [*]
of the Conversion Date [*]
on or after the [*]
of the Conversion Date [*]
on or after the [*]
of the Conversion Date [*]
on or after the [*] [*]
</TABLE>
(c) In addition to termination rights as provided elsewhere herein,
either party may terminate this Agreement in the event that the other party
commits a material breach of this Agreement, provided the breaching party fails
to cure such material breach within [*] its receipt of written notification
thereof from the other party. For purposes of this subparagraph, a "material
breach" is a failure by one party to perform its obligations under this
Agreement that so seriously and adversely affects the other party's ability to
carry on its business that a reasonable person would conclude that the essential
purpose of the Agreement had failed. If a termination of this Agreement pursuant
to this subparagraph is later determined through arbitration to have been
improper, then (i) if Subscriber improperly terminated the Agreement, it will
pay to BETA Systems as liquidated damages and not as a penalty a sum equal to
[*] set forth in subparagraph (b); (ii) if BETA Systems improperly terminated
the Agreement, it will pay to Subscriber [*] as liquidated damages and not as a
penalty, except that if Subscriber elects, and BETA Systems agrees, to reinstate
the services hereunder as if no termination had occurred, the liquidated damage
payment will be [*] All
[*] Confidential Treatment Requested
6
<PAGE>
liquidated damages payments are in lieu of all other damages except unpaid
fees and charges incurred for service provided under this Agreement,
fees and costs provided under paragraph 10, and damages resulting from a
breach of paragraph 11.
(d) BETA Systems will provide the following service levels:
1. system and communication line up time from [*] on
each day the New York Stock Exchange is open for trading.
2. [*] system and communication fine up time from [*]
Monday through Friday [*] Saturday and Sunday and other times that limited
inquiry functionality is available to Subscriber. Scheduled downtime of which
Subscriber has received a least [*] is considered system uptime, as long such
scheduled downtime does not become excessive. Any scheduled downtime of which
Subscriber has not received at [*] least is considered downtime.
3. BETA Systems will have adequate capacity installed at
all times to provide reasonable response times and batch processing.
4. Positions & Balances for each trade day will be available
no later than [*] the following day.
5. Confirms print file will be available by [*] on
each trade day.
6. Customer Statements file should be sent to Subscriber's
Statement vendor within [*] of BETA Systems' receipt of correct and
processable external interface files from Subscriber's other vendors.
7. Requests from Subscriber to add securities to Security
Master will be completed within [*] of request.
(e) If BETA Systems' performance falls below the above service levels
for a period of [*] or if the service levels set forth in subparagraph S(d)
I or 2 fall below [*] Subscriber may, upon [*]
prior written notice, seek to terminate this Agreement, without payment of the
cancellation charge set forth in paragraph 8(b) Subscriber will comply with the
dispute resolution process set forth in paragraph 10(a) before termination of
the Agreement. The parties will
[*] Confidential Treatment Requested
7
<PAGE>
participate in the mediation process expeditiously and will, subject to the
availability of mediators, conclude such proceedings within one month of
commencement. Nothing herein prohibits BETA Systems from challenging the
propriety of any such termination through the process set forth in paragraph
l0(b) or as otherwise permitted in this Agreement.
(f) The parties will agree on development schedules for projects
requested by Subscriber. Upon receipt of a development request from Subscriber
BETA Systems will provide written confirmation of its receipt of the
specifications and an estimate of the time for project completion. Subscriber is
responsible for setting priority levels on all requested development projects.
For all proprietary and custom work requested by Subscriber, Subscriber will pay
the programming charges set forth on Schedule A.
9. Disclaimer of Warranties and Limitations of Liability.
-----------------------------------------------------
(a) Disclaimer of Warranty. EXCEPT AS SPECIFICALLY PROVIDED HEREIN.
----------------------
THERE ARE NO, AND BETA SYSTEMS EXPRESSLY DENIES, REJECTS AND DISCLAIMS ANY,
WARRANTIES, EXPRESSED OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES
OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR WARRANTIES OF THE
CORRECTNESS, ACCURACY, PRECISION, TIMELINESS OR COMPLETENESS OF ANY INFORMATION
OR SERVICES PROVIDED THROUGH BETAHOST.
(b) Limitation of Liability. BETA SYSTEMS, ITS AFFILIATES, EMPLOYEES,
-----------------------
OFFICERS AND AGENTS SHALL NOT BE LIABLE TO SUBSCRIBER OR TO ANY THIRD PARTY FOR
ANY LOSS OR DAMAGE, WHETHER DIRECT OR INDIRECT, RESULTING FROM DELAYS OR
INTERRUPTIONS OF SERVICE DUE TO MECHANICAL, ELECTRICAL OR WIRE DEFECTS OR
DIFFICULTIES, STORMS, STRIKES, WALK-OUTS, EQUIPMENT OR SYSTEMS FAILURES, OR
OTHER CAUSES OVER WHICH BETA SYSTEMS, ITS AFFILIATES, EMPLOYEES, OFFICERS, OR
AGENTS AGAINST WHOM LIABILITY IS SOUGHT, HAVE NO REASONABLE CONTROL, OR FOR LOSS
OR DAMAGE, DIRECT OR INDIRECT, RESULTING FROM INACCURACIES, ERRONEOUS
STATEMENTS, ERRORS OF FACT, OMISSIONS, OR ERRORS IN THE TRANSMISSION OR DELIVERY
OF BETAHOST SERVICE, OR ANY DATA PROVIDED AS A PART OF BETAHOST SERVICE PURSUANT
TO THIS
8
<PAGE>
AGREEMENT. IN ALL OTHER CASES, THE AGGREGATE LIABILITY OF BETA SYSTEMS
TO SUBSCRIBER FOR ALL CLAIMS ARISING UNDER THIS AGREEMENT SHALL BE LIMITED TO,
AND SUBSCRIBER AGREES NOT TO MAKE ANY CLAIM EXCEEDING, OR THAT WOULD CAUSE BETA
SYSTEMS' AGGREGATE LIABILITY TO EXCEED, THE
FOREGOING PROVISIONS OF THIS PARAGRAPH 9(b) DO NOT LIMIT BETA SYSTEMS' LIABILITY
TO SUBSCRIBER FOR BETA SYSTEMS' WILLFUL OR RECKLESS WRONGDOING. FOR PURPOSES OF
THIS AGREEMENT "RECKLESS" WRONGDOING IS UNLAWFUL CONDUCT BY BETA SYSTEMS THAT IS
MORE THAN NEGLIGENT: IT MUST EVIDENCE A CONSCIOUS AND KNOWING DISREGARD OF A
SUBSTANTIAL AND UNREASONABLE RISK OF HARM TO SUBSCRIBER. IN NO EVENT SHALL BETA
SYSTEMS BE LIABLE TO SUBSCRIBER OR TO ANY THIRD PARTY FOR SPECIAL, INDIRECT,
INCIDENTAL, OR CONSEQUENTIAL LOSSES OR DAMAGES WHICH SUBSCRIBER OR SUCH THIRD
PARTY MAY INCUR OR EXPERIENCE ON ACCOUNT OF ENTERING INTO OR RELYING ON THIS
AGREEMENT OR UTILIZING BETAHOST, REGARDLESS OF WHETHER BETA SYSTEMS HAS BEEN
ADVISED OF THE POSSIBILITY OF SUCH DAMAGES OR WHETHER SUCH DAMAGES ARE CAUSED,
IN WHOLE OR IN PART, BY THE NEGLIGENCE OF BETA SYSTEMS.
(c) Time for Making Claims. ANY SUIT OR ACTION BY SUBSCRIBER AGAINST
----------------------
BETA SYSTEMS, ITS AFFILIATES, OFFICERS, DIRECTORS, AGENTS, EMPLOYEES, SUCCESSORS
OR ASSIGNS, BASED UPON ANY ACT OR OMISSION ARISING OUT OF OR RELATING TO THIS
AGREEMENT, OR SERVICES PERFORMED HEREUNDER, OR ANY ALLEGED BREACH THEREOF, SHALL
BE COMMENCED ON THE FIRST OCCURRENCE GIVING RISE TO SUCH CLAIM OR BE FOREVER
BARRED. THIS PROVISION DOES NOT MODIFY OR OTHERWISE AFFECT THE LIMITATION OF
BETA SYSTEMS' LIABILITY SET FORTH IN PARAGRAPH 9 OR ELSEWHERE IN THIS AGREEMENT.
10. Dispute Resolution.
------------------
(a) Any dispute between the parties arising under or relating to this
Agreement that cannot be resolved by the parties themselves shall be submitted
to mediation in Denver, Colorado, administered by and conducted in accordance
with the Rules of Commercial Mediation of the American Arbitration Association.
Each party will bear its own costs in the mediation, including attorneys' fees,
and one-half the cost of the mediator.
9
<PAGE>
(b) Any dispute that remains unresolved after mediation will be
resolved by final and binding arbitration in Denver, Colorado, before a single
arbitrator conducted by and in accordance with the Rules of Commercial
Arbitration of the American Arbitration Association. The arbitrator shall not be
the same person as the mediator. Each party shall bear its own costs in the
arbitration, including attorneys' fees, and each party shall bear one-half of
the cost of the arbitrator.
(c) The arbitrator shall have the authority to award such damages as
are not prohibited by this agreement and may, in addition and in a proper case,
declare rights and order specific performance, but only in accordance with the
terms of this Agreement.
(d) Any party may apply to a court of general jurisdiction to enforce
an arbitrators' award, and if enforcement is ordered, the party against which
the order is issued shall pay the costs and expenses of the other party in
obtaining such order, including reasonable attorneys' fees.
(e) Notwithstanding the provisions of paragraph 10(a) and (b) above,
any action by BETA to enforce its rights under paragraphs 6(b) or 11 of the
Agreement or to enjoin any infringement of the same by Subscriber, and any
action by Subscriber to enforce its right under paragraph 5, may be commenced in
the state or federal courts of California or Wisconsin, and each party consents
to personal jurisdiction and venue in such courts for such actions. Such actions
shall be referred promptly to arbitration, and the arbitrator has the authority
to continue, modify or lift any temporary or preliminary injunctive relief
granted by the court.
11. Use of BETAHOST
---------------
(a) Subscriber acknowledges that the software systems utilized by
BETA Systems in the provision of BETAHOST service hereunder, including all
enhancements thereto, and all screens and formats used in connection therewith,
are the exclusive proprietary property of BETA Systems, and Subscriber shall not
publish, disclose, display, provide access to or otherwise make available any
BETAHOST software or products thereof, or any screens, formats, reports or
printouts used, provided, produced or supplied from or in connection therewith,
to any person or entity other than an employee of Subscriber without the prior
written consent of, and on terms acceptable to, BETA Systems, which consent
shall not be unreasonably withheld; provided, however, that Subscriber may
disclose to a governmental or regulatory agency or to customers of Subscriber
any information expressly prepared for disclosure to such governmental or
regulatory agency or to such customers. Except as
10
<PAGE>
required by law, neither party shall disclose Subscriber's use of BETAHOST
service in any advertising or promotional materials without the prior written
consent to such use, and approval of such materials, by the other. All methods
of data access to, or interactive or batch file transfer of, BETAHost data on
BETA's mainframe computer must be authorized by BETA Systems, and any
unauthorized interactive or batch file transfer of BETAHost data on BETA's
mainframe computer via a program automated workstation or computer is explicitly
prohibited. BETA Systems acknowledges that Subscriber has filed a registration
statement on Form S-1 to effect a public offering. BETA Systems consents to the
use of its name and description as it appears in the Form S-1.
(b) Subscriber agrees that it will use the services provided
hereunder only in connection with its own brokerage business, and it will not,
without the express written permission of BETA Systems, sell, lease, or
otherwise provide or make available BETAHOST service to any third party. For
purposes of the foregoing, Subscriber's "own brokerage business" shall include
Subscriber's affiliates, bona fide correspondents and third-party customers for
whom Subscriber provides private label brokerage services, provided that no more
than one entity may perform brokerage clearing services using BETAHost at any
one time. A person or entity is an "affiliate" of Subscriber for purposes of the
this Agreement if it directly or indirectly controls, is controlled by, or is
under common control with, Subscriber, where "control" means more than 50%
equity ownership and voting control. In all cases, use of BETAHost by
Subscriber's affiliates and correspondents is deemed use by Subscriber.
(c) The obligations of this Paragraph 11 shall survive termination
of this Agreement. Subscriber understands that the unauthorized publication or
disclosure of any of BETA Systems' software or copies thereof, or the
unauthorized use of BETAHOST service would cause irreparable harm to BETA
Systems for which there is no adequate remedy at law. Subscriber therefore
agrees that in the event of such unauthorized disclosure or use, BETA Systems
may, at its discretion and at Subscriber's expense, terminate this Agreement,
obtain immediate injunctive relief in a court of competent jurisdiction, or take
such other steps as it deems necessary to protect its rights. If BETA Systems,
in its reasonable, good faith judgment, determines that there is a material risk
of such unauthorized disclosure or use, it may demand immediate assurances,
satisfactory to BETA Systems, that there will be no such unauthorized disclosure
or use. In the absence of such assurance, BETA Systems may take such steps as it
deems necessary and may, in addition, terminate this Agreement, but only after
submitting the controversy to mediation pursuant to paragraph 10(a) Nothing
herein prohibits Subscriber from challenging the propriety of any
11
<PAGE>
such termination through the process set forth in paragraph l0(b) or as
otherwise permitted in this Agreement. The rights of BETA Systems hereunder are
in addition to any other remedies provided by law.
12. Option to Obtain License. At any time after the end of the [*]
of the date of Subscriber's conversion to BETAHost [*] as set forth in
Paragraph 7(a), provided Subscriber is not then in default of any obligation
hereunder, Subscriber may obtain a nontransferable, non-exclusive, perpetual
license to use BETA's BETAHost software for its own clearing businesses. To
exercise this option Subscriber must (i) provide BETA Systems with at least [*]
written notice of such election; (ii) execute and deliver to BETA Systems a
License Agreement in the form attached as Schedule C; and (iii) pay to BETA
Systems the license fee [*] adjusted as set forth below. Subscriber
will receive a credit against the license fee of [*] of all trade charge
billings paid by Subscriber to BETA Systems through the date of its election to
obtain the license, but such credit shall not exceed [*] . In
addition, for each year or partial year of the initial term of this Agreement
remaining at the time Subscriber provides notice of its election to obtain a
license, Subscriber shall pay to BETA Systems a sum equal to [*] of
all service bureau billings for charges set forth in items 3-8 of Schedule A
paid by Subscriber to BETA Systems through the date such notice is given. At
such time as Subscriber begins to use BETAHost under the license available in
this paragraph, this Agreement will terminate except for those provisions that
survive as provided herein. Should Subscriber exercise its election to obtain a
license to use BETAHost as provided herein, BETA Systems shall provide
maintenance service for [*] from Subscriber's first use of the
licensed software [*] . Thereafter, Subscriber will purchase maintenance
services from BETA Systems for [*] for an annual maintenance fee,
payable at the beginning of the year for which the maintenance service is to be
provided, of [*] of the net license fee payable by Subscriber set
forth above. Such [*] maintenance will entitle Subscriber to all regulatory
changes and all enhancements and modifications to BETAHost developed by BETA for
general use by BETA's service bureau customers.
[*] Confidential Treatment Requested
12
<PAGE>
13. General.
-------
(a) Waiver of Breach. The fact that one (1) party excuses or
----------------
overlooks a breach of any provision of this Agreement by the other party does
not mean that that party excuses any other breach or waives its right to remedy
any other breach by the other party.
(b) Subscriber may not assign this Agreement without the prior
written consent of BETA Systems, except that either party may, without the
other's consent, assign this Agreement to a wholly-owned subsidiary of the
assigning party, or to an affiliate of the assigning party that is wholly-owned
by an entity that directly or indirectly controls the assigning party, provided
further that in no case may Subscriber assign this Agreement to any person or
entity if such person or entity, its parent, any of its affiliates or
subsidiaries, or any other entity that directly or indirectly controls, is
controlled by, or is under common control with, such person or entity, is in the
business of providing services similar to BETAHost to customers such as
Subscriber. This Agreement shall be binding on and inure to the benefit of the
parties and their respective successors and permitted assigns.
(c) Any notice required to be given under this Agreement shall be in
writing and shall be deemed to have been given if served personally, or if sent
by certified mail, postage prepaid, to the parties at the address shown below,
or such other address as either party may hereafter designate by notice to the
other.
To BETA Systems Inc.:
BETA Systems Inc.
350 North Sunny Slope Road
Brookfield, WI 53005
Attn.: Frederic D. Chu
Executive Vice President
To Subscriber:
E*Trade Securities, Inc.
2400 Geng Road
Palo Alto, CA 94303
Attn: Kathy Levinson
(d) This Agreement shall be applied and construed according to the
laws of the State of Wisconsin. If any provision of this Agreement is found to
be illegal or unenforceable, then, notwithstanding such finding, this Agreement
shall remain in full force and effect and such provision shall be deemed
stricken.
13
<PAGE>
(e) The headings in this Agreement are for convenience only and shall
not be used to alter or limit the interpretation of any provision hereof.
(f) This Agreement, together with all Schedules, Exhibits and
amendments hereto, constitute the entire agreement of the parties and supersede
all prior discussion and correspondence between them with respect to the subject
matter hereof. No modification of this Agreement shall be effective unless the
same is in writing and signed by both parties.
(g) This Agreement, all schedules attached hereto, and all terms and
conditions herein, are confidential and shall not be disclosed by Subscriber
except as required by law.
IN WITNESS WHEREOF, we have set our hand as of the date first noted above.
BETA SYSTEMS INC.
By: ________________________________________ _________________
Signature Date
________________________________________
Print
_________________________________________
Title
E*TRADE SECURITIES, INC.
By: ________________________________________ _________________
Signature Date
________________________________________
Print
_________________________________________
Title
14
<PAGE>
Schedule A
BETAHost SERVICES PRICE LIST
----------------------------
1. BETAHost SERVICES
Includes computer system services to support
BETAHost Services shall be deemed as currently described by
documentation presently held at Subscriber, as well as those
enhancements that have been requested and accepted by Subscriber.
BETAHost Services do not include, and Subscriber must make separate
arrangements for,
2. TRADE PROCESSING COUNTS
-----------------------
Trade processing counts are based on the actual number of trade
executions per day, counted as follows:
Type of Trade: Trade Count:
[*] [*]
[*] Confidential Treatment Requested
A1
<PAGE>
3. TRADE PROCESSING CHARGES
------------------------
Trade processing charges are based upon the [*] This
number is calculated by [*]
Trade processing charges are then arrived at by multiplying
the [*] by the corresponding charge per trade from the table
below, times the number of trading days in that month
[*] of Charge
daily trades for the month per trade
$[*]
$[*]
[*] $[*]
$[*]
$[*]
$[*]
4. MINIMUM MONTHLY TRADE PROCESSING
--------------------------------
CHARGE
------
Minimum monthly charge for BETAHOST trade
processing service.
5. MONEY MARKET SWEEP ACCOUNTS
---------------------------
Monthly charge per account, coded for money market
sweep processing, with a money balance.
Monthly minimum charge
6. IRA ACCOUNTS
------------
Monthly charge per IRA account, with Subscriber
as Custodian or an external Custodian, carrying
a money balance or security position.
7. SHAREHOLDER ACCOUNTING
----------------------
Monthly charge per account processed through
shareholder accounting module.
Monthly minimum charge
8. MUTUAL FUND NETWORKING
Monthly charge per position per account
Monthly minimum charge
[*] Confidential Treatment Requested
A2
<PAGE>
9. BETA OTC TRADING SYSTEM (BEST)
-----------------------------
Monthly charge
using the optional BETA OTC Trading System (does not $[*]
include NASDAQ Level 1, INSTINET, and other $[*]
third party charges). $[*]
Monthly communication support charges (includes
INSTINET communications and other third party
communications). $[*]
* To Be Determined. These will vary depending upon third-party charges
and other variables over which BETA Systems has no control.
10. SPECIAL EXTERNAL INTERFACES, INCLUDING OUTSIDE TRADING SYSTEM
-------------------------------------------------------------
INTERFACES
----------
Special external interfaces requested by Subscriber are provided
subject to additional monthly charges. These charges will consist of
three elements: (1) initial programming and testing charge, (2)
monthly communication support charge, and (3) monthly application
interface charge.
11. NETWORK FEES**
--------------
The following network fees have been established, as of the date of
this Agreement, to cover actual costs incurred by BETA. Network fees
are subject to change at any time, and BETA reserves the right to
increase said fees to Subscriber, in conjunction with cost increases
incurred by BETA in the provision of network services, on not less
than 30 days' prior written notice.
Monthly charge for triangulated connection (2 T-1 lines) $[*]
of BETA's Communications Network service to Subscriber's
headquarters location.
Monthly charge for a single T-l connection to
Subscriber's $ back-up data center. $[*]
Monthly charge per 9.6 kbps communication line connected $[*]
to the BETA Communication Network at any location other
than Subscriber's headquarters or back-up data center.
Non-recurring charge for installation of a data $[*]
communications line in a given location.
Dial backup service:
Monthly service charge for each 9.6 kbps line in a $[*]
location that has dial backup capability. This
service is optional. Subscriber is responsible for
providing lines for dial backup service.
**Network fees apply to Subscriber's use of the BETA Communications
Network only in the continental United States.
[*] Confidential Treatment Requested
A3
<PAGE>
12. CHARGES FROM THIRD PARTIES
--------------------------
Charges from third parties in connection with the following (and any
other similar) services approved by Subscriber shall be billed,
according to BETA Systems' standard practice, to Subscriber directly
by the third party or, at BETA Systems' option, paid by BETA Systems
and reimbursed by Subscriber:
Pricing and Factor Services (e.g.: JJ KENNY Municipal Bond
Pricing;Muller/ABSG CMO Prices and Factors)
Postage/Shipping
Information Services and Data Relating to:
.Dividend/Interest Announcements (e.g.: S&P UIT
Dividend Calendar)
.Reorganization Announcements (e.g.: FII Reorg. Files)
.Principal Factor Information
and any other third party service offered by BETA Systems.
13. OTHER CHARGES
-------------
Other charges which shall be due to BETA Systems in connection with
the delivery of BETAHost services shall be paid by Subscriber at the
following rate, and BETA reserves the right to increase said charges
to subscriber. Such charges, subject to change at any time include,
but shall not be limited to, the following:
Programming charges for CSF Statement $ see "Programming"
development below
CSF Software: Statement formatting monthly
charges, per customer statement page. $[*]
Dial-Up Service Charge
Programming and Non-Standard Processing and
Communications Charges
Charges for programming, information processing and data
transmission not included in the standard BETAHost services
may be charged to Subscriber, at BETA Systems option, based
upon the actual use of BETA Systems' personnel, equipment.
and facilities at the following rates:
Programming $[*]
Computer Processing $[*]
Tape File Preparation $[*]
Standard File Transmission/Upload $[*]
Special File Transmissions $[*]
[*] Confidential Treatment Requested
A4
<PAGE>
14. YEAR END TAX REPORTING
----------------------
Charges from third parties in connection with the following (and other
similar) services shall be billed, according to BETA Systems standard
practice, to Licensee directly by the third party, or, at BETA Systems
option, paid by BETA Systems and reimbursed by Licensee:
Year-end third party tax databases and services (OD file,
dividend reallocation file, multi-part tax forms, etc.)
Year-end laser printing, fulfillment, postage and other
service.
REMIC Information Tax Reporting
In-house processing of REMIC information tax reporting. Includes:
REMIC Issuers rate input, OD holding period calculations, market
discount fraction and accrued interest calculations, and
information reporting to the IRS. Does not include cost of
printing and mailing of recipient statements or production and
shipping of microfiche.
REMIC Customer Charge per
Positions Position
$[*]
$[*]
$[*]
15. DECONVERSION CHARGES
--------------------
Charges for service bureau [*] per of Subscriber initial
deconversion copy of each standard deconversion
file, per request, and [*] for
each requested re-run.
Charge for deconversion of [*] per standard correspondent
clearing correspondents: deconversion file, per request,
and [*] for each requested
re-run.
Additional charges will be imposed for non-standard deconversion files.
------------
[*] Confidential Treatment Requested
A5
<PAGE>
SCHEDULE B
MODIFICATION REQUIREMENTS
1. [*]
2. [*]
3. [*]
4. [*]
5. [*]
Modifications are dependent on mutually agreed upon user business requirement
definitions.
[*] Confidential Treatment Requested
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Schedule C
LICENSE AGREEMENT
THIS AGREEMENT is made this ____ day of_________, l99__, between Beta
Systems Inc., 350 North Sunnyslope Road, Third Floor, Brookfield, Wisconsin
53005 (hereinafter called "BETA"), and E*Trade Securities, Inc., 2400 Geng Road,
Palo Alto, CA 94303 ("Licensee").
WHEREAS, BETA has developed and owns all right, title and interest in
certain computer programs, known as BETAHOST(R) ~ programs, by which BETA
provides data processing service, known as BETAHOST services, to its
subscribers; and
WHEREAS, Licensee is entitled by virtue of the provisions of a certain
subscription agreement ("Subscription Agreement") to which BETA and Licensee are
parties to obtain a license to use the BETAHost programs;
NOW, THEREFORE, the parties agree as follows:
1. Grant of License. BETA hereby grants to Licensee, and Licensee accepts
----------------
from BETA, a license to use the BETAHOST Programs and related documentation
(hereinafter the "Licensed Software"), in machine-readable source and object
code formats, at a single designated site, subject to and in accordance with the
terms, conditions and limitations of this Agreement. Unless otherwise agreed in
writing, Licensee's designated site is its central data processing facility
located in Palo Alto, CA.
2. Scope of License.
----------------
The license granted herein is for Licensee [*] Except that Licensee
may provide BETAHOST services to its affiliates and bona fide correspondents,
Licensee shall not sell, rent, lease or sublicense the Licensed Software,
disclose it or make its use available to any other party, nor shall Licensee use
or operate, or permit the use or operation of, the Licensed Software as a
service bureau or facilities management service, or at any site other than the
designated site. Under no circumstances does this license include any right to
use any other proprietary programs, products or services of BETA.
- ---------------
(R) BETAHOST is a registered servicemark of Beta Systems Inc. All rights
reserved.
[*] Confidential Treatment Requested
<PAGE>
3. License Fee. For the license granted herein, Licensee shall pay BETA
-----------
the license fee required by the Subscription Agreement, which payment shall be
made by paying the aforesaid amount to BETA prior to Licensee's first use of the
Licensed Software.
4. License Not a Sale. This license does not constitute a sale, nor does
------------------
it pass to Licensee any title to or any proprietary rights in the Licensed
Software, all of the same being expressly reserved to and vested in BETA. Nor
shall Licensee acquire any right or interest in the Licensed Software as a
result of any changes to, modifications of or additions to the Licensed Software
made by Licensee.
5. Software Maintenance. BETA shall have no obligation to correct errors
--------------------
or remedy defects in, or to provide modifications or enhancements to, the
Licensed Software except as may be provided in the Master Subscription Agreement
or by separate maintenance agreement.
6. Warranties.
----------
(a) For so long as Licensee receives maintenance services from BETA
Systems, BETA Systems warrants that the Licensed Programs will substantially
conform to their documentation; provided, however, that BETA Systems may void
this warranty if Licensee (i) augments or alters the Licensed Software or causes
any other person to do so; (ii) fails to maintain its equipment in accordance
with BETA Systems' reasonable recommendations; or (iii) fails to install any
upgrade, enhancement, fix or release of the Licensed Programs made available by
BETA Systems.
(b) Other than as expressly provided above, the Licensed Software
provided hereunder is provided "AS IS" and without warranty or guarantee
whatsoever, and ALL WARRANTIES, EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED
TO, ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE OR ANY WARRANTIES BY SAMPLE OR DEMONSTRATION, ARE DISCLAIMED.
7. Limitation of Liability.
-----------------------
(a) BETA SHALL HAVE NO LIABILITY TO LICENSEE FOR ANY REASON
WHATSOEVER, INCLUDING BUT NOT LIMITED TO, ANY NEGLIGENT ACT OR OMISSION BY BETA
ARISING OUT OF OR IN CONNECTION WITH THE LICENSED SOFTWARE, THIS LICENSE
2
<PAGE>
AGREEMENT OR BETA'S OBLIGATIONS HEREUNDER, LICENSEE'S USE OF THE LICENSED
SOFTWARE, OR THE USE OF OR RELIANCE UPON ANY INFORMATION RECEIVED BY ANY PERSON
OR ENTITY THROUGH THE USE OF THE LICENSED SOFTWARE, AND NEITHER LICENSEE, ANY
AFFILIATE OF LICENSEE, NOR ANY ASSIGNEE THEREOF SHALL MAKE ANY CLAIM AGAINST
BETA OR IT'S OFFICERS, DIRECTORS, AGENTS OR EMPLOYEES CONCERNING THE FOREGOING.
BETA WILL NOT BE LIABLE TO LICENSEE OR TO ANY THIRD PARTY FOR ANY LOST PROFITS
OR BUSINESS INTERRUPTIONS OR FOR ANY CLAIM OR DEMAND AGAINST LICENSEE BY ANY
OTHER PARTY. IN NO EVENT WILL BETA BE LIABLE TO LICENSEE OR ANY THIRD PARTY FOR
INCIDENTAL, INDIRECT OR CONSEQUENTIAL DAMAGES, EVEN IF BETA HAS BEEN ADVISED OF
THE POSSIBILITY OF SUCH DAMAGES.
8. Confidentiality.
---------------
(a) Licensee acknowledges that the Licensed Software, including
without limitation the Licensed Programs, are highly confidential proprietary
information and trade secrets of BETA Systems, the unauthorized disclosure of
any part of which would result in serious injury to BETA Systems. Licensee shall
take reasonable precautions to maintain the security and confidentiality of the
Licensed Software, which precautions shall not be less stringent than those
employed, or that reasonably should be employed, by Licensee to protect its own
most proprietary information.
(b) This License Agreement and the terms hereof are confidential, and
no information concerning the same shall be disclosed without written consent of
the parties, except as may be necessary to conform to Generally Accepted
Accounting Principles and to comply with applicable laws and regulations.
Neither party shall disclose Subscriber's use of BETAHOST service in any
advertising or promotional materials without the prior written consent to such
use, and approval of such materials, by the other.
9. Remedies.
--------
(a) Licensee recognizes that any unauthorized use, disclosure or
application of the Licensed Software by the Licensee or any of Licensee's
affiliates or correspondents will result in irreparable harm to BETA or its
successor for which there is no adequate remedy at law. Should BETA become aware
of any such
3
<PAGE>
unauthorized use, disclosure or application of the Licensed Software, BETA may
obtain immediate injunctive relief in a court of competent jurisdiction or take
such other steps as it deems necessary to protect its rights, including but not
limited to, directing Licensee to cease such unauthorized use, with which
direction Licensee shall promptly comply.
(b) In the event that Licensee intentionally and willfully engages in
any unauthorized use, disclosure or application of the Licensed Software, or
willfully and intentionally permits or causes the unauthorized use, disclosure
or application of the Licensed Software, Licensee shall forfeit its rights to
use the Licensed Software under this or any other Agreement between Licensee and
BETA, together with all payments made under this or any other Agreement, cease
all use of the Licensed Software, and return all copies of the Licensed
Software, and all documentation, in any form, to BETA or its successor. BETA
may, at Licensee's expense, take such lawful steps as it deems necessary to
preserve the security of the Licensed Software and prevent Licensee's further
use thereof.
(c) The rights of BETA under this Agreement supplement and are not in
lieu of any other remedies provided by law or in equity. In addition, Licensee
shall be liable for all of BETA's costs and attorneys fees in connection with
the pursuit by BETA of any remedy provided or permitted by this Agreement.
10. General.
-------
(a) Waiver of Breach. The fact that one party excuses or overlooks a
----------------
breach of any provision of this Agreement by the other party does not mean that
such party excuses any other breach or waives its right to remedy any other
breach by the other party.
(b) Binding Effect. This Agreement shall be binding on and inure to
--------------
the benefit of the parties and their respective successors and permitted
assigns. Licensee may not assign this Agreement without the prior written
consent of BETA or its successor.
(c) Governing Law. This Agreement shall be applied and construed
-------------
according to the laws of the State of Wisconsin. If any provision of this
Agreement is found to be illegal or unenforceable, then, notwithstanding such
finding, this Agreement shall remain in full force and effect and such provision
shall be deemed stricken.
4
<PAGE>
(e) Jurisdiction. By entering this Agreement, Licensee agrees to and
does hereby submit to the personal jurisdiction of the courts in or for the
State of Wisconsin in the event any legal action is commenced by BETA or its
successor to enforce any rights arising hereunder.
(f) Headings. The headings in this Agreement are for convenience only
and shall not be used to alter or limit the interpretation of any provision
hereof.
(g) Entire Agreement. This Agreement, together with all schedules,
exhibits and amendments hereto, constitute the entire agreement of the parties
and supersede all prior discussion and correspondence between them with respect
to the subject matter hereof. No modifications of this Agreement shall be
effective unless the same is in writing and signed by both parties.
IN WITNESS WHEREOF we have set our hand as of the date first noted above.
BETA SYSTEMS INC. E*TRADE SECURITIES, INC.
By: ___________________________ By: ____________________________
Title:_________________________ Title: _________________________
Date:__________________________ Date: __________________________
5
<PAGE>
EXHIBIT 10.17
================================================================================
STOCK PURCHASE AGREEMENT
among
TRADE*PLUS, INC.
and
GENERAL ATLANTIC PARTNERS II, L.P.
and
GAP COINVESTMENT PARTNERS, L.P.
________________________________
Dated: September 28, 1995
________________________________
================================================================================
<PAGE>
STOCK PURCHASE AGREEMENT
This AGREEMENT, dated September 28, 1995 (this "Agreement"), among
Trade*Plus, Inc., a California corporation (the "Company"), General Atlantic
Partners II, L.P., a Delaware limited partnership ("GAP LP"), and GAP
Coinvestment Partners, L.P., a New York limited partnership ("GAP Coinvestment,"
and together with GAP LP, the "Purchasers").
WHEREAS, the Company proposes to sell to the Purchasers, for an
aggregate purchase price of $12,300,000, 100,000 shares of Series A Convertible
Preferred Stock, par value $.15 per share, of the Company (the "Preferred
Stock").
NOW, THEREFORE, in consideration of the mutual covenants and
agreements set forth herein and for good and valuable consideration, the receipt
and adequacy of which is hereby acknowledged, the parties hereto agree as
follows:
ARTICLE 1
DEFINITIONS
-----------
1.1 Definitions. As used in this Agreement, and unless the context
-----------
requires a different meaning, the following terms have the meanings indicated:
"Affiliate" shall mean any Person who is an "affiliate" as defined in
---------
Rule 12b-2 of the General Rules and Regulations under the Exchange Act. In
addition, the following shall be deemed to be Affiliates of GAP LP:
(a) GAP, the partners or members of GAP, and the limited partners of GAP LP; (b)
any Affiliate of GAP, the partners or members of GAP, and the limited partners
of GAP LP; and (c) any other partnership or limited liability company a majority
in interest of whose partners or members are partners, former partners, members,
consultants or key employees of GAP. In addition, GAP LP and GAP Coinvestment
shall be deemed to be Affiliates of one another.
"Agreement" means this Agreement as the same may be amended,
---------
supplemented or modified in accordance with the terms hereof.
"Balance Sheet Date" means June 30, 1995.
------------------
<PAGE>
2
"Business Day" means any day other than a Saturday, Sunday or other
------------
day on which commercial banks in the State of New York are authorized or
required by law or executive order to close.
"Bylaws" means the amended and restated bylaws of the Company as in
------
effect as of the Closing Date substantially in the form attached hereto as
Exhibit B.
- ---------
"Capital Lease Obligation" of any Person shall mean, as of the date of
------------------------
determination, any obligation of such Person to pay rent or other amounts under
any lease of (or other arrangement conveying the right to use) real or personal
property, or a combination thereof, which obligation is required to be
classified and accounted for as capital leases on a balance sheet of such Person
under GAAP and, for the purposes of this Agreement, the amount of such
obligations, as of the date of determination, shall be the capitalized amount
thereof at such time determined in accordance with GAAP consistently applied.
"Restated Articles of Incorporation" means the Restated Articles of
----------------------------------
Incorporation of the Company, as the same may have been amended and as in effect
as of the Closing Date substantially in the form attached hereto as Exhibit A.
---------
"Closing" has the meaning set forth in Section 2.2 of this Agreement.
-------
"Closing Date" means the date specified in Section 2.2 of this
------------
Agreement.
"Code" means the Internal Revenue Code of 1986, as amended, or any
----
successor statute thereto.
"Commission" means the Securities and Exchange Commission or any
----------
similar agency then having jurisdiction to enforce the Securities Act.
"Common Stock" means the Common Stock, par value $.l0 per share, of
------------
the Company.
"Common Stock Equivalents" means any security or obligation which is
------------------------
by its terms convertible into shares of capital stock of the Company and any
option, warrant or other subscription or purchase right with respect to capital
stock of the Company.
"Company" means Trade*Plus, Inc., a California corporation.
-------
<PAGE>
3
"Condition of the Company" means the assets, business, properties,
------------------------
operations or financial condition of the Company, taken as a whole.
"Contingent Obligation" means, as applied to any Person, any direct or
---------------------
indirect liability of that Person with respect to any Indebtedness, lease,
dividend, guaranty, letter of credit or other obligation, contractual or
otherwise (the "primary obligation") of another Person (the "primary obligor"),
------------------ ---------------
whether or not contingent, (a) to purchase, repurchase or otherwise acquire such
primary obligations or any property constituting direct or indirect security
therefor, or (b) to advance or provide funds (i) for the payment or discharge of
any such primary obligation, or (ii) to maintain working capital or equity
capital of the primary obligor or otherwise to maintain the net worth or
solvency or any balance sheet item, level of income or financial condition of
the primary obligor, or (c) to purchase property, securities or services
primarily for the purpose of assuring the owner of any such primary obligation
of the ability of the primary obligor to make payment of such primary
obligation, or (d) otherwise to assure or hold harmless the owner of any such
primary obligation against loss in respect thereof. The amount of any
Contingent Obligation shall be deemed to be an amount equal to the stated or
determinable amount of the primary obligation in respect of which such
Contingent Obligation is made or, if not stated or determinable, the maximum
reasonably anticipated liability in respect thereof.
"Contractual Obligations" means as to any Person, any provision of any
-----------------------
security issued by such Person or of any agreement, undertaking, contract,
indenture, mortgage, deed of trust or other instrument to which such Person is a
party or by which it or any of its property is bound.
"Defined Benefit Plan" means a defined benefit plan within the meaning
--------------------
of Section 3(35) of ERISA or Section 414(j) of the Code, whether funded or
unfunded, qualified or nonqualified (whether or not subject to ERISA or the
Code).
"Environmental Laws" means federal, state and local laws, principles
------------------
of common law, regulations and codes, as well as orders, decrees, judgments or
injunctions issued, promulgated, approved or entered thereunder relating to
pollution, protection of the environment or public health and safety.
<PAGE>
4
"ERISA" means the Employee Retirement Income Security Act of 1974, as
-----
amended (or any successor statute thereto).
"ERISA Affiliate" means any Person that is treated as a single
---------------
employer with the Company under Section 414(b), (c), (m) or (o) of the Code.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
------------
(or any successor statute thereto) and the rules and regulations of the
Commission promulgated thereunder.
"Financial Statements" has the meaning set forth in Section 3.11 of
--------------------
this Agreement.
"GAAP" means generally accepted United States accounting principles in
----
effect from time to time.
"GAP" means General Atlantic Partners, a New York general partnership
---
(or its successor, General Atlantic Partners, LLC, a Delaware limited liability
company) and the general partner of GAP LP.
"GAP Coinvestment" means GAP Coinvestment Partners, L.P., a New York
----------------
limited partnership.
"GAP LP" means General Atlantic Partners II, L.P., a Delaware limited
------
partnership.
"Governmental Authority" means the government of the United States,
----------------------
any state, city, locality or other political subdivision thereof, any entity
exercising executive, legislative, judicial, regulatory or administrative
functions of or pertaining to government, and any corporation or other entity
owned or controlled, through stock or capital ownership or otherwise, by any of
the foregoing.
"Indebtedness" means as to any Person (a) all obligations of such
------------
Person for borrowed money (including, without limitation, reimbursement and all
other obligations with respect to surety bonds, letters of credit and bankers'
acceptances, whether or not matured), (b) all obligations of such Person
evidenced by notes, bonds, debentures or similar instruments, (c) all
obligations of such Person to pay the deferred purchase price of property or
services, except (i) trade accounts payable and accrued commercial or trade
liabilities arising in the ordinary course of business and (ii) compensation,
pension obligations and other obligations arising out of employee benefits and
employee arrangements,
<PAGE>
5
(d) all interest rate and currency swaps, caps, collars and similar agreements
or hedging devices under which payments are obligated to be made by such Person,
whether periodically or upon the happening of a contingency, (e) all
indebtedness created or arising under any conditional sale or other title
retention agreement with respect to property acquired by such Person (even
though the rights and remedies of the seller or lender under such agreement in
the event of default are limited to repossession or sale of such property), (f)
all obligations of such Person under leases which have been or should be, in
accordance with GAAP, recorded as capital leases, (g) all indebtedness secured
by any Lien (other than Liens in favor of lessors under leases other than leases
included in clause (f)) on any property or asset owned or held by that Person
regardless of whether the indebtedness secured thereby shall have been assumed
by that Person or is non-recourse to the credit of that Person, and (h) any
Contingent Obligation of such Person.
"Liabilities" has the meaning set forth in Section 3.23 of this
-----------
Agreement.
"Lien" means any mortgage, deed of trust, pledge, hypothecation,
----
assignment, encumbrance, lien (statutory or other) or preference, priority,
right or other security interest or preferential arrangement of any kind or
nature whatsoever (excluding preferred stock and equity related preferences)
including, without limitation, those created by, arising under or evidenced by
any conditional sale or other title retention agreement, the interest of a
lessor under a Capital Lease Obligation, or any financing lease having
substantially the same economic effect as any of the foregoing.
"NASD" means the National Association of Securities Dealers, Inc.
----
"Outstanding Borrowings" means all Indebtedness of the Company or its
----------------------
Subsidiary for money borrowed that is outstanding on the relevant date of
determination.
"Permits" has the meaning assigned to such term in Section 3.6 of the
-------
Agreement.
"Person" means any individual, firm, corporation, limited liability
------
company, partnership, trust, incorporated or unincorporated association, joint
venture, joint stock company, Governmental Authority or other entity of any
kind, and shall include any successor (by merger or otherwise) of such entity.
<PAGE>
6
"Preferred Stock" means Series A Convertible Preferred Stock, par
---------------
value $.15 per share, of the Company.
"Purchased Shares" has the meaning set forth in Section 2.1 of this
----------------
Agreement.
"Purchasers" means GAP LP and GAP Coinvestment.
----------
"Requirements of Law" means as to any Person, any law, treaty, rule,
-------------------
regulation, right, privilege, qualification, license or franchise or
determination of an arbitrator or a court or other Governmental Authority, in
each case applicable or binding upon such Person or any of its property or to
which such Person or any of its property is subject or pertaining to any or all
of the transactions contemplated or referred to herein.
"Securities Act" means the Securities Act of 1933, as amended, (or any
--------------
successor statute thereto) and the rules and regulations of the Commission
promulgated thereunder.
"Stockholders Agreement" means the Stockholders Agreement
----------------------
substantially in the form attached hereto as Exhibit C.
---------
"Subsidiary" means E*Trade Securities, Inc., a California corporation.
----------
"Transaction Documents" means collectively, this Agreement and the
---------------------
Stockholders Agreement.
1.2 Accounting Terms; Financial Statements. All accounting terms
--------------------------------------
used herein not expressly defined in this Agreement shall have the respective
meanings given to them in accordance with sound accounting practice. The term
"sound accounting practice" shall mean such accounting practice as, in the
opinion of the independent certified public accountants regularly retained by
the Company, conforms at the time to GAAP applied on a consistent basis except
for changes with which such accountants concur.
1.3 Knowledge of the Company. All references to the knowledge of the
------------------------
Company shall mean knowledge of any officer of the Company or any officer of its
Subsidiary.
<PAGE>
7
ARTICLE 2
PURCHASE AND SALE OF PREFERRED STOCK
------------------------------------
2.1 Purchase and Sale of Preferred Stock. Subject to the terms and
------------------------------------
conditions herein set forth, the Company agrees to sell to each of the
Purchasers, and each of the Purchasers agrees to purchase from the Company on
the Closing Date, the aggregate number of shares of Preferred Stock set forth
opposite such Purchaser's name on Schedule 2.1 hereto, for the purchase price
set forth opposite such Purchaser's name on Schedule 2.1 (all of the shares of
Preferred Stock being purchased pursuant hereto being referred to herein as
"Purchased Shares").
2.2 Closing. The purchase and issuance of the Purchased Shares (the
-------
"Closing") shall take place on the date hereof (the "Closing Date") and shall be
consummated by mail or otherwise in accordance with arrangements reasonably
acceptable to counsel for the Purchasers and counsel for the Company. On the
Closing Date, (a) the Company and each Purchaser shall execute and deliver this
Agreement and the other Transaction Documents, and (b) the Company shall deliver
to the Purchasers certificates representing the Purchased Shares against
delivery by the Purchasers to the Company, of the aggregate purchase price
therefor by wire transfer of immediately available funds or certified check.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
OF THE COMPANY
------------------------------
The Company represents and warrants to the Purchaser, as follows:
3.1 Corporate Existence and Power. Each of the Company and its
-----------------------------
Subsidiary (a) is a corporation duly organized, validly existing and in good
standing under the laws of the State of California; (b) has all requisite
corporate power and authority to own and operate its property, to lease the
property it operates as lessee and to conduct the business in which it is
currently engaged; and (c) is duly qualified as a foreign corporation, licensed
and in good standing under the laws of each jurisdiction in which its ownership,
lease or operation of property or the conduct of its business requires such
qualification, except to the extent that the failure to do so or be so would not
have a material adverse effect on the Condition of the Company. The Company has
the requisite corporate power and
<PAGE>
8
authority to execute, deliver and perform its obligations under this Agreement
and each of the other Transaction Documents to which it is a party.
3.2 Corporate Authorization; No Contravention. Except as set forth on
-----------------------------------------
Schedule 3.2, the execution, delivery and performance by the Company of this
- ------------
Agreement and each of the other Transaction Documents to which it is a party and
the transactions contemplated hereby and thereby, including, without limitation,
the sale, issuance and delivery of the Purchased Shares (a) have been duly
authorized by all necessary corporate action of the Company; (b) do not
contravene the terms of the Restated Articles of Incorporation or Bylaws, or any
amendment of either thereof, and (c) do not violate, conflict with or result in
any breach or contravention of or the creation of any Lien under, any
Contractual Obligation of the Company, or any Requirement of Law applicable to
the Company, except for such violation, conflict, breach, contravention or Lien
which would not have an adverse effect on the Condition of the Company.
3.3 Governmental Authorization; Third Party Consents. Except as set
------------------------------------------------
forth on Schedule 3.3, no approval, consent, compliance, exemption,
------------
authorization, or other action by, or notice to, or filing with, any
Governmental Authority or any other Person in respect of any Requirement of Law
is necessary or required in connection with the execution, delivery or
performance (including, without limitation, the sale, issuance and delivery of
the Purchased Shares), by the Company of the Transaction Documents to which it
is a party or the transactions contemplated hereby or thereby, except for the
filing of a Notice of Transaction pursuant to Section 25102(f) of the California
Corporation Code and a Form D pursuant to the Securities Act, which filings will
be made by the Company immediately following the Closing.
3.4 Binding Effect. This Agreement and each of the other Transaction
--------------
Documents to which the Company is a party have been duly executed and delivered
by the Company and constitute the legal, valid and binding obligation of the
Company, enforceable against the Company in accordance with their terms, except
as enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, fraudulent conveyance or transfer, moratorium or similar laws
affecting the enforcement of creditors' rights generally and by general
principles of equity relating to enforceability (regardless of whether
considered in a proceeding at law or in equity).
<PAGE>
9
3.5 Litigation. Except as set forth on Schedule 3.5, there are no
---------- ------------
legal actions, suits, proceedings, claims, complaints, disputes or
investigations pending, or to the knowledge of the Company threatened, at law,
in equity, in arbitration or before any Governmental Authority against the
Company or its Subsidiary or any of the property or assets of the Company or its
Subsidiary.
3.6 Compliance with Laws.
---------------------
(a) Except as set forth on Schedule 3.6(a), to the knowledge of
---------------
the Company, the Company and its Subsidiary are in compliance with all
Requirements of Law in all respects.
(b) To the knowledge of the Company, (i) the Company and its
Subsidiary have all licenses, permits, orders or approvals of any
Governmental Authority and self-regulating organization, including the
NASD (collectively, "Permits") that are material to or necessary for the
conduct of the business or proposed business of the Company and its
Subsidiary; (ii) such Permits are in full force and effect; and (iii) no
violations are or have been recorded in respect of any Permit.
(c) The Subsidiary is registered as a broker-dealer with the
Commission, is a duly qualified member in good standing of the NASD and
has provided to the Purchasers true and correct copies of all its Form
BD filings with the Commission and amendments thereto during the last
three years. It is duly qualified and registered as a broker-dealer in
each jurisdiction where failure to be so qualified or registered could
have a material adverse effect on the Condition of the Company, and, to
the knowledge of the Company, is in compliance with all applicable laws,
rules and regulations of the Commission, the NASD and any such
jurisdiction.
(d) To the knowledge of the Company, no material expenditure is
presently required by the Company or its Subsidiary to comply with any
existing Requirement of Law.
(e) To the knowledge of the Company, the property, assets and
operations at any time owned or leased by the Company or its Subsidiary
have been in compliance in all material respects with all applicable
Environmental Laws, while so owned or leased.
3.7 Capitalization. After giving effect to the transactions
--------------
contemplated hereby, the authorized capital
<PAGE>
10
stock of the Company consists of (a) 10,000,000 shares of Common Stock, of which
275,802 shares are issued and outstanding and (b) 1,000,000 shares of Preferred
Stock, of which 100,000 shares are issued and outstanding. Schedule 3.7 sets
------------
forth a true and complete list of the stockholders of the Company and, opposite
the name of each stockholder, the amount of all outstanding capital stock and
Common Stock Equivalents owned by such stockholder. All sales of stock to such
stockholders were properly made under the Securities Act to an accredited
investor (as such term is defined in the Securities Act) or were otherwise
exempt from registration under the Securities Act, or will not have a material
adverse effect on the Condition of the Company. The Company has reserved (a)
50,000 shares of Common Stock for issuance to employees, directors and
consultants upon exercise of stock options (which amount includes options for
18,400 shares authorized for future options),(b) 100,000 shares of Common Stock
for issuance upon conversion of the Preferred Stock and (c) 6,108 shares of
Common Stock for issuance upon exercise of three outstanding Warrants. Except as
described herein, there are no options, warrants, conversion privileges or other
rights presently outstanding to purchase or otherwise acquire any authorized but
unissued shares of the Company's capital stock or Common Stock Equivalents and
the Company is under no obligation (whether contingent or otherwise) to issue,
call, repurchase, redeem or transfer any securities of the Company. The
Purchased Shares issued to the Purchasers hereunder, and the Common Stock, when
issued upon conversion of the Purchased Shares (the "Conversion Shares") will be
duly authorized, validly issued, fully paid and nonassessable. The issued and
outstanding shares of Common Stock and Preferred Stock, including, without
limitation, the Purchased Shares, are all duly authorized, validly issued, fully
paid and nonassessable, and were issued in compliance with the registration and
qualification requirements of all applicable federal securities laws.
3.8 No Default or Breach. Neither the Company nor its Subsidiary is
--------------------
in default under or with respect to any provision of their respective articles
of incorporation or bylaws or any Contractual Obligation and no event has
occurred and is continuing under any such provision, which with lapse of time or
the giving of notice or both, would constitute a material default thereunder.
3.9 Title to Properties. The Company and its Subsidiary have good
-------------------
record and marketable title in fee simple to, or holds interests as lessee under
leases in full force and effect in, all real property used in connection with
their business or otherwise owned or leased by the
<PAGE>
11
Company or its Subsidiary, except for such defects in title as would not,
individually or in the aggregate, have a material adverse effect on the
Condition of the Company, and such property is not subject to any Lien.
3.10 Taxes. The Company has filed or caused to be filed, or has
-----
properly filed extensions for, all tax returns which are required to be filed
for federal, state, local and foreign tax purposes and has paid or caused to be
paid all taxes required to be paid by it and all assessments received by it to
the extent that such taxes have become due, except taxes the validity or amount
of which are being contested in good faith by appropriate proceedings and with
respect to which adequate reserves have been set aside. The Company has paid or
caused to be paid, or has established reserves that are adequate in all material
respects, for all tax liabilities applicable to the Company for all fiscal years
which have not been examined and reported on by the taxing authorities (or
closed by applicable statutes).
3.11 Financial Statements. The Company has delivered to the
--------------------
Purchasers its audited consolidated financial statements (balance sheet and
statements of operations, cash flows and shareholders' equity, together with the
notes thereto) for the fiscal year ended and as at September 30, 1994 (the
"Audited Consolidated Financial Statements"), and its unaudited financial
statements (balance sheet and statement of operations) for the nine months ended
and as at June 30, 1995 (the "Unaudited Financial Statements"; the Audited
Financial Statements and Unaudited Financial Statements being collectively
referred to as the "Financial Statements"). The Financial Statements have been
prepared in accordance with GAAP applied on a consistent basis throughout the
periods indicated and with each other, except that the Unaudited Financial
Statements do not contain full footnotes or typical year-end adjustments. The
Financial Statements fairly present the financial condition, operating results
and cash flows of the Company as of the respective dates and for the respective
periods indicated in accordance with GAAP, subject, in the case of the Unaudited
Financial Statements, to normal year-end audit adjustments.
3.12 No Material Adverse Change: Ordinary Course of Business. Since
-------------------------------------------------------
the Balance Sheet Date (a) there has not been any material adverse change in the
Condition of the Company, (b) except as set forth on Schedule 3.12, neither the
-------------
Company nor its Subsidiary has participated in any transaction or acted outside
the ordinary course of business, including, without limitation, declaring or
paying any dividend or declaring or making any distribution to its
<PAGE>
12
shareholders, except out of the earnings of the Company or its Subsidiary and
(c) neither the Company nor its Subsidiary has increased the compensation of any
of its officers or the rate of pay of any of its employees, except as part of
regular compensation increases in the ordinary course of its business.
3.13 Investment Company. Neither the Company nor its Subsidiary is
------------------
an "investment company" within the meaning of the Investment Company Act of
1940, as amended.
3.14 Subsidiaries. Except for the Subsidiary and as set forth on
------------
Schedule 3.14, the Company does not directly or indirectly own nor has it made
- -------------
any investment in any of the capital stock of, or any other proprietary interest
in, any other Person.
3.15 Private Offering. No form of general solicitation or general
----------------
advertising was used by the Company or its representatives in connection with
the offer or sale of the Purchased Shares. Except as set forth on Schedule
--------
3.15, no registration of the Purchased Shares, pursuant to the provisions of the
- ----
Securities Act or any state securities or "blue sky" laws, will be required by
the offer, sale or issuance of the Purchased Shares.
3.16 Labor Relations. To the knowledge of the Company, neither the
---------------
Company nor its Subsidiary is engaged in any unfair labor practice. There is
(a) no grievance or arbitration proceeding arising out of or under collective
bargaining agreements pending or, to the knowledge of the Company, threatened;
(b) no strike, labor dispute, slowdown or stoppage pending or, to the knowledge
of the Company, threatened against the Company or its Subsidiary; (c) neither
the Company nor its Subsidiary is a party to any collective bargaining agreement
or contract; (d) no union representation question existing with respect to the
employees of the Company or its Subsidiary; and, (e) to the knowledge of the
Company, no union organizing activities are taking place.
3.17 Employee Benefit Plans. Neither the Company nor its Subsidiary
----------------------
has any actual or contingent, direct or indirect, material liability in respect
of any employee benefit plan (as defined in Section 3(3) of ERISA), other than
to make contributions under or pay benefits pursuant to the plans listed on
Schedule 3.17 (collectively, the "Plans"). All of the Plans are in substantial
- -------------
compliance with all applicable Requirements of Law. No Plan (a) is subject to
Title IV of ERISA, or is otherwise a Defined Benefit Plan, or is a multiple
employer plan (within the
<PAGE>
13
meaning of Section 413(c) of the Code); or (b) provides for post-retirement
welfare benefits or a "parachute payment" (within the meaning of Section 280G(b)
of the Code). The execution and delivery of the Transaction Documents, the
purchase and sale of the Purchased Shares hereunder and the consummation of the
transactions contemplated hereby and thereby will not result in any prohibited
transaction within the meaning of Section 406 of ERISA or Section 4975 of the
Code.
3.18 Title to Assets. Except as specifically set forth on Schedule
--------------- --------
3.18, the Company or its Subsidiary has good and marketable title to all of the
- ----
properties and assets used in their business in each case free and clear of any
Lien, except for Liens not material to the Condition of the Company.
3.19 Intellectual Property.
----------------------
(a)(i) Except as specifically set forth on Schedule 3.19(a)(i), to
-------------------
the knowledge of the Company, the Company or its Subsidiary owns or is
licensed or otherwise has the right to use all trademarks, service marks,
trade names, copyrights, trade secrets, licenses, franchises and other
rights, all products, processes and methods, computer software, computer
programs and similar intangible assets of the Company and its Subsidiary
(collectively, "Intellectual Property") that are necessary for the
operation of its business as presently conducted and or contemplated in
its business plan.
(a)(ii) Schedule 3.19(a)(ii) sets forth all trademarks, service
-------------------
marks, trade names and registered copyrights owned by, and applications
for any of the above filed by, the Company or its Subsidiary.
(a)(iii) Schedule 3.19(a)(iii) sets forth all Intellectual Property
---------------------
licenses under which the Company or its Subsidiary is a licensee.
(a)(iv) To the knowledge of the Company, other than as set forth
on Schedule 3.19(a)(iv), none of the Intellectual Property currently sold
to third parties by or used by the company or its Subsidiary infringes
upon or otherwise violates any Intellectual Property rights of others.
(a)(v) Except as specifically set forth on Schedule 3.19(a)(v), no
-------------------
litigation is pending and no claim has been made against the Company or
its Subsidiary or, to the knowledge of the Company, is threatened,
contesting the
<PAGE>
14
right of the Company or its Subsidiary to sell or license to third parties
or use the Intellectual Property presently sold or licensed to third
parties or used by the Company or its Subsidiary.
(b) Except as specifically set forth on Schedule 3.19(b), to the
----------------
knowledge of the Company, no Person is infringing upon or otherwise
violating the Intellectual Property rights of the Company or its
Subsidiary.
(c) No former employer of any Company or Subsidiary employee, or
current or former employer of any Company or Subsidiary consultant, has
made a claim against the Company or its Subsidiary, or, to the knowledge
of the Company, against any other Person, that such employee or such
consultant is utilizing proprietary information of such employer.
(d) Except as set forth on Schedule 3.19(d), neither the Company nor
----------------
its Subsidiary is a party to or bound by any license agreement requiring
the payment of any material royalty payment, excluding such agreements
relating to software licensed for use solely on the computers of the
Company or its Subsidiary.
(e) Except as set forth on Schedule 3.19(e), to the knowledge of the
----------------
Company, all of the Intellectual Property licenses listed on Schedule
--------
3.19(a)(iii) are valid, enforceable and in full force and effect, and will
------------
continue to be so in all material respects on identical terms immediately
following the Closing, except as enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, fraudulent conveyance
or transfer, moratorium or similar laws affecting the enforcement of
creditors' rights generally and by general principles of equity relating
to enforceability (regardless of whether considered in a proceeding at law
or in equity). Except as set forth on Schedule 3.19(e), the Company and
----------------
its Subsidiary have substantially performed all obligations imposed upon
them thereunder, and neither the Company nor its Subsidiary is in default
thereunder in any respect, nor is there any event which with notice or
lapse of time or both would constitute a default thereunder.
3.20 Potential Conflicts of Interest. Except as set forth on
-------------------------------
Schedule 3.20, no executive officer, director or stockholder of the Company or
- -------------
its Subsidiary, and, to the knowledge of the Company, no spouse of any such
executive officer, director or stockholder, no relative of such spouse or of any
such executive officer, director or stockholder, and no Affiliate of any of the
foregoing (a) owns, directly
<PAGE>
15
or indirectly, any interest in (excepting less than 1% stock holdings for
investment purposes in securities of publicly held and traded companies), or is
an officer, director, employee or consultant of, any Person which is, or is
engaged in business as, a competitor, lessor, lessee, supplier, distributor,
sales agent or customer of, or lender to or borrower from, the Company; (b)
owns, directly or indirectly, in whole or in part, any tangible or intangible
property that the Company or its Subsidiary uses in the conduct of business; or
(c) has any cause of action or other claim whatsoever against, or owes or has
advanced any amount to, the Company or its Subsidiary, except for claims in the
ordinary course of business such as for accrued vacation pay, accrued benefits
under employee benefit plans, and similar matters and agreements existing on the
date hereof.
3.21 Outstanding Borrowings. Schedule 3.21 sets forth (a) the amount
---------------------- -------------
of all Outstanding Borrowings as of the Closing Date, and (b) the name of each
lender thereof.
3.22 Contracts and Other Agreements. Schedule 3.22(i) sets forth all
------------------------------ ----------------
of the Contractual Obligations of the Company and its Subsidiary, whether
written or oral, other than the Transaction Documents, which involve an amount
in excess of $50,000 or which are otherwise material to the Company's business.
All such Contractual Obligations are valid, subsisting, in full force and effect
and binding upon the Company or its Subsidiary and, to the knowledge of the
Company, the other parties thereto, in accordance with their terms, and, the
Company or its Subsidiary has paid in full or accrued all amounts due thereunder
and has satisfied in full or provided for all of its currently matured
liabilities and obligations thereunder, and is not in default under any of them.
To the knowledge of the Company, no other party to any such Contractual
Obligation, is in default thereunder, nor does any condition exist that with
notice or lapse of time or both will constitute a default by such other party
thereunder. Schedule 3.22(ii) sets forth all of the Contractual Obligations for
which the written agreement has expired but for which the parties continue to
conduct business as usual, and are negotiating new written agreements. In the
absence of such new agreements the Company shall be able to obtain the
equivalent services from other parties without a material adverse effect on the
Condition of the Company, or the absence of such new agreements shall not have a
material adverse effect on the Condition of the Company.
3.23 Liabilities. Except as set forth on Schedule 3.23, neither the
----------- -------------
Company nor its Subsidiary has any direct or indirect obligation or liability
(the
<PAGE>
16
"Liabilities"), other than (i) Liabilities fully and adequately reflected or
reserved against on the Financial Statements, (ii) liabilities not required by
GAAP to be set forth on the Financial Statements and (iii) Liabilities incurred
since the Balance Sheet Date in the ordinary course of business.
3.24 Insurance. Attached as Schedule 3.24 are summaries of all
--------- -------------
insurance contracts covering real and personal property of the Company and its
Subsidiary. Such insurance is in full force and effect and covers all risks
associated with the Company's business that are customarily insured against in
the industry in such amounts as are customary in the industry.
3.25 Broker's, Finder's or Similar Fees. There are no brokerage
----------------------------------
commissions, finder's fees or similar fees or commissions payable by the Company
or its Subsidiary in connection with the transactions contemplated hereby based
on any agreement, arrangement or understanding with the Company or any action
taken by any such entity.
3.26 Disclosure in this Agreement and Other Documents. This
------------------------------------------------
Agreement and the documents and certificates furnished to the Purchasers by the
Company at or prior to the Closing, taken as a whole, do not contain any untrue
statement of a material fact or, to the knowledge of the Company, omit to state
a material fact necessary in order to make the statements contained herein or
therein, in the light of the circumstances under which they were made, not
misleading.
3.27 Environmental Matters. Each of the Company and its Subsidiary
---------------------
is and has been in compliance with all applicable Environmental Laws. To the
knowledge of the Company, there is no civil, criminal or administrative
judgment, action, suit, demand, claim, hearing, notice of violation,
investigation, proceeding, notice or demand letter pending or, threatened
against the Company or its Subsidiary pursuant to Environmental Laws; and, to
the knowledge of the Company, there are no past or present events, conditions,
circumstances, activities, practices, incidents, agreements, actions or plans
which may prevent compliance with, or which have given rise to or will give rise
to liability under, Environmental Laws.
<PAGE>
17
ARTICLE 4
REPRESENTATIONS AND
WARRANTIES OF THE PURCHASERS
----------------------------
Each of the Purchasers hereby represents and warrants to the Company
as follows:
4.1 Existence and Power. Such Purchaser (a) is a partnership duly
-------------------
organized and validly existing under the laws of the jurisdiction of its
formation and (b) has the requisite power and authority to execute, deliver and
perform its obligations under this Agreement and each of the other Transaction
Documents to which it is a party.
4.2 Authorization; No Contravention. The execution, delivery and
-------------------------------
performance by such Purchaser of this Agreement and each of the other
Transaction Documents to which it is a party and the transactions contemplated
hereby and thereby, including, without limitation, the purchase of the Purchased
Shares, (a) have been duly authorized by all necessary action, (b) do not
contravene the terms of such Purchaser's organizational documents, or any
amendment thereof, and (c) do not violate, conflict with or result in any breach
or contravention of or the creation of any Lien under, any Contractual
Obligation of such Purchaser, or any Requirement of Law applicable to such
Purchaser.
4.3 Governmental Authorization; Third Party Consents. No approval,
------------------------------------------------
consent, compliance, exemption, authorization, or other action by, or notice to,
or filing with, any Governmental Authority or any other Person in respect of any
Requirement of Law, is necessary or required in connection with the execution,
delivery or performance (including, without limitation, the purchase of the
Purchased Shares) by such Purchaser of the Transaction Documents to which such
Purchaser is a party or the transactions contemplated hereby.
4.4 Binding Effect. This Agreement and each of the other Transaction
--------------
Documents to which such Purchaser is a party have been duly executed and
delivered by such Purchaser and constitute the legal, valid and binding
obligation of such Purchaser, enforceable against it in accordance with its
terms, except as enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, fraudulent conveyance or transfer, moratorium or
similar laws affecting the enforcement of creditors' rights generally or by
equitable principles relating to enforceabi-
<PAGE>
18
lity (regardless of whether considered in a proceeding at law or in equity).
4.5 Purchase Entirely for Own Account. The Purchased Shares to be
---------------------------------
purchased by the Purchasers hereunder will be acquired for investment for such
Purchaser's own account, not as nominee or agent, and not with a view to or for
sale in connection with any distribution of any part thereof, and such Purchaser
has no present intention of selling, granting any participation in, or otherwise
distributing the same. Such Purchaser does not have any contract, undertaking,
agreement or arrangement with any Person to sell, transfer or grant
participations to any Person, with respect to any of the Purchased Shares.
4.6 Restricted Securities. Each Purchaser understands that the
---------------------
Purchased Shares are characterized as "restricted securities" under the federal
securities laws inasmuch as they are being acquired from the Company in a
transaction not involving a public offering and that under such laws and
applicable regulations such securities may be resold without registration under
the Securities Act only in certain limited circumstances. In this connection
each Purchaser represents that it is familiar with the Commission's Rule 144, as
presently in effect, and understands the resale limitations imposed thereby and
by the Securities Act.
4.7 Further Limitations on Disposition. Without in any way limiting
----------------------------------
the representations set forth above, each Purchaser further agrees not to make
any disposition of all or any portion of the Purchased Shares until (a) there is
then in effect an effective registration statement under the Securities Act
covering such proposed disposition and such disposition is made in accordance
with such registration statement; or (b)(i) such Purchaser shall have notified
the Company of the proposed disposition and shall have furnished the Company
with a detailed statement of the circumstances surrounding the proposed
disposition, (ii) if reasonably requested by the Company, such Purchaser shall
have furnished the Company with an opinion of counsel, reasonably satisfactory
to the Company, that such disposition will not require registration of such
shares under the Securities Act and (iii) if reasonably requested by the
Company, the transferee shall have furnished to the Company its agreement to
abide by its restrictions on transfer set forth herein as if it were a purchaser
hereunder. It is agreed that the Company will not require opinions of counsel
for transactions made pursuant to Rule 144, as currently in existence, or Rule
144A except in unusual circumstances.
<PAGE>
19
4.8 Disclosure of Information. Each Purchaser has had an opportunity
-------------------------
to ask questions and receive answers from the Company regarding the terms and
conditions of the offering of the Purchased Shares and has received from the
Company all of the information it has requested.
4.9 Investment Experience. Each Purchaser is an investor in
---------------------
securities of companies in the development stage and acknowledges that it has,
by reason of its business or financial experience, the capacity to protect its
own interests in connection with the transaction and that it is able to bear the
economic risk of its investment in the transaction. Each Purchaser is an
"Accredited Investor" as defined in Commission Rule 501(a). Each Purchaser has
not been organized solely for the purpose of acquiring the Purchased Shares, and
its investment (including mandatory assessments) does not exceed 10% of its net
worth.
4.10 Legends. To the extent applicable, each certificate or other
-------
document evidencing any of the Purchased Shares issued hereunder or any of the
Conversion Shares shall be endorsed with the legend set forth below, and each
Purchaser covenants that, except to the extent such restrictions are waived by
the Company, such Purchaser shall not transfer the securities without complying
with the restrictions on transfer described in the legend endorsed thereon:
"THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD,
TRANSFERRED, ASSIGNED, PLEDGED, OR HYPOTHECATED ABSENT AN EFFECTIVE REGISTRATION
THEREOF UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR COMPLIANCE WITH
RULE 144 PROMULGATED UNDER SUCH ACT, OR, UNLESS THE COMPANY HAS RECEIVED AN
OPINION OF COUNSEL, IF REASONABLY REQUESTED, SATISFACTORY TO ITS COUNSEL THAT
SUCH REGISTRATION IS NOT REQUIRED."
The Company shall not be required (i) to transfer on its books any
shares of the Purchased Shares or Conversion Shares which shall have been
transferred in violation of any of the provisions set forth in this Agreement,
or (ii) to treat as owner of such shares or to accord the right to vote as such
owner or to pay dividends to any transferee to whom such shares shall have been
so transferred.
4.11 Broker's, Finder's or Similar Fees. There are no brokerage
-----------------------------------
commissions, finder's fees or similar fees or commissions payable by the
Purchasers or any of them, in connection with the transactions contemplated
hereby based
<PAGE>
20
on any agreement, arrangement or understanding with such Purchaser or any action
taken by such Purchaser.
ARTICLE 5
BLUE SKY
--------
5.1 CORPORATE SECURITIES LAW. THE SALE OF SECURITIES WHICH ARE THE
------------------------
SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF
CORPORATIONS OF THE STATE OF CALIFORNIA AND ISSUANCE OF SUCH SECURITIES WITH
PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION FOR SUCH SECURITIES PRIOR TO
SUCH QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF SECURITIES IS EXEMPT FROM
QUALIFICATION BY SECTION 25100, 25102 OR 25105 OF THE CALIFORNIA CORPORATIONS
CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED
UPON SUCH QUALIFICATION BEING OBTAINED, UNLESS THE SALE IS EXEMPT.
ARTICLE 6
CONDITIONS TO THE OBLIGATION
OF THE PURCHASERS TO CLOSE
----------------------------
The obligation of the Purchasers to purchase the Purchased Shares, to
pay the purchase prices therefor at the Closing and to perform any obligations
hereunder shall be subject to the satisfaction as determined by, or waiver by,
the Purchasers of the following conditions on or before the Closing Date.
6.1 Secretary's Certificate. The Purchasers shall have received a
-----------------------
certificate from the Company, in form and substance satisfactory to the
Purchasers, dated the Closing Date and signed by the Secretary or an Assistant
Secretary of the Company, certifying that the attached copies of the Restated
Articles of Incorporation, the Bylaws and resolutions of the Board of Directors
of the Company approving this Agreement and the transactions contemplated
hereby, are all true, complete and correct and remain unamended and in full
force and effect.
6.2 Officer's Certificate. The Purchasers shall have received a
---------------------
certificate from the Company, in form and substance satisfactory to the
Purchasers, dated the Closing Date and signed by its Chief Executive Officer and
its Chief Financial Officer, certifying that (a) the representations and
warranties of the Company contained in Article 3 hereof are true and correct on
the Closing Date and (b) the Company
<PAGE>
21
has performed and complied in all material respects with all of the agreements
and conditions set forth or contemplated herein that are required to be
performed or complied with by the Company on or before the Closing Date.
6.3 Documents. The Purchasers shall have received true, complete and
---------
correct copies of such documents as they may reasonably request in connection
with or relating to the sale of the Purchased Shares and the transactions
contemplated hereby, all in form and substance reasonably satisfactory to the
Purchasers.
6.4 Opinion of Counsel. The Purchasers shall have received an
------------------
opinion of counsel to the Company, dated the Closing Date, relating to the
transactions contemplated hereby or referred to herein, substantially in the
form attached hereto as Exhibit C.
---------
6.5 Stockholders Agreement. The Company and the stockholders of the
----------------------
Company named in the Stockholders Agreement shall have duly executed and
delivered the Stockholders Agreement, substantially in the form attached hereto
as Exhibit D.
---------
6.6 Restated Articles of Incorporation and Bylaws. The Restated
---------------------------------------------
Articles of Incorporation shall have been filed with the Secretary of State of
the State of California.
6.7 Consents and Approvals. All consents, exemptions,
----------------------
authorizations, or other actions by, or notices to, or filings with,
Governmental Authorities and other Persons in respect of all Requirements of Law
and with respect to those Contractual Obligations of the Company which are
necessary or required in connection with the execution, delivery or performance
by the Company or enforcement against the Company of the Transaction Documents
to which it is a party, except for the filing of a Notice of Transaction
pursuant to Section 25102(f) of the California Corporation Code and a Form D
pursuant to the Securities Act, shall have been obtained and be in full force
and effect, and each of the Purchasers shall have been furnished with
appropriate evidence thereof.
6.8 Unaudited Financial Statements. The Purchasers shall have
------------------------------
received the Unaudited Financial Statements and the Company's internal financial
statements for the period July 1, 1995 through August 31, 1995, and the
Purchasers shall be satisfied with all such statements. Representatives of the
Purchasers shall have had the opportunity to meet with the Company's independent
public accountants.
<PAGE>
22
ARTICLE 7
CONDITIONS TO THE OBLIGATIONS
OF THE COMPANY TO CLOSE
-----------------------------
The obligations of the Company to sell the Purchased Shares and to
perform their other obligations hereunder, shall be subject to the satisfaction
as determined by, or waiver by, the Company of the following conditions on or
before the Closing Date:
7.1 Effectiveness of Restated Articles. The Restated Articles of
----------------------------------
Incorporation shall have been filed with the Secretary of State of the State of
California.
7.2 General Partner's Certificate. The Company shall have received a
-----------------------------
certificate from each of the Purchasers, in form and substance satisfactory to
the Company, dated the Closing Date and signed by their respective general
partners, certifying that (a) the representations and warranties of such
Purchaser contained in Article 4 hereof are true and correct on the Closing Date
and (b) such Purchaser has performed and complied in all material respects with
all of the agreements and conditions set forth or contemplated herein that are
required to be performed or complied with by such Purchaser on or before the
Closing Date.
7.3 Opinion of Counsel. The Company shall have received an opinion
------------------
of counsel to the Purchasers, dated the Closing Date, relating to the
transactions contemplated hereby or referred to herein, substantially in the
form attached hereto as Exhibit E.
---------
7.4 Stockholders Agreement. The Purchasers shall have duly executed
----------------------
and delivered the Stockholders Agreement, substantially in the form attached
hereto as Exhibit D.
---------
7.5 Consents and Approvals. All consents, exemptions,
----------------------
authorizations, or other actions by, or notices to, or filings with,
Governmental Authorities and other Persons in respect of all Requirements of Law
and with respect to those Contractual Obligations of the Purchasers which are
necessary or required in connection with the execution, delivery or performance
by the Purchasers or enforcement against each of the Purchasers of the
Transaction Documents to which it is a party, except for the filing of a Notice
of
<PAGE>
23
Transaction pursuant to Section 25102(f) of the California Corporation Code and
a Form D pursuant to the Securities Act, shall have been obtained and be in full
force and effect, and the Company shall have been furnished with appropriate
evidence thereof.
7.6 Legal Investment. At the time of the Closing, the purchase of
----------------
the Purchased Shares by the Purchasers shall be legally permitted by all laws
and regulations to which the Purchasers and the Company are subject.
7.7 California Qualification. The Commissioner of Corporations of
------------------------
the State of California and any other applicable state regulatory authority
shall have issued permits qualifying the offer and sale to the Purchasers of the
Purchased Shares or such offer and sale shall be exempt from such qualification
under the California Corporate Securities Law of 1968, as amended, and any other
applicable state blue-sky law.
ARTICLE 8
INDEMNIFICATION
---------------
8.1 Indemnification of Purchasers. Except as otherwise provided in
-----------------------------
this Article 8, the Company agrees to indemnify, defend and hold harmless each
of the Purchasers and their Affiliates and their respective officers, directors,
agents, employees, subsidiaries, partners and controlling persons to the fullest
extent permitted by law from and against any and all losses, claims (including
any claim by a third party), damages, expenses (including reasonable fees,
disbursements and other charges of counsel) or other liabilities (collectively,
"Losses") resulting from, arising out of or relating to any breach of any
representation or warranty, covenant or agreement by the Company in this
Agreement or the other Transaction Documents to which it is a party, including,
without limitation, Losses arising out of or relating to any legal,
administrative or other actions (including actions brought by the Purchasers or
derivative actions brought by any Person claiming through or in the Company's
name), proceedings or investigations (whether formal or informal), or written
threats thereof, based upon, relating to or arising out of the Transaction
Documents, the transactions contemplated thereby, or the Company's role therein
or in transactions contemplated thereby; provided, however, that the Company
-------- -------
shall not be liable under this Section 8.1 to such party to the extent that it
is finally judicially determined that such Losses resulted primarily from the
<PAGE>
24
material breach by such party of any representation, warranty, covenant or other
agreement of such party contained in this Agreement; and provided, further, that
-------- -------
if and to the extent that such indemnification is unenforceable for any reason,
the Company shall make the maximum contribution to the payment and satisfaction
of such Losses which shall be permissible under applicable laws. In connection
with the obligation of the Company to indemnify for expenses as set forth above,
the Company shall, upon presentation of appropriate invoices containing
reasonable detail, reimburse each indemnified party for all such expenses
(including reasonable fees, disbursements and other charges of counsel) as they
are incurred by such party. The provisions of this Section 8.1 shall not be
deemed exclusive of any other rights of indemnification or other remedy to which
the Purchasers may be entitled.
8.2 Indemnification of the Company. Except as otherwise provided in
------------------------------
this Article 8, the Purchasers, severally and not jointly, agree to indemnify,
defend and hold harmless the Company and it Affiliates and their respective
officers, directors, agents, employees, subsidiaries, partners and controlling
persons to the fullest extent permitted by law from and against any and all
Losses resulting from, arising out of or relating to any breach of any
representation or warranty, covenant or agreement by the Purchasers in this
Agreement, or the other Transaction Documents to which it is a party, including,
without limitation, Losses arising out of or relating to any legal,
administrative or other actions (including actions brought by either of the
Purchasers), proceedings or investigations (whether formal or informal), or
written threats thereof, based upon, relating to or arising out of the
Transaction Documents, the transactions contemplated thereby, or either of the
Purchaser's role therein or in transactions contemplated thereby; provided,
--------
however, that the Purchasers shall not be liable for any payments pursuant to
- -------
this Section 8.2 in excess of the purchase price paid for the Purchased Shares;
provided, further, that the Purchasers shall not be liable under this Section
- -------- -------
8.2 to any party to the extent that it is finally judicially determined that
such Losses resulted primarily from the material breach by such party of any
representation, warranty, covenant or other agreement of such party contained in
this Agreement; and provided, further, that if and to the extent that such
-------- -------
indemnification is unenforceable for any reason, the Purchasers shall make the
maximum contribution to the payment and satisfaction of such Losses which shall
be permissible under applicable laws. In connection with the obligation of the
Purchasers to indemnify for expenses set forth above, the Purchasers shall, upon
presentation of
<PAGE>
25
appropriate invoices containing reasonable detail, reimburse each indemnified
party for all such expenses (including reasonable fees, disbursements and other
charges of counsel) as they are incurred by such party. The provisions of this
Section 8.2 shall not be deemed exclusive of any other rights of indemnification
or other remedy to which the company may be entitled.
8.3 Notification. Each person entitled to indemnification pursuant
------------
to this Article 8 (each, an "Indemnified Party") will, promptly after the
occurrence of any event, or after the receipt of notice of the commencement of
any action, investigation, claim or other proceeding against such Indemnified
Party in respect of which indemnity may be sought from the indemnifying party
under this Article 8 (each, an "Indemnifying Party"), notify the Indemnifying
Party in writing thereof. The omission of any Indemnified Party to so notify
the Indemnifying Party of any such action shall not relieve the Indemnifying
Party from any liability which they may have to such Indemnified Party under
this Article 8 unless, and only to the extent that, such omission results in the
Indemnifying Party's forfeiture of substantive rights or defenses. In case any
such action, claim or other proceeding shall be brought against any Indemnified
Party it shall notify the Indemnifying Party of the commencement thereof, the
Indemnifying Party shall be entitled to assume the defense thereof at their own
expense, with counsel satisfactory to such Indemnified Party in its reasonable
judgment; provided, however, that any Indemnified Party may, at its own expense,
-------- -------
retain separate counsel to participate in such defense at its own expense.
Notwithstanding the foregoing, in any action, claim or proceeding in which both
the Indemnifying Party and an Indemnified Party, are, or are reasonably likely
to become, a party, such Indemnified Party shall have the right to employ
separate counsel at the expense of the Indemnifying Party and to control its own
defense of such action, claim or proceeding if, in the reasonable opinion of
counsel to such Indemnified Party, a conflict or potential conflict exists
between the Indemnifying Party and such Indemnified Party that would make such
separate representation advisable; provided, however, that the Indemnifying
-------- -------
Party shall not be liable for the fees and expenses of more than one counsel to
all Indemnified Parties. The Indemnifying Party agrees that it will not,
without the prior written consent of the Indemnified Party settle, compromise or
consent to the entry of any judgment in any pending or threatened claim, action
or proceeding relating to the matters contemplated hereby (if any Indemnified
Party is a party thereto or has been actually threatened to be made a party
thereto) unless such settlement,
<PAGE>
26
compromise or consent includes an unconditional release of the Indemnified Party
and each other Indemnified Party from all liability arising or that may arise
out of such claim, action or proceeding. The Indemnifying Party shall not be
liable for any settlement of any claim, action or proceeding effected against an
Indemnified Party without its written consent, which consent shall not be
unreasonably withheld.
ARTICLE 9
AFFIRMATIVE COVENANTS
---------------------
Until the consummation of an initial public offering of equity
securities of the Company pursuant to a registration statement under the
Securities Act, the Company hereby covenants and agrees with the Purchasers as
follows:
9.1 Preservation of Corporate Existence. The Company shall and shall
-----------------------------------
cause its Subsidiary to:
(a) preserve and maintain in full force and effect its corporate
existence and good standing under the laws of its jurisdiction of
incorporation or organization; and
(b) use its best efforts to file or cause to be filed in a timely
manner all reports, applications and licenses that shall be required by a
Governmental Authority and that, if not timely filed, would have a
material adverse effect on the Condition of the Company.
9.2 Financial Statements and Other Information. The Company shall
------------------------------------------
deliver to the Purchasers, in form and substance satisfactory to the Purchasers:
(a) as soon as available, but not later than ninety (90) days after
the end of each fiscal year of the Company, a copy of the audited
consolidated balance sheet of the Company as of the end of such year and
the related statements of operations and cash flows for such fiscal year,
setting forth in each case in comparative form the figures for the
previous year, all in reasonable detail and accompanied by a management
summary and analysis of the operations of the Company for such fiscal year
and by the opinion of a nationally recognized independent certified public
accounting firm which report shall not contain a qualification based on
the records of the Company, its accounting controls or procedures or the
scope of the audit, that such financial statements present fairly the
financial
<PAGE>
27
condition as of such date and results of operations and cash flows for the
periods indicated in conformity with GAAP applied on a consistent basis;
(b) commencing with the fiscal period ending on September 30, 1995, as
soon as available, but in any event not later than forty-five (45) days
after the end of each of the first three fiscal quarters of each year, the
unaudited balance sheet of the Company, and the related statements of
operations and cash flows for such quarter and for the period commencing
on the first day of the fiscal year and ending on the last day of such
quarter, all certified by an appropriate officer of the Company as
presenting fairly the financial condition as of such date and results of
operations and cash flows for the periods indicated in conformity with
GAAP applied on a consistent basis, subject to normal year-end audit
adjustments and the absence of footnotes required by GAAP; and
(c) annual budgets and such other financial and operating data which
are customarily prepared by the Company, as the Purchasers reasonably may
request.
9.3 Inspection. The Company shall and shall cause its Subsidiary to
----------
permit representatives of the Purchasers to visit and inspect any of its
properties, to examine its corporate, financial and operating records and make
copies thereof or abstracts therefrom, and to discuss its affairs, finances and
accounts with their respective directors, officers and independent public
accountants, all at such reasonable times during normal business hours and as
often as may be reasonably requested upon reasonable advance notice to the
Company.
9.4 Back-Ups of Computer Software. The Company shall and shall cause
-----------------------------
its Subsidiary reasonably frequently to make back-ups of all material computer
software programs and databases and shall maintain such software programs and
databases at a secure off-site location.
9.5 Books and Records. The Company shall and shall cause its
-----------------
Subsidiary to keep books of record and account, in which accurate entries shall
be made of all financial transactions and the assets and business of the Company
in accordance with GAAP consistently applied to the Company.
9.6 Conversion of Preferred Stock. In the event that the authorized
-----------------------------
number of shares of Common Stock is not sufficient to permit the conversion of
the issued and outstanding shares of the Preferred Stock, the Company shall
<PAGE>
28
use its best efforts to cause the Board of Directors and shareholders to approve
an amendment of the articles of incorporation of the Company to increase the
authorized number of shares of Common Stock to a number sufficient to permit
such conversion.
9.7 Insurance. The Company shall increase its insurance coverage
---------
under the policies referred to in Schedule 3.24 to such amounts as are customary
in the industry.
ARTICLE 10
MISCELLANEOUS
-------------
10.1 Survival of Representations and Warranties. All of the
------------------------------------------
representations and warranties made herein shall survive the execution and
delivery of this Agreement, any investigation by or on behalf of the Purchasers,
acceptance of the Purchased Shares or termination of this Agreement.
10.2 Notices. All notices, demands and other communications provided
-------
for or permitted hereunder shall be made in writing and shall be by registered
or certified first-class mail, return receipt requested, telecopier, courier
service, overnight mail or personal delivery:
(a) if to GAP LP or GAP Coinvestment:
c/o General Atlantic Service Corporation
125 East 56th Street
New York, New York 10022
Telecopy: (212) 644-8339
Attention: Stephen P. Reynolds
with a copy to:
Paul, Weiss, Rifkind, Wharton & Garrison
1285 Avenue of the Americas
New York, New York 10019-6064
Telecopy: (212) 757-3990
Attention: Matthew Nimetz, Esq.
(b) if to the Company:
Trade*Plus, Inc.
480 California Avenue
Palo Alto, CA 94306
Telecopy: (415) 324-3044
Attention: President
<PAGE>
29
with a copy to:
Jackson, Tufts, Cole & Black
640 California Street, 32nd Floor
San Francisco, CA 94108
Telecopy: (415) 392-3494
Attention: Templeton C. Peck, Esq.
All such notices and communications shall be deemed to have been duly
given when delivered by hand, if personally delivered; when delivered by courier
or overnight mail, if delivered by commercial courier service or overnight mail;
five (5) Business Days after being deposited in the mail, postage prepaid, if
mailed; and when receipt is mechanically acknowledged, if telecopied.
10.3 Successors and Assigns. This Agreement shall inure to the
----------------------
benefit of and be binding upon the successors and permitted assigns of the
parties hereto. Subject to applicable securities laws, each of the Purchasers
may assign any of its rights under this Agreement to any of its Affiliates. The
Company may not assign any of its rights under this Agreement, except to a
successor-in-interest to the Company, without the prior written consent of all
of the Purchasers. Except as provided in Article 8, no Person other than the
parties hereto and their successors and permitted assigns is intended to be a
beneficiary of any of the Transaction Documents.
10.4 Amendment and Waiver.
--------------------
(a) No failure or delay on the part of the Company or the Purchasers
in exercising any right, power or remedy hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise of any such
right, power or remedy preclude any other or further exercise thereof or
the exercise of any other right, power or remedy. The remedies provided
for herein are cumulative and are not exclusive of any remedies that may
be available to the Company or the Purchasers at law, in equity or
otherwise.
(b) Any amendment, supplement or modification of or to any provision
of this Agreement, any waiver of any provision of this Agreement, and any
consent to any departure by the Company or the Purchasers from the terms
of any provision of this Agreement, shall be effective only if it is made
or given in writing and signed by the Company and the Purchasers. Except
where notice is specifically required by this Agreement, no notice to or
demand on the Company in any case shall entitle the Company to any other
<PAGE>
30
or further notice or demand in similar or other circumstances.
10.5 Counterparts. This Agreement may be executed in any number of
------------
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
10.6 Headings. The headings in this Agreement are for convenience of
--------
reference only and shall not limit or otherwise affect the meaning hereof.
10.7 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
-------------
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA, WITHOUT REGARD
TO THE PRINCIPLES OF CONFLICTS OF LAW THEREOF.
10.8 Severability. If any one or more of the provisions contained
------------
herein, or the application thereof in any circumstance, is held invalid, illegal
or unenforceable in any respect for any reason, the validity, legality and
enforceability of any such provision in every other respect and of the remaining
provisions hereof shall not be in any way impaired, unless the provisions held
invalid, illegal or unenforceable shall substantially impair the benefits of the
remaining provisions hereof.
10.9 Entire Agreement. This Agreement, together with the exhibits
----------------
and schedules hereto and the other Transaction Documents, is intended by the
parties as a final expression of their agreement and intended to be a complete
and exclusive statement of the agreement and understanding of the parties hereto
in respect of the subject matter contained herein and therein. There are no
restrictions, promises, warranties or undertakings, other than those set forth
or referred to herein or therein. This Agreement, together with the exhibits
hereto, and the other Transaction Documents supersede all prior agreements and
understandings between the parties with respect to such subject matter.
10.10 Fees. Upon the Closing, the Company shall reimburse the
----
Purchasers for their reasonable out-of-pocket expenses (including lawyer's fees,
disbursements and other charges) incurred in connection with the transactions
contemplated by this Agreement; provided, however, the Company shall not be
-------- -------
obligated to reimburse the Purchasers for any reasonable out-of-pocket expenses
in excess of $14,000. If the Closing does not take place, each party shall bear
its own expenses.
<PAGE>
31
10.11 Further Assurances. Each of the parties shall execute such
------------------
documents and perform such further acts (including, without limitation,
obtaining any consents, exemptions, authorizations or other actions by, or
giving any notices to, or making any filings with, any Governmental Authority or
any other Person) as may be reasonably required or desirable to carry out or to
perform the provisions of this Agreement.
[THIS SPACE INTENTIONALLY LEFT BLANK.]
<PAGE>
32
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed and delivered by their respective officers hereunto duly authorized
on the date first above written.
TRADE*PLUS, INC.
By: /s/ William A. Porter
-------------------------------
Name: William A. Porter
Title: President
GENERAL ATLANTIC PARTNERS II, L.P.
By: GENERAL ATLANTIC PARTNERS,
Its General Partner
By: /s/ William E. Ford
-------------------------------
Name: William E. Ford
Title: A General Partner
GAP COINVESTMENT PARTNERS, L.P.
By: /s/ William E. Ford
-------------------------------
Name: William E. Ford
Title: A General Partner
<PAGE>
Schedule 2.1
------------
List of Purchasers
------------------
<TABLE>
<CAPTION>
Purchaser Preferred Stock Purchase Price
- --------- --------------- --------------
<S> <C> <C>
GAP LP 87,742 $10,792,266
GAP Coinvestment 12,258 1,507,734
</TABLE>
<PAGE>
EXHIBIT 10.18
- -------------------------------------------------------------------------------
STOCK PURCHASE AGREEMENT
among
E*TRADE GROUP, INC.
and
GENERAL ATLANTIC PARTNERS II, L.P.
and
GAP COINVESTMENT PARTNERS, L.P.
and
RICHARD S. BRADDOCK
and
THE COTSAKOS GROUP
________________________________
Dated: April 10, 1996
________________________________
- -------------------------------------------------------------------------------
<PAGE>
EXHIBIT 10.18
STOCK PURCHASE AGREEMENT
This AGREEMENT, dated April 10, 1996 (this "Agreement"), among
E*Trade Group, Inc., a California corporation (the "Company"), and the following
purchasers: General Atlantic Partners II, L.P., a Delaware limited partnership
("GAP LP"), GAP Coinvestment Partners, L.P., a New York limited partnership
("GAP Coinvestment"), Richard S. Braddock ("Braddock") and each member of the
Cotsakos Group (as defined herein) (collectively, the "Purchasers").
WHEREAS, the Company proposes to sell to the Purchasers, for an
aggregate purchase price of $2,847,040, an aggregate of 20,336 shares of Series
B Convertible Preferred Stock, par value $.15 per share, of the Company (the
"Preferred Stock").
NOW, THEREFORE, in consideration of the mutual covenants and
agreements set forth herein and for good and valuable consideration, the receipt
and adequacy of which is hereby acknowledged, the parties hereto agree as
follows:
ARTICLE 1
DEFINITIONS
-----------
1.1 Definitions. As used in this Agreement, and unless the
-----------
context requires a different meaning, the following terms have the meanings
indicated:
"Affiliate" shall mean any Person who is an "affiliate" as
---------
defined in Rule 12b-2 of the General Rules and Regulations under the Exchange
Act. In addition, the following shall be deemed to be Affiliates of GAP LP: (a)
GAP, the partners or members of GAP, and the limited partners of GAP LP; (b) any
Affiliate of GAP, the partners or members of GAP, and the limited partners of
GAP LP; and (c) any other partnership or limited liability company a majority in
interest of whose partners or members are partners, former partners, members,
consultants or key employees of GAP. In addition, GAP LP and GAP Coinvestment
shall be deemed to be Affiliates of one another. Members of the Cotsakos Group
shall be deemed to be Affiliates of each other. Braddock and members of the
Cotsakos Group are not Affiliates of GAP LP or GAP Coinvestment or of each
other.
"Agreement" means this Agreement as the same may be amended,
---------
supplemented or modified in accordance with the terms hereof.
<PAGE>
2
"Balance Sheet Date" means February 29,1996.
------------------
"Braddock" means Richard S. Braddock, an individual residing in
--------
the State of New York.
"Business Day" means any day other than a Saturday, Sunday or
------------
other day on which commercial banks in the State of New York are authorized or
required by law or executive order to close.
"Bylaws" means the amended and restated bylaws of the Company as
------
in effect as of the Closing Date substantially in the form attached hereto as
Exhibit B.
- ----------
"Capital Lease Obligation" of any Person shall mean, as of the
------------------------
date of determination, any obligation of such Person to pay rent or other
amounts under any lease of (or other arrangement conveying the right to use)
real or personal property, or a combination thereof, which obligation is
required to be classified and accounted for as capital leases on a balance sheet
of such Person under GAAP and, for the purposes of this Agreement, the amount of
such obligations, as of the date of determination, shall be the capitalized
amount thereof at such time determined in accordance with GAAP consistently
applied.
"Closing" has the meaning set forth in Section 2.2 of this
-------
Agreement.
"Closing Date" means the date specified in Section 2.2 of this
------------
Agreement.
"Code" means the Internal Revenue Code of 1986, as amended, or
----
any successor statute thereto.
"Commission" means the Securities and Exchange Commission or any
----------
similar agency then having jurisdiction to enforce the Securities Act.
"Common Stock" means the Common Stock, par value $.10 per share
------------
of the Company.
"Common Stock Equivalents" means any security or obligation
------------------------
by its terms convertible into shares of capital stock of the Company and any
option, warrant or other subscription or purchase right with respect to capital
stock of the Company.
"Company" means E*Trade Group, Inc., a California corporation.
-------
<PAGE>
3
"Condition of the Company" means the assets, business,
------------------------
properites operations or financial condition of the Company, taken as a whole.
"Contingent Obligation" means, as applied to any Person, any
---------------------
direct indirect liability of that Person with respect to any Indebtedness,
lease, dividend, guaranty, letter of credit or other obligation, contractual or
otherwise (the "primary obligation") of another Person (the "primary obligor"),
whether or not contingent, (a) to purchase, repurchase or otherwise acquire such
primary obligations or any property constituting direct or indirect security
therefor, or (b) to advance or provide funds (i) for the payment or discharge of
any such primary obligation, or (ii) to maintain working capital or equity
capital of the primary obligor or otherwise to maintain the net worth or
solvency or any balance sheet item, level of income or financial condition of
the primary obligor, or (c) to purchase property, securities or services
primarily for the purpose of assuring the owner of any such primary obligation
of the ability of the primary obligor to make payment of such primary
obligation, or (d) otherwise to assure or hold harmless the owner of any such
primary obligation against loss in respect thereof. The amount of any Contingent
Obligation shall be deemed to be an amount equal to the stated or determinable
amount of the primary obligation in respect of which such Contingent Obligation
is made or, if not stated or determinable, the maximum reasonably anticipated
liability in respect thereof.
"Contractual Obligations" means as to any Person, any provision
-----------------------
of any security issued by such Person or of any agreement, undertaking,
contract, indenture, mortgage, deed of trust or other instrument to which such
Person is a party or by which it or any of its property is bound.
"Cotsakos Group" means: (i) Christos M. Cotsakos as custodian
--------------
for Suzanne R. Cotsakos under the California Uniform Transfer to Minors Act,
(ii) Christos M. Cotsakos and Hannah B. Cotsakos as trustees for the benefit of
the Cotsakos Revocable Trust under agreement dated September 3, 1987, and (iii)
the Christos M. Cotsakos IRA Account, Smith Barney Inc., Rollover Custodian.
"Defined Benefit Plan" means a defined benefit plan within the
--------------------
meaning of Section 3(35) of ERISA or Section 414(j) of the Code, whether funded
or unfunded, qualified or nonqualified (whether or not subject to ERISA or the
Code).
"Environmental Laws" means federal, state and local laws,
------------------
principles of common law, regulations and codes, as well as orders, decrees,
judgments or injunctions issued, promulgated, approved or entered thereunder
relating to pollution, protection of the environment or public health and
safety.
<PAGE>
4
"ERISA" means the Employee Retirement Income Security Act of
-----
1974, as amended (or any successor statute thereto).
"ERISA Affiliate" means any Person that is treated as a single
---------------
employer with the Company under Section 414(b), (c), (m) or (0) of the Code.
"Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended, (or any successor statute thereto) and the rules and regulations of the
Commission promulgated thereunder.
"Financial Statements" has the meaning set forth in Section 3.9
--------------------
this Agreement.
"GAAP" means generally accepted United States accounting
----
principles effect from time to time.
"GAP" means General Atlantic Partners, LLC, a Delaware limited
---
liability company and the general partner of GAP LP.
"GAP Coinvestment" means GAP Coinvestment Partners, L.P., a New
----------------
York limited partnership.
"GAP LP" means General Atlantic Partners II, L.P., a Delaware
------
limited partnership.
"Governmental Authority" means the government of the United
----------------------
States, any state, city, locality or other political subdivision thereof, any
entity exercising executive, legislative, judicial, regulatory or administrative
functions of or pertaining to government, and any corporation or other entity
owned or controlled, through stock or capital ownership or otherwise, by any of
the foregoing.
"Indebtedness" means as to any Person (a) all obligations of
------------
such Person for borrowed money (including, without limitation, reimbursement and
all other obligations with respect to surety bonds, letters of credit and
bankers' acceptances, whether or not matured), (b) all obligations of such
Person evidenced by notes, bonds, debentures or similar instruments, (c) all
obligations of such Person to pay the deferred purchase price of property or
services, except (i) trade accounts payable and accrued commercial or trade
liabilities arising in the ordinary course of business and (ii) compensation,
pension obligations and other obligations arising out of employee benefits and
employee arrangements, (d) all interest rate and currency swaps, caps, collars
and similar agreements or hedging devices under which payments are obligated to
be made by such Person, whether periodically or upon the happening of a
contingency, (e) all
<PAGE>
5
indebtedness created or arising under any conditional sale or other title
retention agreement with respect to property acquired by such Person (even
though the rights and remedies of the seller or lender under such agreement in
the event of default are limited to repossession or sale of such property), (f)
all obligations of such Person under leases which have been or should be, in
accordance with GAAP, recorded as capital leases, (g) all indebtedness secured
by any Lien (other than Liens in favor of lessors under leases other than leases
included in clause (f)) on any property or asset owned or held by that Person
regardless of whether the indebtedness secured thereby shall have been assumed
by that Person or is non-recourse to the credit of that Person, and (h) any
Contingent Obligation of such Person.
"Liabilities" has the meaning set forth in Section 3.15 of this
-----------
Agreement.
"Lien" means any mortgage, deed of trust, pledge, hypothecation,
----
assignment, encumbrance, lien (statutory or other) or preference, priority,
right or other security interest or preferential arrangement of any kind or
nature whatsoever (excluding preferred stock and equity related preferences)
including, without limitation, those created by, arising under or evidenced by
any conditional sale or other title retention agreement, the interest of a
lessor under a Capital Lease Obligation, or any financing lease having
substantially the same economic effect as any of the foregoing.
"NASD" means the National Association of Securities Dealers,
----
Inc.
"Outstanding Borrowings" means all Indebtedness of the Company
----------------------
or its Subsidiary for money borrowed that is outstanding on the relevant date of
determination.
"Permits" has the meaning assigned to such term in Section 3.6
-------
of the Agreement.
"Person" means any individual, firm, corporation, limited
------
liability company, partnership, trust, incorporated or unincorporated
association, joint venture, joint stock company, Governmental Authority or other
entity of any kind, and shall include any successor (by merger or otherwise) of
such entity.
"Preferred Stock" means Series B Convertible Preferred Stock,
---------------
per value $.15 per share, of the Company.
<PAGE>
6
"Purchased Shares" has the meaning set forth in Section 2.1 of this
----------------
Agreement.
"Purchasers" means GAP LP, GAP Coinvestment, Braddock and the Cotsakos
----------
Group.
"Requirements of Law" means as to any Person, any law, treaty, rule,
-------------------
regulation, right, privilege, qualification, license or franchise or
determination of an arbitrator or a court or other Governmental Authority, in
each case applicable or binding upon such Person or any of its property or to
which such Person or any of its property is subject or pertaining to any or all
of the transactions contemplated or referred to herein.
"Restated Articles of Incorporation" means the Restated Articles of
----------------------------------
Incorporation of the Company (including a Certificate of Determination or other
amendments establishing the Series B Preferred Stock), as the same may have been
amended and as in effect as of the Closing Date substantially in the form
attached hereto as Exhibit A.
----------
"Securities Act" means the Securities Act of 1933, as amended, (or any
--------------
successor statute thereto) and the rules and regulations of the Commission
promulgated thereunder.
"Stockholders Agreement" means the Stockholders Agreement among the
----------------------
Company, General Atlantic Partners II, L.P., GAP Coinvestment Partners, L.P.,
William A. Porter and Bernard A. Newcomb, dated September 28, 1995.
"Stockholders Agreement Supplement" means the Stockholders Agreement
---------------------------------
Supplement substantially in the form attached hereto as Exhibit D.
---------
"Subsidiary" means E*Trade Securities, Inc., a California corporation.
----------
"Transaction Documents" means collectively, this Agreement and the
---------------------
Stockholders Agreement Supplement.
1.2 Accounting Terms: Financial Statements. All accounting terms used
--------------------------------------
herein not expressly defined in this Agreement shall have the respective
meanings given to them in accordance with sound accounting practice. The term
"sound accounting practice" shall mean such accounting practice as, in the
opinion of the independent certified public accountants regularly retained by
the Company, conforms at the time to GAAP applied on a consistent basis except
for changes with which such accountants concur.
<PAGE>
7
1.3 Knowledge of the Company. All references to the knowledge of the
------------------------
Company shall mean knowledge of any officer of the Company or any officer of its
Subsidiary.
ARTICLE 2
PURCHASE AND SALE OF PREFERRED STOCK
------------------------------------
2.1 Purchase and Sale of Preferred Stock. Subject to the terms and
------------------------------------
conditions herein set forth, the Company agrees to sell to each of the
Purchasers, and each of the Purchasers agrees to purchase from the Company on
the Closing Date, the aggregate number of shares of Preferred Stock set forth
opposite such Purchaser's name on Schedule 2.1 hereto, for the purchase price
------------
set forth opposite such Purchaser's name on Schedule 2.1 (all of the shares of
------------
Preferred Stock being purchased pursuant hereto being referred to herein as
"Purchased Shares")
2.2 Closing. The purchase and issuance of the Purchased Shares (the
-------
"Closing") shall take place on the date hereof (the "Closing Date") and shall be
consummated by mail or otherwise in accordance with arrangements reasonably
acceptable to counsel for the Purchasers and counsel for the Company. On the
Closing Date, (a) the Company and each Purchaser shall execute and deliver this
Agreement and the other Transaction Documents, and (b) the Company shall deliver
to the Purchasers certificates representing the Purchased Shares against
delivery by the Purchasers to the Company, of the aggregate purchase price
therefor by wire transfer of immediately available funds or certified check.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
OF THE COMPANY
-----------------------------
The Company represents and warrants to the Purchasers, as follows
(except as set forth in Schedules to this Agreement referring specifically to
the sections of this Article 3 to which exception is taken and reasonably
specifying the extent to which exception is taken, which Schedules, including
those referred to in this Article 3, shall be delivered to the Purchasers by the
Company within ten days of the date of this Agreement):
<PAGE>
8
3.1 Corporate Existence and Power. Each of the Company and its
-----------------------------
Subsidiary (a) is a corporation duly organized, validly existing and in good
standing under the laws of the State of California; (b) has all requisite
corporate power and authority to own and operate its property, to lease the
property it operates as lessee and to conduct the business in which it is
currently engaged; and (c) is duly qualified as a foreign corporation, licensed
and in good standing under the laws of each jurisdiction in which its ownership,
lease or operation of property or the conduct of its business requires such
qualification, except to the extent that the failure to do so or be so would not
have a material adverse effect on the Condition of the Company. The Company has
the requisite corporate power and authority to execute, deliver and perform its
obligations under this Agreement and each of the other Transaction Documents to
which it is a party.
3.2 Corporate Authorization: No Contravention Except as set forth on
-----------------------------------------
Schedule 3.2, the execution, delivery and performance by the Company of this
- ------------
Agreement and each of the other Transaction Documents to which it is a party and
the transactions contemplated hereby and thereby, including, without limitation,
the sale, issuance and delivery of the Purchased Shares (a) have been duly
authorized by all necessary corporate action of the Company; (b) do not
contravene the terms of the Restated Articles of Incorporation or Bylaws, or any
amendment of either thereof, and (c) do not violate, conflict with or result in
any breach or contravention of or the creation of any Lien under, any
Contractual Obligation of the Company, or any Requirement of Law applicable to
the Company, except for such violation, conflict, breach, contravention or Lien
which would not have an adverse effect on the Condition of the Company.
3.3 Governmental Authorization; Third Party Consents. Except as set
------------------------------------------------
forth on Schedule 3.3, no approval, consent, compliance, exemption,
------------
authorization, or other action by, or notice to, or filing with, any
Governmental Authority or any other Person in respect of any Requirement of Law
is necessary or required in connection with the execution, delivery or
performance (including, without limitation, the sale, issuance and delivery of
the Purchased Shares), by the Company of the Transaction Documents to which it
is a party or the transactions contemplated hereby or thereby, except for the
filing of a Notice of Transaction pursuant to Section 25102(f) of the California
Corporation Code and a Form D pursuant to the Securities Act, which filings will
be made by the Company immediately following the Closing.
3.4 Binding Effect. This Agreement and each of the other Transaction
--------------
Documents to which the Company is a party have been duly executed and delivered
by the Company and constitute the legal, valid and binding obligation of the
Company, enforceable against the Company in accordance with their terms, except
as enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, fraudulent
<PAGE>
9
conveyance or transfer, moratorium or similar laws affecting the enforcement of
creditors' rights generally and by general principles of equity relating to
enforceability (regardless of whether considered in a proceeding at law or in
equity).
3.5 Litigation. Except as set forth on Schedule 3.5, there are no
---------- ------------
legal actions, suits, proceedings, claims, complaints, disputes or
investigations pending, or to the knowledge of the Company threatened, at law,
in equity, in arbitration or before any Governmental Authority against the
Company or its Subsidiary or any of the property or assets of the Company or its
Subsidiary.
3.6 Compliance with Laws.
--------------------
(a) Except as set forth on Schedule 3.6(a), to the knowledge of
---------------
the Company, the Company and its Subsidiary are in compliance with all
Requirements of Law in all respects.
(b) To the knowledge of the Company, (i) the Company and its
Subsidiary have all licenses, permits, orders or approvals of any Governmental
Authority and self-regulating organization, including the NASD (collectively,
"Permits") that are material to or necessary for the conduct of the business or
proposed business of the Company and its Subsidiary; (ii) such Permits are in
full force and effect; and (iii) no violations are or have been recorded in
respect of any Permit.
(c) The Subsidiary is registered as a broker-dealer with the
Commission, is a duly qualified member in good standing of the NASD and has
provided to the Purchasers true and correct copies of all its Form BD filings
with the Commission and amendments thereto during the last three years. It is
duly qualified and registered as a broker-dealer in each jurisdiction where
failure to be so qualified or registered could have a material adverse effect on
the Condition of the Company, and, to the knowledge of the Company, is in
compliance with all applicable laws, rules and regulations of the Commission,
the NASD and any such jurisdiction.
(d) To the knowledge of the Company, no material expenditure is
presently required by the Company or its Subsidiary to comply with any existing
Requirement of Law.
(e) To the knowledge of the Company, the property, assets and
operations at any time owned or leased by the Company or its Subsidiary have
been in compliance in all material respects with all applicable Environmental
Laws, while so owned or leased.
<PAGE>
10
3.7 Capitalization. The authorized capital stock of the Company,
--------------
after giving effect to the transactions contemplated hereby, is set forth on
Schedule 3.7 which lists the number of (a) authorized shares of Common Stock,
- ------------
(b) issued and outstanding shares of Common Stock, (c) authorized shares of
Preferred Stock, (d) issued and outstanding shares of Series A Preferred Stock,
and (e) the authorized but unissued shares of Series B Preferred Stock.
Schedule 3.7 also sets forth a true and complete list of the stockholders of
- ------------
the Company and, opposite the name of each stockholder, the amount of all
outstanding capital stock and Common Stock Equivalents owned by such
stockholder. All sales of stock to such stockholders were properly made under
the Securities Act to an accredited investor (as such term is defined in the
Securities Act) or were otherwise exempt from registration under the Securities
Act, or will not have a material adverse effect on the Condition of the Company.
Schedule 3.7 also sets forth the number of (a) shares of Common Stock the
- -----------
Company has reserved for issuance to employees, directors and consultants upon
exercise of stock options, (b) shares reserved by the Company authorized for
future options, and (c) shares of Common Stock reserved by the Company for
issuance upon conversion of the Preferred Stock. Except as described herein,
there are no options, warrants, conversion privileges or other rights presently
outstanding to purchase or otherwise acquire any authorized but unissued shares
of the Company's capital stock or Common Stock Equivalents and the Company is
under no obligation (whether contingent or otherwise) to issue, call,
repurchase, redeem or transfer any securities of the Company. The Purchased
Shares issued to the Purchasers hereunder, and the Common Stock when issued upon
conversion of the Purchased Shares (the "Conversion Shares"), will be duly
authorized, validly issued, fully paid and nonassessable. The issued and
outstanding shares of Common Stock and Preferred Stock, including, without
limitation, the Purchased Shares, are all duly authorized, validly issued, fully
paid and nonassessable, and were issued in compliance with the registration and
qualification requirements of all applicable federal securities laws.
3.8 No Default or Breach. Neither the Company nor its Subsidiary is
---------------------
in default under or with respect to any provision of their respective articles
of incorporation or bylaws or any Contractual Obligation and no event has
occurred and is continuing under any such provision, which with lapse of time or
the giving of notice or both, would constitute a material default thereunder.
3.9 Financial Statements. The Company has delivered to the Purchasers
--------------------
its audited consolidated financial statements (balance sheet and statements of
operations, cash flows and shareholders' equity, together with the notes
thereto) for the fiscal year ended and as at September 30, 1995, and its
unaudited consolidated balance sheet and statements of operations for the five
month period ending February 29, 1996 (the "Financial Statements"). The
Financial Statements have been prepared in accordance with GAAP applied on a
consistent basis throughout the periods indicated and with each
<PAGE>
11
other, except that the unaudited financial statements do not contain full
footnotes or typical year-end adjustments. The Financial Statements fairly
present the financial condition, operating results and cash flows of the Company
as of the respective dates and for the respective periods indicated in
accordance with GAAP, subject, in the case of the unaudited financial
statements, to normal year-end adjustments.
3.10 No Material Adverse Change; Ordinary Course of Business. Since
-------------------------------------------------------
the Balance Sheet Date (a) there has not been any material adverse change in the
Condition of the Company, (b)except as set forth on Schedule 3.10, neither the
-------------
Company nor its Subsidiary has participated in any transaction or acted outside
the ordinary course of business, including, without limitation, declaring or
paying any dividend or declaring or making any distribution to its shareholders,
except out of the earnings of the Company or its Subsidiary and (c) neither the
Company nor its Subsidiary has increased the compensation of any of its officers
or the rate of pay of any of its employees, except as part of regular
compensation increases in the ordinary course of its business.
3.11 Investment Company. Neither the Company nor its Subsidiary is an
------------------
"investment company" within the meaning of the Investment Company Act of 1940,
as amended.
3.12 Private Offering. No form of general solicitation or general
----------------
advertising was used by the Company or its representatives in connection with
the offer or sale of the Purchased Shares. Except as set forth on Schedule no
----------
registration of the Purchased Shares, pursuant to the provisions of the
Securities Act or any state securities or "blue sky" laws, will be required by
the offer, sale or issuance of the Purchased Shares.
3.13 Title to Assets. Except as specifically set forth on Schedule
--------------- --------
3.13, the Company or its Subsidiary has good and marketable title to all of the
- ----
properties and assets used in their business in each case free and clear of any
Lien, except for Liens not material to the Condition of the Company.
3.14 Intellectual Property.
---------------------
(a)(i) Except as specifically set forth on
Schedule 3.14(a)(i), to the knowledge of the Company, the Company or its
- -------------------
Subsidiary owns or is licensed or otherwise has the right to use all trademarks,
service marks, trade names, copyrights, trade secrets, licenses, franchises and
other rights, all products, processes and methods, computer software, computer
programs and similar intangible assets of the Company and its Subsidiary
(collectively, "Intellectual Property") that are necessary for the operation of
its business as presently conducted and or contemplated in its business plan.
<PAGE>
12
(a)(ii) To the knowledge of the Company, other than as set forth
on Schedule 3.14(a)(iv), none of the Intellectual Property currently sold to
-------------------
third parties by or used by the Company or its Subsidiary infringes upon or
otherwise violates any Intellectual Property rights of others.
(a)(iii) Except as specifically set forth on
Schedule 3.14(a)(v), no litigation is pending and no claim has been made against
- ------------------
the Company or its Subsidiary or, to the knowledge of the Company, is
threatened, contesting the right of the Company or its Subsidiary to sell or
license to third parties or use the Intellectual Property presently sold or
licensed to third parties or used by the Company or its Subsidiary.
(b) Except as specifically set forth on Schedule 3.14(b), to the
----------------
knowledge of the Company, no Person is infringing upon or otherwise violating
the Intellectual Property rights of the Company or its Subsidiary.
3.15 Liabilities. Except as set forth on Schedule 3.15, neither the
----------- -------------
Company nor its Subsidiary has any direct or indirect obligation or liability
(the "Liabilities"), other than (i) Liabilities fully and adequately reflected
or reserved against on the Financial Statements, (ii) Liabilities not required
by GAAP to be set forth on the Financial Statements and (iii) Liabilities
incurred since the Balance Sheet Date in the ordinary course of business.
3.16 Broker's, Finder's or Similar Fees. There are no brokerage
----------------------------------
commissions, finder's fees or similar fees or commissions payable by the Company
or its Subsidiary in connection with the transactions contemplated hereby based
on any agreement, arrangement or understanding with the Company or any action
taken by any such entity.
3.17 Disclosure in this Agreement and Other Documents. This Agreement
------------------------------------------------
and the documents and certificates furnished to the Purchasers by the Company at
or prior to the Closing, taken as a whole, do not contain any untrue statement
of a material fact or, to the knowledge of the Company, omit to state a material
fact necessary in order to make the statements contained herein or therein, in
the light of the circumstances under which they were made, not misleading.
<PAGE>
13
ARTICLE 4
REPRESENTATIONS AND
WARRANTIES OF THE PURCHASERS
----------------------------
Each of the Purchasers hereby, severally and not jointly, represents
and warrants to the Company as follows as to itself:
4.1 Existence and Power. Each of GAP LP and GAP Coinvestment (a) is a
-------------------
partnership duly organized and validly existing under the laws of the
jurisdiction of its formation and (b) has the requisite power and authority to
execute, deliver and perform its obligations under this Agreement and each of
the other Transaction Documents to which it is a party. Braddock is an
individual residing in the State of New York and the members of the Cotsakos
Group are domiciled or reside in the State of Florida.
4.2 Authorization: No Contravention. The execution, delivery and
-------------------------------
performance by each of GAP LP and GAP Coinvestment (and by Braddock and the
Cotsakos Group with respect only to subsection (c) below of this Section 4.2)
and each of the other Transaction Documents to which it is a party and the
transactions contemplated hereby and thereby, including, without limitation, the
purchase of the Purchased Shares, (a) have been duly authorized by all necessary
action, (b) do not contravene the terms of such Purchaser's organizational
documents, or any amendment thereof, and (c) do not violate, conflict with or
result in any breach or contravention of or the creation of any Lien under, any
Contractual Obligation of such Purchaser, or any Requirement of Law applicable
to such Purchaser.
4.3 Governmental Authorization: Third Party Consents. No approval,
------------------------------------------------
consent, compliance, exemption, authorization, or other action by, or notice to,
or filing with, any Governmental Authority or any other Person in respect of any
Requirement of Law, is necessary or required in connection with the execution,
delivery or performance (including, without limitation, the purchase of the
Purchased Shares) by such Purchaser of the Transaction Documents to which such
Purchaser is a party or the transactions contemplated hereby.
4.4 Binding Effect. This Agreement and each of the other Transaction
--------------
Documents to which such Purchaser is a party have been duly executed and
delivered by such Purchaser and constitute the legal, valid and binding
obligation of such Purchaser, enforceable against it in accordance with its
terms, except as enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, fraudulent conveyance or transfer, moratorium or
similar laws affecting the enforcement of creditors' rights generally or by
<PAGE>
14
equitable principles relating to enforceability (regardless of whether
considered in a proceeding at law or in equity).
4.5 Purchase Entirely for Own Account. The Purchased Shares to be
---------------------------------
purchased by the Purchasers hereunder will be acquired for investment for such
Purchaser's own account, not as nominee or agent, and not with a view to or for
sale in connection with any distribution of any part thereof, and such Purchaser
has no present intention of selling, granting any participation in, or otherwise
distributing the same. Such Purchaser does not have any contract, undertaking,
agreement or arrangement with any Person to sell, transfer or grant
participations to any Person, with respect to any of the Purchased Shares.
4.6 Restricted Securities. Each Purchaser understands that the
---------------------
Purchased Shares are characterized as "restricted securities" under the federal
securities laws inasmuch as they are being acquired from the Company in a
transaction not involving a public offering and that under such laws and
applicable regulations such securities may be resold without registration under
the Securities Act only in certain limited circumstances. In this connection
each Purchaser represents that it is familiar with the Commission's Rule 144, as
presently in effect, and understands the resale limitations imposed thereby and
by the Securities Act.
4.7 Further Limitations on Disposition. Without in any way limiting
----------------------------------
the representations set forth above, each Purchaser further agrees not to make
any disposition of all or any portion of the Purchased Shares until (a) there is
then in effect an effective registration statement under the Securities Act
covering such proposed disposition and such disposition is made in accordance
with such registration statement; or (b)(i) such Purchaser shall have notified
the Company of the proposed disposition and shall have furnished the Company
with a detailed statement of the circumstances surrounding the proposed
disposition, (ii) if reasonably requested by the Company, such Purchaser shall
have furnished the Company with an opinion of counsel, reasonably satisfactory
to the Company, that such disposition will not require registration of such
shares under the Securities Act and (iii) if reasonably requested by the
Company, the transferee shall have furnished to the Company its agreement to
abide by its restrictions on transfer set forth herein as if it were a purchaser
hereunder. It is agreed that the Company will not require opinions of counsel
for transactions made pursuant to Rule 144, as currently in existence, or Rule
144A except in unusual circumstances.
4.8 Disclosure of Information. Each Purchaser has had an opportunity
-------------------------
to ask questions and receive answers from the Company regarding the terms and
conditions of the offering of the Purchased Shares and has received from the
Company all of the information it has requested.
<PAGE>
15
4.9 Investment Experience. Each Purchaser is an investor in
---------------------
securities of companies in the development stage and acknowledges that it has,
by reason of its business or financial experience, the capacity to protect its
own interests in connection with the transaction and that it is able to bear the
economic risk of its investment in the transaction. Each Purchaser is an
"Accredited Investor" as defined in Commission Rule 501(a). Each of GAP LP and
GAP Coinvestment has not been organized solely for the purpose of acquiring the
Purchased Shares, and its investment (including mandatory assessments) does not
exceed 10% of its net worth. Christos M. Cotsakos acted as representative of the
members of the Christos Group and has the business and financial experience and
the authority to make investment decisions on behalf of all the members of the
Cotsakos Group.
4.10 Legends. To the extent applicable, each certificate or other
-------
document evidencing any of the Purchased Shares issued hereunder or any of the
Conversion Shares shall be endorsed with the legend set forth below, and each
Purchaser covenants that, except to the extent such restrictions are waived by
the Company, such Purchaser shall not transfer the securities without complying
with the restrictions on transfer described in the legend endorsed thereon:
"THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD,
TRANSFERRED, ASSIGNED, PLEDGED, OR HYPOTHECATED ABSENT AN EFFECTIVE REGISTRATION
THEREOF UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR COMPLIANCE WITH
RULE 144 PROMULGATED UNDER SUCH ACT, OR, UNLESS THE COMPANY HAS RECEIVED AN
OPINION OF COUNSEL, IF REASONABLY REQUESTED, SATISFACTORY TO ITS COUNSEL THAT
SUCH REGISTRATION IS NOT REQUIRED."
The Company shall not be required (i) to transfer on its books any
shares of the Purchased Shares or Conversion Shares which shall have been
transferred in violation of any of the provisions set forth in this Agreement,
or (ii) to treat as owner of such shares or to accord the right to vote as such
owner or to pay dividends to any transferee to whom such shares shall have been
so transferred.
4.11 Broker's, Finder's or Similar Fees. There are no brokerage
----------------------------------
commissions, finder's fees or similar fees or commissions payable by the
Purchasers or any of them, in connection with the transactions contemplated
hereby based on any agreement, arrangement or understanding with such Purchaser
or any action taken by such Purchaser.
<PAGE>
16
ARTICLE 5
BLUE SKY
--------
5.1 CORPORATE SECURITIES LAW. THE SALE OF SECURITIES WHICH ARE THE
------------------------
SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF
CORPORATIONS OF THE STATE OF CALIFORNIA AND ISSUANCE OF SUCH SECURITIES WITH
PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION FOR SUCH SECURITIES PRIOR TO
SUCH QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF SECURITIES IS EXEMPT FROM
QUALIFICATION BY SECTION 25100, 25102 OR 25105 OF THE CALIFORNIA CORPORATIONS
CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED UPON
SUCH QUALIFICATION BEING OBTAINED, UNLESS THE SALE IS EXEMPT.
ARTICLE 6
CONDITIONS TO THE OBLIGATION
OF THE PURCHASERS TO CLOSE
--------------------------
The obligation of the Purchasers to purchase the Purchased Shares, to
pay the purchase prices therefor at the Closing and to perform any obligations
hereunder shall be subject to the satisfaction as determined by, or waiver by,
the Purchasers of the following conditions on or before the Closing Date.
6.1 Secretary's Certificate. The Purchasers shall have received a
-----------------------
certificate from the Company, in form and substance satisfactory to the
Purchasers, dated the Closing Date and signed by the Secretary or an Assistant
Secretary of the Company, certifying that the attached copies of the Restated
Articles of Incorporation, the Bylaws and resolutions of the Board of Directors
of the Company approving this Agreement and the transactions contemplated
hereby, are all true, complete and correct and remain unamended and in full
force and effect.
6.2 Officer's Certificate. The Purchasers shall have received a
---------------------
certificate from the Company, in form and substance satisfactory to the
Purchasers, dated the Closing Date and signed by its Chief Executive Officer and
its Chief Financial Officer, certifying that (a) the representations and
warranties of the Company contained in Article 3 hereof are true and correct on
the Closing Date and (b)the Company has performed and complied in all material
respects with all of the agreements and conditions set forth or
<PAGE>
17
contemplated herein that are required to be performed or complied with by the
Company on or before the Closing Date.
6.3 Documents. The Purchasers shall have received true, complete and
---------
correct copies of such documents as they may reasonably request in connection
with or relating to the sale of the Purchased Shares and the transactions
contemplated hereby, all in form and substance reasonably satisfactory to the
Purchasers.
6.4 Stockholders Agreement Supplement. The Company, the stockholders
---------------------------------
of the Company named in the Stockholders Agreement and each of the Purchasers
shall have duly executed and delivered Supplement No. 1 to the Stockholders
Agreement, substantially in the form attached hereto as Exhibit C.
---------
6.5 Restated Articles of Incorporation and Bylaws. The Restated
---------------------------------------------
Articles of Incorporation shall have been filed with the Secretary of State of
the State of California.
6.6 Consents and Approvals. All consents, exemptions, authorizations,
----------------------
or other actions by, or notices to, or filings with, Governmental Authorities
and other Persons in respect of all Requirements of Law and with respect to
those Contractual Obligations of the Company which are necessary or required in
connection with the execution, delivery or performance by the Company or
enforcement against the Company of the Transaction Documents to which it is a
party, except for the filing of a Notice of Transaction pursuant to Section
25102(f) of the California Corporation Code and a Form D pursuant to the
Securities Act, shall have been obtained and be in full force and effect, and
each of the Purchasers shall have been furnished with appropriate evidence
thereof.
ARTICLE 7
CONDITIONS TO THE OBLIGATIONS
OF THE COMPANY TO CLOSE
---------------------------
The obligations of the Company to sell the Purchased Shares and to
perform their other obligations hereunder, shall be subject to the satisfaction
as determined by, or waiver by, the Company of the following conditions on or
before the Closing Date:
7.1 Effectiveness of Restated Articles. The Restated Articles of
----------------------------------
Incorporation shall have been filed with the Secretary of State of the State of
California.
<PAGE>
18
7.2 Purchaser's Certificate. The Company shall have received a
-----------------------
certificate from each of the Purchasers, in form and substance satisfactory to
the Company, dated the Closing Date and in the case of GAP LP and GAP
Coinvestment, signed by their respective general partners, certifying that (a)
the representations and warranties of such Purchaser contained in Article 4
hereof are true and correct on the Closing Date and (b) such Purchaser has
performed and complied in all material respects with all of the agreements and
conditions set forth or contemplated herein that are required to be performed or
complied with by such Purchaser on or before the Closing Date.
7.3 Stockholders Agreement Supplement. The Company, the stockholders
---------------------------------
of the Company named in the Stockholders Agreement and each of the Purchasers
shall have duly executed and delivered Supplement No. 1 to the Stockholders
Agreement, substantially in the form attached hereto as Exhibit C.
---------
7.4 Consents and Approvals. All consents, exemptions, authorizations,
----------------------
or other actions by, or notices to, or filings with, Governmental Authorities
and other Persons in respect of all Requirements of Law and with respect to
those Contractual Obligations of the Purchasers which are necessary or required
in connection with the execution, delivery or performance by the Purchasers or
enforcement against each of the Purchasers of the Transaction Documents to which
it is a party, except for the filing of a Notice of Transaction pursuant to
Section 25102(f) of the California Corporation Code and a Form D pursuant to the
Securities Act, shall have been obtained and be in full force and effect, and
the Company shall have been furnished with appropriate evidence thereof.
7.5 Legal Investment. At the time of the Closing, the purchase of the
----------------
Purchased Shares by the Purchasers shall be legally permitted by all laws and
regulations to which the Purchasers and the Company are subject.
7.6 California Qualification. The Commissioner of Corporations of the
------------------------
State of California and any other applicable state regulatory authority shall
have issued permits qualifying the offer and sale to the Purchasers of the
Purchased Shares or such offer and sale shall be exempt from such qualification
under the California Corporate Securities Law of 1968, as amended, and any other
applicable state blue-sky law.
<PAGE>
19
ARTICLE 8
INDEMNIFICATION
---------------
8.1 Indemnification of Purchasers. Except as otherwise provided in
-----------------------------
this Article 8, the Company agrees to indemnify, defend and hold harmless each
of the Purchasers and their Affiliates and their respective officers, directors,
agents, employees, subsidiaries, partners and controlling persons to the fullest
extent permitted by law from and against any and all losses, claims (including
any claim by a third party), damages, expenses (including reasonable fees,
disbursements and other charges of counsel) or other liabilities (collectively,
"Losses") resulting from, arising out of or relating to any breach of any
representation or warranty, covenant or agreement by the Company in this
Agreement or the other Transaction Documents to which it is a party, including,
without limitation, Losses arising out of or relating to any legal,
administrative or other actions (including actions brought by the Purchasers or
derivative actions brought by any Person claiming through or in the Company's
name), proceedings or investigations (whether formal or informal), or written
threats thereof, based upon, relating to or arising out of the Transaction
Documents, the transactions contemplated thereby, or the Company's role therein
or in transactions contemplated thereby; provided, however, that the Company
--------- -------
shall not be liable under this Section 8.1 to such party to the extent that it
is finally judicially determined that such Losses resulted primarily from the
material breach by such party of any representation, warranty, covenant or other
agreement of such party contained in this Agreement; and provided, further, that
--------- -------
if and to the extent that such indemnification is unenforceable for any reason,
the Company shall make the maximum contribution to the payment and satisfaction
of such Losses which shall be permissible under applicable laws. In connection
with the obligation of the Company to indemnify for expenses as set forth above,
the Company shall, upon presentation of appropriate invoices containing
reasonable detail, reimburse each indemnified party for all such expenses
(including reasonable fees, disbursements and other charges of counsel) as they
are incurred by such party. The provisions of this Section 8.1 shall not be
deemed exclusive of any other rights of indemnification or other remedy to which
the Purchasers may be entitled.
8.2 Indemnification of the Company. Except as otherwise provided in
------------------------------
this Article 8, the Purchasers, severally and not jointly, agree to indemnify,
defend and hold harmless the Company and it Affiliates and their respective
officers, directors, agents, employees, subsidiaries, partners and controlling
persons to the fullest extent permitted by law from and against any and all
Losses resulting from, arising out of or relating to any breach of any
representation or warranty, covenant or agreement by the Purchasers in this
Agreement, or the other Transaction Documents to which it is a party, including,
without limitation, Losses arising out of or relating to any legal,
administrative or other actions
<PAGE>
20
(including actions brought by either of the Purchasers), proceedings or
investigations (whether formal or informal), or written threats thereof, based
upon, relating to or arising out of the Transaction Documents, the transactions
contemplated thereby, or either of the Purchaser's role therein or in
transactions contemplated thereby; provided,however, that the Purchasers shall
-------- -------
not be liable for any payments pursuant to this Section 8.2 in excess of the
purchase price paid for the Purchased Shares; provided, further, that the
-------- -------
Purchasers shall not be liable under this Section 8.2 to any party to the extent
that it is finally judicially determined that such Losses resulted primarily
from the material breach by such party of any representation, warranty, covenant
or other agreement of such party contained in this Agreement; and provided,
--------
further, that if and to the extent that such indemnification is unenforceable
- -------
for any reason, the Purchasers shall make the maximum contribution to the
payment and satisfaction of such Losses which shall be permissible under
applicable laws. In connection with the obligation of the Purchasers to
indemnify for expenses set forth above, the Purchasers shall, upon presentation
of appropriate invoices containing reasonable detail, reimburse each indemnified
party for all such expenses (including reasonable fees, disbursements and other
charges of counsel) as they are incurred by such party. The provisions of this
Section 8.2 shall not be deemed exclusive of any other rights of indemnification
or other remedy to which the Company may be entitled.
8.3 Notification. Each person entitled to indemnification pursuant to
------------
this Article 8 (each, an "Indemnified Party") will, promptly after the
occurrence of any event, or after the receipt of notice of the commencement of
any action, investigation, claim or other proceeding against such Indemnified
Party in respect of which indemnity may be sought from the indemnifying party
under this Article 8 (each, an "Indemnifying Party"), notify the Indemnifying
Party in writing thereof. The omission of any Indemnified Party to so notify the
Indemnifying Party of any such action shall not relieve the Indemnifying Party
from any liability which they may have to such Indemnified Party under this
Article 8 unless, and only to the extent that, such omission results in the
Indemnifying Party's forfeiture of substantive rights or defenses. In case any
such action, claim or other proceeding shall be brought against any Indemnified
Party it shall notify the Indemnifying Parry of the commencement thereof, the
Indemnifying Party shall be entitled to assume the defense thereof at their own
expense, with counsel satisfactory to such Indemnified Party in its reasonable
judgment; provided, however, that any Indemnified Party may, at its own expense,
--------- -------
retain separate counsel to participate in such defense at its own expense.
Notwithstanding the foregoing, in any action, claim or proceeding in which both
the Indemnifying Party and an Indemnified Party, are, or are reasonably likely
to become, a party, such Indemnified Party shall have the right to employ
separate counsel at the expense of the Indemnifying Party and to control its own
defense of such action, claim or proceeding if, in the reasonable opinion of
counsel to such Indemnified Party, a conflict or potential conflict exists
between the Indemnifying Party and such Indemnified Party that would make such
separate representation advisable; provided, however, that the
-------- -------
<PAGE>
21
Indemnifying Party shall not be liable for the fees and expenses of more than
one counsel to all Indemnified Parties. The Indemnifying Party agrees that it
will not, without the prior written consent of the Indemnified Party settle,
compromise or consent to the entry of any judgment in any pending or threatened
claim, action or proceeding relating to the matters contemplated hereby (if any
Indemnified Party is a party thereto or has been actually threatened to be made
a party thereto) unless such settlement, compromise or consent includes an
unconditional release of the Indemnified Party and each other Indemnified Party
from all liability arising or that may arise out of such claim, action or
proceeding. The Indemnifying Party shall not be liable for any settlement of any
claim, action or proceeding effected against an Indemnified Party without its
written consent, which consent shall not be unreasonably withheld.
ARTICLE 9
AFFIRMATIVE COVENANTS
---------------------
Until the consummation of an initial public offering of equity
securities of the Company pursuant to a registration statement under the
Securities Act, the Company hereby covenants and agrees with the Purchasers as
follows:
9.1 Preservation of Corporate Existence. The Company shall and shall
-----------------------------------
cause its Subsidiary to:
(a) preserve and maintain in full force and effect its corporate
existence and good standing under the laws of its jurisdiction of incorporation
or organization; and
(b) use its best efforts to file or cause to be filed in a timely
manner all reports, applications and licenses that shall be required by a
Governmental Authority and that, if not timely filed, would have a material
adverse effect on the Condition of the Company.
9.2 Financial Statements and Other Information. The Company shall
------------------------------------------
deliver to the Purchasers, in form and substance satisfactory to the Purchasers:
(a) as soon as available, but not later than ninety (90) days
after the end of each fiscal year of the Company, a copy of the audited
consolidated balance sheet of the Company as of the end of such year and the
related statements of operations and cash flows for such fiscal year, setting
forth in each case in comparative form the
<PAGE>
22
figures for the previous year, all in reasonable detail and accompanied by a
management summary and analysis of the operations of the Company for such fiscal
year and by the opinion of a nationally recognized independent certified public
accounting firm which report shall not contain a qualification based on the
records of the Company, its accounting controls or procedures or the scope of
the audit, that such financial statements present fairly the financial condition
as of such date and results of operations and cash flows for the periods
indicated in conformity with GAAP applied on a consistent basis;
(b) commencing with the fiscal period ending on September 30,
1996, as soon as available, but in any event not later than forty-five (45) days
after the end of each of the first three fiscal quarters of each year, the
unaudited balance sheet of the Company, and the related statements of operations
and cash flows for such quarter and for the period commencing on the first day
of the fiscal year and ending on the last day of such quarter, all certified by
an appropriate officer of the Company as presenting fairly the financial
condition as of such date and results of operations and cash flows for the
periods indicated in conformity with GAAP applied on a consistent basis, subject
to normal year-end audit adjustments and the absence of footnotes required by
GAAP; and
(c) annual budgets and such other financial and operating data
which are customarily prepared by the Company, as the Purchasers reasonably may
request.
9.3 Inspection. The Company shall and shall cause its Subsidiary to
----------
permit representatives of the Purchasers to visit and inspect any of its
properties, to examine its corporate, financial and operating records and make
copies thereof or abstracts therefrom, and to discuss its affairs, finances and
accounts with their respective directors, officers and independent public
accountants, all at such reasonable times during normal business hours and as
often as may be reasonably requested upon reasonable advance notice to the
Company.
9.4 Back-Ups of Computer Software. The Company shall and shall cause
-----------------------------
its Subsidiary reasonably frequently to make back-ups of all material computer
software programs and databases and shall maintain such software programs and
databases at a secure off-site location.
9.5 Books and Records. The Company shall and shall cause its
-----------------
Subsidiary to keep books of record and account, in which accurate entries shall
be made of all financial transactions and the assets and business of the Company
in accordance with GAAP consistently applied to the Company.
<PAGE>
23
9.6 Conversion of Preferred Stock. In the event that the authorized
-----------------------------
number of shares of Common Stock is not sufficient to permit the conversion of
the issued and outstanding shares of the Preferred Stock, the Company shall use
its best efforts to cause the Board of Directors and shareholders to approve an
amendment of the articles of incorporation of the Company to increase the
authorized number of shares of Common Stock to a number sufficient to permit
such conversion.
ARTICLE 10
MISCELLANEOUS
-------------
10.1 Survival of Representations and Warranties. All of the
------------------------------------------
representations and warranties made herein shall survive the execution and
delivery of this Agreement, any investigation by or on behalf of the Purchasers,
acceptance of the Purchased Shares or termination of this Agreement.
10.2 Notices. All notices, demands and other communications provided
-------
for or permitted hereunder shall be made in writing and shall be by registered
or certified first-class mall, return receipt requested, telecopier, courier
service, overnight mail or personal delivery:
(a) if to GAP LP or GAP Coinvestment:
c/o General Atlantic Service Corporation
3 Pickwick Plaza
Greenwich, CT 06830 U.S.A.
Telecopy: (203) 622-4099
Attention: Stephen P. Reynolds
with a copy to:
Paul, Weiss, Rifkind, Wharton & Garrison
1285 Avenue of the Americas
New York, NY 10019-6064
Telecopy: (212) 757-3990
Attention: Matthew Nimetz, Esq.
<PAGE>
24
(b) if to Braddock:
10 Gracie Square, Apt. 9F
New York, NY 10028
Telecopy: (212) 8794010
Attention: Richard S. Braddock
(c) if to the Cotsakos Group:
Old Port Cove
Lake Point Tower #2058
100 Lakeshore Drive
North Palm Beach, FL 33408
Telecopy: (407) 626-1580
Attention: Christos M. Cotsakos
(d) if to the Company:
E*Trade Group, Inc.
Four Embarcadero Place
2400 Geng Road
Palo Alto, CA 94306
Telecopy: (415) 324-3044
Attention: President
with a copy to:
Jackson Tufts Cole & Black, LLP
650 California Street
San Francisco, CA 94108-2613
Telecopy: (415) 392-3494
Attention: Templeton C. Peck, Esq.
All such notices and communications shall be deemed to have been duly
given when delivered by hand, if personally delivered; when delivered by courier
or overnight mail, if delivered by commercial courier service or overnight mail;
five (5) Business Days after being deposited in the mall, postage prepaid, if
mailed; and when receipt is mechanically acknowledged, if telecopied.
<PAGE>
25
10.3 Successors and Assigns. This Agreement shall inure to the
----------------------
benefit of and be binding upon the successors and permitted assigns of the
parties hereto. Subject to applicable securities laws, each of the Purchasers
may assign any
of its rights under this Agreement to any of its Affiliates. The Company may not
assign any OF its rights under this Agreement, except to a successor-in-interest
to the Company, without the prior written consent of all of the Purchasers.
Except as provided in Article 8, no Person other than the parties hereto and
their successors and permitted assigns is intended to be a beneficiary of any of
the Transaction Documents.
10.4 Amendment and Waiver.
--------------------
(a) No failure or delay on the part of the Company or the
Purchasers in exercising any right, power or remedy hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise of any such right,
power or remedy preclude any other or further exercise thereof or the exercise
of any other right, power or remedy. The remedies provided for herein are
cumulative and are not exclusive of any remedies that may be available to the
Company or the Purchasers at law, in equity or otherwise.
(b) Any amendment, supplement or modification of or to any
provision of this Agreement, any waiver of any provision of this Agreement, and
any consent to any departure by the Company or the Purchasers from the terms of
any provision of this Agreement, shall be effective only if it is made or given
in writing and signed by the Company and the Purchasers. Except where notice is
specifically required by this Agreement, no notice to or demand on the Company
in any case shall entitle the Company to any other or further notice or demand
in similar or other circumstances.
10.5 Counterparts. This Agreement may be executed in any number of
------------
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
10.6 Headings. The headings in this Agreement are for convenience of
--------
reference only and shall not limit or otherwise affect the meaning hereof.
10.7 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
-------------
IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA, WITHOUT REGARD TO THE
PRINCIPLES OF CONFLICTS OF LAW THEREOF.
<PAGE>
26
10.8 Severability. If any one or more of the provisions contained
------------
herein, or the application thereof in any circumstance, is held invalid, illegal
or unenforceable in any respect for any reason, the validity, legality and
enforceability of any such provision in every other respect and of the remaining
provisions hereof shall not be in any way impaired, unless the provisions held
invalid, illegal or unenforceable shall substantially impair the benefits of the
remaining provisions hereof.
10.9 Entire Agreement. This Agreement, together with the exhibits and
----------------
schedules hereto and the other Transaction Documents, is intended by the parties
as a final expression of their agreement and intended to be a complete and
exclusive statement of the agreement and understanding of the parties hereto in
respect of the subject matter contained herein and therein. There are no
restrictions, promises, warranties or undertakings, other than those set forth
or referred to herein or therein. This Agreement, together with the exhibits
hereto, and the other Transaction Documents supersede all prior agreements and
understandings between the parties with respect to such subject matter.
10.10 Fees. Except as agreed between the Company and the Purchasers,
----
each party will be responsible for the fees and expenses of its own counsel. If
the Closing does not take place, each party shall bear its own expenses.
10.11 Further Assurances. Each of the parties shall execute such
------------------
documents and perform such further acts (including, without limitation,
obtaining any consents, exemptions, authorizations or other actions by, or
giving any notices to, or making any filings with, any Governmental Authority or
any other Person) as may be reasonably required or desirable to carry out or to
perform the provisions of this Agreement.
[THIS SPACE INTENTIONALLY LEFT BLANK.]
<PAGE>
27
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed and delivered by their respective officers hereunto duly authorized
on the date first above written.
E*TRADE GROUP, INC.
By:
=====================================
Name:
Title:
GENERAL ATLANTIC PARTNERS II, L.P.
By: GENERAL ATLANTIC PARTNERS, LLC
Its General Partner
By:
=====================================
Name:
Title: A Managing Member
GAP COINVESTMENT PARTNERS, L.P.
By:
=====================================
Name:
Title: A General Partner
=====================================
Richard S. Braddock
<PAGE>
28
CHRISTOS M. COTSAKOS, AS CUSTODIAN FOR SUZANNE R.
COTSAKOS UNDER THE CALIFORNIA UNIFORM TRANSFER TO
MINORS ACT
By:
========================================
Christos M. Cotsakos as custodian
for Suzanne R. Cotsakos
CHRISTOS M. COTSAKOS AND HANNAH B. COTSAKOS, AS
TRUSTEES FOR THE BENEFIT OF THE COTSAKOS REVOCABLE
TRUST UNDER AGREEMENT DATED SEPTEMBER 3, l987
By:
=======================================
Hannah B. Cotsakos,
as Co-Trustee
By:
========================================
Christos M. Cotsakos,
as Co-Trustee
CHRISTOS M. COTSAKOS,
SMITH BARNEY INC.,
ROLLOVER CUSTODIAN
IRA ACCT #60264445-l0-254
By:
========================================
Christos M. Cotsakos
<PAGE>
29
Schedule 2.1
------------
List of Purchasers
------------------
<TABLE>
<CAPTION>
Shares of
Purchaser Preferred Stock Purchase Price
- -------------------------------- --------------- --------------
<S> <C> <C>
GAP LP 6,267 $ 877,380
GAP Coinvestment 876 122,640
Braddock 7,143 1,000,020
Christos M. Cotsakos, as 1,000 140,000
Custodian for Suzanne R.
Cotsakos under the California
Uniform Transfer to Minors
Act
Christos M. Cotsakos and 3,300 462,000
Hannah B. Cotsakos, as
Trustees for the benefit of the
Cotsakos Revocable Trust
under Agreement Dated
September 3, 1987
Christos M. Cotsakos, 1,750 245,000
Smith Barney Inc.,
Rollover Custodian
IRA Acct #60264445-10-254
</TABLE>
<PAGE>
EXHIBIT 10.19
================================================================================
STOCK PURCHASE AGREEMENT
among
E*TRADE GROUP, INC.
and
SOFTBANK HOLDINGS INC.
--------------------
Dated: June 6, 1996
--------------------
================================================================================
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE 1 DEFINITIONS....................................................... 1
1.1 Definitions............................................ 1
1.2 Accounting Terms; Financial Statements................. 4
1.3 Knowledge of the Company............................... 4
ARTICLE 2 PURCHASE AND SALE OF PREFERRED STOCK.............................. 4
2.1 Purchase and Sale of Preferred Stock................... 4
2.2 Closing................................................ 4
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE COMPANY.... ................ 5
3.1 Corporate Existence and Power........................... 5
3.2 Corporate Authorization; No Contravention............... 5
3.3 Governmental Authorization; Third Party Consents........ 5
3.4 Binding Effect.......................................... 5
3.5 Litigation.............................................. 5
3.6 Compliance with Laws.................................... 6
3.7 Capitalization.......................................... 6
3.8 No Default or Breach.................................... 7
3.9 Financial Statements.................................... 7
3.10 No Material Adverse Change; Ordinary Course of Business. 7
3.11 Investment Company...................................... 7
3.12 Private Offering........................................ 7
3.13 Title to Assets......................................... 7
3.14 Intellectual Property................................... 7
3.15 Liabilities............................................. 8
3.16 Broker's, Finder's or Similar Fees...................... 8
3.17 Disclosure in this Agreement and Other Documents........ 8
ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF THE PURCHASER................... 8
4.1 Existence and Power..................................... 8
4.2 Authorization; No Contravention......................... 8
4.3 Governmental Authorization; Third Party Consents........ 8
4.4 Binding Effect.......................................... 8
4.5 Purchase Entirely for Own Account....................... 9
4.6 Restricted Securities................................... 9
4.7 Further Limitations on Disposition...................... 9
4.8 Disclosure of Information............................... 9
4.9 Investment Experience................................... 9
4.10 Legends................................................. 9
4.11 Broker's, Finder's or Similar Fees...................... 10
4.12 Nature of Transaction................................... 10
ARTICLE 5 BLUE SKY.......................................................... 10
5.1 Corporate Securities Law................................ 10
i.
<PAGE>
Page
----
ARTICLE 6 CONDITIONS TO THE OBLIGATION OF THE PURCHASER TO CLOSE............ 11
6.1 Secretary's Certificate................................. 11
6.2 Certificate............................................. 11
6.3 Documents............................................... 11
6.4 Stockholders Agreement Supplement and Amendment......... 11
6.5 Restated Articles of Incorporation...................... 11
6.6 Consents and Approvals.................................. 11
ARTICLE 7 CONDITIONS TO THE OBLIGATIONS OF THE COMPANY TO CLOSE....... ..... 12
7.1 Restated Articles of Incorporation...................... 12
7.2 Purchaser's Certificate................................. 12
7.3 Stockholders Agreement Supplement and Amendment......... 12
7.4 California Qualification................................ 12
ARTICLE 8 INDEMNIFICATION................................................... 12
8.1 Indemnification of Purchaser............................ 12
8.2 Indemnification of the Company.......................... 13
8.3 Notification............................................ 13
ARTICLE 9 AFFIRMATIVE COVENANTS............................................. 14
9.1 Preservation of Corporate Existence..................... 14
9.2 Financial Statements and Other Information.............. 14
9.3 Inspection.............................................. 14
9.4 Back-Ups of Computer Software........................... 15
9.5 Books and Records....................................... 15
9.6 Conversion of Preferred Stock........................... 15
ARTICLE 10 MISCELLANEOUS.................................................... 15
10.1 Lock-Up Period.......................................... 15
10.2 Survival of Representations and Warranties.............. 15
10.3 Notices................................................. 15
10.4 Successors and Assigns.................................. 16
10.5 Amendment and Waiver.................................... 16
10.6 Counterparts............................................ 17
10.7 Headings................................................ 17
10.8 Governing Law........................................... 17
10.9 Severability............................................ 17
10.10 Entire Agreement........................................ 17
10.11 Fees.................................................... 17
10.12 Further Assurances...................................... 17
ii.
<PAGE>
STOCK PURCHASE AGREEMENT
This AGREEMENT, dated June 6, 1996 (this "Agreement"), among E*Trade
Group, Inc., a California corporation (the "Company"), and SOFTBANK Holdings
Inc., a Delaware corporation ("SOFTBANK" or the "Purchaser").
WHEREAS, the Company proposes to sell to the Purchaser, for an
aggregate purchase price of $8,999,900, an aggregate of 11,180 shares of Series
C Preferred Stock, par value $.15 per share, of the Company (the "Preferred
Stock").
NOW, THEREFORE, in consideration of the mutual covenants and
agreements set forth herein and for good and valuable consideration the receipt
and adequacy of which is hereby acknowledged, the parties hereto agree as
follows:
ARTICLE 1
DEFINITIONS
-----------
1.1 Definitions. As used in this Agreement, and unless the context
-----------
requires a different meaning, the following terms have the meanings indicated:
"Affiliate" shall mean any Person who is an "affiliate" as defined in
---------
Rule 12b-2 under the Exchange Act.
"Agreement" means this Agreement as the same may be amended,
---------
supplemented or modified in accordance with the terms hereof.
"Balance Sheet Date" means March 31, 1996.
------------------
"Business Day" means any day other than a Saturday, Sunday or other
------------
day on which commercial banks in the State of California are authorized or
required by law or executive order to close.
"Bylaws" means the amended and restated bylaws of the Company as in
------
effect as of the Closing Date substantially in the form attached hereto as
Exhibit B.
- ---------
"Capital Lease Obligation" of any Person shall mean, as of the date of
------------------------
determination, any obligation of such Person to pay rent or other amounts under
any lease of (or other arrangement conveying the right to use) real or personal
property, or a combination thereof, which obligation is required to be
classified and accounted for as capital leases on a balance sheet of such Person
under GAAP and, for the purposes of this Agreement, the amount of such
obligations, as of the date of determination, shall be the capitalized amount
thereof at such time determined in accordance with GAAP consistently applied.
"Closing" has the meaning set forth in Section 2.2 of this Agreement.
-------
"Closing Date" means the date specified in Section 2.2 of this
------------
Agreement.
1.
<PAGE>
"Code" means the Internal Revenue Code of 1986, as amended, or any
----
successor statute thereto.
"Commission" means the Securities and Exchange Commission or any
----------
similar agency then having jurisdiction to enforce the Securities Act.
"Common Stock" means the Common Stock, par value $.10 per share, of
------------
the Company.
"Common Stock Equivalents" means any security or obligation which is
------------------------
by its terms convertible into shares of capital stock of the Company and any
option, warrant or other subscription or purchase right with respect to capital
stock of the Company.
"Company" means E*Trade Group, Inc., a California corporation.
-------
"Condition of the Company" means the assets, business, properties,
------------------------
operations or financial condition of the Company, taken as a whole.
"Contingent Obligation" means, as applied to any Person, any direct or
---------------------
indirect liability of that Person with respect to any Indebtedness, lease,
dividend, guaranty, letter of credit or other obligation, contractual or
otherwise (the "primary obligation") of another Person (the "primary obligor"),
------------------ ---------------
whether or not contingent, (a) to purchase, repurchase or otherwise acquire such
primary obligations or any property constituting direct or indirect security
therefor, or (b) to advance or provide funds (i) for the payment or discharge of
any such primary obligation, or (ii) to maintain working capital or equity
capital of the primary obligor or otherwise to maintain the net worth or
solvency or any balance sheet item, level of income or financial condition of
the primary obligor or (c) to purchase property, securities or services
primarily for the purpose of assuring the beneficiary of any such primary
obligation of the ability of the primary obligor to make payment of such primary
obligation, or (d) otherwise to assure or hold harmless the beneficiary of any
such primary obligation against loss in respect thereof. The amount of any
Contingent Obligation shall be deemed to be an amount equal to the stated or
determinable amount of the primary obligation in respect of which such
Contingent Obligation is made or, if not stated or determinable, the maximum
reasonably anticipated liability in respect thereof.
"Contractual Obligations" means as to any Person, any provision of any
-----------------------
security issued by such Person or of any agreement, undertaking, contract,
indenture, mortgage, deed of trust or other instrument to which such Person is a
party or by which it or any of its property is bound.
"Defined Benefit Plan" means a defined benefit plan within the meaning
--------------------
of Section 3(35) of ERISA or Section 414(j) of the Code, whether funded or
unfunded, qualified or nonqualified (whether or not subject to ERISA or the
Code).
"Environmental Laws" means federal, state and local laws, principles
------------------
of common law, regulations and codes, as well as orders, decrees, judgments or
injunctions issued, promulgated, approved or entered thereunder relating to
pollution, protection of the environment or public health and safety.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
-----
amended (or any successor statute thereto).
"ERISA Affiliate" means any Person that is treated as a single
---------------
employer with the Company under Section 414(b), (c), (m) or (o) of the Code.
2.
<PAGE>
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
------------
(or any successor statute thereto) and the rules and regulations of the
Commission promulgated thereunder.
"Financial Statements" has the meaning set forth in Section 3.9 of
--------------------
this Agreement.
"GAAP" means United States generally accepted accounting principles in
----
effect from time to time.
"Governmental Authority" means the government of the United States,
----------------------
any state, city, locality or other political subdivision thereof, any entity
exercising executive, legislative, judicial, regulatory or administrative
functions of or pertaining to government, and any corporation or other entity
owned or controlled, through stock or capital ownership or otherwise, by any of
the foregoing.
"Indebtedness" means as to any Person (a) all obligations of such
------------
Person for borrowed money (including, without limitation, reimbursement and all
other obligations with respect to surety bonds, letters of credit and bankers'
acceptances, whether or not matured), (b) all obligations of such Person
evidenced by notes, bonds, debentures or similar instruments, (c) all
obligations of such Person to pay the deferred purchase price of property or
services, except (i) trade accounts payable and accrued commercial or trade
liabilities arising in the ordinary course of business and (ii) compensation,
pension obligations and other obligations arising out of employee benefits and
employee arrangements, (d) all interest rate and currency swaps, caps, collars
and similar agreements or hedging devices under which payments are obligated to
be made by such Person, whether periodically or upon the happening of a
contingency, (e) all indebtedness created or arising under any conditional sale
or other title retention agreement with respect to property acquired by such
Person (even though the rights and remedies of the seller or lender under such
agreement in the event of default are limited to repossession or sale of such
property), (f) all obligations of such Person under leases which have been or
should be, in accordance with GAAP, recorded as capital leases, (g) all
indebtedness secured by any Lien on any property or asset owned or held by that
Person regardless of whether the indebtedness secured thereby shall have been
assumed by that Person or is non recourse to the credit of that Person, and (h)
any Contingent Obligation of such Person.
"Liabilities" has the meaning set forth in Section 3.15 of this
-----------
Agreement.
"Lien" means any mortgage, deed of trust, pledge, hypothecation,
----
assignment, encumbrance, lien (statutory or other) or preference, priority,
right or other security interest or preferential arrangement of any kind or
nature whatsoever (excluding preferred stock and equity related preferences)
including, without limitation, those created by, arising under or evidenced by
any conditional sale or other title retention agreement, the interest of a
lessor under a Capital Lease Obligation, or any financing lease having
substantially the same economic effect as any of the foregoing.
"NASD" means the National Association of Securities Dealers, Inc.
----
"Outstanding Borrowings" means all Indebtedness of the Company or its
----------------------
Subsidiary for money borrowed that is outstanding on the relevant date of
determination.
"Permits" has the meaning assigned to such term in Section 3.6 of the
-------
Agreement.
"Person" means any individual, firm, corporation, limited liability
------
company, partnership, trust, incorporated or unincorporated association, joint
venture, joint stock company, Governmental
3.
<PAGE>
Authority or other entity of any kind, and shall include any successor (by
merger or otherwise) of such entity.
"Preferred Stock" means Series C Preferred Stock, par value $.15 per
---------------
share, of the Company.
"Purchased Shares" has the meaning set forth in Section 2.1 of this
----------------
Agreement.
"Purchaser" means SOFTBANK Holdings Inc..
---------
"Requirements of Law" means as to any Person, any law, treaty, rule,
-------------------
regulation, right, privilege, qualification, license or franchise or
determination of an arbitrator or a court or other Governmental Authority, in
each case applicable or binding upon such Person or any of its property or to
which such Person or any of its property is subject or pertaining to any or all
of the transactions contemplated or referred to herein.
"Restated Articles of Incorporation" means the Restated Articles of
----------------------------------
Incorporation of the Company (including a Certificate of Determination or other
amendments establishing the Series C Preferred Stock), as the same may have
been amended and as in effect as of the Closing Date substantially in the form
attached hereto as Exhibit A.
---------
"Securities Act" means the Securities Act of 1933, as amended, (or any
--------------
successor statute thereto) and the rules and regulations of the Commission
promulgated thereunder.
"Stockholders Agreement" means the Stockholders Agreement among the
----------------------
Company, General Atlantic Partners II, L.P., GAP Coinvestment Partners, L.P.,
William A. Porter and Bernard A. Newcomb, dated September 28, 1995, as amended
by the Stockholders Agreement Supplement and Amendment.
"Stockholders Agreement Supplement and Amendment" means the
-----------------------------------------------
Stockholders Agreement Supplement and Amendment, substantially in the form
attached hereto as Exhibit C, which supersedes and replaces Supplement No. 1 to
---------
the Stockholders Agreement dated April 10, 1996 by and among General Atlantic
Partners II, L.P., GAP Coinvestment Partners, L.P., William A. Porter, Bernard
A. Newcomb, Richard S. Braddock and the Cotsakos Group.
"Subsidiary" means E*Trade Securities, Inc., a California corporation.
----------
"Transaction Documents" means collectively, this Agreement and any
---------------------
materials or documents delivered pursuant hereto, including the Stockholders
Agreement Supplement.
1.2 Accounting Terms; Financial Statements. All accounting terms
--------------------------------------
used herein not expressly defined in this Agreement shall have the respective
meanings given to them in accordance with sound accounting practice. The term
"sound accounting practice" shall mean such accounting practice as, in the
opinion of the independent certified public accountants regularly retained by
the Company, conforms at the time to GAAP applied on a consistent basis except
for changes with which such accountants concur.
1.3 Knowledge of the Company. All references to the knowledge of the
------------------------
Company shall mean the actual knowledge of any executive officer of the Company
or any executive officer of its Subsidiary.
4.
<PAGE>
ARTICLE 2
PURCHASE AND SALE OF PREFERRED STOCK
------------------------------------
2.1 Purchase and Sale of Preferred Stock. Subject to the terms and
------------------------------------
conditions herein set forth, the Company agrees to sell to the Purchaser, and
the Purchaser agrees to purchase from the Company on the Closing Date, 11,180
shares of Preferred Stock, for the purchase price of $805 per share (all of the
shares of Preferred Stock being purchased pursuant hereto being referred to
herein as "Purchased Shares").
2.2 Closing. The purchase and issuance of the Purchased Shares (the
-------
"Closing") shall take place on the date hereof (the "Closing Date") and shall be
consummated in accordance with arrangements reasonably acceptable to counsel for
the Purchaser and counsel for the Company. On the Closing Date, (a) the Company
and the Purchaser shall execute and deliver the Transaction Documents, and (b)
the Company shall deliver to the Purchaser certificates representing the
Purchased Shares against delivery by the Purchaser to the Company, of the
aggregate purchase price therefor by wire transfer of immediately available
funds or certified check. Notwithstanding the foregoing, the Purchaser
acknowledges and agrees that the Certificate of Determination of Preferences,
designating and creating the Series C Preferred Stock, may not be accepted for
filing by the California Secretary of State on the Closing Date. The Company
agrees that the $8,999,900 (the "Proceeds") delivered to the Company pursuant to
this Agreement shall be held in a non-interesting bearing segregated account of
the Company and shall not be drawn upon or utilized until such time as the
Certificate of Determination of Preferences is accepted by the California
Secretary of State for filing and is in full force and effect. Upon delivery of
the Proceeds to the Company, the transactions contemplated hereby shall be
declared closed. As a condition subsequent to the Closing, the Company agrees to
refund the Proceeds (without interest) to the Purchaser if the Certificate of
Determination of Preferences is not accepted for filing by the California
Secretary of State and in full force and effect within four (4) weeks of the
Closing Date. Purchaser acknowledges that the form of Certificate of
Determination of Preferences initially submitted for filing with the California
Secretary of State may be altered or amended in response to comments received
from the Secretary of State which alterations or amendments shall not materially
alter the rights, preferences and privileges of the Series C Preferred Stock.
ARTICLE 3
REPRESENTATIONS AND
WARRANTIES OF THE COMPANY
-------------------------
The Company represents and warrants to the Purchaser, as follows
(except as set forth in the attached Schedule of Exceptions which includes a
supplemental disclosure entitled "Risk Factors").
3.1 Corporate Existence and Power. Each of the Company and its
-----------------------------
Subsidiary (a) is a corporation duly organized, validly existing and in good
standing under the Laws of the State of California; (b) has all requisite
corporate power and authority to own and operate its property, to lease the
property it operates as lessee and to conduct the business in which it is
currently engaged; and (c) is duly qualified as a foreign corporation, licensed
and in good standing under the laws of each jurisdiction in which its ownership,
lease or operation of property or the conduct of its business requires such
qualification, except to the extent that the failure to do so or be so would not
have a material adverse effect on the Condition of the Company. The Company has
the requisite corporate power and authority
5.
<PAGE>
to execute, deliver and perform its obligations under this Agreement and each of
the other Transaction Documents to which it is a party.
3.2 Corporate Authorization; No Contravention. The execution,
-----------------------------------------
delivery and performance by the Company of this Agreement and each of the other
Transaction Documents to which it is a party and the transactions contemplated
hereby and thereby, including, without limitation, the sale, issuance and
delivery of the Purchased Shares (a) have been duly authorized by all necessary
corporate action of the Company; (b) do not contravene the terms of the Restated
Articles of Incorporation or Bylaws, or any amendment of either thereof, and (c)
do not violate, conflict with or result in any breach or contravention of or the
creation of any Lien under, any Contractual Obligation of the Company, or any
Requirement of Law applicable to the Company.
3.3 Governmental Authorization; Third Party Consents. No approval,
------------------------------------------------
consent, compliance, exemption, authorization, or other action by, or notice to,
or filing with, any Governmental Authority or any other Person in respect of any
Requirement of Law or Contractual Obligation is necessary or required in
connection with the execution, delivery or performance (including, without
limitation, the sale, issuance and delivery of the Purchased Shares), by the
Company of this Agreement and each of the other Transaction Documents to which
it is a party or the transactions contemplated hereby or thereby, except for the
filing of a Notice of Transaction pursuant to Section 25102(f) of the California
Corporation Code and a Form D pursuant to the Securities Act, which filings will
be made by the Company immediately following the Closing.
3.4 Binding Effect. This Agreement and each of the other Transaction
--------------
Documents to which the Company is a party have been duly executed and delivered
by the Company and constitute the legal, valid and binding obligation of the
Company, enforceable against the Company in accordance with their terms, except
as enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, fraudulent conveyance or transfer, moratorium or similar laws
affecting the enforcement of creditors' rights generally and by general
principles of equity relating to enforceability (regardless of whether
considered in a proceeding at law or in equity).
3.5 Litigation. There are no legal actions, suits, proceedings,
----------
claims, complaints, disputes or investigations pending, or to the knowledge of
the Company threatened, at law, in equity, in arbitration or before any
Governmental Authority against the Company or its Subsidiary or any of the
property or assets of the Company or its Subsidiary.
3.6 Compliance with Laws.
--------------------
(a) To the knowledge of the Company, the Company and its
Subsidiary are in compliance with all Requirements of Law in all respects.
(b) (i) The Company and its Subsidiary have all licenses,
permits, orders or approvals of any Governmental Authority and self-regulating
organization, including the NASD (collectively, "Permits") that are material to
or necessary for the conduct of the business or proposed business of the Company
and its Subsidiary.
(ii) Such Permits are in full force and effect.
(iii) No violations are or have been recorded in respect of
any Permit.
6.
<PAGE>
(c) The Subsidiary is registered as a broker-dealer with the
Commission, is a duly qualified member in good standing of the NASD and has
provided to the Purchaser true and correct copies of all its filings with the
Commission and amendments thereto during the last three years. It is duly
qualified and registered as a broker-dealer in each jurisdiction where failure
to be so qualified or registered could have a material adverse effect on the
Condition of the Company and the Subsidiary, and, to the knowledge of the
Company, is in compliance with all applicable laws, rules and regulations of the
Commission, the NASD and any such jurisdiction.
(d) To the knowledge of the Company, no material expenditure is
presently required by the Company or its Subsidiary to comply with any existing
Requirement of Law.
(e) To the knowledge of the Company, the property, assets and
operations at any time owned or leased by the Company or its Subsidiary have
been in compliance in all material respects with all applicable Environmental
Laws, while owned or leased.
3.7 Capitalization. The authorized capital stock of the Company,
--------------
after giving effect to the transactions contemplated hereby, is set forth on
Schedule 3.7 which lists the number of (a) authorized, issued and outstanding
- ------------
shares of Common Stock, (b) authorized, issued and outstanding shares of Series
A Preferred Stock, and (c) the authorized, issued and outstanding shares of
Series B Preferred Stock. Schedule 3.7 also sets forth a true and complete list
------------
of the stockholders of the Company and, opposite the name of each stockholder,
the amount of all outstanding capital stock and Common Stock Equivalents owned
by such stockholder. All sales of stock to such stockholders were properly made
under the Securities Act to an accredited investor (as such term is defined in
the Securities Act) or were otherwise exempt from registration under the
Securities Act. Schedule 3.7 also sets forth the number of (a) shares of Common
------------
Stock the Company has reserved for issuance to employees, directors and
consultants upon exercise of stock options, (b) shares reserved by the Company
authorized for future options, and (c) shares of Common Stock reserved by the
Company for issuance upon conversion of the Preferred Stock. Except as
described herein, there are no options, warrants, conversion privileges or other
rights presently outstanding to purchase or otherwise acquire any authorized but
unissued shares of the Company's capital stock or Common Stock Equivalents and
the Company is under no obligation (whether contingent or otherwise) to issue,
call, repurchase, redeem or transfer any securities of the Company. The
Purchased Shares to be issued to the Purchaser hereunder have been duly and
validly authorized and, when issued and delivered against payment therefor as
provided herein, will be duly and validly issued and fully paid and non-
assessable and entitled to the rights, preferences and terms set forth in the
Certificate of Determination of Preferences. The shares of Common Stock
issuable upon conversion of the Purchased Shares (the "Conversion Shares") have
been duly and validly authorized and reserved for issuance upon such conversion
and, when issued upon such conversion will be validly issued, fully paid and
nonassessable. The issued and outstanding shares of Common Stock and Preferred
Stock, including, without limitation, the Purchased Shares, are all duly
authorized, validly issued, fully paid and nonassessable, and were issued in
compliance with the registration and qualification requirements of all
applicable federal securities laws.
3.8 No Default or Breach. Neither the Company nor its Subsidiary is
--------------------
in default under or with respect to any provision of their respective articles
of incorporation or bylaws or any Contractual Obligation, and no event has
occurred and is continuing under any such provision, which with lapse of time or
the giving of notice or both, would constitute a material default thereunder.
3.9 Financial Statements. The Company has delivered to the Purchaser
--------------------
its audited consolidated financial statements (balance sheet and statements of
operations, cash flows and shareholders' equity, together with the notes
thereto) for the fiscal year ended and as at September 30, 1995, and its
7.
<PAGE>
unaudited consolidated balance sheet and statements of operations for the six
month period ending March 31, 1996 (the "Financial Statements"). The Financial
Statements have been prepared in accordance with GAAP applied on a consistent
basis throughout the periods indicated and with each other, except that the
unaudited financial statements do not contain full footnotes or typical year-end
adjustments. The Financial Statements fairly present the financial condition,
operating results and cash flows of the Company as of the respective dates and
for the respective periods indicated in accordance with GAAP, subject, in the
case of the unaudited financial statements, to normal year-end adjustments.
3.10 No Material Adverse Change; Ordinary Course of Business. Since
-------------------------------------------------------
the Balance Sheet Date (a) there has not been any material adverse change in the
Condition of the Company, (b) neither the Company nor its Subsidiary has
participated in any transaction or acted outside the ordinary course of
business, including, without limitation, declaring or paying any dividend or
declaring or making any distribution to its shareholders, except out of the
earnings of the Company or its Subsidiary and (c) neither the Company nor its
Subsidiary has increased the compensation of any of its officers or the rate of
pay of any of its employees, except as part of regular compensation increases in
the ordinary course of its business.
3.11 Investment Company. Neither the Company nor its Subsidiary is an
------------------
"investment company" within the meaning of the Investment Company Act of 1940,
as amended.
3.12 Private Offering. No form of general solicitation or general
----------------
advertising was used by the Company or its representatives in connection with
the offer or sale of the Purchased Shares. No registration of the Purchased
Shares, pursuant to the provisions of the Securities Act or any state securities
or "blue sky" laws, will be required by the offer, sale or issuance of the
Purchased Shares.
3.13 Title to Assets. The Company or its Subsidiary has good and
---------------
marketable title to all of the properties and assets used in their business in
each case free and clear of any Lien, except for Liens not material to the
Condition of the Company.
3.14 Intellectual Property.
---------------------
(a) (i) To the knowledge of the Company, the Company or its
Subsidiary owns or is licensed or otherwise has the right to use all trademarks,
service marks, trade names, copyrights, code secrets, licenses, franchises and
other rights, all products, processes and methods, computer software, computer
programs and similar intangible assets of the Company and its Subsidiary
(collectively, "Intellectual Property") that are necessary for the operation of
its business as presently conducted and or contemplated in its business plan.
(ii) To the knowledge of the Company, none of the
Intellectual Property currently sold to third parties by or used by the Company
or its Subsidiary infringes upon or otherwise violates any Intellectual Property
rights of others.
(iii) No litigation is pending and no claim has been made
against the Company or its Subsidiary or, to the knowledge of the Company, is
threatened, contesting the right of the Company or its Subsidiary to sell or
license to third parties or use the Intellectual Property presently sold or
licensed to third parties or used by the Company or its Subsidiary.
(b) To the knowledge of the Company, no Person is infringing
upon or otherwise violating the Intellectual Property rights of the Company or
its Subsidiary.
8.
<PAGE>
3.15 Liabilities. Neither the Company nor its Subsidiary has any
-----------
direct or indirect obligation or liability (the "Liabilities"), other than (i)
Liabilities fully and adequately reflected or reserved against on the Financial
Statements, (ii) Liabilities not required by GAAP to be set forth on the
Financial Statements and (iii) Liabilities incurred since the Balance Sheet Date
in the ordinary course of business.
3.16 Broker's, Finder's or Similar Fees. There are no brokerage
----------------------------------
commissions, finder's fees or similar fees or commissions payable by the Company
or its Subsidiary in connection with the transactions contemplated hereby based
on any agreement, arrangement or understanding with the Company or any action
taken by any such entity.
3.17 Disclosure in this Agreement and Other Documents. This Agreement
------------------------------------------------
and the documents and certificates furnished to the Purchaser by the Company at
or prior to the Closing, taken as a whole, do not contain any untrue statement
of a material fact or, to the knowledge of the Company, omit to state a material
fact necessary in order to make the statements contained herein or therein, in
the light of the circumstances under which they were made, not misleading.
ARTICLE 4
REPRESENTATIONS AND
WARRANTIES OF THE PURCHASER
---------------------------
The Purchaser hereby represents and warrants to the Company as
follows:
4.1 Existence and Power. Purchaser (a) is a corporation duly
-------------------
organized and validly existing under the laws of the jurisdiction of its
formation and (b) has the requisite power and authority to execute, deliver and
perform its obligations under this Agreement and each of the other Transaction
Documents to which it is a party.
4.2 Authorization; No Contravention. The execution, delivery and
-------------------------------
performance by Purchaser under the Transaction Documents to which it is a party
and the transactions contemplated hereby and thereby, including, without
limitation, the purchase of the Purchased Shares, (a) have been duly authorized
by all necessary action, (b) do not contravene the terms of the Purchaser's
organizational documents, or any amendment thereof, and (c) do not violate,
conflict with or result in any breach or contravention of or the creation of any
Lien under, any Contractual Obligation of the Purchaser, or any Requirement of
Law applicable to the Purchaser.
4.3 Governmental Authorization; Third Party Consents. No approval,
------------------------------------------------
consent, compliance, exemption, authorization, or other action by, or notice to,
or filing with, any Governmental Authority or any other Person in respect of any
Requirement of Law, is necessary or required in connection with the execution,
delivery or performance (including, without limitation, the purchase of the
Purchased Shares) by the Purchaser of the Transaction Documents to which the
Purchaser is a party or the transactions contemplated hereby.
4.4 Binding Effect. The Transaction Documents to which the Purchaser
--------------
is a party have been duly executed and delivered by the Purchaser and constitute
the legal, valid and binding obligation of the Purchaser, enforceable against it
in accordance with its terms, except as enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, fraudulent conveyance or
transfer,
9.
<PAGE>
moratorium or similar laws affecting the enforcement of creditors' rights
generally or by equitable principles relating to enforceability (regardless of
whether considered in a proceeding at law or in equity).
4.5 Purchase Entirely for Own Account. Except as provided in this
---------------------------------
Section 4.5 and in 10.3, the Purchased Shares to be purchased by the Purchaser
hereunder will be acquired for investment for the Purchaser's own account, not
as nominee or agent, and not with a view to or for sale or resale in connection
with any distribution of any part thereof, and the Purchaser has no present
intention of selling, granting any participation in, or otherwise distributing
the same. The Purchaser does not have any contract, undertaking, agreement or
arrangement with any Person to sell, transfer or grant participations to any
Person, with respect to any of the Purchased Shares. Notwithstanding the
foregoing, the Purchaser shall be entitled to transfer all or part of the
Purchased Shares to one or more affiliated partnerships managed by it.
4.6 Restricted Securities. The Purchaser understands that the
---------------------
Purchased Shares are characterized as "restricted securities" under the federal
securities laws inasmuch as they are being acquired from the Company in a
transaction not involving a public offering and that under such laws and
applicable regulations such securities may be resold without registration under
the Securities Act only in certain limited circumstances. In this connection
the Purchaser represents that it is familiar with the Commission's Section 4.5,
Section 10.3, Rule 144, as presently in effect, and understands the resale
limitations imposed thereby and by the Securities Act.
4.7 Further Limitations on Disposition. Except as provided in
----------------------------------
Section 10.3, without in any way limiting the representations set forth above,
the Purchaser further agrees not to make any disposition of all or any portion
of the Purchased Shares until (a) there is then in effect an effective
registration statement under the Securities Act covering such proposed
disposition and such disposition is made in accordance with such registration
statement; or (b)(i) the Purchaser shall have notified the Company of the
proposed disposition and shall have furnished the Company with a detailed
statement of the circumstances surrounding the proposed disposition, (ii) if
reasonably requested by the Company, the Purchaser shall have furnished the
Company with an opinion of counsel, reasonably satisfactory to the Company, that
such disposition will not require registration of such shares under the
Securities Act and (iii) if reasonably requested by the Company, the transferee
shall have furnished to the Company its agreement to abide by its restrictions
on transfer set forth herein as if it were a purchaser hereunder. It is agreed
that the Company will not require opinions of counsel for transactions made
pursuant to Section 4.5, Section 10.3 and Rule 144, as currently in existence,
or Rule 144A except in unusual circumstances.
4.8 Disclosure of Information. The Purchaser has had an opportunity
-------------------------
to ask questions and receive answers from the Company regarding the terms and
conditions of the offering of the Purchased Shares and has received from the
Company all of the information it has requested. The Purchaser has received a
draft registration statement on Form S-1 which the Company expects to file with
the Securities and Exchange Commission to register the initial public offering
of the Company's Common Stock. The draft registration statement includes a
description of the Company's business and an indication of the risk factors
associated with purchase of the Company's securities. The Purchaser
acknowledges and agrees that the registration statement so received is a draft
only, is subject to change and understands and acknowledges that such changes
may be material.
4.9 Investment Experience. The Purchaser is an investor in
---------------------
securities of companies in the development stage and acknowledges that it has,
by reason of its business or financial experience, the capacity to protect its
own interests in connection with the transaction and that it is able to bear the
economic risk of its investment in the transaction. The Purchaser is an
"Accredited Investor" as defined in Commission Rule 501(a). Purchaser has not
been organized solely for the purpose of acquiring the
10.
<PAGE>
Purchased Shares, and its investment (including mandatory assessments) does not
exceed 10% of its net worth.
4.10 Legends. To the extent applicable, each certificate or other
-------
document evidencing any of the Purchased Shares issued hereunder or any of the
Conversion Shares shall be endorsed with the legend set forth below, and the
Purchaser covenants that, except to the extent such restrictions are waived by
the Company and except as set forth in Sections 4.5 and 10.3, the Purchaser
shall not transfer the Purchased Shares or the Conversion Shares without
complying with the restrictions on transfer described in the legend endorsed
thereon:
"THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD,
TRANSFERRED, ASSIGNED, PLEDGED, OR HYPOTHECATED ABSENT AN EFFECTIVE REGISTRATION
THEREOF UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR COMPLIANCE WITH
RULE 144 OR RULE 144-A PROMULGATED UNDER SUCH ACT, OR, UNLESS THE COMPANY HAS
RECEIVED AN OPINION OF COUNSEL, IF REASONABLY REQUESTED, SATISFACTORY TO ITS
COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED."
The Company shall not be required (i) to transfer on its books any
shares of the Purchased Shares or Conversion Shares which shall have been
transferred in violation of the provisions set forth in this Agreement, or (ii)
to treat as owner of such shares or to accord the right to vote as such owner or
to pay dividends to any transferee to whom such shares shall have been so
transferred in violation of the provisions set forth in this Agreement.
4.11 Broker's, Finder's or Similar Fees. There are no brokerage
----------------------------------
commissions, finder's fees or similar fees or commissions payable by the
Purchaser, in connection with the transactions contemplated hereby based on any
agreement, arrangement or understanding with the Purchaser or any action taken
by the Purchaser.
4.12 Nature of Transaction. Purchaser acknowledges that it was
---------------------
introduced to the Company by a present shareholder of the Company and not as a
result or in connection with any form of general solicitation or advertisement
regarding an offering or sale of the Company's securities. Purchaser further
acknowledges that the Company is currently in the process of preparing a
registration statement on Form S-1 to effect the initial public offering of the
Company's Common Stock. Purchaser acknowledges that it has had access to and an
opportunity to ask questions of the Company's proposed underwriters for purposes
of its due diligence review of the Company and its operations. Purchaser
further understands that there can be no assurance that the Company will be
successful in completing an initial public offering to the Company's Common
Stock or that any initial public offering price per share will be greater than
the amount paid per share by Purchaser in this transaction.
ARTICLE 5
BLUE SKY
--------
5.1 Corporate Securities Law. THE SALE OF SECURITIES WHICH ARE THE
------------------------
SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF
CORPORATIONS OF THE STATE OF CALIFORNIA AND ISSUANCE OF SUCH SECURITIES WITH
PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION FOR SUCH
11.
<PAGE>
SECURITIES PRIOR TO SUCH QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF
SECURITIES IS EXEMPT FROM QUALIFICATION BY SECTION 25100, 25102 OR 25105 OF THE
CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE
EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, UNLESS THE SALE IS
EXEMPT.
ARTICLE 6
CONDITIONS TO THE OBLIGATION
OF THE PURCHASER TO CLOSE
-------------------------
The obligation of the Purchaser to purchase the Purchased Shares, to
pay the purchase price therefor at the Closing and to perform any obligations
hereunder shall be subject to the satisfaction as determined by, or waived by,
the Purchaser of the following conditions on or before the Closing Date.
6.1 Secretary's Certificate. The Purchaser shall have received a
-----------------------
certificate from the Company, in form and substance satisfactory to the
Purchaser, dated the Closing Date and signed by the Secretary or an Assistant
Secretary of the Company, certifying that the attached copies of the Restated
Articles of Incorporation, the Bylaws and resolutions of the Board of Directors
of the Company approving this Agreement and the transactions contemplated
hereby, are all true, complete and correct and remain unamended and in full
force and effect.
6.2 Certificate. The Purchaser shall have received a certificate
-----------
from the Company, in form and substance satisfactory to the Purchaser, dated the
Closing Date and signed by its Chief Executive Officer and its Chief Financial
Officer, certifying that (a) the representations and warranties of the Company
contained in Article 3 hereof are true and correct on the Closing Date and (b)
the Company has performed and complied in all material respects with all of the
agreements and conditions set forth or contemplated herein that are required to
be performed or complied with by the Company on or before the Closing Date.
6.3 Documents. The Purchaser shall have received true, complete and
---------
correct copies of such documents and opinions as they may reasonably request in
connection with or relating to the sale of the Purchased Shares and the
transactions contemplated hereby, all in form and substance reasonably
satisfactory to the Purchaser.
6.4 Stockholders Agreement Supplement and Amendment. The Company,
-----------------------------------------------
the stockholders of the Company named in the Stockholders Agreement and the
Purchaser shall have duly executed and delivered the Stockholders Agreement
Supplement and Amendment, substantially in the form attached hereto as Exhibit
-------
C.
- -
6.5 Restated Articles of Incorporation. Subject to the condition
----------------------------------
subsequent set forth in Section 2.2, the Certificate of Determination of
Preferences shall have been filed with the Secretary of State of the State of
California.
6.6 Consents and Approvals. All consents, exemptions,
----------------------
authorizations, or other actions by, or notices to, or filings with,
Governmental Authorities and other Persons in respect of all Requirements of Law
and with respect to those Contractual Obligations of the Company which are
necessary or required in connection with the execution, delivery or performance
by the Company or enforcement against the Company of the Transaction Documents
to which it is a party, except for the
12.
<PAGE>
filing of a Notice of Transaction pursuant to Section 25102(f) of the California
Corporation Code and a Form D pursuant to the Securities Act, shall have been
obtained and be in full force and effect, and the Purchaser shall have been
furnished with appropriate evidence thereof.
ARTICLE 7
CONDITIONS TO THE OBLIGATIONS
OF THE COMPANY TO CLOSE
-----------------------
The obligations of the Company to sell the Purchased Shares and to
perform its other obligations hereunder, shall be subject to the satisfaction as
determined by, or waived by, the Company of the following conditions on or
before the Closing Date;
7.1 Restated Articles of Incorporation. Subject to the condition
----------------------------------
subsequent set forth in Section 2.2, the Certificate of Determination of
Preferences shall have been filed with the Secretary of State of the State of
California.
7.2 Purchaser's Certificate. The Company shall have received a
-----------------------
certificate from the Purchaser, in form and substance satisfactory to the
Company, dated the Closing Date certifying that (a) the representations and
warranties of the Purchaser contained in Article 4 hereof are true and correct
on the Closing Date and (b) the Purchaser has performed and complied in all
material respects with all of the agreements and conditions set forth or
contemplated herein that are required to be performed or complied with by the
Purchaser on or before the Closing Date.
7.3 Stockholders Agreement Supplement and Amendment. The Company,
-----------------------------------------------
the stockholders of the Company named in the Stockholders Agreement and the
Purchaser shall have duly executed and delivered the Stockholders Agreement
Supplement and Amendment substantially in the form attached hereto as Exhibit C.
---------
7.4 California Qualification. The Commissioner of Corporations of
------------------------
the State of California and any other applicable state regulatory authority
shall have issued permits qualifying the offer and sale to the Purchaser of the
Purchased Shares or such offer and sale shall be exempt from such qualification
under the California Corporate Securities Law of 1968, as amended.
ARTICLE 8
INDEMNIFICATION
---------------
8.1 Indemnification of Purchaser. Except as otherwise provided in
----------------------------
this Article 8, the Company agrees to indemnify, defend and hold harmless the
Purchaser and its Affiliates and its respective officers, directors, agents,
employees, subsidiaries, partners and controlling persons to the fullest extent
permitted by law from and against any and all losses, claims (including any
claim by a third party), damages, expenses (including reasonable fees,
disbursements and other charges of counsel) or other liabilities (collectively,
"Losses") resulting from, arising out of or relating to any breach of any
representation or warranty, covenant or agreement by the Company in this
Agreement or the other Transaction Documents to which it is a party, including,
without limitation, Losses arising out of or relating to any legal,
administrative or other actions (including actions brought by the Purchaser or
derivative actions brought by any Person claiming through or in the Company's
name), proceedings or
13.
<PAGE>
investigations (whether formal or informal), or written threats thereof, based
upon, relating to or arising out of this Agreement or the other Transaction
Documents, the transactions contemplated hereby or thereby, or the Company's
role herein or therein or in transactions contemplated hereby or thereby;
provided, however, that the Company shall not be liable under this Section 8.1
- -------- -------
to such party to the extent that it is finally judicially determined that such
Losses resulted primarily from the material breach by such party of any
representation, warranty, covenant or other agreement of such party contained in
this Agreement; and provided, further, that if and to the extent that such
-------- -------
indemnification is unenforceable for any reason, the Company shall make the
maximum contribution to the payment and satisfaction of such Losses which shall
be permissible under applicable laws. In connection with the obligation of the
Company to indemnify for expenses as set forth above, the Company shall, upon
presentation of appropriate invoices containing reasonable detail, reimburse
each indemnified party for all such expenses (including reasonable fees,
disbursements and other charges of counsel) as they are incurred by such party.
The provisions of this Section 8.1 shall not be deemed exclusive of any other
rights of indemnification or other remedy to which the Purchaser may be
entitled.
8.2 Indemnification of the Company. Except as otherwise provided in
------------------------------
this Article 8, the Purchaser agrees to indemnify, defend and hold harmless the
Company and its Affiliates and their respective officers, directors, agents,
employees, subsidiaries, partners and controlling persons to the fullest extent
permitted by law from and against any and all Losses resulting from, arising out
of or relating to any breach of any representation or warranty, covenant or
agreement by the Purchaser in this Agreement, or the other Transaction Documents
to which it is a party, including, without limitation, Losses arising out of or
relating to any legal, administrative or other actions, proceedings or
investigations (whether formal or informal), or written threats thereof, based
upon, relating to or arising out of the Transaction Documents, the transactions
contemplated thereby, or the Purchaser's role therein or in transactions
contemplated thereby; provided, however, that the Purchaser shall not be liable
-------- -------
for any payments pursuant to this Section 8.2 in excess of the purchase price
paid for the Purchased Shares; provided, further, that the Purchaser shall not
-------- -------
be liable under this Section 8.2 to any party to the extent that it is finally
judicially determined that such losses resulted primarily from the material
breach by such party of any representation, warranty, covenant or other
agreement of such party contained in this Agreement; and provided, further, that
-------- -------
if and to the extent that such indemnification is unenforceable for any reason,
the Purchaser shall make the maximum contribution to the payment and
satisfaction of such Losses which shall be permissible under applicable laws.
In connection with the obligation of the Purchaser to indemnify for expenses set
forth above, the Purchaser shall, upon presentation of appropriate invoices
containing reasonable detail, reimburse each indemnified party for all such
expenses (including reasonable fees, disbursements and other charges of counsel)
as they are incurred by such party. The provisions of this Section 8.2 shall
not be deemed exclusive of any other rights of indemnification or other remedy
to which the Company may be entitled.
8.3 Notification. Each Person entitled to indemnification pursuant
------------
to this Article 8 (each, an "Indemnified Party") will, promptly after the
occurrence of any event, or after the receipt of notice of the commencement of
any action, investigation, claim or other proceeding against such Indemnified
Party in respect of which indemnity may be sought from the indemnifying party
under this Article 8 (each, an "Indemnifying Party"), notify the Indemnifying
Party in writing thereof. The omission of any Indemnified Party to so notify
the Indemnifying Party of any such action shall not relieve the Indemnifying
Party from any liability which they may have to such Indemnified Party under
this Article 8 unless, and only to the extent that, such omission results in the
Indemnifying Party's forfeiture of substantive rights or defenses. In case any
such action, claim or other proceeding shall be brought against any Indemnified
Party, it shall notify the Indemnifying Party of the commencement thereof, and
the Indemnifying Party shall be entitled to assume the defense thereof at its
own expense, with counsel satisfactory to such Indemnified Party in its
reasonable judgment; provided, however, that any
-------- -------
14.
<PAGE>
Indemnified Party may, at its own expense, retain separate counsel to
participate in such defense at its own expense. Notwithstanding the foregoing,
in any action, claim or proceeding in which both the Indemnifying Party and an
Indemnified Party, are, or are reasonably likely to become, a party, such
Indemnified Party shall have the right to employ separate counsel at the expense
of the Indemnifying Party and to control its own defense of such action, claim
or proceeding if, in the reasonable opinion of counsel to such Indemnified
Party, a conflict or potential conflict exists between the Indemnifying Party
and such Indemnified Party that would make such separate representation
advisable; provided, however, that the Indemnifying Party shall not be liable
-------- -------
for the fees and expenses of more than one counsel (plus local counsel) to all
Indemnified Parties. The Indemnifying Party agrees that it will not, without the
prior written consent of the Indemnified Party, settle, compromise or consent to
the entry of any judgment in any pending or threatened claim, action or
proceeding relating to the matters contemplated hereby (if any Indemnified Party
is a party thereto or has been actually threatened to be made a party thereto)
unless such settlement, compromise or consent (i) includes an unconditional
release of the Indemnified Party and each other Indemnified Party from all
liability arising or that may arise out of such claim, action or proceeding and
(ii) does not include a statement as to or an admission of fault, culpability or
a failure to act, by or on behalf of any Indemnified Party. The Indemnifying
Party shall not be liable for any settlement of any claim, action or proceeding
effected against an Indemnified Party without its written consent, which consent
shall not be unreasonably withheld.
ARTICLE 9
AFFIRMATIVE COVENANTS
---------------------
Until the consummation of an initial public offering of equity
securities of the Company pursuant to a registration statement under the
Securities Act (at which time the provisions of this Article 9 shall become null
and void), the Company hereby covenants and agrees with the Purchaser as
follows:
9.1 Preservation of Corporate Existence. The Company shall and shall
-----------------------------------
cause its Subsidiary to:
(a) preserve and maintain in full force and effect its corporate
existence and good standing under the laws of its jurisdiction of incorporation
or organization; and
(b) use its best efforts to file or cause to be filed in a timely
manner all reports, applications and licenses that shall be required by a
Governmental Authority and that, if not timely filed, would have a material
adverse effect on the Condition of the Company.
Notwithstanding the foregoing, the Company intends to effect a
reincorporation into the State of Delaware prior to and in connection with its
initial public offering. Purchaser hereby consents to such reincorporation and
further agrees to take all reasonable actions requested by the Company to cause
such reincorporation to be consummated.
9.2 Financial Statements and Other Information. The Company shall
------------------------------------------
deliver to the Purchaser, in form and substance satisfactory to the Purchaser:
(a) as soon as available, but not later than ninety (90) days
after the end of each fiscal year of the Company, a copy of the audited
consolidated balance sheet of the Company as of the end of such year and the
related statements of operations and cash flows for such fiscal year, setting
forth in each case in comparative form the figures for the previous year, all in
reasonable detail and
15.
<PAGE>
accompanied by a management summary and analysis of the operations of the
Company for such fiscal year and by the opinion of a nationally recognized
independent certified public accounting firm which report shall not contain a
qualification based on the records of the Company, its accounting controls or
procedures or the scope of the audit, and which report shall state that such
financial statements present fairly the financial condition of the Company as of
such date and the results of operations and cash flows for the periods indicated
in conformity with GAAP applied on a consistent basis;
(b) commencing with the fiscal period ending on September 30,
1996, as soon as available, but in any event not later than forty-five (45) days
after the end of each of the first three fiscal quarters of each year, the
unaudited balance sheet of the Company, and the related statements of operations
and cash flows for such quarter and for the period commencing on the first day
of the fiscal year and ending on the last day of such quarter, all certified by
an appropriate officer of the Company as presenting fairly the financial
condition as of such date and results of operations and cash flows for the
periods indicated in conformity with GAAP applied on a consistent basis, subject
to normal year-end audit adjustments and the absence of footnotes required by
GAAP; and
(c) annual budgets and such other financial and operating data
which are customarily prepared by the Company, as the Purchaser reasonably may
request.
9.3 Inspection. The Company shall and shall cause its Subsidiary to
----------
permit a representative of the Purchaser to visit and inspect any of its
properties, to examine its corporate, financial and operating records and make
copies thereof or abstracts therefrom, and to discuss its affairs, finances and
accounts with their respective directors, officers and independent public
accountants, all at such reasonable times during normal business hours and as
often as may be reasonably requested upon reasonable advance notice to the
Company.
9.4 Back-Ups of Computer Software. The Company shall and shall cause
-----------------------------
its Subsidiary reasonably frequently to make back-ups of all material computer
software programs and databases and shall maintain such software programs and
databases at a secure off-site location.
9.5 Books and Records. The Company shall and shall cause its
-----------------
Subsidiary to keep books of record and account, in which accurate entries shall
be made of all financial transactions and the assets and business of the Company
in accordance with GAAP consistently applied to the Company.
9.6 Conversion of Preferred Stock. In the event that the authorized
-----------------------------
number of shares of Common Stock is not sufficient to permit the conversion of
the issued and outstanding shares of the Preferred Stock, the Company shall use
its best efforts to cause the Board of Directors and shareholders to approve an
amendment of the Articles of Incorporation of the Company to increase the
authorized number of shares of Common Stock to a number sufficient to permit
such conversion.
16.
<PAGE>
ARTICLE 10
MISCELLANEOUS
-------------
10.1 Lock-Up Period. Purchaser agrees to sign a lock-up agreement in
--------------
a form substantially similar to that attached hereto as Exhibit D. Purchaser
---------
understands that the form of lock-up agreement is the same as that presented to
other of the Company's shareholders in connection with the Company's initial
public offering of Common Stock.
10.2 Survival of Representations and Warranties. All of the
------------------------------------------
representations and warranties made herein shall survive the execution and
delivery of this Agreement, any investigation by or on behalf of the Purchaser,
acceptance of the Purchased Shares or termination of this Agreement.
10.3 Notices. All notices, demands and other communications provided
-------
for or permitted hereunder shall be made in writing and shall be by registered
or certified first-class mail, return receipt requested, telecopier, courier
service, overnight mail or personal delivery:
(a) if to SOFTBANK:
SOFTBANK Holdings Inc.
10 Langley Road, Suite 403
Newton Centre, MA 02159-1972
Telecopy: (617) 928-9301
Attention: Charles R. Lax
with a copy to:
Sullivan & Cromwell
125 Broad Street
New York, NY 10004
Telecopy: (212) 558-3588
Attention: Stephen A. Grant, Esq.
(b) if to the Company;
E*Trade Group, Inc.
Four Embarcadero Place
2400 Geng Road
Palo Alto, CA 94306
Telecopy: (415) 324-3044
Attention: President
with a copy to:
Brobeck, Phleger & Harrison
Two Embarcadero Place
2200 Geng Road
Palo Alto, CA 94303
Telecopy: (415) 496-2885
Attention: Thomas A. Bevilacqua, Esq.
17.
<PAGE>
All such notices and communications shall be deemed to have been duly
given when delivered by hand, if personally delivered; when delivered by courier
or overnight mail, if delivered by commercial courier service or overnight mail
five (5) Business Days after being deposited in the mail, postage prepaid, if
mailed; and when receipt is mechanically acknowledged, if telecopied.
10.4 Successors and Assigns. This Agreement shall inure to the
----------------------
benefit of and be binding upon the successors and permitted assigns of the
parties hereto. Subject to applicable securities laws, the Purchaser may assign
any of its rights under this Agreement to any of its Affiliates or affiliated
partnerships managed by it. The Company may not assign any of its rights under
this Agreement, except to a successor-in-interest to the Company, without the
prior written consent of the Purchaser. Except as provided in Article 8, no
Person other than the parties hereto and their successors and permitted assigns
is intended to be a beneficiary of any of the Transaction Documents.
10.5 Amendment and Waiver.
--------------------
(a) No failure or delay on the part of the Company or the
Purchaser in exercising any right, power or remedy hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise of any such right,
power or remedy preclude any other or further exercise thereof or the exercise
of any other right, power or remedy. The remedies provided for herein are
cumulative and are not exclusive of any remedies that may be available to the
Company or the Purchaser at law, in equity or otherwise.
(b) Any amendment, supplement or modification of or to any
provision of this Agreement, any waiver of any provision of this Agreement, and
any consent to any departure by the Company or the Purchaser from the terms of
any provision of this Agreement, shall be effective only if it is made or given
in writing and signed by the Company and the Purchaser. Except where notice is
specifically required by this Agreement, no notice to or demand on the Company
in any case shall entitle the Company to any other or further notice or demand
in similar or other circumstances.
10.6 Counterparts. This Agreement may be executed in any number of
------------
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
10.7 Headings. The headings in this Agreement are for convenience of
--------
reference only and shall not limit or otherwise affect the meaning hereof.
10.8 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND
-------------
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA, WITHOUT REGARD
TO THE PRINCIPLES OF CONFLICTS OF LAW THEREOF.
10.9 Severability. If any one or more of the provisions contained
------------
herein, or the application thereof in any circumstance, is held invalid, illegal
or unenforceable in any respect for any reason, the validity, legality and
enforceability of any such provision in every other respect and of the remaining
provisions hereof shall not be in any way impaired, unless the provisions held
invalid, illegal or unenforceable shall substantially impair the benefits of the
remaining provisions hereof.
10.10 Entire Agreement. This Agreement, together with the exhibits
----------------
and schedules hereto and the other Transaction Documents, is intended by the
parties to be a final expression of their agreement and intended to be a
complete and exclusive statement of the agreement and understanding of the
parties hereto in respect of the subject matter contained herein and therein.
There are no restrictions,
18.
<PAGE>
promises, warranties or undertakings other than those set forth or referred to
herein or therein. This Agreement, together with the exhibits hereto, and the
other Transaction Documents supersede all prior agreements and understandings
between the parties with respect to such subject matter.
10.11 Fees. Except as agreed between the Company and the Purchaser,
----
each party will be responsible for the fees and expenses of its own counsel. If
the Closing does not take place, each party shall bear its own expenses.
10.12 Further Assurances. Each of the parties shall execute such
------------------
documents and perform such further acts (including, without limitation,
obtaining any consents, exemptions, authorizations or other actions by, or
giving any notices to, or making any filings with, any Governmental Authority or
any other Person) as may be reasonably required or desirable to carry out or to
perform the provisions of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
E*TRADE GROUP INC.
By:
--------------------------------------
Name:
Title:
SOFTBANK HOLDINGS INC.
By:
--------------------------------------
Name:
Title:
19.
<PAGE>
EXHIBIT 10.20
================================================================================
STOCKHOLDERS AGREEMENT
among
TRADE*PLUS, INC.
and
GENERAL ATLANTIC PARTNERS II, L.P.
and
GAP COINVESTMENT PARTNERS, L.P.
and
THE STOCKHOLDERS NAMED HEREIN
________________________________
Dated:September 28, 1995
________________________________
================================================================================
<PAGE>
STOCKHOLDERS AGREEMENT
----------------------
STOCKHOLDERS AGREEMENT, dated September 28, 1995 (this "AGREEMENT"),
---------
among TRADE*PLUS, INC., a California corporation (the "COMPANY"), General
-------
Atlantic Partners II, L.P., a Delaware limited partnership ("GAP LP"), GAP
------
Coinvestment Partners, a New York limited partnership ("GAP COINVESTMENT"), and
----------------
the stockholders listed on Schedule 1 hereto (the "MAJOR STOCKHOLDERS").
---------- ------------------
WHEREAS, the Major Stockholders own on the date hereof the number of
shares of Common Stock, par value $.10 per share, of the Company (the "COMMON
------
STOCK") set forth opposite their names on Schedule 1;
- -----
WHEREAS, on the date hereof, the Company, GAP LP and GAP Coinvestment
are entering into the Stock Purchase Agreement, dated the date hereof (the
"STOCK PURCHASE AGREEMENT"), pursuant to which the Company, among other things,
- -------------------------
is selling to the General Atlantic Stockholders (as hereinafter defined) an
aggregate of 100,000 shares of Series A Convertible Preferred Stock, par value
$.15 per share, of the Company (the "PREFERRED STOCK"); and
---------------
WHEREAS, the parties hereto wish to restrict the transfer of the
Shares (as hereinafter defined) and to provide for first offer and participation
rights and for certain other rights under certain conditions.
NOW, THEREFORE, in consideration of the mutual promises and agreements
set forth herein, the adequacy of which are hereby acknowledged, the parties
hereto agree as follows:
1. Definitions. As used in this Agreement, the following terms shall have
-----------
the meanings set forth below:
"Acceptance Notice" has the meaning set forth in Section 6.2 of this
-----------------
Agreement.
"Affiliate" shall mean any Person who is an "affiliate" as defined in
---------
Rule 12b-2 of the General Rules and Regulations under the Exchange Act. In
addition, the following shall be deemed to be Affiliates of GAP LP: (a) GAP, the
partners or members of GAP, and the limited partners of GAP LP; (b) any
Affiliate of GAP, the partners or members of GAP, and the limited partners of
GAP LP; and (c) any other partnership or limited liability company the majority
in interest of whose partners or members are partners, former partners, members,
consultants or key
<PAGE>
2
employees of GAP. In addition, GAP LP and GAP Coinvestment shall be deemed to be
Affiliates of one another.
"Board of Directors" means the Board of Directors of the Company.
------------------
"Business Day" means any day other than a Saturday, Sunday or other
------------
day on which commercial banks in the State of New York are authorized or
required by law or executive order to close.
"Charter Documents" means the Restated Articles of Incorporation and
-----------------
the Bylaws of the Company as in effect on the date hereof, copies of which are
attached to the Stock Purchase Agreement as Exhibits A and B thereto,
----------------
respectively.
"Closing Price" means, on any date, the last sale price, regular way,
-------------
or, in case no such sale takes place on such date, the average of the closing
bid and asked prices, in each case as reported in the principal consolidated
transaction reporting system with respect to securities listed on the principal
national securities exchange on which the shares are listed or admitted to
trading, or, if the shares are not listed or admitted to trading on any national
securities exchange, as reported by The Nasdaq Stock Market's National Market,
or if not so reported, the average of the high bid and low asked prices in the
over-the-counter market, as reported by the National Association of Securities
Dealers, Inc. (the "NASD") or such other quotation source then in use.
----
"Commission" means the Securities and Exchange Commission or any
----------
similar agency then having jurisdiction to enforce the Securities Act.
"Common Stock" means the Common Stock, par value $.10 per share, of
------------
the Company.
"Common Stock Equivalents" means any security or obligation which is
------------------------
by its terms convertible into shares of Common Stock and any option, warrant or
other subscription or purchase right with respect to Common Stock.
"Demand Registration" has the meaning set forth in Section 7.1.1 of
-------------------
this Agreement.
"Demand Shares" has the meaning set forth in Section 7.1.1 of this
-------------
Agreement.
"Demand Stockholders" has the meaning set forth in Section 7.1.1
-------------------
of this Agreement.
<PAGE>
3
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
------------
and the rules and regulations of the Commission thereunder.
"Fully Diluted Shares" means the shares of Common Stock outstanding
--------------------
plus the shares of Common Stock issuable upon conversion, exercise or exchange
of all Common Stock Equivalents.
"GAP" means General Atlantic Partners, a New York general partnership
---
(or its successor, General Atlantic Partners, LLC, a Delaware limited liability
company) and the general partner of GAP LP.
"General Atlantic Director" has the meaning set forth in Section
-------------------------
5.3.1 of this Agreement.
"General Atlantic Observer" has the meaning set forth in Section
-------------------------
5.3.2 of this Agreement.
"General Atlantic Stockholders" means GAP LP, GAP Coinvestment and any
-----------------------------
Affiliate of either of them to which Shares are transferred, and the term
"General Atlantic Stockholder" shall mean any such Person.
"Incidental Registration" has the meaning set forth in Section 7.2.1
-----------------------
of this Agreement.
"Incidental Shares" has the meaning set forth in Section 7.2.1 of
-----------------
this Agreement.
"Incidental Stockholder" has the meaning set forth in Section 7.2.1
----------------------
of this Agreement.
"Initial Public Offering" means the Company's initial Public Offering.
-----------------------
"Involuntary Transfer" means any transfer, proceeding or action by or
--------------------
in which a Stockholder shall be deprived or divested of any right, title or
interest in or to any of the Shares (except due to the death of a Stockholder),
including, without limitation, any seizure under levy of attachment or
execution, any transfer in connection with bankruptcy (whether pursuant to the
filing of a voluntary or an involuntary petition under the United States
Bankruptcy Code of 1978, or any modifications or revisions thereto) or other
court proceeding to a debtor in possession, trustee in bankruptcy or receiver or
other officer or agency, any transfer to a state or to a public officer or
agency pursuant to any statute pertaining to escheat or abandoned property and
any transfer pursuant to a
<PAGE>
4
divorce or separation agreement or a final decree of a court in a divorce
action.
"Involuntary Transferee" has the meaning assigned such term in
----------------------
Section 3.2.1 of this Agreement.
"IPO Effectiveness Date" means the date upon which the Company
----------------------
commences an Initial Public Offering.
"Liens" has the meaning assigned such term in Section 3.1.7 of this
-----
Agreement.
"Major Stockholders" means the stockholders listed on Schedule 1
------------------ ----------
hereto, and any Permitted Transferee of any of them to which Shares are
transferred, and the term "Major Stockholder" shall mean any such Person.
"Market Price" of any shares means, on any particular date, the
------------
average of the daily Closing Prices for such shares for each of the immediately
preceding sixty (60) days.
"New Securities" has the meaning set forth in Section 6.2 of this
--------------
Agreement.
"Offered Securities" has the meaning assigned such term in Section
------------------
3.1.1 of this Agreement.
"Offering Notice" has the meaning assigned such term in Section 3.1.1
---------------
of this Agreement.
"Offer Price" has the meaning assigned such term in Section 3.1.1 of
-----------
this Agreement.
"Other Stockholder" means any transferee of a Major Stockholder who
-----------------
is not a Permitted Transferee.
"Permitted Transferee" has the meaning assigned such term in Section
--------------------
2.2 of this Agreement.
"Person" means any individual, corporation, limited liability company,
------
partnership, firm, joint venture, association, joint stock company, trust,
unincorporated organization, governmental body or other entity.
"Preferred Stock" means the Preferred Stock, par value $.15 per
---------------
share, of the company.
"Proportionate Percentage" has the meaning set forth in Section 6.3
------------------------
of this Agreement.
<PAGE>
5
"Public Offering" means any offer for sale of shares of Common Stock
---------------
pursuant to an effective Registration Statement filed under the Securities Act.
"Registration Statement" means a registration statement filed
----------------------
pursuant to the Securities Act.
"Securities Act" means the Securities Act of 1933, as amended, and the
--------------
rules and regulations promulgated thereunder.
"Selling Stockholder" has the meaning assigned such term in Section
-------------------
3.1.1 of this Agreement.
"Shares" means, with respect to each Stockholder, all shares, whether
------
now owned or hereafter acquired, of Common Stock or Preferred Stock and all
other securities of the Company which may be issued (or are issuable) in
exchange for or in respect of shares of Common Stock or Preferred Stock (whether
by way of stock split, stock dividend, combination, reclassification,
reorganization, or any other means).
"Stock Purchase Agreement" has the meaning assigned to such term in
------------------------
the recitals to this Agreement.
"Stockholders" shall mean the Major Stockholders, the General Atlantic
------------
Stockholders and the Other Stockholders, and the term "Stockholder" shall mean
any such Person.
"Stockholders Meeting" has the meaning set forth in Section 5.1.
--------------------
"Transfer" has the meaning set forth in Section 2.1 of this Agreement.
--------
"Transferred Shares" has the meaning set forth in Section 3.2.1 of
------------------
this Agreement.
"Third Party Purchaser" has the meaning set forth in Section 3.1.4
---------------------
of this Agreement.
"Written Consent" has the meaning set forth in Section 5.1 of this
---------------
Agreement.
2. Restrictions on Transfer of Shares.
----------------------------------
2.1 Limitation on Transfer. No Stockholder shall sell, give, assign,
----------------------
hypothecate, pledge, encumber, grant a security interest in or otherwise dispose
of (whether by operation of law or otherwise) (each a
<PAGE>
6
"TRANSFER") any Shares or any right, title or interest therein or thereto except
--------
in connection with a repurchase of Shares by the Company in which each
stockholder of the Company, on a pro rata basis, has an opportunity to
participate, except in accordance with the provisions of this Agreement. Any
attempt to transfer any Shares or any rights thereunder in violation of the
preceding sentence shall be null and void ab initio and the Company shall not
-- ------
register any such transfer.
2.2 Permitted Transfers. At any time, any Stockholder may, subject
-------------------
to this Section 2.2 and Sections 2.3, 3 and 4, transfer Shares to (a), with
respect to a Stockholder who is an individual, a member of such Stockholder's
immediate family, which shall include his parents, spouse, siblings, children or
grandchildren ("FAMILY MEMBERS"), or a trust, corporation, limited liability
--------------
company or partnership, all of the beneficial interests of which shall be held
by such Stockholder or one or more Family Members of such Stockholder or which
would otherwise be an Affiliate of such individual; provided, however, that
-------- -------
during the period any such trust, corporation, limited liability company or
partnership holds any right, title or interest in any Shares, no Person other
than such Stockholder or one or more Family Members of such Stockholder may be
or become beneficiaries, stockholders, members or limited or general partners
thereof; and (b) with respect to a Stockholder that is not an individual, any
Affiliate of such Stockholder (the Persons referred to in the preceding clauses
(a) and (b) are herein each called a "PERMITTED TRANSFEREE").
--------- ----------
2.3 Permitted Transfer Procedures. A General Atlantic Stockholder,
-----------------------------
Major Stockholder or Other Stockholder shall give notice to the Company of its
intention to make any transfer permitted under this Section 2 not less than ten
(10) days prior to effecting such transfer, which notice shall state the name
and address of each Permitted Transferee to whom such transfer is proposed and
the number of Shares proposed to be transferred to such Permitted Transferee.
2.4 Transfers in Compliance with Law; Substitution of Transferee.
------------------------------------------------------------
Notwithstanding any other provision of this Agreement, no transfer may be made
pursuant to this Section 2 unless (a) the Permitted Transferee has agreed in
writing to be bound by the terms and conditions of this Agreement pursuant to an
instrument substantially in the form attached hereto as Exhibit A, (b) the
transfer complies in all respects with the applicable provisions of this
Agreement and (c) the transfer complies in all respects with applicable federal
and state securities
<PAGE>
7
laws, including, without limitation, the Securities Act. Upon becoming a party
to this Agreement, the Permitted Transferee of a General Atlantic Stockholder
shall be substituted for, and shall enjoy the same rights and be subject to the
same obligations as, the transferring General Atlantic Stockholder hereunder.
Upon becoming a party to this Agreement, the Permitted Transferee of a Major
Stockholder shall be substituted for, and shall enjoy the same rights and be
subject to the same obligations as, the transferring Major Stockholder
hereunder. Upon becoming a party to this Agreement, the Permitted Transferee of
an Other Stockholder shall be substituted for, and shall be subject to the same
obligations as, the transferring Other Stockholder hereunder.
3. Right of First Offer, Tag Along Right and Bring Along Right.
-----------------------------------------------------------
3.1 Proposed Voluntary Transfer by Major Stockholder or Other
---------------------------------------------------------
Stockholder.
- -----------
3.1.1 Offering Notice. If any Major Stockholder or Other
---------------
Stockholder (a "SELLING STOCKHOLDER") desires to sell or otherwise transfer all
-------------------
or any portion of his Shares (other than to a Permitted Transferee), such
Selling Stockholder shall send written notice (the "OFFERING NOTICE") to the
---------------
Company and the other Stockholders which shall state (a) the number of
securities of each class of Shares proposed to be sold or otherwise transferred
(the "OFFERED SECURITIES") and (b) the proposed purchase price per Share which
------------------
the Selling Stockholder is willing to accept (the "OFFER PRICE"). Upon delivery
-----------
of the Offering Notice, such offer shall be irrevocable unless and until the
rights of first offer provided for herein shall have been waived or shall have
expired.
3.1.2 Company Option. For a period of thirty (30) days after the
--------------
giving of the Offering Notice pursuant to Section 3.1.1, the Company shall have
the right to purchase any or all of the Offered Securities at a purchase price
equal to the Offer Price and upon the terms and conditions set forth in the
Offering Notice.
3.1.3 Rights of Major and General Atlantic Stockholders. If the
-------------------------------------------------
Company does not elect to purchase all of the Offered Securities pursuant to
Section 3.1.2, then for a period of forty-five (45) days after the giving of the
Offering Notice pursuant to Section 3.1.1, the Major Stockholders and General
Atlantic Stockholders shall have the right to purchase any or all of the
remaining Offered Securities at a purchase price equal to the Offer Price and
upon the terms and conditions set forth in the
<PAGE>
8
Offering Notice. Each such Major Stockholder and General Atlantic Stockholder
shall have the right to purchase that percentage of the Offered Securities
determined by dividing (i) the total number of Fully Diluted Shares then owned
by such Major Stockholder or General Atlantic Stockholder by (ii) the total
number of Fully Diluted Shares then owned by all such Major Stockholders and
General Atlantic Stockholders, other than the Offered Securities. If any Major
Stockholder or General Atlantic Stockholder does not fully subscribe for the
number or amount of Offered Securities it is entitled to purchase, then each
other participating Major Stockholder and General Atlantic Stockholder shall
have the right to purchase that percentage of the Offered Securities not so
subscribed for (for the purposes of this Section 3.1.3, the "EXCESS OFFERED
--------------
SECURITIES") determined by dividing (x) the total number of Fully Diluted Shares
- ----------
then owned by such fully participating Major Stockholder or General Atlantic
Stockholder by (y) the total number of Fully Diluted Shares then owned by all
fully participating Major Stockholders and General Atlantic Stockholders who
elected to purchase Offered Securities. The procedure described in the preceding
sentence shall be repeated until there are no remaining Excess Offered
Securities or there are no Major Stockholders or General Atlantic Stockholders
who desire to purchase any additional Excess Offered Securities.
3.1.4 Tag Along Right. If a Major Stockholder is selling Offered
---------------
Securities and any of the General Atlantic Stockholders do not elect to purchase
such Offered Securities pursuant to Section 3.1.3, each of such non-electing
General Atlantic Stockholders shall have the right to sell, if such Major
Stockholder sells such Offered Securities to a third party other than the
Company or any other Major Stockholders (the "THIRD PARTY PURCHASER"), to the
---------------------
Third Party Purchaser, upon the terms set forth in the Offering Notice, that
number of Shares held by each of such General Atlantic Stockholders equal to
that percentage of the Offered Securities minus any Shares purchased pursuant to
Sections 3.1.2 or 3.1.3 above, determined by dividing (i) the total number of
Fully Diluted Shares then owned by each of such selling General Atlantic
Stockholder by (ii) the total number of Fully Diluted Shares. The electing
General Atlantic Stockholder(s) and the Selling Stockholder shall effect the
sale of the Offered Securities and such General Atlantic Stockholder(s) shall
sell the number of Offered Securities required to be sold pursuant to this
Section 3.1.4, and the number of Offered Securities to be sold to the Third
Party Purchaser by the Selling Stockholder shall be reduced accordingly.
<PAGE>
9
3.1.5 Exercise of Options.
-------------------
(a) The right of the Company to purchase the Offered
Securities under Section 3.1.2 shall be exercisable by delivering
written notice, prior to the expiration of the 30-day period referred to
in Section 3.1.2, to the Selling Stockholder with a copy to the other
Stockholders. The failure of the Company to respond within such 15-day
period shall be deemed to be a waiver of the Company's rights under this
Section 3.1.
(b) The right of each Major and General Atlantic
Stockholder under Section 3.1.3 shall be exercisable by delivering
written notice, prior to the expiration of the 45-day period referred to
in Section 3.1.3, to the Selling Stockholder with a copy to the Company
and the other Stockholders. Each such notice shall state (i) the number
of Fully Diluted Shares held by such Major or General Atlantic
Stockholder and (ii) the number of Shares that such Major or General
Atlantic Stockholder is willing to purchase pursuant to Section 3.1.3.
The failure of a Major Stockholder to respond within such 45-day period
to the Selling Stockholder shall be deemed to be a waiver of such Major
or General Atlantic Stockholder's rights under this Section 3.1.
(c) The rights of a General Atlantic Stockholder under
Section 3.1.4 shall be exercisable by delivering written notice, within
a 45-day period after the giving of the Offering Notice, to the Selling
Stockholder with a copy to the Company and the other Stockholders. Each
such notice shall state (i) the number of Fully Diluted Shares held by
such General Atlantic Stockholder, and (ii) the number of Shares that
such General Atlantic Stockholder desires to sell pursuant to Section
3.1.4. The failure of a General Atlantic Stockholder to respond within
such 45-day period to the Selling Stockholder, shall be deemed to be a
waiver of its rights under this Section 3.1.
3.1.6 Sale to Third Party Purchaser. Unless the Company or the
-----------------------------
other Stockholders elect to purchase all, but not less than all, of the Offered
Securities under Sections 3.1.2, and 3.1.3, the Selling Stockholder and all
General Atlantic Stockholders who elect to participate pursuant to Section
3.1.4, may sell such portions of their Shares that can be sold under Section
3.1.4 to the Third Party Purchaser on the terms and conditions set forth in the
Offering Notice; provided, however, that such sale is bona fide and made
-------- -------
pursuant to a contract entered into within six months of the giving of the
Offering Notice pursuant to Section 3.1.1. If such contract
<PAGE>
10
is not entered within such six-month period for any reason, then the
restrictions provided for herein shall again become effective, and no transfer
of such Offered Securities may be made thereafter (other than to a Permitted
Transferee) by the Selling Stockholder without again offering the same to the
Company and the other Stockholders in accordance with this Section 3.1.
3.1.7 Closing. The closing of the purchases of Offered
-------
Securities subscribed to by the Company under Section 3.1.2, or the Major or
General Atlantic Stockholders under Section 3.1.3 shall be held at the principal
office of the Company at 11:00 a.m. local time on the 90th day after the giving
of the Offering Notice pursuant to Section 3.1.1 or at such other time and place
as the parties to the transaction may agree. At such closing, the Selling
Stockholder shall deliver certificates representing the Offered Securities, duly
endorsed for transfer and accompanied by all requisite transfer taxes, if any,
and such Offered Securities shall be free and clear of any liens, claims,
options, charges, encumbrances or rights ("Liens") (other than those arising
-----
hereunder and those attributable to actions by the purchasers) and the Selling
Stockholder shall so represent and warrant, and further represent and warrant
that it is the beneficial and record owner of such Offered Securities. The
Company or each Stockholder, as the case may be, purchasing Offered Securities
shall deliver at the closing payment in full in immediately available funds for
the Offered Securities purchased by it, unless otherwise specified by the terms
and conditions set forth in the Offering Notice. At such closing, all of the
parties to the transaction shall execute such additional documents as are
otherwise necessary or appropriate.
3.2 Involuntary Transfers.
---------------------
3.2.1 Rights of First Offer upon Involuntary Transfer. If an
-----------------------------------------------
Involuntary Transfer of any Shares (the "TRANSFERRED SHARES") owned by any Major
------------------
Stockholder or Other Stockholder shall occur, the Company and the other
Stockholders shall have the same rights as specified in Sections 3.1.2, and
3.1.3, respectively, with respect to such Transferred Shares as if the
Involuntary Transfer had been a proposed voluntary transfer by a Selling
Stockholder and shall be governed by Section 3.1 except that (a) the time
periods shall run from the date of receipt by the Company and the other
Stockholders of notice of the Involuntary Transfer, (b) such rights shall be
exercised by notice to the transferee of such Transferred Shares (the
"INVOLUNTARY TRANSFEREE") rather than to the Stockholder who suffered or will
----------------------
suffer the Involuntary Transfer and (c) the
<PAGE>
11
purchase price per Transferred Share shall be agreed between the Involuntary
Transferee and the purchasing Stockholders; provided, however, if such parties
-------- -------
fail to agree as to such purchase price, the purchase price shall be the fair
market value thereof as determined in accordance with Section 3.2.2.
3.2.2 Fair Market Value. The fair market value of the Transferred
-----------------
Shares shall be determined by a panel of three independent appraisers, which
shall be recognized investment banking firms or recognized experts experienced
in the valuation of corporations. Within fifteen (15) days after the notice to
the Involuntary Transferee with respect to the exercise of the right to purchase
the Transferred Shares, the Involuntary Transferee and the Board of Directors
shall each designate one such appraiser that is willing and able to conduct such
determination. If either the Involuntary Transferee or the Board fails to make
such designation within such period, the other party that has made the
designation shall have the right to make the designation on its behalf. The two
appraisers designated shall, within a period of fifteen (15) days after the
designation of the second appraiser, agree to designate a third appraiser. The
three appraisers shall conduct their determination as promptly as practicable,
and the fair market value of the Transferred Shares shall be the average of the
determination of the two appraisers that are closer to each other than to the
determination of the third appraiser, which third determination shall be
discarded; provided, however, if the determination of two appraisers are equally
-----------------
close to the determination of the third appraiser, then the fair market value of
the Transferred Shares shall be the average of the determination of all three
appraisers. Such determination shall be final and binding on the Involuntary
Transferee and the purchasing Stockholders. The Involuntary Transferee shall be
responsible for the fees and expenses of the appraiser designated by or on
behalf of it, and the purchasing Stockholders for the fees and expenses of the
appraiser designated by or on behalf of the Board. The Involuntary Transferee
and the purchasing Stockholders shall each share half the fees and expenses of
the appraiser designated by the appraisers.
3.2.3 Closing. The closing of any purchase under this Section
-------
3.3 shall be held at the principal office of the Company at 11:00 a.m. local
time on the 45th day after the receipt by the Company and the other Stockholders
of notice of the Involuntary Transfer or at such other time and place as the
parties to the transaction may agree. At such closing, the Involuntary
Transferee shall deliver certificates, if applicable, or other instruments or
documents representing the Transferred Shares
<PAGE>
12
being purchased under this Section 3.2, duly endorsed with a signature guarantee
for transfer and accompanied by all requisite transfer taxes, if any, and such
Shares shall be free and clear of any Lien (other than that arising hereunder)
arising through the action or inaction of the Involuntary Transferee and the
Involuntary Transferee shall so represent and warrant, and further represent and
warrant that it is the beneficial owner of such Transferred Shares. The Company
or each Stockholder, as the case may be, purchasing such Shares shall deliver at
closing payment in full in immediately available funds for such Transferred
Shares, unless otherwise agreed by the Involuntary Transferee and the Company or
such purchasing Stockholder, as the case may be. At such closing, all parties to
the transaction shall execute such additional documents as are otherwise
necessary or appropriate.
3.2.4 General. In the event that the provisions of this Section
-------
3.2 shall be held to be unenforceable with respect to any particular Involuntary
Transfer, the Company and the other Stockholders shall have the rights specified
in Sections 3.1.2, and 3.1.3, respectively, with respect to any subsequent
transfer by an Involuntary Transferee of such Shares, and each Stockholder
agrees that any Involuntary Transfer shall be subject to such rights, in which
case the Involuntary Transferee shall be deemed to be the Selling Stockholder
for purposes of Section 3.1 of this Agreement and shall be bound by the
provisions of Section 3.1 and other related provisions of this Agreement.
4. All Transfers in Compliance with Law and Subject to this Agreement;
-------------------------------------------------------------------
Substitution of Transferee. Notwithstanding any other provision of this
- --------------------------
Agreement, no transfer may be made by a Major Stockholder, General Atlantic
Stockholder or Other Stockholder pursuant to Section 3 unless (a) each
transferee of Shares has agreed in writing to be bound by the terms and
conditions of this Agreement pursuant to an instrument substantially in the form
attached hereto as Exhibit A, (b) the transfer complies in all respects with the
applicable provisions of this Agreement and (c) the transfer complies in all
respects with applicable federal and state securities laws including, without
limitation, the Securities Act. Upon becoming a party to this Agreement, the
transferee of a Major Stockholder or an Other Stockholder shall be deemed to be,
and shall have the same rights and be subject to the same obligations as, an
Other Stockholder hereunder. Upon becoming a party to this Agreement, the
transferee of a General Atlantic Stockholder shall be deemed to be, and shall
enjoy the same rights and be subject to the same obligations as, a General
Atlantic Stockholder hereunder.
<PAGE>
13
5. Corporate Governance.
--------------------
5.1 General. From and after the execution of this Agreement, each
-------
Stockholder shall vote its Shares at any regular or special meeting of
stockholders of the Company (a "STOCKHOLDERS MEETING") or in any written consent
--------------------
executed in lieu of such a meeting of stockholders (a "WRITTEN CONSENT"), and
---------------
shall take all other actions necessary, to give effect to the provisions of this
Agreement (including Section 5.3 hereof) and to ensure that the Charter
Documents do not, at any time hereafter, conflict in any respect with the
provisions of this Agreement. In addition, each Stockholder shall vote its
Shares at any Stockholders Meeting or act by Written Consent with respect to
such Shares, upon any matter submitted for action by the Company's stockholders
or with respect to which such Stockholder may vote or act by Written Consent, in
conformity with the specific terms and provisions of this Agreement and the
Charter Documents.
5.2 Stockholders Actions. In order to effectuate the provisions of
--------------------
this Section 5, each Stockholder (a) hereby agrees that when any action or vote
is required to be taken by such Stockholder pursuant to this Agreement, such
Stockholder shall use its best efforts to call, or cause the appropriate officer
and directors of the Company to call, a Stockholders Meeting or to execute or
cause to be executed a Written Consent to effectuate such stockholder action,
(b) shall use its best efforts to cause the Board of Directors to adopt, either
at a meeting of the Board of Directors or by the unanimous written consent of
the Board of Directors, all the resolutions necessary to effectuate the
provisions of this Agreement and (c) shall use its best efforts to cause the
Board of Directors to cause the Secretary of the Company, or if there be no
secretary, such other officer of the Company as the Board of Directors may
appoint to fulfill the duties of Secretary, not to record any vote or consent
contrary to the terms of this Section 5.
5.3 Election of Directors.
---------------------
5.3.1 Number and Composition. Each Stockholder agrees that the
----------------------
number of directors constituting the entire Board of Directors shall be
initially six (6) but may be either five (5), six (6) or seven (7). Each
Stockholder shall vote its Shares at any Stockholders Meeting called for the
purpose of filling the positions on the Board of Directors, or in any Written
Consent executed for such purpose, and to take all other actions necessary to
ensure the election to the Board of Directors of one individual (who initially
shall be William E. Ford) designated by the
<PAGE>
14
General Atlantic Stockholders (the "GENERAL ATLANTIC DIRECTOR").
-------------------------
5.3.2 General Atlantic Observer. The General Atlantic
-------------------------
Stockholders shall be entitled to designate one individual to attend and observe
any regular or special meeting of the Board of Directors (the "GENERAL ATLANTIC
----------------
OBSERVER").
- --------
5.3.3 Removal and Replacement of General Atlantic Director. The
----------------------------------------------------
General Atlantic Director may be removed at any time and for any reason (or for
no reason) by the General Atlantic Stockholders. If, at any time, a vacancy is
created on the Board of Directors by reason of the death, removal or resignation
of the General Atlantic Director, the General Atlantic Stockholders shall
designate a nominee to be elected to fill such vacancy until the next
Stockholders Meeting. Upon receipt of notice of the designation of a nominee,
each Stockholder shall, as soon as practicable after the date of such notice,
take action, including the voting of its Shares to elect the director designated
by the General Atlantic Stockholders to fill such vacancy.
5.4 Actions of the Board of Directors.
---------------------------------
The Board of Directors shall be the ultimate decision making
authority in the Company and shall supervise the business activities of the
Company.
(a) The management of the Company shall prepare annual operating
and capital budgets for the Company and shall submit them in a timely
manner to the Board of Directors. The annual operating and capital
budgets shall be effective upon the approval of a majority of the Board
of Directors.
(b) The Company shall not issue or become liable for any long
term debt in excess of $500,000 without the approval of a majority of
the Board of Directors.
(c) The Company shall obtain the approval of a majority of the
Board of Directors of the Company (which majority shall include the
General Atlantic Director) prior to taking any binding action in respect
of the following:
(i) The sale, merger or liquidation of the Company, or the
sale, lease or other disposition of all or substantially all of the
Company's assets;
<PAGE>
15
(ii) Any change in material accounting methods or policies
of the Company; and
(iii) Any material amendment to the Charter Documents or the
list of actions set forth in this Section 5.4.
6. After-Acquired Securities; Future Financings; Preemptive Rights.
---------------------------------------------------------------
6.1 After-Acquired Securities. All of the provisions of this
-------------------------
Agreement shall apply to all of the Shares now owned or which may be issued or
transferred hereafter to a Stockholder in consequence of any additional
issuance, purchase, exchange or reclassification of any of the Shares, corporate
reorganization, or any other form of recapitalization, consolidation, merger,
share split or share dividend, or which are acquired by a Stockholder in any
other manner.
6.2 Future Financings. If the Company, at any time, proposes to
-----------------
issue or sell any equity securities (the "NEW SECURITIES") to any person other
--------------
than a Stockholder, except for securities of the Company which may be issued to
employees, officers, directors, consultants, independent contractors or advisors
of the Company pursuant to a stock option plan or other employee benefit
arrangement approved by the Board of Directors, the General Atlantic
Stockholders shall have the right to purchase all such New Securities. The
Company shall offer to sell to the General Atlantic Stockholders the New
Securities at the same price and on the same terms proposed to be issued and
sold, which shall be specified by the Company in a written notice delivered to
each of the General Atlantic Stockholders (the "OFFER"). The Offer shall by its
terms remain open for a period of at least fifteen (15) Business Days from the
date thereof and shall specify the date on which the New Securities will be sold
to the General Atlantic Stockholders (which shall be not more than ninety (90)
days from the date of such Offer). The General Atlantic Stockholders shall have
the right to purchase all, but not less than all, of the New Securities at the
purchase price and on the terms stated in such Offer. Notice by any General
Atlantic Stockholder of its acceptance (the "ACCEPTANCE NOTICE"), of the Offer
-----------------
shall be in writing and signed by such General Atlantic Stockholder and shall be
delivered to the Company prior to the end of the period specified in the Offer,
setting forth the number of New Securities such General Atlantic Stockholder
elects to purchase. In the event that the General Atlantic Stockholders decline
such Offer or do not agree to buy all of the New Securities, the Company may
(subject to Section 6.3 below) during the period of six (6)
<PAGE>
16
months following the date of expiration of such Offer sell to any other Person
the New Securities, but only on terms and conditions that are no more favorable
to such Person or less favorable to the Company then those set forth in such
Offer. Any New Securities not sold during such six-month period may not be sold
by the Company or otherwise disposed of without again being subject to the
rights of the General Atlantic Stockholders set forth in this Section 6.2. Any
New Securities issued to any General Atlantic Stockholder as contemplated by
this Section 6.2 shall be free and clear of all Liens created by the Company
(other than those arising hereunder), and upon issuance thereof to the General
Atlantic Stockholders against payment of the consideration payable therefor,
such New Securities shall be duly and validly issued and fully paid and
nonassessable.
6.3 Preemptive Rights. In the event the General Atlantic Stockholders
-----------------
do not purchase the New Securities pursuant to Section 6.2 or in the event the
Company proposes to issue or sell any New Securities to an Other Stockholder,
and except for securities of the Company which may be issued to employees,
officers, directors, consultants, independent contractors or advisors of the
Company pursuant to a stock option plan or other employee benefit arrangement
approved by the Board of Directors, each General Atlantic Stockholder shall have
the right to purchase that percentage of such New Securities determined by
dividing (i) the total number of Fully Diluted Shares then owned by such General
Atlantic Stockholder by (ii) the total number of Fully Diluted Shares (the
"PROPORTIONATE PERCENTAGE"). The Company shall offer to sell to each General
------------------------
Atlantic Stockholder such amount of New Securities at the same price and on the
same terms proposed to be issued and sold, which shall be specified by the
Company in a written notice delivered to each General Atlantic Stockholder for
purposes of this Section 6.3 (the "PREEMPTIVE RIGHTS OFFER"). The Preemptive
-----------------------
Rights Offer shall by its terms remain open for a period of at least fifteen
(15) Business Days from the date thereof and shall specify the date on which the
New Securities will be sold to accepting General Atlantic Stockholders (which
shall be not more than ninety (90) days from the date of such Preemptive Rights
Offer). Each General Atlantic Stockholder shall have the right, during the
period specified in the Preemptive Rights Offer, to purchase any or all of its
Proportionate Percentage of the New Securities at the purchase price and on the
terms stated in such Preemptive Rights Offer. Notice by any General Atlantic
Stockholder of its acceptance for purposes of this Section 6.3 (a "PREEMPTIVE
----------
RIGHTS ACCEPTANCE NOTICE"), in whole or in part, of the Preemptive Rights Offer
- ------------------------
shall be in writing and signed by such General Atlantic Stockholder and shall be
delivered to the Company
<PAGE>
17
prior to the end of the period specified in the Preemptive Rights Offer, setting
forth the number of New Securities such General Atlantic Stockholder elects to
purchase. In the case of any such Preemptive Rights Offer, the Company may
during the period of ninety (90) days following the date of expiration of such
Preemptive Rights Offer sell to any other Person all or any part of the New
Securities not covered by the Preemptive Rights Acceptance Notices, but only on
terms and conditions that are no more favorable to such Person or Persons or
less favorable to the Company than those set forth in the Preemptive Rights
Offer. If there shall be any New Securities not purchased by any General
Atlantic Stockholder or by any other Person as contemplated by this Section 6.3
during such 90-day period, such securities may not be sold by the Company or
otherwise disposed of without again being subject to the preemptive rights of
the General Atlantic Stockholders set forth in this Section 6.3. Any New
Securities issued to any General Atlantic Stockholder as contemplated by this
Section 6.3 shall be free and clear of all Liens created by the Company (other
than those arising hereunder), and upon issuance thereof to the General Atlantic
Stockholders against payment of the consideration payable therefor, such New
Securities shall be duly and validly issued and fully paid and nonassessable.
6.4 Agreement to be Bound. The Company shall not issue any shares of
---------------------
Common Stock or any Common Stock Equivalents to any Person not a party to this
Agreement, until the Company has used all reasonable efforts to (a) induce such
Person to become a party to this Agreement with such amendments as may be
reasonable and appropriate or (b) negotiate a new stockholders agreement
satisfactory to the parties to this Agreement and such Person. Upon becoming a
party to this Agreement, such Person shall be deemed to be, and shall be subject
to the same obligations as, an Other Stockholder hereunder. Any issuance of
Common Stock or any Common Stock Equivalents by the Company in violation of this
Section 6.4 shall be null and void ab initio. Notwithstanding the foregoing, the
-- ------
provisions of this Section 6.4 shall not be applicable to issuances of Common
Stock upon the exercise of options granted to employees, officers, directors,
consultants, independent contractors or advisors of the Company pursuant to an
employee benefit plan approved by the Board of Directors.
<PAGE>
18
7. Registration Rights.
-------------------
7.1 Demand Registration.
-------------------
7.1.1 General. At any time after ninety (90) days following the
-------
Company's Initial Public Offering or such longer period as the managing
underwriter deems advisable, but in no event longer than 180 days, one or more
of the General Atlantic Stockholders, acting through GAP or its written
designee, or a Major Stockholder (in each case a "DEMAND STOCKHOLDER" and
------------------
collectively, the "DEMAND STOCKHOLDERS"), may make a written request to the
-------------------
Company to register, under the Securities Act and under the securities or "blue
sky" laws of any jurisdiction designated by the Demand Stockholders (the "DEMAND
------
REGISTRATION"), the number of Shares (including the Shares held by Permitted
- ------------
Transferees of the Demand Stockholders, the "DEMAND SHARES") stated in such
-------------
request, provided that the estimated public offering price of the Demand Shares
exceeds $5 million. The request for a Demand Registration by a Demand
Stockholder shall specify the amount of Demand Shares proposed to be sold and
the intended method of disposition thereof. The General Atlantic Stockholders
shall have the right to request two Demand Registrations, and each of the Major
Stockholders shall have the right to request one Demand Registration.
7.1.2 Effective Demand Registration. The Company shall use its
-----------------------------
reasonable efforts to cause the Demand Registration pursuant to Section 7.1.1 to
become and remain effective not later than ninety (90) days after the Company
receives from a Demand Stockholder a request for such Demand Registration. A
registration shall constitute a Demand Registration, irrespective of the number
of Demand Shares included in such Demand Registration, if the Demand
Registration has become effective and remains continuously effective for the
lesser of (a) 120 days and (b) the consummation of the sale, pursuant to such
registration, of all of the Shares covered by such registration. A Demand
Registration that is withdrawn for whatever reason (except the bad faith of the
Demand Stockholder) shall not constitute a Demand Registration.
7.1.3 Underwriting Adjustment. If the Demand Registration
-----------------------
pursuant to Section 7.1.1 involves an underwritten offering, and the managing
underwriter shall advise the Company in writing that, in its opinion, the number
of Shares requested to be included in such registration exceeds the number which
can be sold in such offering, the Company will include in such registration, to
the extent of the number of Shares which the Company is so advised can be sold
in such offering, (a) first, the Demand
<PAGE>
19
Shares, (b) second, shares held by other stockholders who have demand
registration rights under this or any other agreement with the Company proposed
by the Company to be included, (C) third, unissued shares proposed by the
Company to be included and (d) fourth, other shares held by other stockholders
proposed by the Company to be included in such registration.
7.2 Incidental or "Piggyback" Registration.
--------------------------------------
7.2.1 General. If at any time following the Company's Initial
-------
Public Offering, the Company proposes to register any Shares under the
Securities Act for public sale for its own account or for the account of any
Stockholder, the Company shall give to each General Atlantic Stockholder and the
Major Stockholders (each, an "INCIDENTAL STOCKHOLDER") notice of such proposed
----------------------
registration at least twenty (20) days prior to the filing of a Registration
Statement with respect to such public sale. Upon the written request of any
Incidental Stockholder delivered to the Company within ten (10) days after the
receipt of the notice from the Company (which request shall state the number of
Shares, including Shares held by Permitted Transferees of such Incidental
Stockholder (collectively, the "INCIDENTAL SHARES"), that such Incidental
-----------------
Stockholder wishes to sell or distribute publicly under such Registration
Statement proposed to be filed by the Company), the Company shall use its
reasonable efforts to register such Incidental Shares under such Registration
Statement, and to cause such registration to become and remain effective so long
as the Company keeps such registration effective as to such other Shares (the
"INCIDENTAL REGISTRATION"). The Company may withdraw a Registration Statement at
-----------------------
any time before it becomes effective or postpone or terminate the offering
without obligation to any Incidental Stockholder.
7.2.2 Underwriting Adjustment. If the Incidental Registration
-----------------------
pursuant to Section 7.2.1 involves an underwritten offering, and the Company's
managing underwriter shall advise the Company in writing that, in its opinion,
the number of Shares requested to be included in such registration exceeds the
number which can be sold in such offering in light of the price per share, the
Company will include in such registration, to the extent of the number of Shares
which the Company is so advised can be sold in such offering, (a) first, Shares
that the Company proposes to issue and sell for its own account, if any, (b)
second, shares held by stockholders (including Incidental Shares) who have
registration rights under this or any other agreement with the Company proposed
by the Company to be included and (c) third, other shares held by other
<PAGE>
20
stockholders proposed by the Company to be included in such registration.
7.3 Registration Procedures. With respect to any Registration
-----------------------
Statement that includes any Shares pursuant to Sections 7.1 and 7.2:
7.3.1 Underwriters.
------------
(a) Except with the consent of a majority of the Board of
Directors, any Demand Registration pursuant to Section 7.1 or Incidental
Registration pursuant to Section 7.2 must be an underwritten offering.
(b) In the event of a Demand Registration pursuant to
Section 7.1, the Demand Stockholder may select and obtain an investment
banking firm of national reputation to act as the managing underwriter
of the offering; provided, that, such underwriter shall be acceptable to
--------- ----
the Company in its reasonable judgment.
(c) In the event of an Incidental Registration pursuant to
Section 7.2, the distribution for the account of the Incidental
Stockholders shall be underwritten by the same underwriters, if any, who
underwrite the distribution of the securities for the account of the
Company or the Incidental Stockholder whose securities are covered by
such Registration Statement.
7.3.2 Registration Statement. The Company will deliver to the
----------------------
Demand Stockholders and the Incidental Stockholders, as the case may be, after
the effectiveness of any Registration Statement such reasonable number of copies
of a definitive prospectus included in such Registration Statement and of any
revised or supplemental prospectus as the Demand Stockholders or Incidental
Stockholders may from time to time request.
7.3.3 Expenses. In connection with the registration of Demand
--------
Shares and Incidental Shares pursuant to Sections 7.1 and 7.2, the Company shall
pay the reasonable expenses (including accountants and counsel fees) whether or
not such Demand Registration or Incidental Registration becomes effective,
except for indemnity commissions and counsel of Incidental Stockholders up to a
maximum amount as follows: (a) if such registration is pursuant to a Form S-1
under the Securities Act the Company shall pay a maximum of sixty percent (60%)
of the expenses of the Initial Public Offering, as adjusted for inflation, and
(b) if such registration is pursuant to a Form S-3 under the Securities Act the
Company shall pay a maximum of forty
<PAGE>
21
percent (40%) of the expenses of the Initial Public Offering, as adjusted for
inflation.
7.3.4 Hold-Back.
---------
(a) Each holder of Shares included in a Registration
Statement hereunder agrees not to effect any public sale or distribution
of Shares during the seven days prior to, and during the ninety (90) day
period following, the effective date of such Registration Statement or
such longer period as shall be reasonably requested by the managing
underwriter, but in no event longer than 25 days prior to and 120 days
after (except as part of such registration).
(b) The Company agrees not to effect any public sale or
distribution of any of its securities for its own account during the
ninety (90) day period beginning on the later of (i) the effective date
of any Registration Statement in which the General Atlantic or Major
Stockholders are participating as a result of a Demand Registration
pursuant to Section 7.1 hereof and (ii) the commencement of a public
distribution of the Shares pursuant to such Registration Statement.
7.3.5 Registration Delay. Notwithstanding anything to the
------------------
contrary contained in this Agreement, if the Company shall deliver to the Demand
Stockholders or an Incidental Stockholder, in connection with a Demand
Registration or an Incidental Registration, as the case may be, written
notification that in the opinion of the Board of Directors of the Company it
would be detrimental to the Company and the Stockholders for a Registration
Statement to be filed at that time, the Company shall have the right to defer
taking action with respect to the filing of such Registration Statement for a
period of not more than sixty (60) days after receipt by the Company of a
request for a Demand Registration or an Incidental Registration, as the case may
be.
7.3.6 Frequency of Registration. Notwithstanding any provisions
-------------------------
of this Section 7, the Company shall not be required to register Shares in a
Public Offering more than once every six months.
7.4 Indemnity. In the case of any registration of Shares pursuant to
---------
this Section 7, the Company will indemnify and hold harmless each Demand
Stockholder and each Incidental Stockholder under Sections 7.1 and 7.2 hereof
(each referred to individually as an "INDEMNITEE"), and any person who controls
----------
such Indemnitee or underwriter within the meaning of Section 15
<PAGE>
22
of the Securities Act, and their respective officers, directors, partners,
members, employees and agents against all claims, losses, damages, liabilities
and expenses (collectively, "LOSSES") resulting from any untrue statement or
------
allegedly untrue statement of a material fact contained in any Registration
Statement, preliminary prospectus, final prospectus or summary prospectus
contained therein, or any amendment or supplement thereto, or from any omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein (in light of the
circumstances under which they were made) not misleading, except insofar as the
same may have been based on information furnished in writing to the Company by
such Indemnitee or such underwriter expressly for use therein and used in
accordance with such writing. Each Indemnitee, by acceptance of the provisions
herein, agrees to furnish to the Company such information concerning such
Indemnitee and the proposed sale or distribution as shall, in the opinion of
counsel for the Company, be necessary in connection with any such registration
or qualification of any Demand Shares or Incidental Shares, and to indemnify and
hold harmless the Company, its officers, directors, employees and agents and
each of its underwriters (and any person who controls the Company or such
underwriters within the meaning of Section 15 of the Securities Act) against all
Losses resulting from any untrue statement or allegedly untrue statement of a
material fact contained in any Registration Statement, preliminary prospectus,
final prospectus or summary prospectus contained therein, or any amendment or
supplement thereto, or from any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein (in light of the circumstances under which they were made) not
misleading, insofar as the same may have been based on information furnished in
writing to the Company by such Indemnitee or to such underwriter expressly for
use therein and used in accordance with such writing, but not insofar as the
same may have been based on the failure of the underwriter to send or give a
copy of the final prospectus (or any amendment or supplement thereto) to the
person asserting the untrue statement or omission or alleged omission at or
prior to the sale of the Shares to such person if such statement was corrected
in the final prospectus.
8. Stock Certificate Legend. A copy of this Agreement shall be filed with
------------------------
the Secretary of the Company and kept with the records of the Company. Each
certificate representing Shares now held or hereafter acquired by any
Stockholder shall for as long as this Agreement is effective bear legends
substantially in the following forms:
<PAGE>
23
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR THE SECURITIES
LAWS OF ANY STATE. THE SECURITIES MAY NOT BE TRANSFERRED EXCEPT PURSUANT
TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE
SECURITIES LAWS OR PURSUANT TO AN APPLICABLE EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF SUCH ACT AND SUCH LAWS.
THE SALE, ASSIGNMENT, HYPOTHECATION, PLEDGE, ENCUMBRANCE OR OTHER
DISPOSITION (EACH A "TRANSFER") AND VOTING OF ANY OF THE SECURITIES
REPRESENTED BY THIS CERTIFICATE ARE RESTRICTED BY THE TERMS OF THE
STOCKHOLDERS AGREEMENT, DATED SEPTEMBER 28, 1995, AMONG TRADE*PLUS, INC.,
GENERAL ATLANTIC PARTNERS II, L.P., GAP COINVESTMENT PARTNERS, L.P. AND THE
STOCKHOLDERS NAMED THEREIN, A COPY OF WHICH MAY BE INSPECTED AT THE
COMPANY'S PRINCIPAL OFFICE. THE COMPANY WILL NOT REGISTER THE TRANSFER OF
SUCH SECURITIES ON THE BOOKS OF THE COMPANY UNLESS AND UNTIL THE TRANSFER
HAS BEEN MADE IN COMPLIANCE WITH THE TERMS OF THE STOCKHOLDERS AGREEMENT.
9. Miscellaneous.
-------------
9.1 Notices. All notices, demands or other communications provided for
-------
or permitted hereunder shall be made in writing and shall be by registered or
certified first class mail, return receipt requested, telecopier, courier
service, overnight mail or personal delivery:
Trade*Plus, Inc.
480 California Avenue
Palo Alto, CA 94306
Attention: President
Telecopy: (415) 324-3044
with a copy to:
Jackson, Tufts, Cole & Black
650 California Street, 32nd Floor
San Francisco, CA 94108
Attention: Templeton C. Peck, Esq.
Telecopy: (415) 392-3494
<PAGE>
24
(b) if to any of the General Atlantic Stockholders:
c/o General Atlantic Service Corporation
125 East 56th Street
New York, New York 10022
Attention: Stephen P. Reynolds
Telecopy: (212) 644-8339
with a copy to:
Paul, Weiss, Rifkind, Wharton & Garrison
1285 Avenue of the Americas
New York, New York 10019-6064
Attention: Matthew Nimetz, Esq.
Telecopy: (212) 757-3990
(c) if to the Major Stockholders:
c/o Trade*Plus, Inc.
480 California Avenue
Palo Alto, CA 94306
Telecopy: (415) 324-3044
with a copy to:
Jackson, Tufts, Cole & Black
650 California Street, 32nd Floor
San Francisco, CA 94108
Attention: Templeton C. Peck, Esq.
Telecopy: (415) 392-3494
(d) if to any other Stockholder, at its address as it appears on the
record books of the Company.
Any party may by notice given in accordance with this Section 9.1 designate
another address or person for receipt of notices hereunder. All such notices
and communications shall be deemed to have been duly given when delivered by
hand, if personally delivered; when delivered by courier or overnight mail, if
delivered by commercial courier service or overnight mail; five (5) Business
Days after being deposited in the mail, postage prepaid, if mailed; and when
receipt is mechanically acknowledged, if telecopied.
9.2 Amendment and Waiver.
--------------------
(a) No failure or delay on the part of any party hereto in
exercising any right, power or remedy hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise of any such
right, power or remedy preclude any other or further exercise thereof or
the exercise of any other right, power or remedy. The remedies
<PAGE>
25
provided for herein are cumulative and are not exclusive of any remedies
that may be available to the parties hereto at law, in equity or
otherwise.
(b) Any amendment, supplement or modification of or to any
provision of this Agreement, any waiver of any provision of this
Agreement, and any consent to any departure by any party from the terms
of any provision of this Agreement, shall be effective only if it is
made or given in writing and signed by the General Atlantic Stockholders
and by parties holding 50% of the remaining Shares hereunder.
9.3 Specific Performance. The parties hereto intend that each of
--------------------
the parties have the right to seek damages or specific performance in the
event that any other party hereto fails to perform such party's obligations
hereunder. Therefore, if any party shall institute any action or proceeding to
enforce the provisions hereof, any party against whom such action or proceeding
is brought hereby waives any claim or defense therein that the plaintiff party
has an adequate remedy at law.
9.4 Headings. The headings in this Agreement are for convenience
--------
of reference only and shall not limit or otherwise affect the meaning hereof.
9.5 Severability. If any one or more of the provisions contained
------------
herein, or the application thereof in any circumstance, is held invalid, illegal
or unenforceable in any respect for any reason, the validity, legality and
enforceability of any such provision in every other respect and of the remaining
provisions hereof shall not be in any way impaired, unless the provisions held
invalid, illegal or unenforceable shall substantially impair the benefits of the
remaining provisions hereof.
9.6 Entire Agreement. This Agreement, together with the exhibits
----------------
and schedules hereto, is intended by the parties as a final expression of their
agreement and intended to be a complete and exclusive statement of the agreement
and understanding of the parties hereto in respect of the subject matter
contained herein and therein. There are no restrictions, promises, warranties or
undertakings, other than those set forth or referred to herein or therein. This
Agreement, together with the exhibits hereto, supersede all prior agreements and
understandings between the parties with respect to such subject matter.
9.7 Term of Agreement. This Agreement shall become effective upon
-----------------
the execution hereof and, except for Section 7, shall terminate upon the IPO
Effectiveness Date.
<PAGE>
26
9.8 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED AND CONSTRUED IN
-------------
ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA APPLICABLE TO AGREEMENTS
MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE, WITHOUT REGARD TO THE
PRINCIPLES OF CONFLICTS OF LAW THEREOF, EXCEPT FOR THOSE PROVISIONS OF THIS
AGREEMENT THAT BY THE LAWS OF THE STATE OF DELAWARE ARE GOVERNED BY THE LAWS OF
SUCH STATE.
9.9 Further Assurances. Each of the parties shall, and shall cause
------------------
their respective Affiliates to, execute such instruments and take such action as
may be reasonably required or desirable to carry out the provisions hereof and
the transactions contemplated hereby. Specifically, but not by way of
limitation, the parties agree to cause to be executed and filed an amendment to
the Articles of Incorporation of the Company, if required, to include the
provisions of Section 8 therein.
9.10 Successors and Assigns. This Agreement shall be binding upon
----------------------
and inure to the benefit of the parties and their respective successors, heirs,
legatees and legal representatives. This Agreement is not assignable except in
connection with a transfer of Shares in accordance with this Agreement.
9.11 Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed an original, and all of which taken
together shall constitute one and the same instrument.
[THIS SPACE INTENTIONALLY LEFT BLANK.]
<PAGE>
27
IN WITNESS WHEREOF, the undersigned have executed, or have caused to
be executed, this Agreement on the date first written above.
TRADE*PLUS, INC.
By:
----------------------------------
Name:
Title:
GENERAL ATLANTIC PARTNERS II, L.P.
By: GENERAL ATLANTIC PARTNERS
Its General Partner
By:
----------------------------------
Name: William E. Ford
Title: A General Partner
GAP COINVESTMENT PARTNERS, L.P.
By:
----------------------------------
Name: William E. Ford
Title: A General Partner
----------------------------------
William A. Porter
----------------------------------
Bernard A. Newcomb
<PAGE>
28
IN WITNESS WHEREOF, the undersigned have executed, or have cause to be
executed, this Agreement on the date first written above.
TRADE*PLUS, INC.
By:
----------------------------------
Name: William A. Porter
Title: President
GENERAL ATLANTIC PARTNERS II, L.P.
By: GENERAL ATLANTIC PARTNERS
Its General Partner
By:
----------------------------------
Name:
Title: A General Partner
GAP COINVESTMENT PARTNERS, L.P.
By:
----------------------------------
Name:
Title: A General Partner
----------------------------------
William A. Porter
----------------------------------
Bernard A. Newcomb
<PAGE>
Annex 1
-------
CONSENT OF SPOUSES
------------------
Each of the undersigned is a spouse of one of the Stockholders and
hereby acknowledges that he or she has read the foregoing Stockholders Agreement
and knows its contents. Each of the undersigned is aware that by its provisions,
his or her spouse is appointed as agent for any interest that the undersigned
may have in the Shares and that such spouse has agreed to sell all of his or her
shares in the Company, including the undersigned's community interest therein,
if any, on the occurrence of certain events. Each of the undersigned hereby
consents to the sale, approves the provisions of the Stockholders Agreement and
agrees that those shares and his or her interest in them, if any, are subject to
the provisions of the Stockholders Agreement and that he or she will take no
action at any time to hinder operation of the Stockholders Agreement on those
shares or his or her interest, if any, in them.
Name:
-----------------------------
<PAGE>
Schedule 1
----------
Major Stockholders
------------------
Stockholder Number of Shares
----------- ----------------
William A. Porter 63,704
Bernard A. Newcomb 50,804
<PAGE>
Exhibit A/1/
------------
ACKNOWLEDGMENT AND AGREEMENT
The undersigned wishes to receive from ___________ ("Transferor")
certain shares or certain options, warrants or other rights to purchase shares
(the "Shares") of Common Stock, par value $.10 per share, of TRADE*PLUS, INC., a
California corporation (the "Company");
The Shares are subject to that certain Stockholders Agreement,
dated September __, 1995 (the "Agreement"), among the Company, General Atlantic
Partners II, L.P., GAP Coinvestment Partners, L.P., and certain stockholders
named therein;
The undersigned has been given a copy of the Agreement and
afforded ample opportunity to read it, and the undersigned is thoroughly
familiar with its terms;
Pursuant to terms of the Agreement, the Transferor is prohibited
from transferring such Shares and the Company is prohibited from registering the
transfer of the Shares unless and until the recipient of such Shares
acknowledges the terms and conditions of the Agreement and agrees to be bound
thereby; and
The undersigned wishes to receive such Shares and have the
Company register the transfer of such Shares;
NOW, THEREFORE, in consideration of the mutual premises contained
herein and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, and to induce the Transferor to
transfer such Shares to the undersigned and the Company to register such
transfer, the undersigned does hereby acknowledge and agree that (i) he has been
given a copy of the Agreement and ample opportunity to read it, and the
undersigned is thoroughly familiar with its terms, (ii) the Shares are subject
to the terms and conditions set forth in the Agreement, and (iii) the
undersigned does hereby agree fully to be bound thereby as [a "General Atlantic
Stock-
______________________________________
/1/ For transfers of previously issued stock.
<PAGE>
holder" ]/2/ [a "Major Stockholder"]/3/ [an "Other Stockholder"]/4/ (as
therein defined).
This _________ day of ________________, 19__.
__________________________________
______________________________________
/2/ To be used only if the transfer is made by a General Atlantic Stockholder.
/3/ To be used only if the transfer is made by a Major Stockholder to a
Permitted Transferee.
/4/ To be used for all other transfers.
<PAGE>
EXHIBIT 10.21
SUPPLEMENT NO. 1 TO STOCKHOLDERS AGREEMENT
The undersigned have entered into a Stock Purchase Agreement dated the
date hereof to purchase an aggregate of _____ shares (the "Shares") of Series B
Preferred Stock, par value $.15 per share, of E*TRADE GROUP, INC., a California
corporation (the "Company") from the Company;
To the extent hereinafter provided, the Shares are subject to that
certain Stockholders Agreement dated September 28, 1995 (the "Agreement"), among
the Company, General Atlantic Partners II, L.P., GAP Coinvestment Partners,
L.P., and certain other stockholders named therein;
The undersigned has been given a copy of the Agreement and afforded
ample opportunity to read it, and the undersigned is thoroughly familiar with
its terms;
The undersigned wishes to purchase the Shares and to become subject to
the Agreement, and the stockholders of the Company wish to supplement the
Agreement to include the undersigned therein to the extent provided hereinafter,
and to have the Company sell such Shares;
NOW, THEREFORE, in consideration of the mutual premises contained
herein and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged:
1. The undersigned hereby acknowledges and agrees that (i) such party
has been given a copy of the Agreement and ample opportunity to read it and is
thoroughly familiar with its terms, and (ii) the Shares to be acquired by such
party will be subject to the terms and conditions set forth in the Agreement.
2. Notwithstanding anything to the contrary in the Agreement, it is
agreed that Richard S. Braddock and the undersigned members of the Cotsakos
Group shall have Incidental or "Piggyback" Registration rights pursuant to
Section 7.2 of the Agreement in the same manner as the Major Shareholders (as
defined in the Agreement) and shall be deemed to be Incidental Shareholders for
purposes of Sections 7.2, 7.3 and 7.4 of the Agreement. For all other sections
of the Agreement, Richard S. Braddock and the Cotsakos Group shall be deemed to
be Other Shareholders (as defined in the Agreement) and to have all rights and
obligations of Other Shareholders under the Agreement as if they were initial
signatories thereto.
<PAGE>
3. This Supplement No. 1 shall be governed and construed in
accordance with the laws of the State of California applicable to agreements
made and to be performed entirely within such state, without regard to the
principles of conflicts of law thereof, except for those provisions of this
agreement that by the laws of the State of Delaware are governed by the laws of
such state.
4. This Supplement No. 1 shall be binding upon and inure to the
benefit of the parties and their respective successors, heirs, legatees and
legal representatives. This Agreement is not assignable except in connection
with a transfer of Shares in accordance with this Supplement No. 1.
5. This Supplement No. 1 may be executed in one or more counterparts,
each of which shall be deemed an original, and all of which taken together shall
constitute one and the same instrument.
IN WITNESS WHEREOF, the undersigned have executed and delivered this
Supplement No. 1 as of the 10th day of April, 1996.
GENERAL ATLANTIC PARTNERS II, L.P.
By: GENERAL ATLANTIC PARTNERS, LLC
Its General Partner
By: _____________________________
Name: Stephen P. Reynolds
Title: A Managing Member
GAP COINVESTMENT PARTNERS, L.P.
By: _____________________________
Name: Stephen P. Reynolds
Title: A General Partner
_____________________________
Richard S. Braddock
<PAGE>
CHRISTOS M. COTSAKOS, AS CUSTODIAN FOR SUZANNE R.
COTSAKOS UNDER THE CALIFORNIA UNIFORM TRANSFER TO
MINORS ACT
By: _____________________________
Christos M. Cotsakos as custodian
for Suzanne R. Cotsakos
CHRISTOS M. COTSAKOS AND HANNAH B. COTSAKOS, AS
TRUSTEES FOR THE BENEFIT OF THE COTSAKOS REVOCABLE
TRUST UNDER AGREEMENT DATED SEPTEMBER 3, l987
By: _____________________________
Hannah B. Cotsakos,
as Co-Trustee
By: _____________________________
Christos M. Cotsakos,
as Co-Trustee
CHRISTOS M. COTSAKOS,
SMITH BARNEY INC.,
ROLLOVER CUSTODIAN
IRA ACCT #60264445-l0-254
By: _____________________________
Christos M. Cotsakos
<PAGE>
Approved and agreed to by the
Stockholders of the Company holding
in excess of 50% of the outstanding
shares of the Company:
________________________________
William A. Porter
________________________________
Bernard A. Newcomb
GENERAL ATLANTIC PARTNERS II, L.P.
By: GENERAL ATLANTIC PARTNERS, LLC
Its General Partner
By: _____________________________________
Name:
Title: A Managing Member
GAP COINVESTMENT, L.P.
By: _____________________________________
Name:
Title: A General Partner
Acknowledged:
E*TRADE GROUP, INC.
By: _____________________________________
Name:
Title:
<PAGE>
EXHIBIT 10.22
STOCKHOLDERS AGREEMENT SUPPLEMENT AND AMENDMENT
The undersigned have entered into one or more of the following
agreements with E*TRADE GROUP, INC., a California corporation (the "Company"):
(i) a Stock Purchase Agreement dated September 28, 1995 (the "Agreement"), among
the Company, General Atlantic Partners II, L.P., GAP Coinvestment Partners,
L.P., and certain other stockholders named therein (the "Series A Purchasers"),
to purchase an aggregate of 100,000 shares of Series A Preferred Stock, par
value $.15 per share (the "Series A Stock"), of the Company from the Company,
(ii) a Stock Purchase Agreement dated April 10, 1996, among the Company, General
Atlantic Partners II, L.P., GAP Coinvestment Partners, L.P., Richard S.
Braddock and the Cotsakos Group (the "Series B Purchasers") to purchase an
aggregate of 20,336 shares of Series B Preferred Stock, par value $.15 per share
(the "Series B Stock"), of the Company from the Company, and/or (iii) a Stock
Purchase Agreement dated the date hereof (the "Series C Agreement"), between the
Company and SOFTBANK Holdings Inc. (the "Series C Purchaser") to purchase an
aggregate of 11,180 shares of Series C Preferred Stock, par value $.15 per share
(the "Series C Stock"), of the Company from the Company (the Series A Stock, the
Series B Stock and the Series C Stock are collectively referred to as the
"Shares" and the Series A Purchasers, the Series B Purchasers and the Series C
Purchaser are collectively referred to as the "Purchasers");
WHEREAS, the Series A Purchasers and the Series B Purchasers wish to
amend their respective agreements with the Company with respect to the
registration rights on the Series A Stock and the Series B Stock held by each
and desire and intend that the Series A Stock and the Series B Stock be subject
to the Agreement in the manner and to the extent hereinafter provided;
WHEREAS, the Series C Purchaser desires to hold and have registration
rights similar to that held by the Series A Purchasers and the Series B
Purchasers and desires and intends that the Series C Stock be subject to the
Agreement in the manner and to the extent hereinafter provided;
WHEREAS, the undersigned has been given a copy of the Agreement and
afforded ample opportunity to read it, together with this Stockholders Agreement
Supplement and Amendment, and the undersigned is thoroughly familiar with the
terms included therein; and
WHEREAS, the Series C Purchaser wishes to purchase the Series C Stock
and to become subject to the Agreement, and the Series A Purchasers and the
Series B Purchasers wish to supplement the Agreement to include the Series C
Purchaser therein to the extent provided hereinafter, and to have the Company
sell such Series C Stock to the Series C Purchaser.
NOW, THEREFORE, in consideration of the mutual promises contained
herein and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged:
1. The undersigned hereby acknowledges and agrees that (i) such party
has been given a copy of the Agreement and ample opportunity to read it and is
thoroughly familiar with its terms, and (ii) the Shares acquired by such party
will be subject to the terms and conditions set forth in the Agreement to the
extent set forth or amended herein.
2. Notwithstanding anything to the contrary in the Agreement, it is
agreed that the Series C Purchaser shall have Demand, Incidental and "Piggyback"
Registration rights pursuant to Section 7 of the Agreement in the same manner as
the Major Shareholders (as defined in the Agreement). For all other sections of
the Agreement, the Series C Purchaser shall be deemed to be Other Shareholders
(as defined in the Agreement) and to have all rights and obligations of Other
Shareholders under the Agreement as if they were initial signatories thereto.
3. Notwithstanding anything to the contrary in the Agreement, it is
agreed that Section 6.1 of the Agreement be amended such that the provisions
therein specified shall not apply to any securities or
1.
<PAGE>
Shares purchased or offered for sale in open market transactions and shall not
apply to any securities otherwise registered under the Securities Act of 1933,
as amended, prior to the date of acquisition of such securities or Shares by the
Purchasers.
4. Notwithstanding anything to the contrary in the Agreement, it is
agreed that Section 7 of the Agreement be amended such that the provisions
therein specified shall apply only to the shares of Common Stock of the Company
into which the Shares are converted or to be converted prior to any sale or
offer for sale pursuant to an effective registration statement filed under the
Securities Act of 1933, as amended. Nothing therein or herein shall be
interpreted or construed to grant any registration rights with respect to the
Shares.
5. For purposes of effecting the sale of Series C Preferred Stock to
the Series C Purchaser pursuant to the Series C Agreement only, the General
Atlantic Stockholders hereby waive their right to purchase the shares of Series
C Preferred Stock offered and sold to the Series C Purchaser.
6. This Stockholders Agreement Supplement and Amendment shall be
governed and construed in accordance with the laws of the State of California
applicable to agreements made and to be performed entirely within such state,
without regard to the principles of conflicts of law thereof, except for those
provisions of this Agreement that by the laws of the State of Delaware are
governed by the laws of such state.
7. This Stockholders Agreement Supplement and Amendment shall be
binding upon and inure to the benefit of the parties and their respective
successors, heirs, legatees and legal representatives. This Stockholders
Agreement Supplement and Amendment is not assignable except in connection with a
transfer of Shares in accordance with this Stockholders Agreement Supplement and
Amendment; provided, however that the Series C Purchaser may assign any of its
-------- -------
rights under this Stockholders Agreement Supplement and Amendment and the
Agreement to any of its Affiliates or affiliated partnerships managed by it, and
such transferee shall be a "Permitted Transferee" as defined in and set forth in
the Agreement.
8. This Stockholders Agreement Supplement and Amendment may be
executed in one or more counterparts, each of which shall be deemed an original,
and all of which taken together shall constitute one and the same instrument.
9. This Stockholders Agreement Supplement and Amendment constitutes
each Shareholder's consent (i) to the Amendment of the Articles of Incorporation
of the Company to create the Company's Series C Preferred Stock, $.15 par value
per share, (ii) to the rights, preferences and privileges of the Series C
Preferred Stock as set forth in the Certificate of Determination of Preferences
of Series C Preferred Stock, (iii) to the offering and sale of the Series C
Preferred Stock, and (iv) the terms of the Stock Purchase Agreement entered into
by the Company to effect the sale of the Series C Preferred Stock.
[This space is intentionally left blank.]
2.
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed and delivered this
Stockholders Agreement Supplement and Amendment as of the 6th day of June, 1996.
E*TRADE GROUP, INC., a California corporation
By: ______________________________________
Name:
Title:
SOFTBANK HOLDINGS INC., a Delaware corporation
By: ______________________________________
Name:
Title:
GENERAL ATLANTIC PARTNERS II, L.P.
By: GENERAL ATLANTIC PARTNERS, LLC
Its General Partner
By:
______________________________________
Name: Stephen P. Reynolds
Title: A Managing Member
GAP COINVESTMENT PARTNERS, L.P.
By:
______________________________________
Name: Stephen P. Reynolds
Title: A General Partner
__________________________________________
Richard S. Braddock
CHRISTOS M. COTSAKOS, AS CUSTODIAN FOR SUZANNE R.
COTSAKOS UNDER THE CALIFORNIA UNIFORM TRANSFER TO
MINORS ACT
By:
_______________________________________
Christos M. Cotsakos
[signatures continued on following page]
3.
<PAGE>
CHRISTOS M. COTSAKOS, AND HANNAH B. COTSAKOS, AS
TRUSTEES FOR THE BENEFIT OF THE COTSAKOS
REVOCABLE TRUST UNDER AGREEMENT DATED SEPTEMBER
3, 1987
By:
______________________________________
Hannah B. Cotsakos, Co-Trustee
By:
______________________________________
Christos M. Cotsakos, Co-Trustee
CHRISTOS M. COTSAKOS, SMITH BARNEY INC., ROLLOVER
CUSTODIAN IRA ACCOUNT NO. 60254445-10-254
By:
______________________________________
Christos M. Cotsakos, Co-Trustee
__________________________________________
William A. Porter
__________________________________________
Bernard A. Newcomb
4.
<PAGE>
EXHIBIT 10.23
CONSULTING AGREEMENT
--------------------
This Agreement is made as of June 7, 1996, by and between George
Hayter, a director of E*TRADE GROUP and E*TRADE Group, Inc., located at Four
Embarcadero Place, 2400 Geng Road, Palo Alto, California 94304 ("E*TRADE
Group").
1. Engagement of Mr. Hayter; Consulting Tasks. E*TRADE Group hereby
------------------------------------------
engages Mr. Hayter, and Mr. Hayter hereby agrees, to advise E*TRADE Group
on the expansion of E*TRADE Group into international markets.
E*TRADE Group understands that the manner and means used by Mr.
Hayter to accomplish the consulting tasks are in the sole discretion and
control of Mr. Hayter. However, Mr. Hayter will utilize the highest degree
of skill and expertise in order to professionally accomplish the consulting
tasks in a timely fashion.
2. Predecessor Agreement; Term. This Agreement shall supersede the
---------------------------
letter agreement dated December 14, 1995 by and between Mr. Hayter and
E*TRADE Group (the "Predecessor Agreement"). In full satisfaction of the
Common Stock component of the Predecessor Agreement, E*TRADE Group has
issued 7,517 shares of its Common Stock (assuming a 60 to 1 stock split in
connection with the reincorporation of E*TRADE Group in the State or
Delaware) to Mr. Hayter, and Mr. Hayter hereby acknowledges receipt of such
shares. Of these shares, 6,096 relate to consulting services rendered by
Mr. Hayter on or prior to March 31, 1996, while 1,421 relate to services
rendered after such date. All of such shares were issued to Mr. Hayter at
their then prevailing fair market value on the date services were rendered
(with the pre-March 31, 1996 shares having an average fair market value of
$8.00 per share and the post-March 31, 1996 shares having a deemed fair
market value of $13.41 per share). The Predecessor Agreement shall be of
no further force and effect. This Agreement shall remain in effect at the
discretion of the Board of Directors.
3. Time Commitment. Mr. Hayter shall devote sufficient time to the
---------------
consulting tasks, performed at the request of E*TRADE Group, to complete
them within the time frames agreed by Mr. Hayter and E*TRADE Group.
4. Compensation. E*TRADE Group shall pay Mr. Hayter fees in the
------------
amount of $1,500.00 per day for work performed in accordance with Section
3, excluding attendance at all Board meetings. Mr. Hayter shall submit
invoices to E*TRADE Group for such fees, and such fees shall be paid in
accordance with E*TRADE Group's normal payment procedures.
5. Travel. Upon reasonable request by E*TRADE Group, Mr. Hayter
------
shall travel to appropriate locations to perform the consulting tasks
(where the nature of such tasks so requires) or to discuss the consulting
tasks. Travel time shall not count as time spent on the consulting tasks
except to the extent that work is actually performed during travel periods.
1.
<PAGE>
6. Expenses. E*TRADE Group shall reimburse Mr. Hayter for all
--------
expenses associated with the performance of the consulting tasks when such
expenditure is approved in advance. In the event such approval has been
granted, Mr. Hayter must provide E*TRADE Group with an itemized expense
report and receipts for all expenses.
7. No Conflicts. Mr. Hayter represents and warrants that: (a) Mr.
------------
Hayter is not bound by, and will not enter into, any oral or written
agreement with another party that conflicts in any way with Mr. Hayter's
obligations under this Agreement or any agreement made or to be made in
connection herewith and (b) Mr. Hayter's agreements and performance under
this Agreement and such related agreements do not require consent or
approval of any person that has not already been obtained.
8. Confidentiality of Protected Information.
----------------------------------------
(a) Definition. "Protected Information: consists of:
----------
(1) information that E*TRADE Group considers to be
proprietary and/or confidential and which was
previously or is hereafter disclosed or made available
to Mr. Hayter by E*TRADE Group, including information
relating to E*TRADE Group or its subsidiaries or their
businesses that becomes available to Mr. Hayter due to
Mr. Hayter's access to E*TRADE Group's property or
products; and
(2) information that has been or is created, developed,
conceived, reduced to practice or discovered by Mr.
Hayter (alone or jointly with others) using any
Protected Information or any property or materials
supplied to Mr. Hayter by E*TRADE Group; and
(3) information that was or is created, conceived,
reduced to practice, discovered, developed by, or made
known to, Mr. Hayter (either alone or jointly with
others) during the period that Mr. Hayter is retained
as a consultant by E*TRADE Group and which is within
the scope of the consulting tasks.
By way of illustration but not limitation, Protected
Information includes: inventions, discoveries,
developments, improvements, trade secrets, know-how, ideas,
techniques, designs, processes, formulae, data and software
(collectively, "Inventions"); plans for research,
development, new products, marketing and selling; budgeting
and financial information; production and sales information
including prices, costs, quantities and information about
suppliers and customers; information about business
relationships; and information about skills and
2.
<PAGE>
compensation of E*TRADE Group's employees and consultants.
(b) Non-Disclosure; Restricted Use. At all times during and after
------------------------------
Mr. Hayter's engagement by E*TRADE Group, Mr. Hayter shall: hold
Protected Information in strictest confidence; not disclose
Protected Information to any third party without written consent
of an E*TRADE Group officer, take all reasonable steps to
safeguard Protected Information; and not use Protected
Information for any purpose other than performing work for
E*TRADE Group.
(c) Exclusions. This Section 8 shall impose no restrictions on use
----------
and disclosure of any information which Mr. Hayter can establish
by legally sufficient evidence: (i) was otherwise known to Mr.
Hayter at the time of disclosure; or (ii) becomes known or
available to Mr. Hayter without restriction from a third party
without violation of any confidentiality obligation to E*TRADE
Group; or (iii) is or becomes part of the public domain without
violation of this Agreement by Mr. Hayter.
(d) Third-Party Information. The use and disclosure restrictions in
-----------------------
this Section 8 shall also apply to proprietary or confidential
information of a third party received by E*TRADE Group and
disclosed to Mr. Hayter.
9. Mr. Hayter Not to Disclose Confidential Information of Others.
-------------------------------------------------------------
Mr. Hayter shall not disclose any information to E*TRADE Group which it
believes to be confidential or proprietary to a third party (including
present or former clients or employers).
10. Research Records. If the consulting tasks involve work that
----------------
could lead to the development for E*TRADE Group of any products,
inventions, technology, software or other proprietary material, then Mr.
Hayter shall maintain such records, research notes, data and other
materials as may be necessary and in sufficient detail to reflect properly
all work done and results achieved in performing this Agreement. All such
material becomes E*TRADE Group's property when produced.
11. Termination. This Agreement may be terminated by either party on
-----------
three (3) days' written notice to the other, regardless of whether or not
the consulting tasks have yet been completed. On termination, or earlier on
E*TRADE Group's request, Mr. Hayter shall deliver to E*TRADE Group any
supplies or equipment provided by E*TRADE Group for use in performing the
consulting tasks, all materials produced under Section 10, and all physical
property and documents or other media (including copies) that contain
Protected Information.
12. Independent Contractor; No Employee Benefits. Mr. Hayter shall
--------------------------------------------
at all times act as an independent contractor and not as an employee of
E*TRADE Group. Accordingly, Mr. Hayter understands that E*TRADE Group will
not pay or withhold from payments to Mr. Hayter under this Agreement any
F.I.C.A. (social security), state unemployment or disability
3.
<PAGE>
insurance premiums, state or federal income taxes, or other taxes and that
Mr. Hayter is responsible for paying any applicable federal self-employment
tax (in lieu of F.I.C.A.), state and federal income taxes (including
estimated tax payments) and other applicable taxes. Mr. Hayter also
understands that he will receive no employee benefits of any kind
including, for example, vacation or health insurance.
13. Miscellaneous. Neither party has any authority to bind the other
-------------
in any way. This Agreement constitutes the entire agreement between the
parties relating to the subject matter hereof. Except as expressly
provided herein, this Agreement shall not be amended except by written
agreement between the parties. No oral waiver, amendment or modification
shall be effective under any circumstances. If any term, covenant or
condition of this Agreement shall for any reason be held unenforceable by a
court of competent jurisdiction, the rest of this Agreement shall remain in
full force and shall in no way be affected or impaired. The
representations and warranties herein shall survive termination or
expiration of this Agreement. This Agreement shall be governed and
construed under California law, excluding choice of law rules.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed as of the date set forth above.
E*TRADE GROUP, INC.
By /s/ Christos Cotsakos /s/ George Hayter
------------------------- ---------------------------
Name: Christos Cotsakos George Hayter
Title:
4.
<PAGE>
EXHIBIT 11.1
E*TRADE GROUP, INC.
STATEMENT RE: COMPUTATION OF PER-SHARE EARNINGS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED SEPTEMBER 30, JUNE 30,
-------------------------- ------------------
1993 1994 1995 1995 1996
-------- -------- -------- -------- ---------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Weighted average shares
outstanding................... 15,099 15,226 15,741 15,776 15,530
Series A convertible preferred
stock......................... -- -- -- -- --
Options and warrants granted
prior to June 7, 1995 (on a
treasury stock basis)......... 3,076 2,458 2,239 1,173 3,274
Securities issued after June 7,
1995, in accordance with Staff
Accounting Bulletin 83:
Series A convertible
preferred................... 4,882 4,882 4,882 4,882 6,000
Series B convertible
preferred................... 961 961 961 961 961
Series C convertible
preferred...................
Stock options................ 2,785 2,785 2,785 2,785 2,785
-------- -------- -------- -------- ---------
Shares used to compute per
share data.................... 26,803 26,312 26,608 25,577 28,550
======== ======== ======== ======== =========
Net income (loss).............. $ 99 $ 785 $ 2,581 $ 2,150 $ (1,334)
======== ======== ======== ======== =========
Net income (loss) per share.... $ -- $ .03 $ .10 $ .08 $ (.05)
======== ======== ======== ======== =========
</TABLE>
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
1. E*TRADE Securities, Inc., incorporated in the State of California.
2. E*TRADE Online Ventures, Inc., incorporated in the State of California.
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 to Registration Statement No.
333-05525 of E*TRADE Group, Inc. of our report dated November 20, 1995
( as to Note 10), appearing in the Prospectus, which is part of this
Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
San Francisco, California
July , 1996
----------------
The accompanying consolidated financial statements give effect to the
reincorporation of the Company in Delaware, an increase in the number of
authorized shares to 50,000,000 and the related exchange of each share of
common stock of the Company for 60 shares of common stock of the Delaware
Corporation in July 1996. The above consent is in the form which will be
signed by Deloitte & Touche LLP upon completion of such exchange of the
Company's outstanding common stock described in Note 10 to the consolidated
financial statements and assuming that from July 19, 1996 to the date of such
completion, no other material events have occurred that would affect the
accompanying consolidated financial statements or required disclosure therein.
DELOITTE & TOUCHE LLP
San Francisco, California
July 19, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS INCLUDED IN THIS REGISTRATION STATEMENT FILING AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 9-MOS YEAR
<FISCAL-YEAR-END> SEP-30-1996 SEP-30-1995
<PERIOD-START> OCT-01-1995 OCT-01-1994
<PERIOD-END> JUN-30-1996 SEP-30-1995
<CASH> 15,408,710 9,624,219
<SECURITIES> 0 0
<RECEIVABLES> 3,232,051 2,051,213
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 21,098,233 12,029,686
<PP&E> 7,459,854 2,457,154
<DEPRECIATION> 1,476,679 999,002
<TOTAL-ASSETS> 29,685,184 14,163,564
<CURRENT-LIABILITIES> 5,445,459 2,971,046
<BONDS> 0 0
0 0
1,315 1,000
<COMMON> 165,016 148,910
<OTHER-SE> 22,213,029 10,998,057
<TOTAL-LIABILITY-AND-EQUITY> 29,685,184 14,163,564
<SALES> 13,591,794 20,834,586
<TOTAL-REVENUES> 15,149,183 23,340,538
<CGS> 8,011,232 12,678,339
<TOTAL-COSTS> 8,095,919 12,819,524
<OTHER-EXPENSES> 3,081,013 5,813,052
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 381,873 398,601
<INCOME-PRETAX> 3,590,378 4,309,361
<INCOME-TAX> 1,440,000 1,728,364
<INCOME-CONTINUING> 2,150,378 2,580,997
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,150,378 2,580,997
<EPS-PRIMARY> .083 .096
<EPS-DILUTED> .083 .096
</TABLE>
