<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
COMMISSION FILE NUMBER 1-11921
E*TRADE GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-2844166
(State or other jurisdiction (I.R.S. Employer Identification
of incorporation or organization) Number)
FOUR EMBARCADERO PLACE, 2400 GENG ROAD, PALO ALTO, CA 94303
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (650) 842-2500
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [ x ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
As of May 8, 1998, the number of shares outstanding of the registrant's common
stock was 39,284,711.
<PAGE>
E*TRADE GROUP, INC.
FORM 10-Q QUARTERLY REPORT
FOR THE QUARTER ENDED MARCH 31, 1998
TABLE OF CONTENTS
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PAGE
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PART I -- FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Statements of Operations................................. 3
Consolidated Balance Sheets........................................... 4
Consolidated Statements of Cash Flows................................. 5
Notes to Consolidated Financial Statements............................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................... 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk........ 12
PART II -- OTHER INFORMATION:
Item 1. Legal Proceedings................................................. 13
Item 2. Changes in Securities and Use of Proceeds......................... 13
Item 3. Defaults Upon Senior Securities................................... 14
Item 4. Submission of Matters to a Vote of Security Holders............... 15
Item 5. Other Information................................................. 15
Item 6. Exhibits and Reports on Form 8-K.................................. 15
Signatures................................................................ 16
</TABLE>
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UNLESS OTHERWISE INDICATED, REFERENCES TO "COMPANY" MEAN E*TRADE GROUP, INC.
AND ITS SUBSIDIARIES.
FORWARD-LOOKING STATEMENTS: In addition to the historical information
contained throughout this quarterly report, there are forward-looking
statements that reflect management's expectations for the future. These
statements relate to a variety of matters including the Company's strategy,
sources of liquidity and capital expenditures. Many factors could cause actual
results to differ materially from these statements. These factors include, but
are not limited to: the timing of introductions of enhancements to online
financial services and products by the Company or its competitors; market
acceptance of online financial services and products; the pace of development
of the market for online commerce; changes in transaction volume on the
securities markets; trends in the securities markets; domestic and
international regulation of the brokerage industry; 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 revenues;
changes in the level of operating expenses to support projected growth and/or
new product or service launches; and general economic conditions. For a
description of certain of these and other factors that may cause actual
results to so differ, reference is made hereby to the Company's Annual Report
on Form 10-K and other documents filed by the Company from time to time with
the Securities and Exchange Commission. The Company disclaims any obligation
to update its forward-looking statements.
The Company's quarterly revenues and operating results are difficult to
forecast, and the Company believes that period-to-period comparisons of its
operating results will not necessarily be meaningful and should not be relied
upon as an indication of future performance. It is likely that the Company's
future quarterly operating results from time to time will not meet the
expectations of securities analysts or investors, which may have an adverse
effect on the market price of the Company's Common Stock.
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
E*TRADE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
<TABLE>
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THREE MONTHS SIX MONTHS
ENDED MARCH 31, ENDED MARCH 31,
--------------- ---------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues:
Transaction revenues......................... $37,778 $24,419 $75,462 $44,791
Interest, net of interest expense (A)........ 12,617 5,017 24,653 8,871
International................................ 1,593 2,000 1,620 2,000
Computer services and other.................. 1,321 765 2,704 1,562
------- ------- ------- -------
Net revenues............................... 53,309 32,201 104,439 57,224
------- ------- ------- -------
Cost of services............................... 24,280 13,198 47,027 25,623
------- ------- ------- -------
Operating expenses:
Selling and marketing........................ 10,563 7,884 18,663 11,100
Technology development....................... 5,162 2,210 10,157 4,530
Acquired in-process research and development. -- -- 2,756 --
General and administrative................... 3,897 3,809 8,662 6,983
------- ------- ------- -------
Total operating expenses................... 19,622 13,903 40,238 22,613
------- ------- ------- -------
Total cost of services and operating
expenses.................................. 43,902 27,101 87,265 48,236
------- ------- ------- -------
Pre-tax income................................. 9,407 5,100 17,174 8,988
Income tax expense............................. 3,289 2,046 6,142 3,674
------- ------- ------- -------
Net income..................................... $ 6,118 $ 3,054 $11,032 $ 5,314
======= ======= ======= =======
Basic net income per share..................... $ 0.16 $ 0.10 $ 0.28 $ 0.18
======= ======= ======= =======
Diluted net income per share................... $ 0.15 $ 0.09 $ 0.27 $ 0.16
======= ======= ======= =======
Shares used in computation of basic net income
per share..................................... 39,050 29,941 38,898 29,809
Shares used in computation of diluted net
income
per share..................................... 41,465 33,446 41,528 33,338
</TABLE>
- --------
(A) Interest is presented net of interest expense. Interest expense for the
three months ended March 31, 1998 and 1997 was $8,578 and $2,516,
respectively. Interest expense for the six months ended March 31, 1998 and
1997 was $17,290 and $4,813, respectively.
See notes to consolidated financial statements.
3
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E*TRADE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
----------- -------------
1998 1997
----------- -------------
(Unaudited)
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ASSETS
Current assets:
Cash and equivalents................................ $ 63,485 $ 21,814
Cash and investments required to be segregated under
Federal or other regulations....................... 5,000 15,001
Investment securities............................... 180,301 191,398
Brokerage receivables--net.......................... 1,023,288 724,365
Other assets........................................ 5,727 4,744
---------- --------
Total current assets............................... 1,277,801 957,322
Property and equipment--net.......................... 26,472 18,802
Other assets......................................... 18,121 13,779
---------- --------
Total assets..................................... $1,322,394 $989,903
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Brokerage payables.................................. $ 981,464 $681,106
Bank loan payable................................... -- 9,400
Accounts payable, accrued liabilities and other..... 46,333 18,122
---------- --------
Total liabilities................................ 1,027,797 708,628
---------- --------
Contingencies (Note 6)
Stockholders' equity:
Common stock, $.01 par: shares authorized,
150,000,000; shares issued and outstanding: March
1998, 39,230,981; September 1997, 38,657,328....... 392 387
Additional paid-in capital.......................... 268,901 266,712
Retained earnings................................... 25,208 14,176
Unrealized gain on available-for-sale securities,
net of tax......................................... 96 --
---------- --------
Total stockholders' equity......................... 294,597 281,275
---------- --------
Total liabilities and stockholders' equity....... $1,322,394 $989,903
========== ========
</TABLE>
See notes to consolidated financial statements.
4
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E*TRADE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
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SIX MONTHS ENDED
MARCH 31,
------------------
1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................. $ 11,032 $ 5,314
Non-cash items included in net income:
Deferred income taxes.................................... (1,105) 571
Depreciation and amortization............................ 3,572 1,309
Income from equity investment............................ (602) (904)
Other.................................................... 49 --
Net effect of changes in broker-related assets and
liabilities:
Cash and investments required to be segregated under
Federal or other regulations............................ 10,001 14,000
Brokerage receivables.................................... (298,923) (160,353)
Brokerage payables....................................... 300,358 142,584
Bank loan payable........................................ (9,400) --
Other changes, net:
Other assets............................................. (468) (2,244)
Accounts payable, accrued liabilities and other.......... 29,316 8,792
-------- --------
Net cash provided by operating activities.................. 43,830 9,069
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment......................... (10,928) (5,536)
Internally developed software.............................. (2,820) --
Purchase of investment securities.......................... (864,237) (189,943)
Sale/maturity of investment securities..................... 874,680 198,097
Related party transactions................................. (304) (3,147)
Acquisition of net tangible assets of OptionsLink (net of
$2,756 in-process R&D).................................... (744) --
Distributions received from equity investments............. -- 206
-------- --------
Net cash used in investing activities...................... (4,353) (323)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Costs from initial public offering......................... -- (102)
Employee stock transactions................................ 2,194 866
Repayment of capital leases................................ -- (10)
-------- --------
Net cash provided by financing activities.................. 2,194 754
-------- --------
INCREASE IN CASH AND EQUIVALENTS........................... 41,671 9,500
CASH AND EQUIVALENTS--Beginning of period.................. 21,814 14,641
-------- --------
CASH AND EQUIVALENTS--End of period........................ $ 63,485 $ 24,141
======== ========
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest..................................... $ 16,429 $ 4,617
======== ========
Cash paid for income taxes................................. $ -- $ 1,205
======== ========
Non-cash activities:
Unrealized gain on available-for-sale securities, net of
tax..................................................... $ 96 $ --
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
E*TRADE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1.--GENERAL
The accompanying unaudited consolidated financial statements include E*TRADE
Group, Inc. and its subsidiaries (collectively, the "Company"). E*TRADE Group,
Inc. is a holding company engaged, through its subsidiaries, in securities
brokerage and related investment services. E*TRADE Group Inc.'s principal
operating subsidiary, E*TRADE Securities, Inc. ("E*TRADE Securities") is a
securities broker-dealer.
These financial statements have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC") and, in the
opinion of management, reflect all normal recurring adjustments necessary to
present fairly the financial position, results of operations and cash flows
for the periods presented in conformity with generally accepted accounting
principles. All material intercompany balances and transactions have been
eliminated. These financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
1997 Annual Report to Stockholders on Form 10-K for the fiscal year ended
September 30, 1997.
Certain items in these financial statements have been reclassified to
conform to the current period presentation.
NOTE 2.--BROKERAGE RECEIVABLES AND PAYABLES--NET
Brokerage receivables and payables--net consists of the following (in
thousands):
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MARCH 31, SEPTEMBER 30,
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1998 1997
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Receivable from customers and non-customers (less
allowance for doubtful accounts of $215 at March 31,
1998 and $435 at September 30, 1997)................. $ 860,867 $655,981
Receivable from brokers, dealers and clearing
organizations:
Net settlement and deposits with clearing
organizations...................................... 11,637 37,198
Deposits paid for securities borrowed............... 143,665 25,584
Securities failed to deliver........................ 1,378 1,011
Other............................................... 5,741 4,591
---------- --------
Total brokerage receivables--net.................. $1,023,288 $724,365
========== ========
Payable to customers and non-customers................ $ 318,613 $279,348
Payable to brokers, dealers and clearing
organizations:
Deposits received for securities loaned............. 656,519 398,007
Securities failed to receive........................ 1,820 1,304
Other............................................... 4,512 2,447
---------- --------
Total brokerage payables.......................... $ 981,464 $681,106
========== ========
</TABLE>
Receivable from and payable to brokers, dealers and clearing organizations
result from the Company's brokerage activities. Receivable from customers and
non-customers represents credit extended to finance their purchases of
securities on margin. Credit extended with respect to margin accounts was $935
million at March 31, 1998 and $678 million at September 30, 1997. Securities
owned by customers and non-customers are held as collateral for amounts due on
margin balances (the value of which is not reflected on the accompanying
consolidated balance sheets). Payable to customers and non-customers
represents free credit balances and other funds pending completion of
securities transactions. The Company pays interest on certain customer and
non-customer credit balances.
6
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NOTE 3.--ACQUISITION
In December 1997, the Company completed its acquisition of the OptionsLink
Division of Hambrecht & Quist LLC for cash of approximately $3,500,000. The
purchase price exceeded the fair value of net assets acquired by approximately
$3 million, of which $2,756,000 was allocated to in-process research and
development and written-off in the period.
NOTE 4.--NET INCOME PER SHARE
As of October 1, 1997, the Company has adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, Earnings per Share. SFAS No. 128
requires a dual presentation of basic and diluted EPS. Basic EPS excludes
dilution and is computed by dividing net income by the weighted average of
common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common
stock were exercised or converted into common stock. Prior periods have been
restated to conform with SFAS No. 128.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------- -----------------
1998 1997 1998 1997
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Shares used in computation (in
thousands):
Weighted average common shares
outstanding used in computation of
basic net income per share............ 39,050 29,941 38,898 29,809
Dilutive effect of stock options....... 2,415 3,505 2,630 3,529
--------- --------- -------- --------
Shares used in computation of diluted
net income per share.................. 41,465 33,446 41,528 33,338
========= ========= ======== ========
</TABLE>
Options to purchase 2,009,133 and 263,000 shares of common stock at prices
ranging from $23.06 to $46.06 and $17.38 to $24.69 were outstanding as of
March 31, 1998 and 1997, respectively, but not included in the computation of
diluted net income per share for the three months ended March 31, 1998 and
1997 because the options' exercise price was greater than the average market
price of the common stock for the periods, and therefore would be anti-
dilutive for purposes of this calculation.
Options to purchase 1,358,333 and 462,500 shares of common stock at prices
ranging from $26.25 to $46.06 and $16.38 to $24.69 were outstanding as of
March 31, 1998 and 1997, respectively, but not included in the computation of
diluted net income per share for the six months ended March 31, 1998 and 1997
because the options' exercise price was greater than the average market price
of the common stock for the periods and therefore would be anti-dilutive for
purposes of this calculation.
NOTE 5.--REGULATORY REQUIREMENTS
E*TRADE Securities is subject to the Uniform Net Capital Rule (the "Rule")
under the Securities Exchange Act of 1934 administered by the SEC and the
National Association of Securities Dealers, Inc. ("NASD"), which requires the
maintenance of minimum net capital. E*TRADE Securities has elected to use the
alternative method permitted by the Rule, which requires that the Company
maintain minimum net capital equal to the greater of $250,000 or 2 percent of
aggregate debit balances arising from customer transactions, as defined. At
March 31, 1998, E*TRADE Securities had net capital of $71,056,000 (7.8% of
aggregate debit balances), which was $52,952,000 in excess of its required net
capital of $18,104,000. Under the alternative method, a broker-dealer may not
repay subordinated borrowings, pay cash dividends or make any unsecured
advances or loans to its parent or employees if such payment would result in
net capital of less than 5% of aggregate debit balances or less than 120% of
its minimum dollar amount requirement.
7
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NOTE 6.--CONTINGENCIES
The Company is a defendant in civil actions arising from the normal course
of business. In the opinion of management, these actions are expected to be
resolved with no material effect on the Company's consolidated financial
position or results of operations.
On November 21, 1997, a putative class action was filed in the Superior
Court of California, County of Santa Clara, by Larry R. Cooper and other
similarly situated individuals, seeking injunctive and other relief due to the
Company's alleged false and deceptive advertising and other communications
regarding the Company's commission rates and the Company's ability to execute
transactions in a timely manner. The action seeks injunctive relief enjoining
alleged deceptive and unfair practices alleged in the action and unqualified
compensatory and punitive damages. This proceeding is at a very early stage
and the Company is unable to speculate as to its ultimate outcome, however,
management does not expect the outcome to have a material effect on its
consolidated financial position or results of operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 VS. 1997
Revenues
Transaction revenues increased 55% to $37,778,000 for the second quarter of
fiscal 1998, up from $24,419,000 for the same period in fiscal 1997.
Transaction revenues consist of commission revenues and payments for order
flow. Commission revenues for the second quarter of fiscal 1998 increased 83%
to $31,675,000, up from $17,294,000 for the same period a year ago.
Transactions for the second quarter of fiscal 1998 totaled 1,597,000 or an
average of 26,181 transactions per day. This is an increase of 83% over the
average daily transaction volume of 14,283 for the same period last year.
Average commissions per transaction declined slightly from $19.85 in the
second quarter of fiscal 1997 to $19.83 in the second quarter of fiscal 1998
due to a change in product mix. Payments for order flow decreased 14% to
$6,103,000 for the second quarter of fiscal 1998, down from $7,125,000 for the
same period in the prior year. This decrease is reflective of a trend that the
Company expects to continue as a result of the implementation by the SEC of
new order handling rules in January 1997.
Net interest revenues increased 152% to $12,617,000 for the second quarter
of fiscal 1998, up from $5,017,000 for the same period in fiscal 1997. This
increase is a result of average customer margin debit balances increasing 187%
to $823 million, average customer credit balances increasing 4% to $237
million and average customer money market fund balances increasing 122% to
$1.3 billion compared to such average balances in the second quarter of fiscal
1997.
International revenues of $1,593,000 for the second quarter of fiscal 1998
primarily represent international licensing fees recognized from agreements
signed as part of E*TRADE's international expansion effort. International
alliances signed in this quarter included Europe, Israel, Southeast Asia and
North Asia.
Computer services and other revenues increased 73% to $1,321,000 for the
second quarter of fiscal 1998, up from $765,000 for the comparable period in
fiscal 1997. These revenues grew as a result of increases in customer connect
time charges, equity income from the Company's investment in Roundtable
Partners LLC, and broker-related fees for services.
Cost of Services
Total cost of services increased 84% to $24,280,000 for the second quarter
of fiscal 1998, up from $13,198,000 for the comparable period in fiscal 1997.
The increase results primarily from the higher volume of customer transactions
processed by the Company.
8
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Operating Expenses
Selling and marketing expenses increased 34% to $10,563,000 for the second
quarter of fiscal 1998, up from $7,884,000 for the comparable period in fiscal
1997. This increase reflects expenditures for advertising placements, creative
development and collateral materials resulting from a variety of advertising
campaigns. The Company's selling and marketing expenses vary depending upon a
variety of factors including, without limitation, the launch of new products
or services.
Technology development expenses increased 134% to $5,162,000 for the second
quarter of fiscal 1998, up from $2,210,000 for the comparable period in fiscal
1997. The increased level of expenses was incurred to enhance the Company's
existing product offerings, including maintenance of the Company's Web site,
development efforts related to the planned launch of destination E*TRADE in
the third quarter of fiscal 1998 and reflects the Company's continuing
commitment to invest in new products and technologies.
General and administrative costs increased 2% to $3,897,000 for the second
quarter of fiscal 1998, up from $3,809,000 for the comparable period in fiscal
1997. This increase is the result of personnel additions and the development
of administrative functions resulting from the overall growth in the Company.
Income Tax Expense
Income tax expense represents the provision for federal and state income
taxes at an effective rate of 35.0% for the second quarter of fiscal 1998 and
40.1% for the comparable period in fiscal 1997. This decrease reflects
expected tax benefits from tax-exempt interest income.
SIX MONTHS ENDED MARCH 31, 1998 VS. 1997
Revenues
Transaction revenues increased 69% to $75,462,000 for the six months ended
March 31, 1998, up from $44,791,000 for the same period in fiscal 1997.
Transaction revenues consist of commission revenues and payments for order
flow. Commission revenues for the six months ended March 31, 1998 increased
101% to $62,568,000, up from $31,131,000 for the same period a year ago.
Transactions for the six months ended March 31, 1998 totaled 3,172,000 or an
average of 25,374 transactions per day. This is an increase of 103% over the
average daily transaction volume of 12,476 for the same period last year.
Average commissions per transaction declined to $19.73 for the six months
ended March 31, 1998 compared to $19.96 per transaction for the same period in
fiscal 1997 due to a change in product mix. Payments for order flow decreased
6% to $12,894,000 for the six months ended March 31, 1998, down from
$13,660,000 for the same period in the prior year. This decrease is reflective
of a trend that the Company expects to continue as a result of the
implementation by the SEC of new order handling rules in January 1997.
Net interest revenues increased 178% to $24,653,000 for the six months ended
March 31, 1998, up from $8,871,000 for the same period in fiscal 1997. This
increase is a result of average customer margin debit balances increasing 231%
to $818 million, average customer credit balances increasing 13% to $233
million and average customer money market fund balances increasing 131% to
$1.2 billion compared to such average balances in fiscal 1997.
International revenues of $1,620,000 for the six months ended March 31, 1998
primarily represent international licensing fees recognized from agreements
signed as part of E*TRADE's international expansion effort. International
alliances signed in this quarter included Europe, Israel, Southeast Asia and
North Asia.
Computer services and other revenues increased 73% to $2,704,000 for the six
months ended March 31, 1998, up from $1,562,000 for the comparable period in
fiscal 1997. These revenues grew as a result of an increase in the return on
the Company's investment in Roundtable Partners LLC and the new revenue
streams from OptionsLink, mutual funds and advertising on the Company's Web
site.
9
<PAGE>
Cost of Services
Total cost of services increased 84% to $47,027,000 for the six months ended
March 31, 1998, up from $25,623,000 for the comparable period in fiscal 1997.
The increase results primarily from the higher volume of customer transactions
processed by the Company.
Operating Expenses
Selling and marketing expenses increased 68% to $18,663,000 for the six
months ended March 31, 1998, up from $11,100,000 for the comparable period in
fiscal 1997. This increase is the result of the Company's continued focus on
building brand awareness, expanding the customer base and maintaining customer
retention rates.
Technology development expenses increased 124% to $10,157,000 for the six
months ended March 31, 1998, up from $4,530,000 for the comparable period in
fiscal 1997. The continued increase in expenses is a result of the Company's
emphasis on enriching current product offerings and reflects the Company's
commitment to invest in new products and technologies.
The Company recorded a onetime charge of $2,756,000, or $0.04 per share
after tax, in the first quarter of fiscal 1998 for acquired in-process
research and development in connection with the Company's acquisition of
OptionsLink, a division of Hambrecht & Quist LLC.
General and administrative costs increased 24% to $8,662,000 for the six
months ended March 31, 1998, up from $6,983,000 for the comparable period in
fiscal 1997. This increase primarily reflects the development of
administrative functions resulting from the overall growth in the Company and
is expected to continue to decline as a percentage of revenues.
Income Tax Expense
Income tax expense represents the provision for federal and state income
taxes at an effective rate of 35.8% for the six months ended March 31, 1998
and 40.9% for the comparable period in fiscal 1997. This decrease reflects
expected tax benefits from tax-exempt interest income.
Variability of Results
The Company expects to experience significant fluctuations in future
quarterly operating results that may be caused by many factors, including the
following: the timing of introductions of enhancements to online financial
services and products by the Company or its competitors; market acceptance of
online financial services and products; the pace of development of the market
for online commerce; changes in transaction volume on the securities markets;
domestic and international regulation of the brokerage industry; 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 or other strategic relationships; changes in key personnel;
seasonal trends; the extent of international expansion; the mix of
international and domestic revenues; changes in the level of operating
expenses to support projected growth and/or new product or service launches;
and general economic conditions.
The Company's quarterly revenues and operating results are difficult to
forecast, and the Company believes that period-to-period comparisons of its
operating results will not necessarily be meaningful and should not be relied
upon as an indication of future performance. It is likely that the Company's
future quarterly operating results from time to time will not meet the
expectations of securities analysts or investors, which may have an adverse
effect on the market price of the Company's Common Stock.
10
<PAGE>
Liquidity and Capital Resources
The Company currently anticipates that its available cash resources and
credit facilities will be sufficient to meet its presently anticipated working
capital and capital expenditure requirements for at least the next 12 months.
However, the Company may need to raise additional funds in order to support
more rapid expansion, develop new or enhanced services and products, respond
to competitive pressures, acquire complementary businesses or technologies or
take advantage of unanticipated opportunities. The Company's future liquidity
and capital requirements will depend upon numerous factors, including costs
and timing of expansion of research and development efforts and the success of
such efforts, the success of the Company's existing and new service offerings
and competing technological and market developments. The Company's forecast of
the period of time through which its financial resources will be adequate to
support its operations is a forward-looking statement that involves risks and
uncertainties, and actual results could vary. The factors described earlier in
this paragraph will impact the Company's future capital requirements and the
adequacy of its available funds. 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, any of which could
have a material adverse effect on the Company's business, financial condition
and operating results.
Cash provided by operating activities was $43,830,000 for the six months
ended March 31, 1998 compared with $9,069,000 for the comparable period in
fiscal 1997. The increase in cash provided in the six months ended March 31,
1998 was primarily a result of increases in brokerage-related liabilities in
excess of related assets, net income during the period, non-cash items
included in net income and increases in accounts payable, accrued and other
liabilities.
Cash used in investing activities was $4,353,000 for the six months ended
March 31, 1998 compared with $323,000 for the comparable period in fiscal
1997. The increase in cash used in the six months ended March 31, 1998 was
primarily a result of the acquisition of OptionsLink, a division of Hambrecht
& Quist LLC, and increases in cash used for purchases of property and
equipment and investments in internally developed software, offset by a
decrease in cash used for related party transactions.
Cash provided by financing activities was $2,194,000 for the six months
ended March 31, 1998 compared with $754,000 for the comparable period in
fiscal 1997. The increase in cash provided in the six months ended March 31,
1998 was primarily a result of increases in proceeds from the exercise of
stock options and proceeds from the purchase of common stock by Employee Stock
Purchase Plan participants.
The Company expects that it will incur approximately $35 million of capital
expenditures during the fiscal year ending September 30, 1998.
Securities Industry
The securities industry is subject to extensive regulation under federal,
state and applicable international laws. As a result, the Company is required
to comply with many complex laws and rules and its ability to so comply is
dependent in large part upon the establishment and maintenance of a qualified
compliance system. The Company is aware of certain instances of its past non-
compliance with applicable regulations.
11
<PAGE>
Year 2000 Compliance
The Company utilizes and is dependent upon data processing systems and
software to conduct its business. The data processing systems and software
include those developed and maintained by the Company's third-party data
processing vendors and software which is run on in-house computer networks.
During the first quarter of fiscal 1998, the Company initiated a review and
assessment of all hardware and software to confirm that it will function
properly in the year 2000. With respect to internal systems, the results of
that evaluation to date have not revealed any year 2000 issues that, in the
Company's opinion, cannot be remediated in a timely manner; and therefore are
not expected to create a material risk of disruption of operations. With
respect to outside vendors, those vendors which have been contacted have
indicated that their hardware or software is or will be year 2000 compliant in
time frames that meet regulatory requirements. Evaluation of these issues is
continuing and there can be no assurance that additional issues, not presently
known to the Company, will not be discovered which could present a material
risk of disruption to the Company's operations. In addition, the method of
trading employed by the Company is heavily dependent on the integrity of
electronic systems outside of the Company's control, such as online and
Internet service providers, and third-party software such as Internet
browsers. A failure of any such system in the trading process, even for a
short time, could cause interruption to the Company's business.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK--Not
applicable.
12
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS--
On November 21, 1997, a putative class action was filed in the Superior
Court of California, County of Santa Clara, by Larry R. Cooper on behalf of
himself and other similarly situated individuals. The action alleges, among
other things, that the Company's advertising, other communications and
business practices regarding the Company's commission rates and its ability to
timely execute transactions through its online brokerage services were false
and deceptive. The action seeks injunctive relief enjoining the purported
deceptive and unfair practices alleged in the action and also seeks
unspecified compensatory and punitive damages, as well as attorney fees.
This proceeding is at a very early stage and the Company is unable to
speculate as to its ultimate outcome. However, the Company believes it has
meritorious defenses to the claims and intends to conduct vigorous defenses.
An unfavorable outcome in any matters which are not covered by insurance could
have a material adverse effect on the Company's business, financial condition
and results of operations. In addition, even if the ultimate outcomes are
resolved in favor of the Company, the defense of such litigation could entail
considerable cost and the diversion of efforts of management, either of which
could have a material adverse effect on the Company's results of operation.
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 claims or disciplinary actions decided adversely against the Company
could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company is also subject to periodic
regulatory audits and inspections.
The securities industry is subject to extensive regulation under federal,
state and applicable international laws. As a result, the Company is required
to comply with many complex laws and rules and its ability to so comply is
dependent in large part upon the establishment and maintenance of a qualified
compliance system. The Company is aware of certain instances of its past non-
compliance with applicable regulations. In particular, in fiscal 1997, the
Company failed to comply with applicable advertising restrictions in one
international jurisdiction and due to a clerical oversight, failed to timely
renew its registration as a broker-dealer in two states, Nebraska and Ohio.
One of the state jurisdictions, Ohio, as a condition of renewing the Company's
license as a broker-dealer in that jurisdiction, required the Company to offer
customers resident in that state the ability to rescind (for up to 30 days)
certain securities transactions effected through the Company during the period
January 1, 1997 through April 15, 1997, the date the Company's license was
renewed. For fiscal 1997, the Company recorded a one-time $4.3 million pre-tax
charge against earnings in connection with this matter.
The Company maintains insurance in such amounts and with such coverages,
deductibles and policy limits as management believes are reasonable and
prudent. The principal risks that the Company insures against are
comprehensive general liability, commercial property, hardware/software
damage, directors and officers, and errors and omissions liability. The
Company believes that such insurance coverages are adequate for the purpose of
its business.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS--
Use of Proceeds
On August 16, 1996, a Registration Statement on Form S-1 (No. 333-05525) was
declared effective by the SEC, pursuant to which 5,026,550 shares of the
Company's Common Stock were offered and sold for the account of the Company at
a price of $10.50 per share, generating gross offering proceeds of $52,779,000
for the account of the Company. A further 675,450 shares of the Company's
Common Stock were offered and sold for the account of selling stockholders at
a price of $10.50 per share, generating gross offering proceeds
13
<PAGE>
of $7,092,000 for the account of selling stockholders. Each share of Series A,
Series B and Series C Preferred Stock was automatically converted into 60
shares of Common Stock upon the closing of the initial public offering. The
managing underwriters were BancAmerica Robertson Stephens, Hambrecht & Quist
LLC, and Deutsche Morgan Grenfell/C.J. Lawrence, Inc.
In connection with the offering, the Company incurred $3,695,000 in
underwriting discounts and commissions, and $2,682,000 in other related
expenses. The net proceeds of the offering, after deducting the foregoing
expenses, were $46,402,000.
On August 20, 1997, a Registration Statement on Form S-1 (No. 333-31841) was
declared effective by the SEC, pursuant to which 7,305,000 shares of the
Company's Common Stock were offered and sold for the account of the Company at
a price of $27.50 per share, generating gross offering proceeds of
$200,888,000 for the account of the Company. A further 2,010,000 shares of the
Company's Common Stock were offered and sold for the account of selling
stockholders at a price of $27.50 per share, generating gross offering
proceeds of $55,275,000 for the account of selling stockholders. The managing
underwriters were BancAmerica Robertson Stephens, Hambrecht & Quist LLC,
Deutsche Morgan Grenfell/C.J. Lawrence, Inc., NationsBanc Montgomery
Securities, and E*TRADE Securities, Inc.
In connection with the offering, the Company incurred $10,044,000 in
underwriting discounts and commissions, and $2,019,000 in other related
expenses. The net proceeds of the offering, after deducting the foregoing
expenses, were $188,825,000.
The Company has used a portion of the net proceeds of the two offerings as
follows: (i) $17,121,000 for the purchase and installation of software,
machinery and equipment, (ii) $5,252,000 for the construction of plant,
building and facilities, (iii) $2,250,000 for the repayment of indebtedness,
(iv) $3,147,000 for a relocation loan to an officer, (v) $2,543,000 for the
purchase of equity investments, (vi) $2,000,000 for investment in KAP Group,
LLC, (vii) $3,500,000 for the acquisition of OptionsLink, (viii) $6,896,000
for investment in new projects, technology and products to expand and
complement the business, and (ix) $192,518,000 for investment in short-term,
investment grade, interest bearing securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES -- Not applicable.
14
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS --
The annual meeting of stockholders was held on February 10, 1998. William E.
Ford, George Hayter, and Keith Petty were elected as directors, as tabulated
below.
<TABLE>
<CAPTION>
AGAINST OR
ELECTION OF DIRECTORS FOR WITHHELD
--------------------- ---------- ----------
<S> <C> <C>
William E. Ford........................................ 33,124,543 88,012
George Hayter.......................................... 33,124,793 87,762
Keith Petty............................................ 33,124,793 87,762
</TABLE>
In addition, Christos M. Cotsakos, William A. Porter, Richard S. Braddock,
Lewis E. Randall, and Lester C. Thurow will continue as directors.
The proposal to approve a series of amendments to the Company's 1996 Stock
Incentive Plan (the "Plan"), including a 1,900,000 share increase in the
maximum number of shares of Common Stock reserved for issuance under the Plan
was approved, as tabulated below.
<TABLE>
<CAPTION>
AGAINST OR
FOR WITHHELD ABSTENTIONS
---------- ---------- -----------
<S> <C> <C> <C>
Votes...................................... 27,256,826 5,908,150 47,579
</TABLE>
The proposal to ratify the selection of Deloitte & Touche LLP as independent
public accountants for the Company for the fiscal year ending September 30,
1998 was approved, as tabulated below.
<TABLE>
<CAPTION>
AGAINST OR
FOR WITHHELD ABSTENTIONS
---------- ---------- -----------
<S> <C> <C> <C>
Votes...................................... 33,160,771 22,515 29,269
</TABLE>
ITEM 5. OTHER INFORMATION -- None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit:
3.1 Second Amended and Restated Certificate of Incorporation.
27.1 Financial Data Schedule.
(b) Form 8-K:
No reports on Form 8-K were filed during the three months ended March
31, 1998.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
E*TRADE Group, Inc.
(Registrant)
Dated: May 14, 1998
/s/ Christos M. Cotsakos
-------------------------------------
Christos M. Cotsakos,
President, Chief Executive Officer
and Director (principal executive
officer)
/s/ Stephen C. Richards
-------------------------------------
Stephen C. Richards,
Senior Vice President, Finance and
Administration, Chief Financial
Officer (principal financial and
accounting officer)
16
<PAGE>
EXHIBIT 3.1
SECOND AMENDED AND 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 One
Hundred Fifty-One Million (151,000,000) shares. One Hundred Fifty Million
(150,000,000) 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.
(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
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
<PAGE>
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.
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
<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-
<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
<PAGE>
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.
(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
<PAGE>
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
(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
<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 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 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 TENTH 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.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Statements of Operations and Consolidated Balance Sheets of the
Company's Quarterly Report on Form 10-Q for the period ended March 31, 1998,
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 63,485
<RECEIVABLES> 879,623
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 143,665
<INSTRUMENTS-OWNED> 180,301
<PP&E> 26,472
<TOTAL-ASSETS> 1,322,394
<SHORT-TERM> 46,333
<PAYABLES> 324,945
<REPOS-SOLD> 0
<SECURITIES-LOANED> 656,519
<INSTRUMENTS-SOLD> 0
<LONG-TERM> 0
0
0
<COMMON> 392
<OTHER-SE> 294,205
<TOTAL-LIABILITY-AND-EQUITY> 1,322,394
<TRADING-REVENUE> 0
<INTEREST-DIVIDENDS> 21,195
<COMMISSIONS> 37,778
<INVESTMENT-BANKING-REVENUES> 0
<FEE-REVENUE> 0
<INTEREST-EXPENSE> 8,578
<COMPENSATION> 0
<INCOME-PRETAX> 9,407
<INCOME-PRE-EXTRAORDINARY> 6,118
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,118
<EPS-PRIMARY> 0.16
<EPS-DILUTED> 0.15
</TABLE>
