<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported)
March 29, 1999
---------------------------------------------
E*TRADE Group, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in charter)
<TABLE>
<CAPTION>
Delaware 1-11921 94-2844166
- ----------------------------------------------------------------------------
<S> <C> <C>
(State or other
jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
</TABLE>
Four Embarcadero Place, 2400 Geng Road, Palo Alto, California 94303
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(650) 842-2500
- --------------------------------------------------------------------------------
Not Applicable
- --------------------------------------------------------------------------------
(Former name or former address, if changed since last report.)
<PAGE>
Item 2 ACQUISITION OR DISPOSITION OF ASSETS
This Form 8-K/A amends the Current Report on Form 8-K filed on April 13,
1999 to incorporate Item 7(a), the Financial Statements of Business Acquired
and Item 7(b), the Pro Forma Financial Information.
On March 28, 1999, E*TRADE Group, Inc. ("E*TRADE") entered into an agreement
with ClearStation, Inc. ("ClearStation"), a California corporation, pursuant to
which Crystal Acquisition Corporation, a wholly owned subsidiary of E*TRADE,
was merged with and into ClearStation, with ClearStation continuing as the
surviving entity and as a wholly owned subsidiary of E*TRADE (the "Merger").
The securityholders of ClearStation received an aggregate of 939,072 shares
(adjusted for the stock split effective May 21, 1999) of E*TRADE common stock
in the Merger. The amount of such consideration was determined based upon
arm's-length negotiations between E*TRADE and ClearStation. The purpose of the
acquisition is to add online financial community services to E*TRADE's current
offerings. The acquisition was accounted for as a pooling of interests.
Item 7 FINANCIAL STATEMENTS, PRO FORMA INFORMATION AND EXHIBITS
(a) Financial Statements of Business Acquired.
(1) Report of Independent Accountants
(2) Clearstation, Inc. (A Development Stage Company) Balance Sheets
as of December 31, 1998 and 1997
(3) Clearstation, Inc. (A Development Stage Company) Statement of
Changes in Shareholders Equity (Deficit) for the period from
October 30, 1997 (date of inception) to December 31, 1998
(4) Clearstation, Inc. (A Development Stage Company) Statements of
Cash Flows for the period from October 30, 1997 (date of
inception) to December 31, 1998
(5) Clearstation, Inc. (A Development Stage Company) Notes to
Financial Statements
(b) Pro Forma Financial Information.
(1) Pro Forma Combined Balance Sheets as of March 31, 1999
(unaudited)
(2) Pro Forma Combined Statements of Operations for the six-month
periods ended March 31, 1999 and 1998 (unaudited)
(3) Pro Forma Combined Statements of Operations for the year ended
September 30, 1998 (unaudited)
(c) Exhibits.
The following documents are filed as exhibits to this Report:
23.1 Consent of PricewaterhouseCoopers LLP, Independent Auditors
99.1 Press Release, dated March 29, 1999, issued by E*TRADE Group,
Inc. announcing the agreement to acquire ClearStation, Inc.*
- --------
* Filed as part of the Registrant's Current Report on Form 8-K dated March 29,
1999, filed April 13, 1999, and incorporated herein by reference.
2
<PAGE>
Report of Independent Accountants
To the Board of Directors and Shareholders
ClearStation, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, of changes in shareholders' equity (deficit) and of cash flows
present fairly, in all material respects, the financial position of
ClearStation, Inc. (a development stage company) at December 31, 1998 and 1997,
and the results of its operations and its cash flows for the year ended
December 31, 1998, the period from October 30, 1997 (date of inception) to
December 31, 1997 and the cumulative period from October 30, 1997 (date of
inception) to December 31, 1998, in conformity with generally accepted
accounting principles. 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 of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audits 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has sustained recurring losses and negative
cash flows from operations that raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
PriceWaterhouseCoopers LLP
San Jose, California
April 9, 1999
3
<PAGE>
ClearStation, Inc.
(A Development Stage Company)
Balance Sheets
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
----------- ---------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents.............................. $ 500 $ 206,849
Accounts receivable.................................... 135,444 --
Notes receivable from related parties.................. 43,433 41,500
Prepaid expenses and other current assets.............. 15,113 20,150
----------- ---------
Total current assets................................. 194,490 268,499
----------- ---------
Property and equipment, net............................ 319,925 202,756
----------- ---------
Total assets......................................... $ 514,415 $ 471,255
=========== =========
Liabilities and Shareholders' Equity
Current liabilities:
Bank overdraft......................................... $ 5,625 $ --
Accounts payable and accrued expenses.................. 145,640 50,430
Accrued payroll and related expenses................... 10,293 7,842
Amount payable to related parties...................... 1,030,500 146,751
Deferred salaries...................................... 125,772 5,769
----------- ---------
Total current liabilities............................ 1,317,830 210,792
----------- ---------
Convertible note payable............................... 30,000 --
----------- ---------
Total liabilities.................................... 1,347,830 210,792
----------- ---------
Commitments (Note 4)
Shareholders' equity (deficit):
Preferred stock, no par value:
Authorized: 10,000,000 shares in 1998 and none in
1997.................................................
Issued and outstanding: 1,000,000 shares in 1998 (liq-
uidation preference $150,000) and none in 1997....... 150,000 --
Common stock, no par value:
Authorized: 35,000,000 shares in 1998 and 20,000,000
shares in 1997.......................................
Issued and outstanding: 16,819,727 shares in 1998
and 16,000,000 shares in 1997........................ 470,153 400,000
Deficit accumulated during the development stage....... (1,453,568) (139,537)
----------- ---------
Total shareholders' equity (deficit)................. (833,415) 260,463
----------- ---------
Total liabilities and shareholders' equity
(deficit).......................................... $ 514,415 $ 471,255
=========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
ClearStation, Inc.
(A Development Stage Company)
Statements of Operations
For the Period From October 30, 1997 (date of inception) Through December 31,
1998
<TABLE>
<CAPTION>
For the period from
-----------------------------------------------------
January 1, 1998 October 30, 1997 October 30, 1997
to to to
December 31, 1998 December 31, 1997 December 31, 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
Revenues................ $ 270,392 $ -- $ 270,392
Cost of revenues........ 178,060 -- 178,060
----------- --------- -----------
Gross profit........... 92,332 -- 92,332
----------- --------- -----------
Operating expenses
Sales and marketing.... 186,194 9,000 195,194
Product development.... 408,539 1,910 410,449
General and
administrative........ 745,525 127,551 873,076
----------- --------- -----------
Total operating
expenses............. 1,340,258 138,461 1,478,719
----------- --------- -----------
Loss from operations.... (1,247,926) (138,461) (1,386,387)
Interest and other
income (expense), net.. (66,105) (1,076) (67,181)
----------- --------- -----------
Net loss................ $(1,314,031) $(139,537) $(1,453,568)
=========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
ClearStation, Inc.
(A Development Stage Company)
Statements of Changes in Shareholders' Equity (Deficit)
For the Period From October 30, 1997 (date of inception)
Through December 31, 1998
<TABLE>
<CAPTION>
Deficit
Accumulated Total
Preferred Stock Common Stock During the Shareholders'
------------------ ------------------- Development Equity
Shares Amount Shares Amount Stage (Deficit)
--------- -------- ---------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock
to founder for cash at
$.05 per share in
October 1997........... -- $ -- 8,000,000 $400,000 $ -- $ 400,000
Issuance of common stock
to founder in exchange
for technology in
October 1997........... -- -- 8,000,000 -- -- --
Net loss for the
period................. -- -- -- -- (139,537) (139,537)
--------- -------- ---------- -------- ----------- -----------
Balances, December 31,
1997................... -- -- 16,000,000 400,000 (139,537) 260,463
Issuance of common stock
to employee for cash at
$.05 per share in
September 1998......... -- -- 403,060 20,153 -- 20,153
Issuance of common stock
to investor for cash at
$.12 per share in
September 1998......... -- -- 416,667 50,000 -- 50,000
Issuance of preferred
share to investor for
cash of $.15 per share
in November 1998....... 1,000,000 150,000 -- -- -- 150,000
Net loss for the year... -- -- -- -- (1,314,031) (1,314,031)
--------- -------- ---------- -------- ----------- -----------
Balances, December 31,
1998................... 1,000,000 $150,000 16,819,727 $470,153 $(1,453,568) $ (833,415)
========= ======== ========== ======== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
ClearStation, Inc.
(A Development Stage Company)
Statements of Cash Flows
For the Period From October 30, 1997 (date of inception)
Through December 31, 1998
<TABLE>
<CAPTION>
For the period from
-----------------------------------------------------
January 1, 1998 October 30, 1997 October 30, 1997
to to to
December 31, 1998 December 31, 1997 December 31, 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
Cash flows from operating
activities:
Net loss................ $(1,314,031) $(139,537) $(1,453,568)
Adjustments to reconcile
net loss to net cash
used in operating
activities:
Depreciation of
property and
equipment............. 116,899 40,337 157,236
Changes in operating
assets and
liabilities:
Accounts receivable... (135,444) -- (135,444)
Prepaid expenses and
other current
assets............... 5,037 (20,150) (15,113)
Accounts payable and
accrued expenses..... 95,210 50,430 145,640
Accrued payroll and
related expenses..... 2,451 7,842 10,293
Deferred salaries..... 120,003 5,769 125,772
----------- --------- -----------
Net cash used in
operating
activities.......... (1,109,875) (55,309) (1,165,184)
----------- --------- -----------
Cash flow from investing
activities:
Purchase of property and
equipment.............. (234,068) (243,093) (477,161)
Notes receivable from
related parties........ (1,933) (41,500) (43,433)
----------- --------- -----------
Net cash used in
investing
activities.......... (236,001) (284,593) (520,594)
----------- --------- -----------
Cash flows from financing
activities:
Proceeds from issuance
of common stock........ 70,153 400,000 470,153
Proceeds from issuance
of preferred stock..... 150,000 -- 150,000
Proceeds from issuance
of convertible note.... 30,000 -- 30,000
Proceeds from borrowings
from related parties... 883,749 146,751 1,030,500
Increase in bank
overdraft.............. 5,625 -- 5,625
----------- --------- -----------
Net cash provided by
financing
activities.......... 1,139,527 546,751 1,686,278
----------- --------- -----------
Net increase
(decrease) in cash.. (206,349) 206,849 500
Cash and cash
equivalents, beginning
of period............... 206,849 -- --
----------- --------- -----------
Cash and cash
equivalents, end of
period.................. $ 500 $ 206,849 $ 500
=========== ========= ===========
Noncash financing
activities:
Common stock issued in
exchange for
technology............. $ -- $ -- $ --
Revenue and advertising
expense from barter
transactions........... $ 23,825 $ -- $ 23,825
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
ClearStation, Inc.
(A Development Stage Company)
Notes to Financial Statements
1.Company Background
ClearStation, Inc. (the Company) was incorporated in the State of
California on October 30, 1997 to provide information to financial
investors via the Internet. Since its inception, the Company has focused on
developing its technology and marketing strategy and recruiting personnel.
The Company has generated revenue from advertising on its web site since
August 1998 but is still considered a development stage company. The
Company has also financed its operations through raising equity capital. In
connection with the incorporation of the Company, one of the founders
transferred some proprietary technology to the Company in exchange for
8,000,000 shares of common stock. For accounting purposes, no value was
assigned to this transaction as there was no predecessor basis in the
technology.
2.Summary of Significant Accounting Policies
Basis of presentation
The Company's financial statements have been prepared assuming the
Company will continue as a going concern. The Company has incurred losses
from operations and negative cash flows from operating activities since
inception. These factors raise substantial doubt about the Company's
ability to continue as a going concern. The Company is seeking to achieve
profitable operations by gaining market acceptance of its services. The
Company is also seeking to raise additional capital through the offering of
equity securities. However, there can be no assurance that the Company's
efforts to achieve profitable operations or raise additional capital will
be successful. These financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles 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 date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Business risks and credit concentrations
The Company operates in the Internet content industry segment, which is
new, rapidly evolving and highly competitive. In 1998, there was one
customer that accounted for 88% of the Company's revenue, and 98% of the
Company's account receivable.
Cash and cash equivalents
The Company considers all highly liquid monetary instruments with an
original maturity of three months or less to be cash equivalents.
Substantially all of the Company's cash is held at one major financial
institution.
Fair value of financial instruments
Carrying amounts of certain of the Company's financial instruments,
including cash and cash equivalents, accounts receivable, notes receivable
from and amounts payable to related parties, accounts payable and other
accrued liabilities and convertible notes payable approximate fair value
due to their short maturities.
8
<PAGE>
ClearStation, Inc.
(A Development Stage Company)
Notes to Financial Statements--(Continued)
Property and equipment
Property and equipment are stated at cost. Maintenance and repairs are
charged to operations as incurred. Depreciation and amortization are
determined on the straight-line method over the estimated useful lives of
the related assets. Computer hardware, software and other equipment have
useful lives of three years, furnitures and fixtures have useful lives of
five years and leasehold improvements have a useful life equal to the
lesser of the life of the related asset or term of the lease. When assets
are retired or otherwise disposed of, the cost and accumulated depreciation
are removed from the accounts, and any resulting gain or loss is reflected
in operations in the period realized.
Revenue recognition
The Company derives revenue from the sale of advertisements, which is
recognized ratably in the period in which the advertisement is displayed,
provided that no significant obligations for the Company remain and
collection of the resulting receivable is probable. Barter advertisement
transactions are recorded at the lower of estimated fair value of the
services received or the estimated fair value of the advertisements given.
Advertising costs
Costs relating to advertising and promotion will be charged to expense
as incurred and totaled $9,000, $186,194 and $195,194 during the period
ended December 31, 1997, the year ended December 31, 1998 and the
cumulative period from October 30, 1997 to December 31, 1998, respectively.
Product development costs
The Company expenses research and development costs as incurred. Product
development costs include expenses incurred by the Company to develop and
enhance the Company's web site. Product development costs are expensed as
incurred.
Stock-based compensation
In 1997, the Company adopted the disclosure provisions of Financial
Accounting Standards Board ("FASB") Statement of Financial Accounting
Standards ("SFAS") No. 123, Accounting for Stock-based Compensation. The
Company has elected to continue accounting for stock-based compensation
issued to employees using Accounting Principles Board ("APB") Opinion No.
25, Accounting for Stock Issued to Employees, and, accordingly, pro forma
disclosures required under SFAS No. 123 have been presented (see Note 8).
Under APB No. 25, compensation expense is based on the difference, if any,
on the date of the grant, between the fair value of the Company's stock and
the exercise price. Stock issued to non-employees has been accounted for in
accordance with SFAS No. 123 and valued using the Black-Scholes model.
Income taxes
Deferred income taxes are recognized for the differences between the tax
basis of assets and liabilities and their financial reporting amounts based
on enacted tax laws and statutory tax rates applicable to the periods in
which the differences are expected to affect taxable income. A valuation
allowance is
9
<PAGE>
ClearStation, Inc.
(A Development Stage Company)
Notes to Financial Statements--(Continued)
recognized for deferred tax assets when it is more likely than not that
some portion or all of the deferred tax asset will be realized. Income tax
expense is comprised of tax payable or refundable for the current period
plus the change during the period in deferred tax assets and liabilities.
Comprehensive income
Effective for the fiscal years commencing December 15, 1997, the Company
adopted the provisions of SFAS No. 130, Reporting Comprehensive Income.
SFAS No. 130 establishes standards for reporting comprehensive income and
its components in financial statements. Comprehensive income, as defined,
includes all changes in equity during a period from non-owner sources. The
Company's total comprehensive loss was the same as its net loss for the
year ended December 31, 1998.
Recently issued accounting pronouncements
In March 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of
Position No. 98-1, Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use (SOP 98-1). SOP 98-1 requires computer
software costs related to internal software that are incurred in the
preliminary project stage to be expensed as incurred. Once the
capitalization criteria of SOP-98-1 have been met, certain direct costs
should be capitalized. SOP 98-1 is effective for financial statement for
fiscal years beginning after December 15, 1998. Accordingly, the Company
will adopt SOP 98-1 in its financial statements for the year ending
December 31, 1999. The Company does not believe the adoption of SOP 98-1
will have a material effect on the Company's results of operations or
financial condition.
On April 3, 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-5 (SOP 98-5), Reporting on the Costs of Start-Up
Activities, which provides guidance on the financial reporting of start-up
costs and organization costs. It requires costs of start-up activities and
organization costs to be expensed as incurred. SOP 98-5 is effective for
financial statements for fiscal years beginning after December 15, 1998. As
the Company has not capitalized such costs to date, the adoption of SOP 98-
5 is not expected to have an impact on the financial statements of the
Company.
3.Property and Equipment
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Computer hardware........................................ $417,322 $239,418
Computer software........................................ 9,855 1,000
Office equipment......................................... 5,512 --
Furniture and fixtures................................... 32,534 --
Leasehold improvements................................... 11,938 2,675
-------- --------
477,161 243,093
Accumulated depreciation................................. (157,236) (40,337)
-------- --------
Property and equipment, net............................. $319,925 $202,756
======== ========
</TABLE>
Depreciation expense totaled $40,337, $116,899 and $157,236 during the
period ended December 31, 1997, the year ended December 31, 1998 and the
cumulative period from October 30, 1997 to December 31, 1998, respectively.
10
<PAGE>
ClearStation, Inc.
(A Development Stage Company)
Notes to Financial Statements--(Continued)
4.Commitments
Operating leases
The Company leases office facilities under noncancelable operating
leases. Minimum future payments under these lease agreements at December
31, 1998 are as follows:
<TABLE>
<CAPTION>
Operating
Leases
---------
<S> <C>
1999............................................................... $ 60,452
2000............................................................... 60,452
2001............................................................... 60,452
2002............................................................... 60,452
--------
Total minimum lease payments....................................... $241,808
========
</TABLE>
Facility rent expense for the period ended December 31, 1997, the year
ended December 31, 1998 and the cumulative period from October 30, 1997 to
December 31, 1998 was $0, $60,452 and $60,452, respectively.
Litigation
From time to time, the Company may be involved in litigation arising out
of claims in the normal course of business. Based upon the information
presently available, including discussion with outside legal counsel,
management believes that there are no claims or actions pending or
threatened against the Company, the ultimate resolution of which will have
a material adverse effect on the Company's financial position, liquidity or
results of operations.
5.Convertible Preferred Stock
At December 31, 1998, the amounts of the convertible preferred stock by
series were as follows:
<TABLE>
<CAPTION>
Shares
Shares Issued and Net
Authorized Outstanding Amount
---------- ----------- --------
<S> <C> <C> <C>
Series B..................................... 1,000,000 1,000,000 $150,000
Undesignated................................. 9,000,000 -- --
---------- --------- --------
10,000,000 1,000,000 $150,000
========== ========= ========
</TABLE>
Under the Company's Certificate of Incorporation, the Company's
preferred stock is issuable in series and the Company's Board of Directors
is authorized to determine the rights, preferences and privileges of each
series. At December 31, 1998, the terms of the convertible preferred stock
are as follows:
Dividends
The holders of the Series B convertible preferred stock are entitled
to receive dividends at the same rate as dividends are paid on the common
stock (other than dividends payable in additional shares of common
stock). Each share of convertible preferred stock would be treated as
being equal to the number of shares of common stock into which each share
of convertible preferred stock is then convertible. Such dividends will
be declared or paid prior and in preference to any declaration or payment
of any dividend on the common stock, other than a common stock dividend
payable solely in shares of common stock.
11
<PAGE>
ClearStation, Inc.
(A Development Stage Company)
Notes to Financial Statements--(Continued)
Voting rights
Each share of Series B convertible preferred stock entitles a holder
to the number of votes per share equal to the number of shares of common
stock (with any fractional share rounded to the nearest whole share) into
which each share of Series B convertible preferred stock is then
convertible.
Liquidation preference
Upon any liquidation, dissolution or winding up of the Company, the
holders of Series B convertible preferred stock will be entitled to
receive, in equal preference, before any distribution or payment is made
to the holders of common stock, an amount per share equal to $0.15 for
each outstanding share of Series B Preferred Stock.
Conversion
Each share of Series B convertible preferred stock is convertible into
the number of shares of common stock determined by dividing $0.15, by the
conversion price at the time in effect for each such share of convertible
preferred stock. The initial conversion price will be $0.15 per share for
the Series B convertible preferred stock. Conversion can be requested at
any time at the option of the holder.
The convertible preferred stock would mandatorily convert into common
stock at the conversion price relevant at that time, if the Company
closes a firm commitment underwritten public offering, pursuant to an
effective registration statement on Form S-1 under the Securities Act of
1933, as amended, covering the offer and sale of the corporation's equity
securities.
Warrant for preferred stock
On December 23, 1998, the Company issued warrants for preferred stock to
a financial institution as part of negotiation for a factoring agreement.
The total shares underlying the warrant are 160,000 and are exercisable at
a price equal to $0.15. The fair value of the grant was estimated at $1,067
using the Black-Scholes model.
6.Common Stock
The Company is authorized to issue up to 35,000,000 shares of no par
common stock. The Company has issued 16,819,727 of the common shares as of
December 31, 1998.
Warrant for Common Stock
On October 2, 1998 the Company issued warrants for common stock to a
third party in connection with a convertible promissory note in the
principal amount of $30,000. The total shares underlying the warrant are
20,000 and are exercisable at a price of $0.05. The fair value of the grant
was estimated at $256 using the Black-Scholes model.
7.Stock Option Plan
In June 1998, the Company adopted a Stock Option Plan (the Plan) under
which the Board of Directors may grant common stock options to employees,
directors and consultants. The shares may be fully vested when issued or
may vest over time as the recipient provides services or achieves specified
performance objectives. Under the Plan, options generally vest 25% six
months from the vesting
12
<PAGE>
ClearStation, Inc.
(A Development Stage Company)
Notes to Financial Statements--(Continued)
commencement date with an additional 25% vesting each year thereafter.
Options generally expire ten years from the date of grant. A total of
4,000,000 shares of the Company's common stock have been reserved for
issuance under the Plan. Shares sold under the Plan are subject to various
restrictions as to resale and right of repurchase by the Company.
The following table summarizes activity under the Plan for the year
ended December 31, 1998.
<TABLE>
<CAPTION>
Year Ended
December 31, 1998
---------------------------
Weighted Average
Shares Exercise Price
--------- ----------------
<S> <C> <C>
Outstanding at the beginning of the year......... -- $ --
Granted......................................... 2,823,300 0.05
Exercised....................................... -- --
Cancelled....................................... (57,600) 0.05
--------- -----
Outstanding at the end of year................... 2,765,700 $0.05
--------- -----
Options exercisable at year end without
the right of repurchase by the Company.......... 1,451,917
---------
Weighted average minimum fair value
of options granted during the year.............. $ 0.05
=========
</TABLE>
The following table summarizes information about stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding at
December 31, 1998
------------------------------------------------------
Number of Weighted Average
Exercise Shares Remaining
Price Outstanding Contractual Life
-------- ----------- ----------------
<S> <C> <C>
$0.05 2,765,700 9.71
</TABLE>
Fair value disclosures
The Company calculated the minimum fair value of each option grant on
the date of the grant using the minimum value option pricing model as
prescribed by SFAS No. 123 using the following assumptions:
<TABLE>
<CAPTION>
December 31,
1998
------------
<S> <C>
Risk free interest rate......................................... 5%
Expected life................................................... 3
Dividend yield.................................................. --
</TABLE>
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the option's vesting period. The
Company's pro forma information follows:
<TABLE>
<CAPTION>
December 31,
1998
------------
<S> <C>
Net loss attributable to common stockholders................... $(1,314,031)
===========
Pro forma net loss............................................. $(1,323,825)
===========
</TABLE>
13
<PAGE>
ClearStation, Inc.
(A Development Stage Company)
Notes to Financial Statements--(Continued)
The effect of applying SFAS 123 in this pro forma disclosure may not be
indicative of future amounts. Additional awards in future are anticipated.
8.Income Taxes
The principal items accounting for the difference between income taxes
computed at the US statutory rate and the provision for income taxes are as
follows:
<TABLE>
<CAPTION>
1998 1997
--------- --------
<S> <C> <C>
US statutory rate....................................... 34% 34%
Operating losses not benefited.......................... (34) (34)
--------- --------
-- --
========= ========
The Company's net deferred tax asset is comprised as follows:
<CAPTION>
1998 1997
--------- --------
<S> <C> <C>
Net operating loss carryforwards........................ $ 577,904 $ 55,584
Research and development credit carryforwards........... 47,633 1,719
Valuation allowance..................................... (625,537) (57,303)
--------- --------
Net deferred tax asset................................. $ -- $ --
========= ========
</TABLE>
Due to uncertainty surrounding the realization of deferred tax assets,
the Company has recorded a valuation allowance against its net deferred tax
asset.
As of December 31, 1998, the Company has net operating loss
carryforwards of approximately $1,452,000 for federal income tax purposes.
These carryforwards expire in 2018. In addition, the Company has
carryforwards of approximately $1,451,000 as of December 31, 1998 for
California franchise tax purposes, expiring in 2005.
In the event of changes in the Company's ownership, the amount of loss
carryforwards available to offset future federal and state taxable income
may be limited by IRS Code Section 382 pursuant to the Tax Reform Act of
1986. The amount of such limitation, if any, has not been determined.
9.Related Party Transaction
The Company recorded a note receivable for $40,000 from a shareholder of
the Company in exchange for cash. The note remains outstanding at December
31, 1998. The note bears interest at 5% a year and is payable on demand.
As of December 31, 1998, DBSafe, a related company, lent money to the
Company totaling $935,126 by direct transfer of cash or direct payment to
supplier on behalf of the Company. This note is collateralized by all
assets of the Company. The note bears interest of 10% a year and is payable
by monthly installment of $100,000 starting on December 1998. No payment
was made as of December 31, 1998.
At December 31, 1997 and 1998, the Company owed a total of $5,769 and
$125,772, respectively to founders, directors and employees. These amounts
represented deferred salaries and are included in current liabilities in
the balance sheets presented.
14
<PAGE>
ClearStation, Inc.
(A Development Stage Company)
Notes to Financial Statements--(Continued)
10.Subsequent Events
On December 1998, the Company entered into a factoring agreement, which
provides that the Company could finance its working capital needs up to 80%
of its eligible accounts receivable. In January 1999, the Company used the
credit facility and borrowed $99,530.
In March 1999, the Company raised $214,233 by issuing 856,932 Series B
Preferred Stock.
In March 1999, the Company received an offer to purchase all the shares
of the Company from E*TRADE. After the transaction, the outstanding capital
stock and voting securities of the Company on a fully diluted basis will be
converted into shares of common stock of E*TRADE.
15
<PAGE>
PRO FORMA FINANCIAL INFORMATION
On March 28, 1999, E*TRADE Group, Inc. ("E*TRADE") entered into an agreement
with ClearStation, Inc., a California corporation ("ClearStation"), pursuant to
which Crystal Acquisition Corporation, a wholly owned subsidiary of E*TRADE,
was merged with and into ClearStation, with ClearStation continuing as the
surviving entity and as a wholly owned subsidiary of E*TRADE (the "Merger").
The securityholders of ClearStation received an aggregate of 939,072 shares
(adjusted for the stock split effective May 21, 1999) of E*TRADE common stock
in the Merger. The amount of such consideration was determined based upon
arm's-length negotiations between E*TRADE and ClearStation. The purpose of the
acquisition is to add online financial community services to E*TRADE's current
offerings. The acquisition was accounted for as a pooling of interests. The
purpose of the acquisition is to add online financial community services to
E*TRADE's current offerings.
The following unaudited pro forma combined financial statements give effect
to the merger between E*TRADE and ClearStation. The unaudited pro forma
combined balance sheet of E*TRADE and ClearStation as of March 31, 1999
combines the unaudited balance sheets of E*TRADE and ClearStation as of March
31, 1999. [The unaudited pro forma combined statements of operations of E*TRADE
and ClearStation for the six month period ended March 31, 1999 and the fiscal
year ended September 30, 1998, give effect to the proposed merger as if the
merger had been completed at the beginning of the periods presented, as
required under pooling of interests accounting.] ClearStation had a fiscal year
that ended on December 31 of each year. For purposes of the unaudited pro forma
combined statements of operations, ClearStation's statements of operations for
the six month periods ended March 31, 1999 and 1998, and the twelve month
period ended September 30, 1998, were derived from the unaudited quarterly
information of ClearStation for those periods. The operations of ClearStation
commenced on October 30, 1997 (date of inception), therefore, pro forma
combined statements of operations for fiscal year's ended September 30, 1997
and 1996 were not presented because the historical financial statements of
E*TRADE are not affected.
In January 1999 and April 1999, E*TRADE issued two-for-one stock splits to
shareowners in the form of 100% stock dividends. Accordingly, all pro forma
E*TRADE and ClearStation share and per share amounts have been restated to
reflect the two-for-one stock splits, as appropriate.
The pro forma information is presented for illustrative purposes only and is
not necessarily indicative of the operating results or financial position that
would have occurred if these transactions had been consummated at the beginning
of the earliest period presented, nor is it necessarily indicative of future
operating results or financial position.
16
<PAGE>
E*TRADE GROUP, INC. AND SUBSIDIARIES
Pro Forma Combined Balance Sheets
(in thousands, except share amounts)
(Unaudited)
<TABLE>
<CAPTION>
March 31, 1999
-------------------------------
E*TRADE Clear Pro Forma
As Reported Station Combined
----------- ------- ----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and equivalents......................... $ 49,658 $ -- $ 49,658
Cash and investments required to be
segregated under Federal or other
regulations................................. 5,000 -- 5,000
Investment securities........................ 409,192 -- 409,192
Brokerage receivables--net................... 2,276,014 -- 2,276,014
Other assets................................. 18,873 197 19,070
---------- ------- ----------
Total current assets....................... 2,758,737 197 2,758,934
Property and equipment--net.................... 65,328 394 65,722
Investments.................................... 482,043 482,043
Related party receivables...................... -- -- --
Other assets................................... 6,193 -- 6,193
---------- ------- ----------
Total assets............................... $3,312,301 $ 591 $3,312,892
========== ======= ==========
LIABILITIES AND SHAREOWNERS' EQUITY
Liabilities:
Brokerage payables........................... $2,133,456 $ -- $2,133,456
Accounts payable, accrued and other
liabilities ................................ 208,488 1,174 209,662
---------- ------- ----------
Total liabilities.......................... 2,341,944 1,174 2,343,118
---------- ------- ----------
Shareowners' equity:
Common stock, $.01 par value; shares
authorized, 300,000,000; shares issued and
outstanding, 232,759,206.................... 2,319 9 2,328
Additional paid-in capital................... 725,873 987 726,860
Retained earnings ........................... 7,890 (1,579) 6,311
Accumulated other comprehensive income....... 234,275 -- 234,275
---------- ------- ----------
Total shareowners' equity ................. 970,357 (583) 969,774
---------- ------- ----------
Total liabilities and shareowners'
equity.................................. $3,312,301 $ 591 $3,312,892
========== ======= ==========
</TABLE>
17
<PAGE>
E*TRADE GROUP, INC. AND SUBSIDIARIES
Pro Forma Combined Statements of Operations
(in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
March 31, 1999 March 31, 1998
----------------------------- -----------------------------
E*TRADE Clear Pro Forma E*TRADE Clear Pro Forma
As Reported Station Combined As Reported Station Combined
----------- ------- --------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Transaction revenues.. $150,844 $ -- $150,844 $ 75,462 $ -- $75,462
Interest--net of
interest expense
(A).................. 50,104 (88) 50,016 24,653 -- 24,653
International......... 2,016 -- 2,016 1,620 -- 1,620
Other................. 11,762 451 12,213 8,402 -- 8,402
-------- ----- -------- -------- ----- -------
Net revenues........ 214,726 363 215,089 110,137 -- 110,137
-------- ----- -------- -------- ----- -------
Cost of services........ 97,638 224 97,862 48,824 5 48,829
-------- ----- -------- -------- ----- -------
Operating expenses:
Selling and
marketing............ 100,881 156 101,037 20,916 -- 20,916
Technology
development.......... 29,449 373 29,822 13,368 414 13,782
General and
administrative....... 32,374 89 32,463 10,602 41 10,643
-------- ----- -------- -------- ----- -------
Total operating
expenses........... 162,704 618 163,322 44,886 455 45,341
-------- ----- -------- -------- ----- -------
Total cost of
services and
operating expenses.. 260,342 842 261,184 93,710 460 94,170
-------- ----- -------- -------- ----- -------
Operating income
(loss)................. (45,616) (479) (46,095) 16,427 (460) 15,967
-------- ----- -------- -------- ----- -------
Non-operating income
(expense):
Gain on sale of
investment........... 33,367 -- 33,367 -- -- --
Loss on equity
investments.......... (1,334) -- (1,334) -- -- --
-------- ----- -------- -------- ----- -------
Total non-operating
income............. 32,033 -- 32,033 -- -- --
-------- ----- -------- -------- ----- -------
Pre-tax income (loss)... (13,583) (479) (14,062) 16,427 (460) 15,967
Income tax expense
(benefit).............. (6,163) -- (6,163) 6,793 -- 6,793
-------- ----- -------- -------- ----- -------
Net income (loss)....... $ (7,420) $(479) $ (7,899) $ 9,634 $(460) $ 9,174
======== ===== ======== ======== ===== =======
Net income (loss) per
share:
Basic................. $ (0.03) $ (0.03) $ 0.06 $ 0.06
======== ======== ======== =======
Diluted............... $ (0.03) $ (0.03) $ 0.06 $ 0.05
======== ======== ======== =======
Shares used in
computation of net
income (loss) per
share:
Basic................. 228,540 811 229,351 160,794 647 161,441
Diluted............... 228,540 811 229,351 172,160 647 172,807
</TABLE>
- --------
(A) Interest is presented net of interest expense. Interest expense for the six
months ended March 31, 1999 and 1998 was $26,028 and $17,290, respectively.
18
<PAGE>
E*TRADE GROUP, INC. AND SUBSIDIARIES
Pro Forma Combined Statements of Operations
(in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Twelve Months Ended
September 30, 1998
------------------------------
E*TRADE Clear Pro Forma
As Reported Station Combined
----------- ------- ---------
<S> <C> <C> <C>
Revenues:
Transaction revenues.......................... $162,097 $ -- $162,097
Interest--net of interest expense (A)......... 56,019 1 56,020
International................................. 7,031 -- 7,031
Other......................................... 20,135 34 20,169
-------- ------- --------
Net revenues................................ 245,282 35 245,317
-------- ------- --------
Cost of services................................ 111,832 56 111,888
-------- ------- --------
Operating expenses:
Selling and marketing......................... 71,293 154 71,447
Technology development........................ 32,916 783 33,699
General and administrative.................... 30,906 142 31,048
-------- ------- --------
Total operating expenses.................... 135,115 1,079 136,194
-------- ------- --------
Total cost of services and operating
expenses................................... 246,947 1,135 248,082
-------- ------- --------
Pre-tax loss.................................... (1,665) (1,100) (2,765)
Income tax benefit.............................. (953) -- (953)
-------- ------- --------
Net loss........................................ $ (712) $(1,100) $ (1,812)
======== ======= ========
Net loss per share:
Basic......................................... $ (0.00) $ (0.01)
======== ========
Diluted....................................... $ (0.00) $ (0.01)
======== ========
Shares used in computation of net loss per
share:
Basic......................................... 169,140 651 169,791
Diluted....................................... 169,140 651 169,791
</TABLE>
- --------
(A) Interest is presented net of interest expense. Interest expense for the
twelve months ended September 30, 1998 was $39,714.
19
<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: June 10, 1999
By: /s/ Leonard C. Purkis
-------------------------
Leonard C. Purkis
Executive Vice President, Finance and
Administration,
Chief Financial Officer (principal financial
and accounting officer)
20
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<C> <S>
23.1 Consent of PricewaterhouseCoopers LLP, Independent Auditors
99.1 Press Release, dated March 29, 1999, issued by E*TRADE Group, Inc.
announcing the agreement to acquire ClearStation, Inc.*
</TABLE>
- --------
* Filed as part of the Registrant's Current Report on Form 8-K dated March 29,
1999, filed April 13, 1999, and incorporated herein by reference.
21
<PAGE>
Exhibit 23.1
Consent of PricewaterhouseCoopers LLP, Independent Auditors
We consent to the incorporation by reference in Registration Statements No.
333-72149, No. 333-62333, No. 333-52631, and No. 333-12503 of E*TRADE Group,
Inc. on Form S-8 of our report dated April 9, 1999, appearing in this Current
Report on Form 8-K/A of E*TRADE Group, Inc.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
PricewaterhouseCoopers LLP
San Jose, California
June 10, 1999
