<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
for the quarterly period ended December 31, 1999
Commission file number 1-11921
E*TRADE Group, Inc.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 94-2844166
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or
organization)
</TABLE>
4500 Bohannon Drive, Menlo Park, CA 94025
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (650) 331-6000
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 February 7, 2000, the number of shares outstanding of the
registrant's common stock was 289,095,417.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
E*TRADE Group, Inc.
Form 10-Q/A Quarterly Report
For the Quarter Ended December 31, 1999
Table of Contents
<TABLE>
<CAPTION>
Page
----
Part I--Financial Information
<S> <C> <C>
Item 1. Financial Statements
Consolidated Statements of Operations.................................................. 3
Consolidated Balance Sheets............................................................ 4
Condensed 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.. 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................. 38
<CAPTION>
Part II--Other Information
<S> <C> <C>
Item 1. Legal and Administrative Proceedings................................................... 40
Item 2. Changes in Securities and Use of Proceeds.............................................. 42
Item 3. Defaults Upon Senior Securities........................................................ 42
Item 4. Submission of Matters to a Vote of Security Holders.................................... 42
Item 5. Other Information...................................................................... 42
Item 6. Exhibits and Reports on Form 8-K....................................................... 42
Signatures..................................................................................... 44
</TABLE>
----------------
UNLESS OTHERWISE INDICATED, REFERENCES TO "COMPANY" MEAN E*TRADE GROUP,
INC. AND ITS SUBSIDIARIES.
This Form 10-Q/A is being filed to give retroactive effect to the Company's
acquisition of Telebanc Financial Corporation on January 12, 2000, which was
accounted for as a pooling of interests (see Note 10 to the consolidated
financial statements). Other than the acquisition of Telebanc Financial
Corporation, the inclusion of certain additional exhibits, and updates to Part
II Item 1. Legal and Administrative Proceedings, this Form 10-Q/A has not been
updated to give effect to any items addressed in documents filed with the SEC
subsequent to December 31, 1999.
E*TRADE(R) and the E*TRADE logo are registered trademarks of E*TRADE
Securities, Inc. All other products, trademarks or service marks mentioned in
this document or any document incorporated by reference herein are trademarks
or service marks of E*TRADE Group, Inc., its subsidiaries, or other companies
with which they are associated or with which they have a business
relationship.
----------------
FORWARD-LOOKING STATEMENTS
Certain statements in this discussion and analysis, including statements
regarding the Company's strategy, financial performance and revenue sources,
are forward-looking statements based on current expectations and entail
various risks and uncertainties. The Company's actual results may differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including, but not limited to, those set forth
under "Risk Factors" and elsewhere in this report. Readers are urged to
carefully review and consider the various disclosures made by the Company in
this report and in the Company's other reports filed with the SEC, including
the Company's Annual Report on Form 10-K/A as filed with the SEC, that attempt
to advise interested parties of certain risks and factors that may affect the
Company's business. Readers are cautioned not to place undue reliance on these
forward-looking statements to reflect events or circumstances occurring after
the date hereof. The following should be read in conjunction with the
Company's financial statements and notes thereto.
2
<PAGE>
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>
<CAPTION>
Three months ended
December 31,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
Revenues:
Transaction revenues................................... $ 152,312 $ 60,320
Interest income........................................ 157,197 61,040
Global and institutional............................... 33,699 28,106
Other.................................................. 19,283 8,250
--------- ---------
Gross revenues....................................... 362,491 157,716
Interest expense....................................... (94,312) (38,019)
Provision for loan losses.............................. (537) (280)
--------- ---------
Net revenues......................................... 267,642 119,417
--------- ---------
Cost of services......................................... 111,507 50,237
--------- ---------
Operating expenses:
Selling and marketing.................................. 129,680 57,709
Technology development................................. 36,380 14,566
General and administrative............................. 42,078 20,366
Amortization of goodwill and other intangibles......... 2,025 760
Merger-related expenses................................ 5,787 --
--------- ---------
Total operating expenses............................. 215,950 93,401
--------- ---------
Total cost of services and operating expenses........ 327,457 143,638
--------- ---------
Operating loss........................................... (59,815) (24,221)
--------- ---------
Non-operating income (expense):
Corporate interest income--net......................... 1,789 5,409
Gain on sale of investments............................ 31,316 --
Unrealized gain on venture fund........................ 25,453 --
Equity in income (losses) of investments............... (3,889) 14
Other.................................................. 153 (44)
--------- ---------
Total non-operating income........................... 54,822 5,379
--------- ---------
Pre-tax loss............................................. (4,993) (18,842)
Income tax benefit....................................... (697) (8,481)
Minority interest in subsidiary.......................... 495 571
--------- ---------
Net loss................................................. (4,791) (10,932)
Preferred stock dividends................................ -- 60
--------- ---------
Loss applicable to common stock.......................... $ (4,791) $ (10,992)
========= =========
Loss per share:
Basic and Diluted...................................... $ (0.02) $ (0.04)
========= =========
Shares used in computation of loss per share:
Basic and Diluted...................................... 282,505 257,860
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
E*TRADE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
December September 30,
31, 1999 1999
----------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
------
Cash and equivalents.................................. $ 297,298 $ 124,801
Cash and investments required to be segregated under
Federal or other regulations......................... 811,153 104,500
Brokerage receivables--net............................ 4,243,618 2,912,581
Mortgage-backed securities............................ 2,025,192 1,426,053
Loans receivable--net................................. 2,422,252 2,154,509
Investments........................................... 1,086,944 830,329
Property and equipment--net........................... 194,351 178,854
Goodwill and other intangibles........................ 372,987 17,211
Other assets.......................................... 284,842 159,386
----------- ----------
Total assets........................................ $11,738,637 $7,908,224
=========== ==========
LIABILITIES AND SHAREOWNERS' EQUITY
-----------------------------------
Liabilities:
Brokerage payables.................................. $ 4,758,423 $2,824,212
Banking deposits.................................... 2,714,204 2,162,682
Borrowings by bank subsidiary....................... 1,760,158 1,267,474
Bank loan payable................................... 107,785 --
Accounts payable, accrued and other liabilities..... 417,830 203,971
----------- ----------
Total liabilities................................. 9,758,400 6,458,339
----------- ----------
Company-obligated mandatorily redeemable preferred
capital securities of subsidiary trusts holding
solely junior subordinated debentures of the
Company and other mandatorily redeemable preferred
securities......................................... 30,600 30,584
----------- ----------
Commitments and contingencies
Shareowners' equity:
Common stock, $.01 par: shares authorized,
600,000,000; shares issued and outstanding:
December 31, 1999, 288,259,448;
September 30, 1999, 275,145,791.................... 2,883 2,751
Additional paid-in capital.......................... 1,611,428 1,269,167
Unearned ESOP shares................................ (1,970) (2,122)
Accumulated deficit................................. (13,155) (8,364)
Accumulated other comprehensive income.............. 350,451 157,869
----------- ----------
Total shareowners' equity......................... 1,949,637 1,419,301
----------- ----------
Total liabilities and shareowners' equity......... $11,738,637 $7,908,224
=========== ==========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
E*TRADE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
Net cash provided by (used in) operating activities.. $ (72,889) $ 82,981
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of available-for-sale securities.......... (1,135,729) (2,207,993)
Proceeds from sales, maturities of and principal
payments on available-for-sale securities......... 592,661 2,007,804
Net increase in loans held for investment.......... (271,299) (142,458)
Purchase of investments............................ (23,865) (777)
Proceeds from sales of investments................. 39,393 --
Restricted deposits................................ (49,759) --
Cash used in acquisitions.......................... (26,707) --
Purchases of property and equipment, net of capital
lease............................................. (33,716) (4,443)
Proceeds from the sale of foreclosed real estate... 213 265
Release of unearned shares held by Employee Stock
Ownership Plan.................................... 152 60
Equity investments in subsidiaries-net............. (176) (295)
----------- -----------
Net cash used in investing activities.......... (908,832) (347,837)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in banking deposits................... 551,521 90,187
Advances from the Federal Home Loan Bank of
Atlanta........................................... 946,000 529,500
Payments on advances from the Federal Home Loan
Bank of Atlanta................................... (730,000) (265,000)
Net increase (decrease) in securities sold under
agreements to repurchase.......................... 276,684 (75,307)
Proceeds from issuance of common stock............. 7,937 1,822
Proceeds from bank loans payable, net of
transaction costs................................. 102,535 --
Dividends paid on trust preferred securities....... (495) (571)
Other.............................................. 36 114
----------- -----------
Net cash provided by financing activities...... 1,154,218 280,745
----------- -----------
INCREASE IN CASH AND EQUIVALENTS..................... 172,497 15,889
CASH AND EQUIVALENTS--Beginning of period............ 124,801 71,317
----------- -----------
CASH AND EQUIVALENTS--End of period.................. $ 297,298 $ 87,206
=========== ===========
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest ............................ $ 79,667 $ 38,596
Cash paid for income taxes......................... $ 1,153 $ 47
Non-cash investing and financing activities:
Unrealized gain on available-for-sale
securities...................................... $ 325,159 $ 30,433
Assets acquired under capital lease obligations... $ 31,698 $ --
Acquisitions, net of cash acquired:
Common stock issued and stock options assumed.. $ 323,967 --
Cash paid, less acquired....................... 26,707 --
Liabilities assumed............................ 6,000 --
Carrying value of joint-venture investment..... 5,343 --
----------- -----------
Fair value of assets acquired (including
goodwill of $357,397)......................... $ 362,017
=========== ===========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
E*TRADE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1.--BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements
include E*TRADE Group, Inc., a financial services holding company, and its
subsidiaries (collectively, the "Company"), including E*TRADE Securities, Inc.
("E*TRADE Securities"), a securities broker-dealer, Telebanc Financial
Corporation ("Telebanc"), a provider of financial services, and TIR (Holdings)
Limited ("TIR"), a provider of global securities brokerage and other related
services to institutional clients. The primary business of Telebanc is the
activities conducted by Telebank and Telebanc Capital Markets, Inc. ("TCM").
Telebank is a federally chartered savings bank that provides deposit accounts
insured by the Federal Deposit Insurance Corporation ("FDIC") to customers
nationwide. TCM is a funds manager and registered broker-dealer.
These interim consolidated 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 accounting principles
generally accepted in the United States of America. All significant
intercompany accounts and transactions have been eliminated. These interim
consolidated financial statements should be read in conjunction with the
audited annual consolidated financial statements and notes thereto included in
the Company's Annual Report to Shareowners on Form 10-K/A for the fiscal year
ended September 30, 1999.
The consolidated financial statements of the Company have been prepared to
give retroactive effect to the acquisition of Telebanc on January 12, 2000,
which was accounted for as a pooling of interests (see Note 10).
NOTE 2.--BROKERAGE RECEIVABLES--NET AND PAYABLES
Brokerage receivables--net and payables consist of the following (in
thousands):
<TABLE>
<CAPTION>
December 31, September 30,
1999 1999
------------ -------------
<S> <C> <C>
Receivable from customers and non-customers (less
allowance for doubtful accounts of $2,955 at
December 31, 1999 and $975 at September 30,
1999)............................................ $3,782,599 $2,559,283
Receivable from brokers, dealers and clearing
organizations:
Net settlement and deposits with clearing
organizations................................... 34,092 20,066
Deposits paid for securities borrowed............ 396,829 306,326
Securities failed to deliver..................... 4,423 7,508
Other............................................ 25,675 19,398
---------- ----------
Total brokerage receivables--net................ $4,243,618 $2,912,581
========== ==========
Payable to customers and non-customers............ $1,286,794 $ 946,760
Payable to brokers, dealers and clearing
organizations:
Deposits received for securities loaned.......... 3,434,902 1,806,590
Securities failed to receive..................... 14,370 7,235
Other............................................ 22,357 63,627
---------- ----------
Total brokerage payables........................ $4,758,423 $2,824,212
========== ==========
</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. At December 31, 1999 and September 30, 1999, credit
extended to customers
6
<PAGE>
and non-customers with respect to margin accounts was $3,776 million and
$2,452 million, respectively. 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 customer
and non-customer funds pending completion of securities transactions. The
Company pays interest on certain customer and non-customer credit balances.
NOTE 3.--INVESTMENTS
Investments are comprised of trading and available-for-sale debt and equity
securities, as defined under the provisions of SFAS No. 115, Accounting for
Certain Investments in Debt and Equity Securities. Also included in
investments are investments in entities in which the Company owns between 20%
and 50% or has the ability to exercise significant influence, accounted for
under the equity method.
The carrying amounts of investments are shown below (in thousands):
<TABLE>
<CAPTION>
December 31, September 30,
1999 1999
------------ -------------
<S> <C> <C>
Trading securities................................ $ 17,673 $ 38,269
Available-for-sale investment securities.......... 934,877 685,555
Equity method investments:
Joint ventures (see Note 10).................... 13,285 20,862
Archipelago..................................... 25,162 25,149
Venture funds................................... 65,473 36,270
E*OFFERING...................................... 15,898 11,391
KAP Group......................................... 2,000 2,000
Other investments................................. 12,576 10,833
---------- --------
Total investments................................. $1,086,944 $830,329
========== ========
</TABLE>
Publicly-traded Equity Securities
Included in available-for-sale securities are investments in several
companies that are publicly-traded and carried at fair value. These companies
include Knight/Trimark Inc., CriticalPath, Digital Island, Message Media, E-
LOAN and Versus. During the first quarter of fiscal 2000, the Company sold
shares of Knight/Trimark generating proceeds of $30.0 million, resulting in a
pre-tax gain of $29.9 million. Unrealized gains related to these investments
were $610.2 million and $282.3 million at December 31, 1999 and September 30,
1999, respectively. There were no unrealized losses at December 31, 1999 and
September 30, 1999. Certain of these investments are currently subject to sale
restriction agreements.
Equity Method Investments
The Company made a $25 million contribution to the E*TRADE eCommerce Fund,
L.P. (the "Fund") on October 1, 1999. The Fund has committed capital of
approximately $100 million, $75 million of which was raised from third party
investors. The Fund invests in early to mid-stage Internet companies focused
on e-commerce, infrastructure tools, communication and services. The Company
received a general and limited partnership interest of approximately 28% in
the Fund. Through the Fund, the Company is able to leverage its own investment
capital, expand the scope of its strategic investments (beyond financial
services) and keep it in a position to capitalize on leading-edge
technologies. The Fund is managed by its General Partner, E*TRADE Ventures I,
LLC (the "General Partner"). Christos M. Cotsakos, the Chairman of the Board
of Directors and Chief Executive Officer of the Company, and Thomas
Bevilacqua, Chief Strategic Investment Officer, are the managing members of
the General Partner. The Company is a non-managing member of the General
Partner. The General Partner receives an annual management fee of
approximately 1.75% of the total committed capital.
7
<PAGE>
The management fee is paid in its entirety to the Company and is used to
offset the costs and expenses of its corporate development group. In addition,
to the extent that the Fund generates profits, 20% are allocated to the
General Partner as a carried interest. As members of the General Partner, the
Company is entitled to receive 50% of such amount and Messrs. Cotsakos and
Bevilacqua are each entitled to receive 25% of such amount, provided that up
to one-fifth of the Company's interest can be allocated by the managing
members to Company personnel. The Company also has limited partnership
interests in two other unrelated venture capital funds.
In the quarter ended December 31, 1999, the Company invested an additional
$5,000,000 in E*OFFERING in the form of a subordinated note, which was
utilized by E*OFFERING for its Internet-based investment banking activities.
The note has been classified as part of the investment at December 31, 1999
and was subsequently repaid in January 2000. E*OFFERING has since completed
additional rounds of financing whereby the Company's ownership position was
reduced to approximately 28%.
NOTE 4.--COMPREHENSIVE INCOME
On October 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income, which requires that an enterprise report, by major
components and as a single total, the change in net assets during the period
from non-owner sources. The reconciliation of net loss to comprehensive income
is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months
Ended December
31,
------------------
1999 1998
-------- --------
<S> <C> <C>
Net loss................................................... $ (4,791) $(10,932)
Changes in other comprehensive income:
Unrealized gain on available-for-sale securities, net of
tax..................................................... 192,498 17,710
Cumulative translation adjustments....................... 84 658
-------- --------
Total comprehensive income............................. $187,791 $ 7,436
======== ========
</TABLE>
NOTE 5.--LOSS PER SHARE
The Company reported a net loss for the three months ended December 31,
1999 and 1998; therefore, the calculation of diluted net loss per share does
not include common stock equivalents as it would result in a reduction of net
loss per share. If the Company had reported net income for the three months
ended December 31, 1999 and 1998, there would have been 20,234,000 and
15,308,000 additional shares in the calculation of diluted earnings per share,
respectively.
NOTE 6.--BANK LOANS
In November 1999, the Company obtained a $50 million line of credit under
an agreement with a bank that expires in November 2000. The line of credit is
collateralized by investment securities that are owned by the Company.
Borrowings under the line of credit bear interest at 0.35% above LIBOR. The
agreement requires the Company to meet certain financial covenants; as of
December 31, 1999, the Company was in compliance with all such covenants. As
of December 31, 1999, the Company had $34.8 million outstanding under this
line of credit.
In December 1999, the Company obtained a $150 million line of credit
agreement with a syndicate of banks that expires on March 31, 2000. The line
of credit is collateralized by publicly-traded investments owned by the
Company. Borrowings under the line of credit bear interest at 0.25% above
LIBOR. The agreement requires the Company to meet certain financial covenants
and prohibits the assumption of any major debt, except for equipment leases;
as of December 31, 1999, the Company was in compliance with all such
covenants. As of December 31, 1999, the Company had $70.0 million outstanding
under this line of credit.
8
<PAGE>
NOTE 7.--COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED CAPITAL SECURITIES
In June 1997, Telebanc formed Telebanc Capital Trust I ("TCT I"), which in
turn sold, at par, 10,000 shares of trust preferred securities, Series A,
liquidation amount of $1,000, for a total of $10.0 million. TCT I is a
business trust formed for the purpose of issuing capital securities and
investing the proceeds in junior subordinated debentures issued by Telebanc.
These junior subordinated debentures, which are the sole assets of TCT I, have
a principal amount of $10.0 million and bear interest at an annual rate of
11.0%. The junior subordinated debentures mature in 2027.
In July 1998, Telebanc formed Telebanc Capital Trust II ("TCT II"), a
business trust formed solely for the purpose of issuing capital securities.
TCT II sold, at par, 1,100,000 shares of Beneficial Unsecured Securities,
Series A, with a liquidation amount of $25 per share, for a total of $27.5
million and invested the net proceeds in Telebanc's 9.0% Junior Subordinated
Deferrable Interest Debentures, Series A. These Junior Subordinated Deferrable
Interest Debentures, Series A, which are the sole assets of TCT II, have a
principal amount of $27.5 million and mature in 2028.
All of the capital securities of TCT I and TCT II (together the "Trusts")
are owned by Telebanc. The guarantees for the Trusts, together with
obligations under the trust agreements as assumed in the Company's acquisition
of Telebanc, and the indenture and junior subordinated debentures, constitute
a full, irrevocable and unconditional guarantee by the Company of the capital
securities issued by TCT I and TCT II.
NOTE 8.--REGULATORY REQUIREMENTS
E*TRADE Securities is subject to the Uniform Net Capital Rule (the "Rule")
under the Securities Exchange Act of 1934 administered by the Securities and
Exchange Commission ("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 two percent of aggregate debit balances arising
from customer transactions, as defined. E*TRADE Securities had amounts in
relation to the Rule as follows (in thousands, except percentage data):
<TABLE>
<CAPTION>
December 31, September 30,
1999 1999
------------ -------------
<S> <C> <C>
Net capital..................................... $239,353 $162,729
Percentage of aggregate debit balances.......... 6.0% 6.2%
Required net capital............................ $ 79,218 $ 52,206
Excess net capital.............................. $160,135 $110,523
</TABLE>
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.
TIR's brokerage subsidiary companies are also subject to net capital
requirements. These companies are located in the United States, Australia,
Hong Kong, Ireland, the Philippines and the United Kingdom. The companies
outside the United States have various and differing capital requirements, all
of which were met at December 31, 1999 and September 30, 1999. The net capital
requirements of TIR's brokerage subsidiary companies located in the United
States are summarized as follows:
TIR Securities, Inc. and TIR Investor Select, Inc.--TIR Securities, Inc.
and TIR Investor Select, Inc. are subject to the Rule and are required to
maintain net capital equal to the greater of $5,000 or 6.67% of aggregate
indebtedness, as defined. The Rule also requires that the ratio of
aggregate indebtedness to net capital shall not exceed 15 to 1. TIR
Securities, Inc. is also subject to the Commodity Futures Trading
Commission ("CFTC") Regulation 1.17, which requires the maintenance of net
capital of 4% of the funds
9
<PAGE>
required to be segregated in accordance with Section 4d(2) of the
Commodities Exchange Act or $30,000, whichever is greater. TIR Securities,
Inc. is required to maintain net capital in accordance with the Rule or
CFTC Regulation 1.17, whichever is greater.
Marquette Securities, Inc.--Marquette Securities, Inc. is subject to the
Rule and is required to maintain net capital equal to the greater of
$250,000 or 6.67% of aggregate indebtedness, as defined. The Rule also
requires that the ratio of aggregate indebtedness to net capital shall not
exceed 15 to 1.
The table below summarizes the minimum capital requirements for the above
companies (in thousands):
<TABLE>
<CAPTION>
December 31, 1999 September 30, 1999
------------------------ ------------------------
Required Excess Required Excess
net Net net net Net net
capital capital capital capital capital capital
-------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
TIR Securities, Inc...... $ 65 $1,398 $1,333 $ 82 $2,289 $2,207
TIR Investor Select,
Inc..................... 5 39 34 5 254 249
Marquette Securities,
Inc..................... 250 445 195 250 445 195
</TABLE>
Telebank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory--and possibly additional discretionary--actions
by regulators that, if undertaken, could have a direct material effect on
Telebank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, Telebank must meet specific
capital guidelines that involve quantitative measures of Telebank's assets,
liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. Telebank's capital amounts and classification
are also subject to qualitative judgments by the regulators about components,
risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require Telebank to maintain minimum amounts and ratios of total and Tier I
capital to risk-weighted assets and of Tier I capital to average assets.
Management believes, as of December 31, 1999, that Telebank meets all capital
adequacy requirements to which it is subject. As of December 31, 1999 and
September 30, 1999, the Office of Thrift Supervision ("OTS") categorized
Telebank as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, Telebank must
maintain minimum total risk-based, Tier I risk-based, and Tier I leverage
ratios as set forth in the following table. There are no conditions or events
since that notification that management believes have changed the
institution's category.
Telebank's actual capital amounts and ratios are presented in the table
below (dollars in thousands):
<TABLE>
<CAPTION>
Required To Be
Well
Capitalized
Under Prompt
Required For Corrective
Capital Adequacy Action
Actual Purposes Provisions
--------------- ---------------- ---------------
Amount Ratio Amount Ratio Amount Ratio
--------- ----- ---------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999:
Core Capital (to adjusted
tangible assets).......... $ 441,987 8.83% >$200,314 >4.0% >$250,392 > 5.0%
Tangible Capital (to
tangible assets).......... $ 441,987 8.83% >$ 75,118 >1.5% N/A N/A
Tier I Capital (to risk
weighted assets).......... $ 441,987 21.08% N/A N/A >$125,828 > 6.0%
Total Capital (to risk
weighted assets).......... $ 449,174 21.42% >$167,771 >8.0% >$209,713 >10.0%
As of September 30, 1999:
Core Capital (to adjusted
tangible assets).......... $ 440,469 11.20% >$ 157,320 >4.0% >$196,651 > 5.0%
Tangible Capital (to
tangible assets).......... $ 440,469 11.20% >$ 58,995 >1.5% N/A N/A
Tier I Capital (to risk
weighted assets).......... $ 440,469 25.97% N/A N/A >$101,768 > 6.0%
Total Capital (to risk
weighted assets).......... $ 441,170 26.36% >$ 135,691 >8.0% >$169,614 >10.0%
</TABLE>
10
<PAGE>
Telebank is subject to certain restrictions on the amount of dividends it
may declare without prior regulatory approval. At December 31, 1999,
approximately $128.4 million of Telebank's retained earnings was available for
dividend declaration.
NOTE 9.--COMMITMENTS, CONTINGENCIES AND OTHER REGULATORY MATTERS
As of December 31, 1999, the Company had commitments to purchase $26.0
million in fixed rate and $180.8 million in variable rate loans, and
certificates of deposit scheduled to mature in less than one year
approximating $1.1 billion. In the normal course of business, the Company
makes various commitments to extend credit and incur contingent liabilities
that are not reflected in the balance sheets.
The Company is a defendant in civil actions arising in the normal course of
business, including several putative class action filings. The matters alleged
by the plaintiffs include:
. False and deceptive advertising and other communications regarding the
Company's commission rates and ability to timely execute and confirm
online transactions;
. Damages arising from alleged problems in accessing accounts and placing
orders;
. Damages arising from system interruptions, including those occurring on
February 3, 4 and 5, 1999; and
. Unfair business practices regarding the extent to which initial public
offering shares are made available to the Company's customers.
These proceedings are at early stages, and the Company is unable to predict
their ultimate outcome; however, the Company believes that all of these claims
are without merit and intends to defend against them vigorously. An
unfavorable outcome in any of these matters, if they 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, arbitrations 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 several instances of its
noncompliance with applicable regulations.
11
<PAGE>
NOTE 10.--ACQUISITIONS
On January 12, 2000, the Company completed the acquisition of Telebanc.
Telebanc is the holding company for Telebank, an Internet-based bank. Under
the terms of the agreement, Telebanc shareowners received 1.05 shares of
E*TRADE common stock for each share of Telebanc common stock representing a
total of 35.6 million shares of the Company's common stock. The Company also
assumed all outstanding Telebanc options, which were converted to options to
purchase approximately 5,494,000 shares of the Company's common stock. The
acquisition was accounted for as a pooling of interests and, accordingly, all
prior financial data of the Company has been restated to include the
historical operations of Telebanc. There were no significant intercompany
transactions requiring elimination for any prior periods presented. The
information below reflects the operations of E*TRADE (as reported) and
Telebanc on a standalone and consolidated basis (in thousands):
<TABLE>
<CAPTION>
Three Months Ended December 31,
----------------------------------------------------------------
1999 1998
------------------------------- -------------------------------
E*TRADE Proforma E*TRADE Proforma
(as reported) Telebanc Combined (as reported) Telebanc Combined
------------- -------- -------- ------------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net revenues............ $244,219 $23,423 $267,642 $110,511 $8,906 $119,417
Net income (loss)....... $ (5,214) $ 423 $ (4,791) $(11,587) $ 655 $(10,932)
</TABLE>
During the quarter ended December 31, 1999, the Company acquired 100%
ownership of three of its foreign affiliates, E*TRADE Nordic AB, a Swedish
company, E*TRADE @ Net Bourse S.A., a French company, and the remaining
portion of its E*TRADE UK joint venture, for an aggregate purchase price of
$362 million. The purchase price was composed of 11.7 million shares of the
Company's common stock, cash of $26.7 million and the assumption of options of
the affiliates. The purchase price exceeded the fair value of the assets
acquired by $357 million, which was recorded as goodwill to be amortized over
20 years.
The pro forma information below assumes that the acquisitions occurred at
the beginning of fiscal 1998 and includes the effect of amortization of
goodwill from that date (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended
December 31,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
Net revenues.......................................... $ 267,642 $ 119,417
Net loss.............................................. $ (10,259) $ (15,874)
Basic and diluted loss per share...................... $ (0.03) $ (0.06)
</TABLE>
The pro forma information is for informational purposes only and is not
necessarily indicative of the results of future operations nor results that
would have been achieved had the acquisitions taken place at the beginning of
fiscal 1998.
12
<PAGE>
NOTE 11.--SEGMENT INFORMATION
The Company provides securities brokerage and related investment and
financial services. Following the acquisitions of TIR and Telebanc (see Note
10), the Company has classified the operations of E*TRADE's historical
business, TIR and Telebanc as separate reportable segments due to the
relatively short operating history of the combined operations of E*TRADE's
historical business with TIR and Telebanc and due to Telebanc's online banking
services which represent a new line of business. This is the manner in which
management currently evaluates their operating performance. Financial
information for the Company's reportable segments is presented in the table
below, and the totals are equal to the Company's consolidated amounts as
reported in the consolidated financial statements.
<TABLE>
<CAPTION>
E*TRADE
Group TIR Telebanc Total
---------- ------- ---------- -----------
(in thousands)
<S> <C> <C> <C> <C>
Quarter ended December 31,
1999:
Interest--net of interest
expense..................... $ 41,398 $ 154 $ 21,333 $ 62,885
Non-interest revenue--net of
provision for loan losses... 169,496 33,171 2,090 204,757
---------- ------- ---------- -----------
Net revenues................. $ 210,894 $33,325 $ 23,423 $ 267,642
========== ======= ========== ===========
Operating income (loss)...... $ (64,241) $ 2,224 $ 2,202 $ (59,815)
Pre-tax income (loss)........ $ (9,431) $ 2,189 $ 2,249 $ (4,993)
Segment assets............... $6,627,493 $66,774 $5,044,370 $11,738,637
Quarter ended December 31,
1998:
Interest--net of interest
expense..................... $ 16,167 $ 233 $ 6,621 $ 23,021
Non-interest revenue--net of
provision of loan losses.... 66,665 27,446 2,285 96,396
---------- ------- ---------- -----------
Net revenues................. $ 82,832 $27,679 $ 8,906 $ 119,417
========== ======= ========== ===========
Operating income (loss)...... $ (28,424) $ 2,250 $ 1,953 $ (24,221)
Pre-tax income (loss)........ $ (23,118) $ 2,316 $ 1,960 $ (18,842)
Segment assets............... $2,241,518 $73,144 $2,283,341 $ 4,598,003
</TABLE>
No one single customer accounted for greater than 10% of total revenues for
the quarters ended December 31, 1999 or 1998.
NOTE 12.--RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. The new standard
requires companies to record derivatives on the balance sheet as assets or
liabilities, measured at fair value. Gains or losses resulting from changes in
the values of those derivatives will be reported in the statement of
operations or as a deferred item, depending on the use of the derivatives and
whether they qualify for hedge accounting. The key criterion for hedge
accounting is that the derivative must be highly effective in achieving
offsetting changes in fair value or cash flows of the hedged items during the
term of the hedge. The effective date of SFAS No. 133 was delayed to fiscal
2001 by the issuance of SFAS No. 137. The Company expects to implement SFAS
133 as of October 1, 2000. The Company has not yet determined the effect, if
any, of adopting this new standard.
13
<PAGE>
NOTE 13.--SUBSEQUENT EVENTS
Debt Offering
On February 7, 2000, the Company completed a Rule 144A offering of $500
million convertible subordinated notes due February 2007. The notes are
convertible, at the option of the holder, into a total of 21,186,441 shares of
the Company's common stock at a conversion price of $23.60 per share. The
notes bear interest at 6%, payable semiannually, and are non-callable for
three years and may then be called by the Company at a premium, which declines
over time. The holders have the right to require redemption at a premium in
the event of a change in control or other defined redemption event. On March
17, 2000, the initial purchasers exercised an option to purchase an additional
$150 million of notes, which are convertible into 6,355,932 shares of common
stock. The Company expects to use $150 million of the net proceeds to
refinance outstanding senior secured indebtedness and the remaining net
proceeds for general corporate purposes, including financing the future growth
of the business. Debt issuance costs of $19.1 million will be included in
other assets and amortized to interest expense over the term of the notes. Had
these securities been issued as of the beginning of the quarter ended December
31, 1999, loss per share would have been increased to $0.05 due to the
additional net interest expense associated with the securities.
14
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward-Looking Statements
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the consolidated
financial statements and notes thereto included elsewhere in this Form 10-Q/A.
This discussion contains forward-looking statements, including statements
regarding the Company's strategy, financial performance and revenue sources
which involve risks and uncertainties. The Company's actual results may differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including, but not limited to, those set forth in
the section entitled "Risk Factors" and elsewhere in this Form 10-Q/A.
Results of Operations
Revenue Detail (in millions, except percentage and transaction data)
The following table sets forth the components of revenue and the quarterly
change for the three months ended December 31, 1999 and December 31, 1998:
<TABLE>
<CAPTION>
Three Months
Ended
December 31,
-------------
1999 1998 Change
------ ------ ------
<S> <C> <C> <C>
Transaction revenues:
Commissions ............................................. $136.7 $ 52.3 161%
Order flow............................................... 15.6 8.0 95%
------ ------
Total transaction revenue............................ 152.3 60.3 153%
------ ------
Interest income:
Brokerage-related activities............................. 75.2 25.8 191%
Banking-related lending activities....................... 82.0 35.2 133%
------ ------
Total interest income................................ 157.2 61.0 158%
------ ------
Global and institutional .................................. 33.7 28.1 20%
Other...................................................... 19.3 8.3 133%
------ ------
Gross revenues....................................... 362.5 157.7 130%
------ ------
Interest expense:
Brokerage-related activities............................. 33.6 9.4 257%
Banking-related borrowing activities..................... 60.7 28.6 112%
------ ------
Total interest expense............................... 94.3 38.0 148%
Provision for loan losses.................................. 0.6 0.3 92%
------ ------
Net revenues......................................... $267.6 $119.4 124%
====== ======
</TABLE>
Revenues
The Company's net revenues increased to $267.6 million in the first quarter
of fiscal 2000, up 124% from $119.4 million in the equivalent period of fiscal
1999.
Transaction Revenues
Transaction revenues increased to $152.3 million in the first quarter of
fiscal 2000, up 153% from $60.3 million in the equivalent period in fiscal
1999. Transaction revenues consist of commission revenues and payments for
order flow. Growth in transaction revenues reflected the overall high level of
trading volume in U.S. financial markets, as well as the increase in new
customer accounts.
15
<PAGE>
Commission revenues for the first quarter of fiscal 2000 increased to
$136.7 million, up 161% from $52.3 million for the same period a year ago.
Brokerage transactions for the first quarter of fiscal 2000 totaled 8.5
million or an average of 133,000 transactions per day. This is an increase of
209% over the average daily brokerage transaction volume of 43,000 in the
prior year. The decline in commissions per trade was a result of promotional
activities, changes in the mix of revenue generating transactions and the
August 1999 implementation of the new Power E*TRADE program, a component of
which provides reduced commissions for active traders.
Payments for order flow increased to $15.6 million for the first quarter of
fiscal 2000, up 95% from $8.0 million for the same period a year ago. As a
percentage of transaction revenue, payments for order flow have decreased to
10% for the first quarter of fiscal 2000, down from 13% for the same period a
year ago. Payments for order flow did not increase at the same rate as
transactions due to changes in the order flow mix, a decrease in the average
shares per equity transaction, and the continued impact of the SEC's order
handling rules.
Interest Income and Expense
Interest income from brokerage-related activities is comprised of interest
earned by the Company on credit extended to its customers to finance their
purchases of securities on margin, and fees on its customer assets invested in
money market accounts. Interest expense from brokerage-related activities is
comprised of interest paid to customers on certain credit balances, interest
paid to banks and interest paid to other broker-dealers through the Company's
stock loan program. Interest income from banking-related activities reflects
interest earned on assets, consisting primarily of loans receivable and
mortgage-backed securities. Interest expense from banking-related activities
is comprised of interest-bearing liabilities which include customer deposits,
advances from the Federal Home Loan Bank of Atlanta, and other borrowings.
Brokerage interest income increased to $75.2 million in the first quarter
of fiscal 2000, up 191% from $25.8 million for the same period a year ago.
This increase primarily reflects the overall increase in average customer
margin balances, which increased 193% to $2.9 billion in the first quarter of
fiscal 2000, from $1.0 billion in the same period a year ago, and average
customer money market fund balances, which increased 145% to $5.3 billion in
the first quarter of fiscal 2000, from $2.2 billion in the same period a year
ago. Brokerage interest expense increased to $33.6 million, up 257% from $9.4
million in the comparable prior year quarter, due to an overall increase in
average customer credit balances, which increased 277% to $1.1 billion in the
first quarter of fiscal 2000, from $0.3 billion in the same period a year ago
and average stock loan balances, which increased 299% to $2.1 billion in the
first quarter of fiscal 2000, from $0.5 billion in the same period a year ago.
Banking interest income increased to $82.0 million in the first quarter of
fiscal 2000, up 133% from $35.2 million for the same period a year ago. This
increase reflects an increase in the average interest-earning asset balances
coupled with an increase in the average interest yield. Average interest-
earning assets increased 130% to $4.5 billion during the first quarter of
fiscal 2000, from $2.0 billion in the same period a year ago. The average
yield increased to 7.27% in the first quarter of fiscal 2000 from 7.13% in the
same period a year ago. Interest expense from banking activities increased to
$60.7 million in the first quarter of fiscal 2000, up 112% from $28.6 million
for the same period a year ago. This increase reflects an increase in the
average interest-bearing liabilities partially offset by a decrease in the
average cost of the borrowings. Average interest-bearing liabilities increased
118% to $4.1 billion during the first quarter of fiscal 2000, from $1.9
billion in the same period a year ago. The average cost decreased to 5.85% in
the first quarter of fiscal 2000 from 5.90% in the same period a year ago.
16
<PAGE>
The following table presents average balance data and income and expense
data for the Company's banking operations and the related interest yields and
rates for the quarters ended December 31, 1999 and 1998. The table also
presents information for the periods indicated with respect to net interest
margin, an indicator of an institution's profitability. Another indicator of
profitability is net interest spread, which is the difference between the
weighted average yield earned on interest-earning assets and weighted average
rate paid on interest-bearing liabilities. Interest includes the incremental
tax benefit of tax exempt income.
<TABLE>
<CAPTION>
Quarter Ended December 31, Quarter Ended December 31,
1999 1998
------------------------------ ------------------------------
Interest Average Interest Average
Average Income/ Annualized Average Income/ Annualized
Balance Expense Yield/Cost Balance Expense Yield/Cost
---------- -------- ---------- ---------- -------- ----------
(In thousands)
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning banking
assets:
Loans receivable,
net.................. $2,337,629 $43,698 7.48% $ 857,065 $16,761 7.82%
Interest-bearing
deposits............. 45,524 581 5.06 13,091 193 5.85
Mortgage-backed and
related available-
for-sale securities
..................... 1,887,358 33,369 7.07 856,042 14,225 6.65
Available-for-sale
investment
securities........... 187,998 3,163 6.96 221,743 3,523 6.35
Investment in FHLB
stock................ 37,837 740 7.75 16,779 318 7.50
Trading securities.... 23,823 467 7.84 3,333 67 8.07
---------- ------- ---------- -------
Total interest-
earning banking
assets............. 4,520,169 $82,018 7.27 1,968,053 $35,087 7.13
------- -------
Non-interest-earning
banking assets......... 166,762 87,866
---------- ----------
Total banking
assets............. $4,686,931 $2,055,919
========== ==========
Interest-bearing banking
liabilities:
Retail deposits....... $2,304,878 $33,379 5.74% $1,072,181 $15,831 5.86%
Brokered callable
certificates of
deposit.............. 79,180 1,305 6.54 67,038 1,122 6.64
FHLB advances......... 739,185 10,903 5.77 318,040 4,447 5.47
Other borrowings...... 990,692 15,099 5.96 402,650 5,829 5.66
Subordinated debt,
net.................. -- -- -- 29,814 884 11.85
---------- ------- ---------- -------
Total interest-
bearing banking
liabilities........ 4,113,935 $60,686 5.85 1,889,723 $28,113 5.90
------- -------
Non-interest-bearing
banking liabilities.... 66,564 62,708
---------- ----------
Total banking
liabilities........ 4,180,499 1,952,431
Total banking
shareowners'
equity............. 506,432 103,488
---------- ----------
Total banking
liabilities and
shareowners'
equity............. $4,686,931 $2,055,919
========== ==========
Excess of interest-
earning banking assets
over interest-bearing
banking liabilities/net
interest income........ $ 406,234 $21,332 $ 78,330 $ 6,974
========== ======= ========== =======
Net interest spread..... 1.42% 1.23%
====== ======
Net interest margin (net
yield on interest-
earning banking
assets)................ 1.90% 1.42%
====== ======
Ratio of interest-
earning banking assets
to interest-bearing
banking liabilities.... 109.87% 104.15%
====== ======
Return on average total
banking assets......... 0.04% 0.13%
====== ======
Return on average net
banking assets......... 0.33% 2.53%
====== ======
Equity to total banking
assets................. 10.81% 5.03%
====== ======
</TABLE>
17
<PAGE>
Global and Institutional
Global and institutional revenues increased to $33.7 million for the first
quarter of fiscal 2000, up 20% from $28.1 million for the same period one year
ago. Global and institutional revenues are comprised of revenues from TIR's
operations, as well as licensing fees and royalties from E*TRADE
International's affiliates. TIR's revenues increased to $33.1 million in the
first quarter of fiscal 2000, up 23% from $27.0 million for the same period a
year ago. These increases are primarily attributable to strong market
conditions in Asia and Europe, as well as an increase in futures commissions.
TIR revenues are largely comprised of commissions from institutional trade
executions; for the first quarter of fiscal 2000 approximately 55% of TIR's
transactions were from outside the U.S., and approximately 82% were cross-
border transactions.
Other Revenues
Other revenues increased to $19.3 million in the first quarter of fiscal
2000, up 133% from $8.3 million for the comparable period in fiscal 1999.
Other revenues increased primarily due to growth in mutual funds revenue,
revenues from fees charged for advertising on the Company's Web site,
investment banking revenue, E*TRADE Business Solutions revenue, gains from the
sales and prepayments of banking-related held-for-investment loans and
available-for-sale securities, and brokerage and banking-related fees for
services.
Provision for Loan Losses
The provision for loan losses increased to $537,000 in the first quarter of
fiscal 2000, up 92% from $280,000 for the comparable period in fiscal 1999.
The provision for loan losses recorded reflects increases to the Company's
allowance for loan losses based upon management's review and assessment of the
risk in the Company's loan portfolio, as well as the level of charge-offs to
the Company's allowance for loan losses. The increase in the provision for
loan losses in the first quarter of fiscal 2000 primarily reflects the growth
in the Company's loan portfolio. As of December 31, 1999, the total loan loss
allowance was $7.6 million, or 0.32% of total loans outstanding. The total
loan loss allowance as of September 30, 1999 was $7.1 million, or 0.33% of
total loans outstanding. As of December 31, 1999, the general loan loss
allowance was $7.2 million, or 66.1% of total non-performing assets of $10.9
million. As of September 30, 1999, the general loan loss allowance was $6.7
million, or 78.8% of total non-performing assets of $8.5 million.
Cost of Services
Total cost of services increased to $111.5 million for the first quarter of
fiscal 2000, up 122% from $50.2 million in the comparable period in fiscal
1999. Cost of services includes expenses related to the Company's clearing
operations, customer service activities, Web site content costs, system
maintenance, communication expenses and depreciation. These increases reflect
the overall increase in customer transactions processed by the Company, a
related increase in customer service inquiries, and operations and maintenance
costs associated with the Company's technology centers in Rancho Cordova,
California, and Alpharetta, Georgia. Cost of services as a percentage of net
revenues was 42% in the first quarter of fiscal 2000 and in the comparable
period in fiscal 1999.
Operating Expenses
Selling and marketing expenses increased to $129.7 million in the first
quarter of fiscal 2000, up 125% from $57.7 million in the comparable period in
fiscal 1999. The increases reflect expenditures for advertising placements,
creative development and collateral materials resulting from a variety of
advertising campaigns directed at building brand name recognition, growing the
customer base and market share, and maintaining customer retention rates.
Beginning in the fourth quarter of fiscal 1998, the Company significantly
expanded its marketing efforts including the launch of Destination E*TRADE,
expanded national television advertising and new strategic marketing alliances
with key business partners, such as AOL and Yahoo!. These increased
expenditure levels are expected to continue throughout fiscal 2000.
Technology development expenses increased to $36.4 million in the first
quarter of fiscal 2000, up 150% from $14.6 million in the comparable period in
fiscal 1999. The increased level of expense was incurred to
18
<PAGE>
enhance the Company's existing product offerings, including maintenance of the
Company's Web site, and reflects the Company's continuing commitment to invest
in new products and technologies.
General and administrative expenses increased to $42.1 million in the first
quarter of fiscal 2000, up 107% from $20.4 million in the comparable period in
fiscal 1999. These increases were the result of personnel additions and the
development of administrative functions resulting from the overall growth in
the Company.
Amortization of goodwill of $2.0 million in the first quarter of fiscal
2000 primarily consists of amortization of goodwill related to the acquisition
of three of the Company's foreign affiliates. Goodwill is amortized over 15-20
years.
Merger-related expenses of $5.8 million were recognized in the first
quarter of fiscal 2000 and primarily relate to transaction costs associated
with the Telebanc acquisition. Additional costs associated with the Company's
mergers and acquisitions are expected to be incurred throughout fiscal 2000,
including a charge of approximately $30 million to be recorded in the second
quarter of fiscal 2000 relating to the acquisition of Telebanc.
Non-operating Income (Expense)
Corporate interest income was $1.8 million and $5.4 million for the
quarters ended December 31, 1999 and 1998, respectively, which primarily
resulted from interest earned on the Company's investments.
In the first quarter of fiscal 2000, the Company continued to liquidate
portions of its investment portfolio and recognized realized gains of $31.3
million.
The Company also recorded unrealized gains of $25.5 million on its
participation in the E*TRADE eCommerce Fund L.P., which was formed in the
first quarter of fiscal 2000.
Equity in losses of investments was $3.9 million in the first quarter of
fiscal 2000, which resulted from the Company's minority ownership in its
investments that are accounted for under the equity method. These investments
include E*TRADE Japan, E*OFFERING and Archipelago. The Company expects that
these companies will continue to invest in the development of their products
and services, and will incur operating losses throughout fiscal 2000, which
will result in future charges being recorded by the Company to reflect its
proportionate share of losses.
Income Tax Benefit
Income tax benefit represents the benefit for federal and state income
taxes at an effective tax rate of 14.0% for the first quarter of fiscal 2000,
and 45.0% for the comparable period in fiscal 1999. The rate for the first
quarter of fiscal 2000 reflects the impact of non-deductible merger-related
expenses and amortization of goodwill arising from the foreign acquisitions.
Minority Interest in Subsidiary
Minority interest in subsidiary was $495,000 and $571,000 in the first
quarters of fiscal 2000 and 1999, respectively, resulting from Telebanc's
interest payments to subsidiary trusts which have issued Company-obligated
mandatorily redeemable capital securities and which hold junior subordinated
debentures of the Company.
Year 2000 Compatibility
Many computer systems use only two digits to identify a specific year and
therefore may not accurately recognize and handle dates beyond the year 1999.
Additionally, the year 2000 is a leap year and computer systems may not
accurately recognize and handle February 29, 2000. If not corrected, these
computer applications could fail or create erroneous results in the year 2000.
The Company utilizes, and is dependent
19
<PAGE>
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 that is run on in-
house computer networks. Due to the Company's dependence on computer
technology to conduct its business, and the dependence of the financial
services industry on computer technology, the nature and impact of year 2000
processing failures on the Company's business, financial position, results of
operations or cash flows could be material.
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 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. The year
2000 issue could lower demand for the Company's services while increasing the
Company's costs. The combination of these factors, while not quantifiable,
could have a material adverse impact on the Company's financial results.
During the first quarter of fiscal 1998, the Company initiated a review and
assessment of its hardware and software to evaluate whether they will function
properly in the year 2000 without material errors or interruptions. The
Company's year 2000 efforts addressed the Company's computer systems and
equipment, as well as business partner relationships considered essential to
the Company's ability to conduct its business. The objective of the Company's
year 2000 project was to identify the core business processes and associated
computer systems and equipment that may be at risk due to the use of two-digit
year dates. Once identified, the systems and equipment were rated for risk and
prioritized for conversion or replacement according to their impact on core
business operations. The Company's year 2000 project followed a structured
approach in analyzing and mitigating year 2000 issues. This approach consisted
of six phases: awareness, assessment, remediation, validation, implementation
and industry-wide testing. The work associated with each phase was performed
simultaneously with other phases of the project, depending on the nature of
the work performed and the technology and business requirements of the
specific business unit. For example, awareness was an ongoing effort and
occurred in each phase. As part of this project, the Company reviewed its
vendor relationships (suppliers, alliances and third-party providers) in an
attempt to assess their ability to meet the year 2000 challenge. This plan
sought to ensure that all of the Company's business partners and service
providers were also year 2000 ready. In addition, written contingency plans
were developed for all mission critical systems to address any unexpected year
2000 failures.
Status of Year 2000 Efforts
The Company completed each of the phases planned for year 2000 readiness.
The Company believes that all material year 2000 problems with internally-
managed hardware and software revealed as a result of its evaluation were
remedied; however, there can be no assurances that these efforts have solved
all possible year 2000 issues, and there is a risk that other problems, not
presently known to the Company, will be discovered that could present a
material risk of disruption to the Company's operations and result in material
adverse consequences to the Company. Furthermore, there can be no assurance
that the Company will not experience unexpected delays in remediation of any
year 2000 issues that have not yet surfaced. Any inability to remediate such
issues in a timely manner could cause a material disruption of the Company's
business.
All mission-critical vendors were contacted and each indicated that their
hardware and software are year 2000 ready. The Company has relied upon
representations by vendors as to their year 2000 readiness and generally has
not attempted to perform independent verification of the accuracy of those
representations. There can be no assurance that all third parties provided
accurate and complete information or that all their systems are fully year
2000 capable. If these vendors fail to adequately address year 2000 issues for
the products and services they provide to the Company, this failure could have
a material adverse impact on the Company's operations and financial results.
The Company is dependent on systems, such as the Internet, telecommunications
and electrical systems, which are not within its control. Any failure by such
systems could also prevent the Company from delivering its services to its
customers, which could have a material adverse effect on the Company's
business, results of operations and financial condition.
20
<PAGE>
In addition, other third parties' year 2000 processing failures, not
currently identified by the Company as mission-critical, could have an
unexpectedly severe material adverse impact on the Company's systems and
operations. In many cases, the Company is relying on assurances from suppliers
that new and upgraded information systems and other products are year 2000
capable. The Company cannot be sure that its tests were adequate or that, if
problems are identified, they will be addressed by the supplier in a timely
and satisfactory way.
On May 31, 1999, the Company entered into a definitive agreement to acquire
Telebanc Financial Corporation ("Telebanc"), a holding company for Telebank, a
branchless bank, which provides banking products and services over the
Internet. On July 13, 1999, the Company entered into a definitive agreement to
acquire TIR (Holdings) Limited ("TIR"), an international financial services
company offering global multi-currency securities execution and settlement
services, and a leader in providing independent research to institutional
investors. The Company has been advised by both Telebanc and TIR that they had
ongoing programs to identify and remediate any year 2000 issues. With respect
to TIR and Telebanc, the Company has relied upon the representations of
management or former management with respect to year 2000 readiness, including
representations and warranties that products and services and internal
computer systems are year 2000 ready, that appropriate inquiries of its key
suppliers of services and products have been made, and that TIR and Telebanc
did not incur any material expenses associated with securing year 2000
readiness of its products or services, internal computer systems or the
computer systems of key suppliers or customers. The TIR acquisition closed on
August 31, 1999 and the Telebanc acquisition closed on January 12, 2000;
therefore, the Company's operating results were not impacted by the additional
assessment, remediation, validation, implementation and testing costs that
these entities incurred. While the managements of Telebanc and TIR have made
certain representations with respect to their year 2000 readiness, the Company
can give no assurances as to the adequacy of the year 2000 efforts of Telebanc
or TIR or their impact to the Company.
The Company spent approximately $8.2 million on year 2000 readiness efforts
through December 31, 1999, and currently estimates that it will spend an
additional $300,000. These expenditures will consist primarily of compensation
for employees and contractors dedicated to this project and the operation of
command centers through January 7, 2000. The Company funded all year 2000
related costs through operating cash flows. These costs did not result in
increased information technology expenditures because they were funded through
a reallocation of the Company's overall development spending. In accordance
with accounting principles generally accepted in the United States of America,
such expenditures were expensed as incurred. The costs of addressing year 2000
issues did not have a material adverse impact on the Company's financial
position.
The foregoing year 2000 discussion and the information contained herein are
provided as a Year 2000 Readiness Disclosure.
Liquidity and Capital Resources
The Company has financing facilities totaling $425 million to meet the
needs of E*TRADE Securities that would be collateralized by customer
securities. There were no borrowings outstanding under these lines on December
31, 1999. The Company also has a short term loan for up to $150 million,
collateralized by publicly- traded investment securities owned by the Company,
of which $70 million was outstanding as of December 31, 1999, and a short term
line of credit for up to $50.0 million, collateralized by marketable
securities owned by the Company, of which $34.8 million was outstanding as of
December 31, 1999. In addition, the Company has entered into numerous
agreements with other broker-dealers to provide financing under the Company's
stock loan program.
On February 7, 2000, the Company completed a Rule 144A offering of $500
million convertible subordinated notes due February 2007. The notes are
convertible, at the option of the holder, into a total of 21,186,441 shares of
the Company's common stock at a conversion price of $23.60 per share. The
notes bear interest at 6%, payable semiannually, and are non-callable for
three years and may then be called by the
21
<PAGE>
Company at a premium, which declines over time. The holders have the right to
require redemption at a premium in the event of a change in control or other
defined redemption event. On March 17, 2000, the initial purchasers exercised
an option to purchase an additional $150 million of notes, convertible into
6,355,932 shares of common stock. The Company expects to use approximately
$150 million of the net proceeds to refinance outstanding senior secured
indebtedness and the remaining net proceeds for general corporate purposes,
including financing the future growth of the business. Debt issuance costs of
$19.1 million will be included in other assets and amortized to interest
expense over the term of the notes. Had these securities been issued as of the
beginning of the quarter ended December 31, 1999, net loss per share would
have increased to $0.05 due to the additional net interest expense associated
with the securities.
The Company currently anticipates that its available cash resources and
credit facilities, along with the convertible subordinated debt offering
described above, 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 shareowners of
the Company will be reduced, shareowners 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 used in operating activities was $72.9 million in the first quarter of
fiscal 2000 compared to cash provided by operating activities of $83.0 million
in the first quarter of fiscal 1999. Cash used in operating activities
primarily reflects the increase in segregated cash balances of $706.7 million,
offset by the increase in brokerage-related liabilities in excess of assets of
$603.2 million. Cash provided by operating activities in the prior year period
was $83.0 million, which primarily reflects net loss of $10.9 million offset
by the Company's minority interest and equity portion of losses from
investments of $79.2 million and the increase in brokerage-related liabilities
in excess of assets of $36.2 million, and the impact of depreciation and
amortization of $5.5 million.
Cash used in investing activities was $908.8 million in the first quarter
of fiscal 2000 and $347.8 million in the comparable period in fiscal 1999. In
the first quarter of fiscal 2000, cash used in investing activities was the
result of the excess of purchases of investment securities over the net
sale/maturity of investments of $543.1 million, an increase in restricted
deposits of $50.0 million, the purchase of $23.9 million of investments, $33.7
million of property and equipment, an increase in loans held for investment of
$271.3 million and $26.7 million paid for the acquisition of three foreign
affiliates, offset by the proceeds from sales of investments of $39.4 million.
This compares to cash used in investing activities in the first quarter of
fiscal 1999 where the Company had an excess of purchases of investment
securities over the net sale/maturity of investments of $200.2 million, the
purchase of $0.7 million of investments, $4.4 million of property and
equipment, and an increase in loans held for investment of $142.5 million.
22
<PAGE>
Cash provided by financing activities was $1.2 billion in the first quarter
of fiscal 2000, compared with $280.7 million in fiscal 1999. Cash provided by
financing activities in the first quarter of fiscal 2000 primarily resulted
from $1.5 billion in increased banking deposits and advances from the Federal
Home Loan Bank of Atlanta and increases in securities sold under agreements to
repurchase, offset by $730.0 million in payments on outstanding loans. Cash
provided by financing activities in the first quarter of fiscal 1999 primarily
resulted from $620.0 million in increased banking deposits and advances from
the Federal Home Loan Bank of Atlanta, offset by $265.0 million in payments on
outstanding loans and decreases in securities sold under agreements to
repurchase agreement.
23
<PAGE>
RISK FACTORS
You should carefully consider the risks described below before making an
investment decision in our company. The risks and uncertainties described
below are not the only ones facing our company and there may be additional
risks that we do not presently know of or that we currently deem immaterial.
All of these risks may impair our business operations. This document also
contains forward-looking statements that involve risks and uncertainties and
actual results may differ materially as a result of certain factors, including
those set forth below and elsewhere in this filing. If any of the following
risks actually occur, our business, financial condition or results of
operations could be materially adversely affected. In such case, the trading
price of our common stock could decline, and you may lose all or part of your
investment.
In accordance with "plain English" guidelines provided by the Securities
and Exchange Commission, the risk factors have been written in the first
person.
We could suffer substantial losses and be subject to customer litigation if
our systems fail or our transaction processing is slow
We receive and process transactions mostly through the Internet, online
service providers and touch-tone telephone. Thus, we depend heavily on the
integrity of the electronic systems supporting these types of transactions,
including our internal software programs and computer systems. Our systems or
any other systems in the transaction process could slow down significantly or
fail for a variety of reasons including:
. undetected errors in our internal software programs or computer systems;
. our inability to effectively resolve any errors in our internal software
programs or computer systems once they are detected; or
. heavy stress placed on our system during certain peak trading times.
If our systems or any other systems in the transaction process slow down
significantly or fail even for a short time, our customers could suffer delays
in transaction processing, which could cause substantial losses and possibly
subject us to claims for such losses or to litigation claiming fraud or
negligence. We have experienced such systems failures and degradation in the
past, including certain days in February 1999. We could experience future
system failures and degradations, especially in foreign markets where we must
implement new transaction processing infrastructures. To promote customer
satisfaction and protect our brand name, we have, on certain occasions,
compensated customers for verifiable losses from such failures. To date,
during our systems failures, we were able to take orders by telephone,
however, with respect to our brokerage transactions, only associates with
securities brokers' licenses can accept telephone orders. An adequate number
of such associates may not be available to take customer calls in the event of
a future systems failure. We may not be able to increase our customer service
personnel and capabilities in a timely and cost-effective manner. We could
experience a number of adverse consequences as a result of these systems
failures including the loss of existing customers and the inability to attract
or retain new customers. There can be no assurance that our network structure
will operate appropriately in any of the following events:
. subsystem, component or software failure;
. a power or telecommunications failure;
. human error;
. an earthquake, fire or other natural disaster; or
. an act of God or war.
There can be no assurance that, in any such event, we will be able to
prevent an extended systems failure. Any such systems failure that interrupts
our operations could have a material adverse effect on our business,
24
<PAGE>
financial condition and operating results. We have received in the past,
including as a result of our systems failures in February 1999, adverse
publicity in the financial press and in online discussion forums primarily
relating to systems failures.
Our security could be breached, which could damage our reputation and deter
customers from using our services
We must protect our computer systems and network from physical break-ins,
security breaches and other disruptive problems caused by the Internet or
other users. Computer break-ins could jeopardize the security of information
stored in and transmitted through our computer systems and network, which
could adversely affect our ability to retain or attract customers, damage our
reputation and subject us to litigation. We have in the past, and could in the
future, be subject to denial of service, vandalism and other attacks on our
systems by Internet hackers. Although we intend to continue to implement
security technology and establish operational procedures to prevent break-ins,
damage and failures, these security measures may fail. Our insurance coverage
in certain circumstances may be insufficient to cover issues that may result
from such events.
Our business could suffer if we cannot protect the confidentiality of customer
information transmitted over public networks
A significant barrier to online commerce is the secure transmission of
confidential information over public networks. We rely on encryption and
authentication technology, including cryptography technology licensed from RSA
Data Security, Inc., to provide secure transmission of confidential
information. There can be no assurance that advances in computer and
cryptography capabilities or other developments will not result in a
compromise of the RSA or other algorithms we use to protect customer
transaction data. If any such compromise of our security were to occur, it
could have a material adverse effect on our business, financial condition and
operating results.
Our quarterly results fluctuate and do not reliably indicate future operating
results
We do not believe that our historical operating results should be relied
upon as an indication of our future operating results. We expect to experience
large fluctuations in future quarterly operating results that may be caused by
many factors, including the following:
. fluctuations in the fair market value of our equity investments in other
companies, including through existing or future private investment funds
managed by us;
. fluctuations in interest rates, which will impact our investment and loan
portfolios;
. increased levels of advertising, sales and marketing expenditures for
customer acquisition, which may be affected by competitive conditions in
the marketplace;
. the timing of introductions or enhancements to online investing services
and products by us or our competitors;
. market acceptance of online financial services and products;
. the pace of development of the market for online commerce;
. changes in trading volume in securities markets;
. trends in securities and banking markets;
. domestic and international regulation of the brokerage, banking and
internet industries;
. implementation of new accounting pronouncements, such as Statement of
Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities;
. changes in domestic or international tax rates;
25
<PAGE>
. changes in pricing policies by us or our 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;
. fluctuation in foreign exchange rates;
. changes in the level of operating expenses to support projected growth;
and
. general economic conditions.
We have also experienced fluctuations in the average number of customer
transactions per day. Thus, the rate of growth in customer transactions at any
given time is not necessarily indicative of future transaction activity.
Our business will suffer if we cannot effectively compete
The market for financial services over the Internet is new, rapidly
evolving and intensely competitive. We expect competition to continue and
intensify in the future. We face direct competition from financial
institutions, brokerage firms, banks, mutual fund companies, Internet portals
and other organizations. These competitors include, among others:
. America Online, Inc.;
. Ameritrade, Inc.;
. Bank of America;
. Charles Schwab & Co., Inc.;
. Citigroup, Inc.;
. CyBerCorp.com;
. Datek Online Holdings Corporation;
. DLJdirect;
. Fidelity Brokerage Services, Inc.;
. Intuit Inc.;
. Merrill Lynch, Pierce, Fenner & Smith Incorporated;
. Microsoft Money;
. National Discount Brokers;
. Net.B@nk, Inc.;
. PaineWebber Incorporated;
. Quick & Reilly, Inc.;
. Salomon Smith Barney, Inc.;
. SURETRADE, Inc.;
26
<PAGE>
. TD Waterhouse Securities, Inc.;
. Wells Fargo & Company;
. WingspanBank.com; and
. Yahoo! Inc.
Many of our competitors have longer operating histories and significantly
greater financial, technical, marketing and other resources than we do. In
addition, many of our competitors offer a wider range of services and
financial products than we do, and thus may be able to respond more quickly to
new or changing opportunities, technologies and customer requirements. Many of
our competitors also have greater name recognition and larger customer bases
that could be leveraged, thereby gaining market share from us. Such
competitors may conduct more extensive promotional activities and offer better
terms and lower prices to customers than we do, possibly even sparking a price
war in the online financial services industry. Moreover, certain competitors
have established cooperative relationships among themselves or with third
parties to enhance their services and products. For example, Charles Schwab's
One-Source mutual fund service and similar services may discourage potential
customers from using our brokerage services. Accordingly, it is possible that
new competitors or alliances among existing competitors may significantly
reduce our market share.
General financial success within the financial services industry over the
past several years has strengthened existing competitors. We believe that such
success will continue to attract new competitors, such as software development
companies, insurance companies and others, as such companies expand their
product lines. Commercial banks and other financial institutions have become
more competitive with our brokerage operations by offering their customers
certain corporate and individual financial services traditionally provided by
securities firms. The current trend toward consolidation in the commercial
banking industry could further increase competition in all aspects of our
business. Commercial banks generally are expanding their securities and
financial services activities. While we cannot predict the type and extent of
competitive services that commercial banks and other financial institutions
ultimately may offer, we may be adversely affected by such competition. To the
extent our competitors are able to attract and retain customers, our business
or ability to grow could be adversely affected. In many instances, we are
competing with such organizations for the same customers. In addition,
competition among financial services firms exists for experienced technical
and other personnel.
There can be no assurance that we will be able to compete effectively with
current or future competitors or that such competition will not have a
material adverse effect on our business, financial condition and operating
results.
Our success depends on our ability to effectively adapt to changing business
conditions
We have grown rapidly and our business and operations have changed
substantially since we began offering electronic investing services in 1992,
and Internet investing services in February 1996, and we expect this trend to
continue. Such rapid change and expansion places significant demands on our
administrative, operational, financial, and technical management and other
resources.
We expect operating expenses and staffing levels to increase substantially
in the future. In particular, we have hired and intend to hire a significant
number of additional skilled personnel, including persons with experience in
the computer, brokerage and banking industries, and, specifically, persons
with Series 7 or other broker-dealer licenses. Competition for such personnel
is intense, and there can be no assurance that we will be able to find or keep
additional suitable senior managers or technical persons or licensed
representatives in the future. In particular, we depend heavily on our chief
executive officer, president and chief operating officer and other members of
senior management, the loss of any of whom could seriously harm our business.
We also expect to expend resources for future expansion of our accounting and
internal information management systems and for a number of other new systems
and procedures. In addition, we expect that future expansion will continue to
challenge our ability to successfully hire and retain associates. If our
revenues do not keep up with operating
27
<PAGE>
expenses, our information management systems do not expand to meet increasing
demands, we fail to attract, assimilate and retain qualified personnel, or we
fail to manage our expansion effectively, there could be a material adverse
effect on our business, financial condition and operating results.
The rapid growth in the use of our services has strained our ability to
adequately expand technologically. As we acquire new equipment and
applications quickly, we have less time to test and validate hardware and
software, which could lead to performance problems. We also rely on a number
of third parties to process our transactions, including online and Internet
service providers, back office processing organizations, service providers and
market-makers, all of which will need to expand the scope of the operations
they perform for us. Any backlog caused by a third party's inability to expand
sufficiently to meet our needs could have a material adverse effect on our
business, financial condition and operating results. As transaction volume
increases, we may have difficulty hiring and training qualified personnel at
the necessary pace, and the shortage of licensed personnel could cause a
backlog in the processing of brokerage orders that need review, which could
lead to not only unsatisfied customers, but also to liability for brokerage
orders that were not executed on a timely basis.
Through our Digital Financial Media initiative, we plan to deliver
interactive multimedia content and commerce through a variety of broadband
communications channels and electronic platforms. We believe that achieving
success in this strategy is essential to our ability to compete in the rapidly
evolving electronic marketplaces in which we operate. We have limited
experience in these media and our failure to execute this strategy
successfully may limit our future growth.
Our ability to attract customers and our profitability may suffer if changes
in government regulation favor our competition or restrict our business
practices
The securities and banking industries in the United States are each subject
to extensive regulation under both federal and state laws. Broker-dealers are
subject to regulations covering all aspects of the securities business,
including:
. sales methods;
. trade practices among broker-dealers;
. use and safekeeping of customers' funds and securities;
. capital structure;
. record keeping;
. advertising;
. conduct of directors, officers and employees; and
. supervision.
Because we are a self-clearing broker-dealer, we have to comply with many
complex laws and rules. These include rules relating to possession and control
of customer funds and securities, margin lending and execution and settlement
of transactions. Our ability to so comply depends largely on the establishment
and maintenance of a qualified compliance system.
Similarly, E*TRADE and Telebanc, as savings and loan holding companies, and
Telebank, as a federally chartered savings bank and subsidiary of Telebanc,
are subject to extensive regulation, supervision and examination by the Office
of Thrift Supervision ("OTS") and, in the case of Telebank, the Federal
Deposit Insurance Corporation. Such regulation covers all aspects of the
banking business, including lending practices, safeguarding deposits, capital
structure, record keeping, and conduct and qualifications of personnel.
In November 1999, the Gramm-Leach-Bliley Act was enacted into law. This act
reduces the legal barriers between banking, securities and insurance companies
will make it easier for bank holding companies to compete
28
<PAGE>
directly with our securities business, as well as for our competitors in the
securities business to diversify their revenues and attract additional
customers through entry into the banking and insurance businesses. The Gramm-
Leach-Bliley Act may have a material impact on the competitive landscape that
we face.
Additionally our mode of operation and profitability may be directly
affected by:
. additional legislation;
. changes in rules promulgated by the SEC, the National Association of
Securities Dealers, Inc., ("NASD"), the Board of Governors of the Federal
Reserve System, the OTS, the various stock exchanges and other self-
regulatory organizations; or
. changes in the interpretation or enforcement of existing laws and rules.
The SEC, the NASD or other self-regulatory organizations and state
securities commissions can censure, fine, issue cease-and-desist orders or
suspend or expel a broker-dealer or any of its officers or employees. The OTS
may take similar action with respect to our banking activities. Our ability to
comply with all applicable laws and rules is largely dependent on our
establishment and maintenance of a system to ensure such compliance, as well
as our ability to attract and retain qualified compliance personnel. Our
growth has placed considerable strain on our ability to ensure such
compliance. We could be subject to disciplinary or other actions due to
claimed noncompliance in the future, which could have a material adverse
effect on our business, financial condition and operating results.
We have initiated an aggressive marketing campaign designed to bring brand
name recognition to E*TRADE. All marketing activities by E*TRADE Securities
are regulated by the NASD, and all marketing materials must be reviewed by an
E*TRADE Securities Series 24 licensed principal prior to release. The NASD has
in the past asked us to revise certain marketing materials. The NASD can
impose certain penalties for violations of its advertising regulations,
including:
. censures or fines;
. suspension of all advertising;
. the issuance of cease-and-desist orders; or
. the suspension or expulsion of a broker-dealer or any of its officers or
employees.
We do not currently solicit orders from our customers or make investment
recommendations. However, if we were to engage in such activities, we would
become subject to additional rules and regulations governing, among other
things, sales practices and the suitability of recommendations to customers.
We intend to continue expanding our business to other countries and to
broaden our customers' abilities to trade securities of non-U.S. companies and
execute other transactions through the Internet and other gateways. In order
to expand our services globally, we must comply with the regulatory controls
of each specific country in which we conduct business. Our international
expansion could be limited by the compliance requirements of other national
regulatory jurisdictions. We intend to rely primarily on local third parties
and our subsidiaries for regulatory compliance in international jurisdictions.
See "Risk Factors--We face numerous risks associated with doing business in
international markets."
There can be no assurance that other federal, state or foreign agencies
will not attempt to regulate our online and other activities. We anticipate
that we may be required to comply with record keeping, data processing and
other regulatory requirements as a result of proposed federal legislation or
otherwise. We may also be subject to additional regulation as the market for
online commerce evolves. Because of the growth in the electronic commerce
market, Congress has held hearings on whether to regulate providers of
services and transactions in the electronic commerce market. As a result,
federal or state authorities could enact laws, rules or regulations affecting
our business or operations. We may also be subject to federal, state or
foreign money transmitter laws
29
<PAGE>
and state and foreign sales or use tax laws. If such laws are enacted or
deemed applicable to us, our business or operations would be rendered more
costly or burdensome, less efficient or even impossible. Any of the foregoing
could have a material adverse effect on our business, financial condition and
operating results.
Due to the increasing popularity of the Internet, laws and regulations may
be passed dealing with issues such as user privacy, pricing, content and
quality of products and services.
As required by the Gramm-Leach-Bliley Act, the SEC and OTS have recently
proposed regulations on financial privacy, to take effect in November 2000,
that will require E*TRADE Securities and Telebank to notify consumers about
the circumstances in which they may share consumers' personal information with
unaffiliated third parties and to give consumers the right to opt out of such
information sharing. Although E*TRADE Securities and Telebank already provide
such opt-out rights in our privacy policies, the regulations could require us
to modify the text and the form of presentation of our privacy policies and to
incur additional expense to ensure ongoing compliance with the regulations.
In addition, the New York Attorney General carried out an investigation of
the online brokerage industry and issued a report, citing consumer complaints
about delays and technical difficulties conducting online stock trading. SEC
Commissioner Laura Unger also issued a report on issues raised by online
brokerage, including suitability and marketing issues. Increased attention
focused upon these issues could adversely affect the growth of the online
financial services industry, which could, in turn, decrease the demand for our
services or could otherwise have a material adverse effect on our business,
financial condition and operating results.
We may be fined or forced out of business if we do not maintain the net
capital levels required by regulators
The SEC, NASD, OTS and various other regulatory agencies have stringent
rules with respect to the maintenance of specific levels of net capital by
securities broker-dealers and regulatory capital by banks. Net capital is the
net worth of a broker or dealer (assets minus liabilities), less deductions
for certain types of assets. If a firm fails to maintain the required net
capital it may be subject to suspension or revocation of registration by the
SEC and suspension or expulsion by the NASD, and could ultimately lead to the
firm's liquidation. In the past, our broker-dealer subsidiaries have depended
largely on capital contributions by us in order to comply with net capital
requirements. If such net capital rules are changed or expanded, or if there
is an unusually large charge against net capital, operations that require the
intensive use of capital would be limited. Such operations may include trading
activities and the financing of customer account balances. Also, our ability
to withdraw capital from brokerage subsidiaries could be restricted, which in
turn could limit our ability to pay dividends, repay debt and redeem or
purchase shares of our outstanding stock. A large operating loss or charge
against net capital could adversely affect our ability to expand or even
maintain our present levels of business, which could have a material adverse
effect on our business, financial condition and operating results.
The table below summarizes the minimum net capital requirements for our
domestic broker-dealer subsidiaries as of December 31, 1999 (in thousands):
<TABLE>
<CAPTION>
Required Excess
net Net net
capital capital capital
-------- -------- --------
<S> <C> <C> <C>
E*TRADE Securities, Inc.......................... $79,218 $239,353 $160,135
TIR Securities, Inc.............................. 65 1,398 1,333
TIR Investor Select, Inc......................... 5 39 34
Marquette Securities, Inc........................ 250 445 195
</TABLE>
Similarly, banks, such as Telebank, are subject to various regulatory
capital requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory--and possibly
additional discretionary--actions by regulators that, if undertaken, could
have a direct material effect on a bank's operations and financial statements.
Under capital adequacy guidelines and the regulatory framework
30
<PAGE>
for prompt corrective action, a bank must meet specific capital guidelines
that involve quantitative measures of a bank's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. A bank's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require a bank to maintain minimum amounts and ratios of total and Tier 1
capital to risk-weighted assets and of Tier 1 capital to average assets. To be
categorized as well capitalized a bank must maintain minimum total risk-based,
Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the following
table.
The table below summarizes the capital adequacy requirements for Telebank
as of December 31, 1999 (dollars in thousands):
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
Prompt Corrective
Actual Action Provisions
-------------- --------------------
Amount Ratio Amount Ratio
-------- ----- ----------- --------
<S> <C> <C> <C> <C>
Core Capital (to adjusted tangible
assets).............................. $441,987 8.83% > $ 250,392 >5.0%
Tier 1 Capital (to risk weighted
assets).............................. $441,987 21.04% > $ 126,016 >6.0%
Total Capital (to risk weighted
assets).............................. $449,174 21.39% > $ 210,027 >10.0%
</TABLE>
As a significant portion of our revenues come from online investing services,
any downturn in the securities industry could significantly harm our business
A significant portion of our revenues in recent years has been from online
investing services, and we expect this business to continue to account for a
significant portion of our revenues in the foreseeable future. We, like other
financial services firms, are directly affected by economic and political
conditions, broad trends in business and finance and changes in volume and
price levels of securities and futures transactions. The U.S. securities
markets are characterized by considerable fluctuation and a downturn in these
markets could adversely affect our operating results. In October 1987 and
October 1989, the stock market suffered major declines, as a result of which
many firms in the industry suffered financial losses, and the level of
individual investor trading activity decreased after these events. Reduced
trading volume and prices have historically resulted in reduced transaction
revenues. When trading volume is low, our operating results may be adversely
affected because overhead remains relatively fixed. Severe market fluctuations
in the future could have a material adverse effect on our business, financial
condition and operating results. Some of our competitors with more diverse
product and service offerings might withstand such a downturn in the
securities industry better than we would. See "Risk Factors--Our business will
suffer if we cannot effectively compete."
Our brokerage business, by its nature, is subject to various other risks,
including customer default and employee misconduct and errors. We sometimes
allow customers to purchase securities on margin, therefore we are affected
because we are subject to risks inherent in extending credit. This risk is
especially great when the market is rapidly declining and the value of the
collateral we hold could fall below the amount of a customer's indebtedness.
Under specific regulatory guidelines, any time we borrow or lend securities,
we must correspondingly disburse or receive cash deposits. If we fail to
maintain adequate cash deposit levels at all times, we run the risk of loss if
there are sharp changes in market values of many securities and parties to the
borrowing and lending transactions fail to honor their commitments. Any such
losses could have a material adverse effect on our business, financial
condition and operating results.
Changes in interest rates may reduce Telebanc's profitability
The results of operations for Telebanc depend in large part upon the level
of its net interest income, that is, the difference between interest income
from interest-earning assets, such as loans and mortgage-backed securities,
and interest expense on interest-bearing liabilities, such as deposits and
borrowings. Many factors
31
<PAGE>
cause changes in interest rates, including governmental monetary policies and
domestic and international economic and political conditions. If Telebanc is
unsuccessful in managing the effects of changes in interest rates, its
financial condition and results of operations could suffer.
Changes in market interest rates could reduce the value of Telebanc's
financial assets. Fixed-rate investments, mortgage-backed and related
securities and mortgage loans generally decline in value as interest rates
rise.
We could lose customers and have difficulty attracting new customers if we are
unable to quickly introduce new products and services that satisfy changing
customer needs
Our future success depends, in part, on our ability to develop and enhance
our services and products. There are significant technical risks in the
development of new services and products or enhanced versions of existing
services and products. There can be no assurance that we will be successful in
achieving any of the following:
. effectively using new technologies;
. adapting our services and products to emerging industry standards;
. developing, introducing and marketing service and product enhancements;
or
. developing, introducing and marketing new services and products.
We may also experience difficulties that could delay or prevent the
development, introduction or marketing of these services and products. Our
status as a regulated savings and loan holding company resulting from the
acquisition of Telebanc could also lead to delays in or prevent the
development, introduction and marketing of new services and products.
Additionally, these new services and products may not adequately meet the
requirements of the marketplace or achieve market acceptance. If we are unable
to develop and introduce enhanced or new services and products quickly enough
to respond to market or customer requirements, or if they do not achieve
market acceptance, our business, financial condition and operating results
will be materially adversely affected.
Our success depends upon the growth of the Internet as a commercial
marketplace
The market for financial services, particularly over the Internet, is
rapidly evolving. Consequently, demand and market acceptance for recently
introduced services and products are subject to a high level of uncertainty.
For us, this uncertainty is compounded by the risks that consumers will not
continue to adopt online commerce and that commerce on the Internet will not
adequately develop or flourish to permit us to continue to grow.
Sales of many of our services and products will depend on consumers
continuing to adopt the Internet as a method of doing business. There can be
no assurance that the Internet infrastructure will continue to be able to
support the demands placed on it by this continued growth. In addition, the
Internet could be adversely affected by slow development or adoption of
standards and protocols to handle increased Internet activity, or due to
increased governmental regulation. Moreover, critical issues including
security, reliability, cost, ease of use, accessibility and quality of service
remain unresolved and may negatively affect the growth of Internet use or
commerce on the Internet.
Adoption of online commerce by individuals who have relied upon traditional
means of commerce in the past will require such individuals to accept new and
very different methods of conducting business. Moreover, our brokerage and
banking services over the Internet involve a new approach to securities
trading and banking which require extensive marketing and sales efforts to
educate prospective customers regarding their uses and benefits. For example,
consumers who trade with traditional brokerage firms, or even discount
brokers, may be reluctant or slow to change to obtaining brokerage services
over the Internet. Also, concerns about security and privacy on the Internet
may hinder the growth of online investing and banking, which could have a
material adverse effect on our business, financial condition and operating
results.
32
<PAGE>
The market price of our common stock, like other technology stocks, may be
highly volatile and any significant decrease in our stock price may make it
difficult for our shareowners to sell their stock
The market price of our common stock has been, and is likely to continue to
be, highly volatile and subject to wide fluctuations due to various factors,
many of which may be beyond our control, including:
. quarterly variations in operating results;
. volatility in the stock market;
. volatility in the general economy;
. changes in interest rates;
. announcements of acquisitions, technological innovations or new software,
services or products by us or our competitors; and
. changes in financial estimates and recommendations by securities
analysts.
In addition, there have been large price and volume fluctuations in the
stock market which have affected the market prices of securities of many
technology, Internet and financial services companies, often unrelated to the
operating performance of such companies. These broad market fluctuations may
adversely affect the market price of our common stock. In the past, volatility
in the market price of a company's securities has often led to securities
class action litigation. Such litigation could result in substantial costs and
a diversion of our attention and resources, which could have a material
adverse effect on our business, financial condition and operating results.
Our success depends on our ability to protect our intellectual property and
any failure to do so could substantially harm our business
Our success and ability to compete are dependent to a significant degree on
our proprietary technology. We rely primarily on copyright, trade secret and
trademark law to protect our technology and our brand. Effective trademark
protection may not be available for our trademarks. Although we have
registered the trademark "E*TRADE" in the United States and certain other
countries, and have certain other registered trademarks, there can be no
assurance that we will be able to secure significant protection for these
trademarks. Our competitors or others may adopt product or service names
similar to "E*TRADE," thereby impeding our ability to build brand identity and
possibly leading to customer confusion. Our inability to adequately protect
the name "E*TRADE" could have a material adverse effect on our business,
financial condition and operating results. Despite any precautions we take, a
third party may be able to copy or otherwise obtain and use our software or
other proprietary information without authorization or to develop similar
software independently. Policing unauthorized use of our technology is made
especially difficult by the global nature of the Internet and difficulty in
controlling the ultimate destination or security of software or other data
transmitted on it. The laws of other countries may afford us little or no
effective protection for our intellectual property. There can be no assurance
that the steps we take will prevent misappropriation of our technology or that
agreements entered into for that purpose will be enforceable. In addition,
litigation may be necessary in the future to:
. enforce our intellectual property rights;
. protect our trade secrets;
. determine the validity and scope of the proprietary rights of others; or
. defend against claims of infringement or invalidity.
Such litigation, whether successful or unsuccessful, could result in
substantial costs and diversion of resources, either of which could have a
material adverse effect on our business, financial condition and operating
results.
33
<PAGE>
We may face claims for infringement of third parties' proprietary rights and
it could be costly and time-consuming to defend against such claims, even
those without merit
We have received in the past, and may receive in the future, notices of
claims of infringement of other parties' proprietary rights. There can be no
assurance that claims for infringement or invalidity--or any indemnification
claims based on such claims--will not be asserted or prosecuted against us.
Any such claims, with or without merit, could be time consuming and costly to
defend or litigate, divert our attention and resources or require us to enter
into royalty or licensing agreements. There can be no assurance that such
licenses would be available on reasonable terms, if at all, and the assertion
or prosecution of any such claims could have a material adverse effect on our
business, financial condition and operating results.
Our attempts to enter new markets may be unsuccessful, which could decrease
our earnings and consequently decrease the market value of our common stock
One element of our strategy is to leverage the E*TRADE brand and technology
to enter new markets. No assurance can be given that we will be able to
successfully adapt our proprietary processing technology for use in other
markets. Even if we do adapt our technology, no assurance can be given that we
will be able to compete successfully in any such new markets. There can be no
assurance that our pursuit of any of these opportunities will be successful.
If these efforts are not successful, we could realize less than expected
earnings, which in turn could result in a decrease in the market value of our
common stock. Furthermore, such efforts may divert management attention or
inefficiently utilize our resources.
As a result of our recent merger with Telebanc, we face numerous new risks,
including possible failure to successfully integrate and assimilate Telebanc's
operations with our own
On January 12, 2000, we acquired Telebanc. Telebanc is an online provider
of Internet banking services. This represents a new line of business for us.
No assurance can be given that we will be successful in this market. We may
experience difficulty in assimilating Telebanc's products and services with
our own and we may not be able to integrate successfully the employees of
Telebanc into our organization. These difficulties may be exacerbated by the
geographical distance between our various locations and Telebanc's Virginia
location. If we fail to successfully integrate Telebanc's operations with our
own, our operating results and business could be adversely affected.
Telebank holds a loan portfolio consisting primarily of one- to four-family
residential loans. A critical component of the banking industry is the ability
to accurately assess credit risk and establish corresponding loan loss
reserves. Our status as a regulated savings and loan holding company resulting
from the acquisition of Telebanc could also lead to delays or prevent the
development, introduction and marketing of new services and products. This is
a new industry for E*TRADE and accordingly, we are dependent upon Telebanc
management and employees to advise us in this area.
Due to our recent merger with Telebanc, we may be restricted in expanding our
activities, and our inexperience with being regulated as a savings and loan
holding company could negatively affect both E*TRADE and Telebanc
Upon the completion of our acquisition of Telebanc and its subsidiary,
Telebank, on January 12, 2000, we became subject to regulation as a savings
and loan holding company. As a result, we are required to register with the
OTS and file periodic reports, and are subject to examination by the OTS.
Under financial modernization legislation recently enacted into law, our
activities are restricted to activities that are financial in nature and
certain real estate-related activities. We may also make merchant banking
investments in companies whose activities are not financial in nature, if
those investments are engaged in for the purpose of appreciation and ultimate
resale of the investment, and we do not manage or operate the company. Such
merchant banking investments may be subject to maximum holding periods and
special capital requirements.
34
<PAGE>
We believe that all of our existing activities and investments are
permissible under the new legislation, but the OTS has not yet issued
regulations or otherwise interpreted the new statute. Even if all of our
existing activities and investments are permissible, under the new legislation
we will be constrained in pursuing future new activities that are not
financial in nature. We are also limited in its ability to invest in other
savings and loan holding companies, and all transactions between E*TRADE and
Telebank must be conducted on an arms' length basis.
In addition to regulation of E*TRADE and Telebanc as savings and loan
holding companies, federal savings banks such as Telebank are subject to
extensive regulation of their activities and investments, their
capitalization, their risk management policies and procedures, and their
relationship with affiliated companies. In addition, as a condition to
approving our acquisition of Telebanc, the OTS imposed various notice and
other requirements, primarily a requirement that Telebank obtain prior
approval from the OTS of any future material changes to Telebanc's business
plan. These regulations and conditions, and our inexperience with them, could
affect our ability to realize synergies from the merger, and could negatively
affect both E*TRADE and Telebank following the merger.
We face numerous risks associated with doing business in international markets
One component of our strategy is a planned increase in efforts to attract
more international customers. To date, we have limited experience in providing
brokerage services internationally, and Telebanc has had only limited
experience providing banking services to customers outside the United States.
There can be no assurance that our international licensees or subsidiaries
will be able to market our branded services and products successfully in
international markets. In addition, there are certain risks inherent in doing
business in international markets, particularly in the heavily regulated
brokerage and banking industries, such as:
. unexpected changes in regulatory requirements, tariffs and other trade
barriers;
. difficulties in staffing and managing foreign operations;
. the level of investor interest in cross-border trading;
. authentication of on-line customers;
. political instability;
. fluctuations in currency exchange rates;
. reduced protection for intellectual property rights in some countries;
. seasonal reductions in business activity during the summer months in
Europe and certain other parts of the world;
. the level of adoption of the Internet in international markets; and
. potentially adverse tax consequences.
Any of the foregoing could adversely impact the success of our
international operations. In addition, because some of these international
markets are served through license arrangements with others, we rely upon
these third parties for a variety of business and regulatory compliance
matters. We have limited control over the management and direction of these
third parties. We run the risk that their action or inaction could harm our
operations and/or the goodwill associated with our brand name. Additionally,
certain of our international licensees have the right to sell sub-licenses.
Generally, we have less control over sub-licensees than we do over licensees.
As a result, the risk to our operations and goodwill is higher. There can be
no assurance that one or more of the factors described above will not have a
material adverse effect on our future international operations, if any, and,
consequently, on our business, financial condition and operating results.
35
<PAGE>
Any failure to successfully integrate the companies that we acquire into our
existing operations or failure to maintain our relationships with strategic
partners could harm our business
We recently acquired Telebanc, TIR and some of our European licensees. We
may also acquire other companies or technologies in the future, and we
regularly evaluate such opportunities. Acquisitions and mergers entail
numerous risks, including:
. difficulties in the assimilation of acquired operations and products;
. diversion of management's attention from other business concerns;
. amortization of acquired intangible assets; and
. potential loss of key employees of acquired companies.
We have limited experience in assimilating acquired organizations into our
operations. No assurance can be given as to our ability to integrate
successfully any operations, technology, personnel, services or new businesses
or products that might be acquired in the future. Failure to successfully
assimilate acquired organizations could have a material adverse effect on our
business, financial condition and operating results.
We have established a number of strategic relationships with online and
Internet service providers, as well as software and information service
providers. There can be no assurance that any such relationships will be
maintained, or that if they are maintained, they will be successful or
profitable. Additionally, we may not be able to develop any new relationships
of this type in the future. We also make investments, either directly or
through affiliated private investment funds, in equity securities of other
companies without acquiring control of those companies. There may be no public
market for the securities of the companies we invest in. In order for us to
realize a return on our investment, such companies must be sold or
successfully complete a public offering of their securities. There can be no
assurance that such companies will be acquired or complete a public offering
or that such an acquisition or public offering will allow us to sell our
securities at a profit, or at all.
Due to the foregoing factors, quarterly revenues and operating results are
difficult to forecast. We believe that period-to-period comparisons of our
operating results will not necessarily be meaningful and you should not rely
on them as any indication of future performance. Our future quarterly
operating results may not consistently meet the expectations of securities
analysts or investors, which in turn may have an adverse effect on the market
price of our common stock.
We have substantially increased our indebtedness, which may make it more
difficult to make payments on our debts or to obtain financing
Subsequent to the end of fiscal 1999, as a result of our sale of our 6%
convertible subordinated notes, E*TRADE will incur $650 million of additional
indebtedness, increasing our ratio of debt to equity (expressed as a
percentage) from approximately 96% to approximately 129% as of December 31,
1999, on a pro forma basis giving effect to the sales of the notes and the
application of proceeds therefrom. We may incur substantial additional
indebtedness in the future. The level of our indebtedness, among other things,
could
. make it difficult for us to make payments on our debt;
. make it difficult for us to obtain any necessary financing in the future
for working capital, capital expenditures, debt service requirements or
other purposes;
. limit our flexibility in planning for, or reacting to, changes in our
business; and
. make us more vulnerable in the event of a downturn in our business.
There can be no assurance that we will be able to meet our debt service
obligations, including obligations under the notes.
36
<PAGE>
Loss or reductions in revenue from order flow rebates could harm our business
Order flow revenue as a percentage of revenue has decreased over the past
three years. There can be no assurance that payments for order flow will
continue to be permitted by the SEC, the NASD or other regulatory agencies,
courts or governmental units. Loss of any or all of these revenues could have
a material adverse effect on our business, financial condition and operating
results.
We may incur costs to avoid investment company status and may suffer adverse
consequences if we are deemed to be an investment company
We may incur significant costs to avoid investment company status and may
suffer other adverse consequences if we are deemed to be an investment company
under the Investment Company Act of 1940, which is commonly referred to as the
"1940 Act".
A company may be deemed to be an investment company if it owns investment
securities with a value exceeding 40% of its total assets, subject to certain
exclusions. After giving effect to the offering, we will have substantial
short-term investments until the net proceeds from the offering can be
deployed. In addition, we and our subsidiaries have made minority equity
investments in other companies that may constitute investment securities under
the 1940 Act. In particular, many of our publicly traded equity investments,
which are owned directly by us or through related venture funds, are deemed to
be investment securities. Although our investment securities currently
comprise less than 40% of our total assets, the value of these minority
investments has fluctuated in the past, and substantial appreciation in some
of these investments may, from time to time, cause the value of our investment
securities to exceed 40% of our total assets. These factors may result in us
being treated as an "investment company" under the 1940 Act.
We believe we are primarily engaged in a business other than investing,
reinvesting, owning, holding, or trading securities for our account and,
therefore, are not an investment company within the meaning of the 1940 Act.
However, in the event that such exemption is not available and the 40% limit
were to be exceeded (including through fluctuations in the value of our
investment securities), we may need to reduce our investment securities as a
percentage of our total assets. This reduction can be attempted in a number of
ways, including the sale of investment securities and the acquisition of non-
investment security assets, such as cash, cash equivalents and government
securities. If we sell investment securities, we may sell them sooner than we
intended. These sales may be at depressed prices and we may never realize
anticipated benefits from, or may incur losses on, these investments. Some
investments may not be sold due to normal contractual or legal restrictions or
the inability to locate a suitable buyer. Moreover, we may incur tax
liabilities if we sell these assets. We may also be unable to purchase
additional investment securities that may be important to our operating
strategy. If we decide to acquire non-investment security assets, we may not
be able to identify and acquire suitable assets, and will likely realize a
lower return on any such investments.
If we were deemed to be an investment company, we could become subject to
substantial regulation under the 1940 Act with respect to our capital
structure, management, operations, affiliate transactions and other matters.
As a consequence, we could be barred from engaging in business or issuing our
securities as we have in the past and might be subject to civil and criminal
penalties for noncompliance. In addition, some of our contracts might be
voidable, and a court-appointed receiver could take control of us and
liquidate our business in certain circumstances.
Our business will suffer if our systems do not accurately process date
information relating to dates after January 1, 2000
Because many computer systems were not designed to handle dates beyond the
year 1999, computer hardware and software may need to be modified in order for
it to remain functional. This may affect us in numerous ways:
. We have assessed the impact of year 2000 issues, including other date-
related anomalies, on our products, services and internal information
systems. We do not expect our financial results to be materially affected
37
<PAGE>
by the need to address year 2000 issues, but if the costs associated with
addressing these issues are greater than planned, our earnings and results
of operations could be affected. Furthermore, if corrective actions are
not adequate to avoid year 2000 problems, the impact of year 2000
processing failures on the Company's business, financial position, results
of operations or cash flows could be material;
. We must rely on outside vendors to address year 2000 issues for their
hardware and software. If these vendors fail to adequately address year
2000 issues for the products and services they provide to the Company,
this could have a material adverse impact on the Company's operations and
financial results. We have developed contingency plans in the event that
we, or our key vendors, are not year 2000 capable, but the failure of
such contingency plans may have a negative effect on our financial
results; and
. The method of transaction processing we employ depends heavily on the
integrity of electronic systems outside of our control, such as online
and Internet service providers, and third-party software such as Internet
browsers. A failure of any of these systems due to year 2000 issues could
interfere with the trading process and, in turn, may have a material
adverse effect on our business, financial condition and operating
results.
Due to our dependence on computer technology to conduct our business, the
nature and impact of year 2000 processing failures on our business, financial
condition and operating results could be material.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
For quantitative and qualitative disclosures about market risk, the Company
has evaluated such risk for its brokerage and banking related operations
separately due to the recent acquisition of Telebanc which represents a new
line of business for the Company. The following discussion about the Company's
market risk disclosures includes forward-looking statements. Actual results
could differ materially from those projected in the forward-looking statements
as a result of certain factors, including those set forth in the section
entitled "Risk Factors" and elsewhere in this filing. Reference is made to
Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk,
in our Annual Report on Form 10-K/A for the year ended September 30, 1999.
Brokerage and Investment Operations
The Company is exposed to market risk related to changes in interest rates,
foreign currency exchange rates and equity security price risk. The Company
does not have derivative financial instruments for speculative or trading
purposes.
Interest Rate Sensitivity
During the quarter ended December 31, 1999, the Company obtained two
variable rate bank lines of credit. As of December 31, 1999, the Company had
$104.8 million outstanding under these lines. These lines of credit and the
monthly interest payment are subject to interest rate risk. If market interest
rates were to increase immediately and uniformly by 10 percent at December 31,
1999, the interest payments would increase by an immaterial amount.
Equity Price Risk
The Company has investments in publicly-traded equity securities. The fair
value of these securities at December 31, 1999 was $646.6 million. If the
market price of the securities held at December 31, 1999 were to decrease by
10%, the fair value of the portfolio would decline by $64.7 million, which
would not have a material effect on the financial position of the Company. The
Company accounts for these securities as available-for-sale, and unrealized
gains and losses resulting from changes in the fair value of these securities
are reflected as a change in shareowners' equity, and not reflected in the
determination of operating results until the securities are sold. At December
31, 1999, unrealized gains on these securities were $610.2 million.
38
<PAGE>
Financial Instruments
For its working capital and reserves, which are required to be segregated
under Federal or other regulations, the Company invests in money market funds,
resale agreements, certificates of deposit, and commercial paper. Money market
funds do not have maturity dates and do not present a material market risk.
The other financial instruments are fixed rate investments with short
maturities and do not present a material interest rate risk.
Banking Operations
The Company manages its bank-related interest rate risk through the use of
financial derivatives such as interest rate cap, swap and floor agreements.
The Company uses these instruments to ensure that the market value of equity
and net interest income are protected from the impact of changes in interest
rates. The Company has experienced no material changes in market risk
pertaining to its banking operations during the quarter ended December 31,
1999.
39
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal and Administrative 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 our advertising, other communications and business
practices regarding our commission rates and our ability to timely execute and
confirm transactions through our 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. On
June 1, 1999, the court entered an order denying plaintiffs' motion for class
certification. While the court declined to certify a class as to any of
plaintiffs' alleged claims, it did indicate that plaintiffs may be able to
pursue one of their claims (relating to our commission structure) on a
representative basis. On January 25, 2000, the court ordered plaintiffs to
submit all claims (including representative claims) seeking monetary relief to
arbitration; claims for injunctive relief were not ordered to arbitration, but
were stayed pending arbitration. We are unable to predict the ultimate outcome
of this proceeding.
On February 11, 1999, a putative class action was filed in the Supreme
Court of New York, County of New York, by Evan Berger, on behalf of himself
and other similarly situated individuals. The action alleged, among other
things, that our advertising, other communications and business practices
regarding our ability to timely execute and confirm transactions through our
online brokerage services were false and deceptive. Plaintiff seeks damages
based on causes of action for breach of contract and violation of New York
consumer protection statutes. After we filed a motion to dismiss or stay the
complaint on April 14, 1999, the plaintiff chose to file an amended complaint.
In response to that amended complaint, we have moved to compel arbitration or,
alternatively, dismiss the amended complaint. By a Decision and Order, entered
by the Court on March 28, 2000, the Court granted E*TRADE's notion to compel
arbitration of plaintiff's breach of contract claim by dismissing plaintiff's
breach of contract claim and ordering plaintiff to proceed to arbitration of
that claim. The Court also granted E*TRADE's motion to dismiss by dismissing
plaintiff's claims based on violation of New York's consumer protection
statutes.
On March 1, 1999, a putative class action was filed in the Court of Common
Pleas, Cuyahoga County, Ohio, by Truc Q. Hoang. The Hoang complaint seeks
damages and injunctive relief arising out of, among other things, plaintiff's
alleged problems accessing her account and placing orders. Plaintiff alleges
causes of action for breach of contract, fiduciary duty and unjust enrichment,
fraud, unfair and deceptive trade practices, negligence/intentional tort and
injunctive relief. We have filed motions both to compel arbitration and to
dismiss the complaint. All discovery regarding the merits of plaintiff's
claims is stayed pending the determination of our motion to dismiss. On
September 1, 1999, the court denied our motion to compel arbitration. We
appealed the order and a hearing on the appeal took place on February 2, 2000.
By a Journal Entry and Opinion, dated March 16, 2000, the Court of Appeals
reversed the trial court's decision on the grounds that its resolution of
E*TRADE's motion to compel arbitration was premature prior to resolution of
whether the case should be certified as a class action. The Court of Appeals
remanded the case to the trial court. This proceeding is still at an early
stage and we are unable to predict its ultimate outcome.
On March 10, 1999, a putative class action was filed in the Superior Court
of California, County of Santa Clara, by Raj Chadha. The Chadha complaint
seeks damages and injunctive relief arising out of, among other things, the
February 3, 4 and 5, 1999, system interruptions. Plaintiff brings causes of
action for breach of fiduciary duty and violations of the Consumer Legal
Remedies Act and California Unfair Business Practices Act. In response to the
complaint, we filed a petition to compel arbitration. Among other things, we
argued that, in light of the Cooper court's decision to deny class
certification, all customers who were members of the alleged Cooper class--
including Chadha--are obligated to submit their claims to arbitration in
accordance with the customer agreement. The court granted the petition to
compel arbitration on July 29, 1999, and stayed all further proceedings
pending arbitration.
40
<PAGE>
On March 11, 1999, a putative class action was filed in the Superior Court
of California, County of Santa Clara, by Elie Wurtman. The Wurtman complaint
seeks damages and injunctive relief arising out of, among other things,
plaintiff's alleged problems accessing her account and placing orders. The
complaint also makes allegations regarding access problems relating to our
customers residing or traveling outside of the United States. Plaintiff brings
causes of action for negligence and violations of the Consumer Legal Remedies
Act and California Unfair Business Practices Act. In response to the
complaint, we filed a petition to compel arbitration. As in Chadha, we argued
that, in light of the Cooper court's decision to deny class certification,
Wurtman is obligated to submit his claims to arbitration in accordance with
the customer agreement. The petition to compel arbitration was heard by the
court on September 9, 1999 and was denied. On October 4, 1999, we appealed the
court's order denying the petition, and that appeal has the effect of staying
all further proceedings in the trial court. Briefing has not yet begun on our
appeal. This proceeding is still at an early stage and we are unable to
predict the ultimate outcome.
On April 14, 1999, a putative class action was filed in the Superior Court
of California, County of Los Angeles, by Matthew J. Rosenberg. Plaintiff seeks
injunctive relief based on alleged violations of the California Unfair
Business Practices Act regarding the extent to which shares in IPOs are made
available to our customers. We filed a demurrer and motion to strike on August
13, 1999, arguing (among other things) that the plaintiff has not alleged
facts sufficient to state a claim against us. On October 6, 1999, the court
dismissed the class action claims with prejudice. The claim for unfair
business practices was dismissed with leave to amend, but for injunctive
relief only and not money damages. Plaintiff filed an amended complaint on
October 26, 1999. We filed a petition to compel arbitration in response. On
December 29, 1999, the court granted the petition to compel arbitration and
dismissed the court proceeding. We are unable to predict the ultimate outcome
of this proceeding.
On December 23, 1999, plaintiff Kathleen Nyquist filed a complaint in
federal court. Ms. Nyquist is a customer who brings claims for breach of
fiduciary duty, negligence/recklessness, unfair trade practices, securities
law violations and aiding and abetting. Her claims against us arise out of
allegedly unauthorized transactions and unrestricted day-trading effected by
her husband in her IRA account as well as another account. Plaintiff alleges
losses totaling approximately $700,000 and also seeks attorney's fees,
punitive damages as well as treble damages under the South Carolina unfair
trade practices laws. E*TRADE has made a motion to compel arbitration that is
currently pending before the court. This proceeding is still at an early stage
and we are unable to predict the ultimate outcome.
The Company believes that these claims are without merit and intend to
defend against them vigorously. 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, arbitrations 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 our ability to so comply is
dependent in large part upon the establishment and maintenance of a qualified
compliance system. The Company is aware of several instances of its
noncompliance with applicable regulations. In particular, in fiscal 1997, the
Company's failure to timely renew its broker dealer registration in Ohio
resulted in a $4.3 million pre-tax charge against earnings.
41
<PAGE>
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--Not applicable.
Item 3. Defaults Upon Senior Securities--Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders--
The annual meeting of shareowners was held on December 21, 1999. Lewis E.
Randall, Lester C. Thurow, and Peter Chernin were elected as directors, as
tabulated below.
<TABLE>
<CAPTION>
Election of Directors For Against
--------------------- ----------- ----------
<S> <C> <C>
Lewis E. Randall...................................... 202,537,670 2,541,659
Lester C. Thurow...................................... 191,846,312 13,233,017
Peter Chernin......................................... 202,451,036 2,628,293
</TABLE>
In addition, Christos M. Cotsakos, William A. Porter, Richard S. Braddock,
Masayoshi Son, William E. Ford, and George Hayter will continue as directors.
The proposal to approve the amendment to the Company's 1996 Stock Incentive
Plan (the "Plan"), including an 11,900,000 shares increase in the maximum
number of shares of Common Stock reserved for issuance under the Plan was
approved, as tabulated below.
<TABLE>
<CAPTION>
For Against Abstentions
----------- ---------- -----------
<S> <C> <C> <C>
Votes..................................... 180,132,435 22,384,013 1,014,910
</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, 2000 was approved, as tabulated below.
<TABLE>
<CAPTION>
For Against Abstentions
----------- ------- -----------
<S> <C> <C> <C>
Votes........................................ 202,564,183 727,679 239,467
</TABLE>
Item 5. Other Information--None.
Item 6. Exhibits and Reports on Form 8-K
(a)Exhibits
<TABLE>
<C> <S>
* 4.1 Indenture, dated February 1, 2000, by and between the Company and The
Bank of New York.
*10.1 Employment agreement, dated June 1, 1999, by and between the Company
and Christos M. Cotsakos.
*10.2 Employment agreement, dated June 1, 1999, by and between the Company
and Kathy Levinson.
*10.3 Purchase Agreement, dated February 1, 2000, by and among the Company,
FleetBoston Robertson Stephens Inc., Hambrecht & Quist LLC and
Goldman, Sachs & Co.
*10.4 Registration Rights Agreement, dated February 1, 2000, by and among
the Company, FleetBoston Robertson Stephens Inc., Hambrecht & Quist
LLC and Goldman, Sachs & Co.
**10.5 E*TRADE Ventures I, LLC, Limited Liability Company Operating
Agreement.
</TABLE>
42
<PAGE>
<TABLE>
<C> <S>
**10.6 E*TRADE eCommerce Fund, L.P., Amended and Restated Limited
Partnership Agreement.
**27.1 Financial Data Schedule
*99.1 Press release, dated January 25, 2000, relating to the 6% convertible
subordinated notes due 2007.
*99.2 Press release, dated February 2, 2000, relating to the 6% convertible
subordinated notes due 2007.
</TABLE>
- --------
* As previously filed.
** Filed herewith.
(b) Reports on Form 8-K
None
43
<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: April 17, 2000
/s/ Christos M. Cotsakos
By: _________________________________
Christos M. Cotsakos
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
/s/ Leonard C. Purkis
By: _________________________________
Leonard C. Purkis
Chief Financial Officer
(Principal Financial and
Accounting Officer)
44
<PAGE>
EXHIBIT 10.5
Execution Copy
E*Trade Ventures I, LLC
A Delaware Limited Liability Company
LIMITED LIABILITY COMPANY
OPERATING AGREEMENT
September 23, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I NAME, PURPOSE AND PRINCIPAL OFFICE OF COMPANY.......................................................... 1
1.1. Name........................................................................................... 1
1.2. Agreement...................................................................................... 1
1.3. Purpose; Powers................................................................................ 1
1.4. Registered Office and Agent.................................................................... 2
1.5. Principal Office............................................................................... 2
1.6. Definitions.................................................................................... 2
ARTICLE II TERM AND TERMINATION OF THE COMPANY................................................................... 4
2.1. Term........................................................................................... 4
2.2. Termination.................................................................................... 4
2.3. Extension of Term.............................................................................. 4
ARTICLE III INITIAL MEMBERS; CHANGES IN MEMBERSHIP............................................................... 4
3.1. Name and Address............................................................................... 4
3.2. Admission of Additional Members................................................................ 5
3.3. Death, Disability or Withdrawal of a Managing Member........................................... 5
3.4. Withdrawal of a Member......................................................................... 5
ARTICLE IV MANAGEMENT, DUTIES AND RESTRICTIONS................................................................... 6
4.1. Management..................................................................................... 6
4.2. Conversion of Status as Managing Member........................................................ 7
4.3. Liability of Members to the Company and the Other Members...................................... 7
4.4. Restrictions on the Members.................................................................... 7
4.5. Additional Restrictions on Non-Managing Members................................................ 7
4.6. Officers....................................................................................... 8
ARTICLE V CAPITAL CONTRIBUTIONS.................................................................................. 8
5.1. Capital Commitments and Membership Interests of the Members.................................... 8
5.2. Liability of the Members....................................................................... 8
5.3. Liability of Transferees....................................................................... 9
5.4. Defaulting Members............................................................................. 9
ARTICLE VI CAPITAL ACCOUNTS AND ALLOCATIONS...................................................................... 10
6.1. Capital Accounts............................................................................... 10
6.2. Definitions.................................................................................... 10
6.3. Allocation of Net Income or Loss............................................................... 12
</TABLE>
i.
<PAGE>
<TABLE>
<S> <C>
ARTICLE VII EXPENSES............................................................................................ 13
ARTICLE VIII DISTRIBUTIONS...................................................................................... 13
8.1. Interest...................................................................................... 13
8.2. Mandatory Distributions....................................................................... 13
8.3. Discretionary Distributions................................................................... 13
ARTICLE IX ASSIGNMENT OR TRANSFER OF MEMBERS' INTERESTS......................................................... 14
9.1. Restrictions on Transfer of Members' Interests................................................ 14
9.2. Opinion of Counsel............................................................................ 14
9.3. Violation of Restrictions..................................................................... 15
9.4. Agreement Not to Transfer..................................................................... 15
9.5. Multiple Ownership............................................................................ 15
9.6. Substitute Members............................................................................ 15
ARTICLE X VESTING OF PERCENTAGE INTERESTS....................................................................... 15
10.1. Vesting of Managing Members' and E*Trade's Interests.......................................... 15
10.2. Vesting of Other Non-Managing Members' and Additional Members' Interests...................... 16
ARTICLE XI DISSOLUTION AND LIQUIDATION OF THE COMPANY........................................................... 16
11.1. Liquidation Procedures........................................................................ 16
ARTICLE XII FINANCIAL ACCOUNTING AND REPORTS.................................................................... 16
12.1. Tax Accounting and Reports.................................................................... 16
12.2. Valuation of Securities and Other Assets Owned by the Company................................. 17
12.3. Supervision; Inspection of Books.............................................................. 18
12.4. Confidentiality............................................................................... 18
ARTICLE XIII OTHER PROVISIONS................................................................................... 18
13.1. Execution and Filing of Documents............................................................. 18
13.2. Other Instruments and Acts.................................................................... 18
13.3. Binding Agreement............................................................................. 18
13.4. Governing Law................................................................................. 18
13.5. Notices....................................................................................... 18
13.6. Power of Attorney............................................................................. 18
13.7. Amendment Procedure........................................................................... 19
13.8. Effective Date................................................................................ 19
13.9. Entire Agreement.............................................................................. 19
13.10. Titles; Subtitles............................................................................. 19
13.11. Company Name.................................................................................. 19
13.12. Exculpation................................................................................... 19
13.13. Indemnification............................................................................... 19
13.14. Limitation of Liability of Members............................................................ 20
</TABLE>
ii.
<PAGE>
<TABLE>
<S> <C>
13.15. Arbitration................................................................................... 20
13.16. Tax Matters Partner........................................................................... 20
13.17. Taxation as Company........................................................................... 21
ARTICLE XIV MISCELLANEOUS TAX COMPLIANCE PROVISIONS............................................................. 21
14.1. Substantial Economic Effect................................................................... 21
14.2. Income Tax Allocations........................................................................ 22
14.3. Withholding................................................................................... 22
</TABLE>
EXHIBIT A Members' Capital Commitments and Percentage Interests
iii.
<PAGE>
E*Trade Ventures I, LLC
a Delaware Limited Liability Company
OPERATING AGREEMENT
This Operating Agreement is entered into as of the 23rd day of
September, 1999, by and among (i) Christos M. Cotsakos and Thomas A. Bevilacqua,
as managing members (the "Managing Members"), and (ii) E*Trade Group, Inc.
("E*Trade") and each of the other persons whose names are set forth under the
heading "Non-Managing Members" on Exhibit A attached hereto, as non-Managing
Members (such persons and any additional non-Managing Member admitted after the
date of this Agreement being referred to herein as the "Non-Managing Members").
The Managing Members and the Non-Managing Members are referred to herein
collectively as the "Members."
The Members have formed the Company by causing a Certificate of
Formation (the "Certificate") conforming to the requirements of the Delaware
Revised Limited Liability Company Act (the "Act") to be filed in the Office of
the Secretary of State for the State of Delaware.
ARTICLE I
NAME, PURPOSE AND
PRINCIPAL OFFICE OF COMPANY
1.1. Name. The name of the Company is "E*Trade Ventures I, LLC." The
affairs of the Company shall be conducted under such name or such other name as
the Managing Members may, in their discretion, determine. E*Trade hereby grants
the Company the right, at no cost, to use the "E*Trade" name for the term of the
Company as set forth in Article II hereof.
1.2. Agreement. In consideration of the mutual covenants herein
contained and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Members executing this
Agreement hereby agree to the terms and conditions of this Agreement, as it may
be amended from time to time. It is the express intention of the Members that
this Agreement shall be the sole statement of agreement among them, and, except
to the extent a provision of this Agreement expressly incorporates matters by
express reference, this Agreement shall govern even when inconsistent with or
different from the provisions of the Act or any other provision of law.
1.3. Purpose; Powers.
(a) Purpose. The primary purpose of the Company is to act as
-------
the general partner of E*Trade eCommerce Fund, L.P. (the "Fund").
<PAGE>
(b) Powers. Subject to all of the terms and provisions hereof,
------
the Company shall have all powers necessary, suitable or convenient for the
accomplishment of the purpose of the Company, including, without limitation, the
following:
(1) to purchase, sell, invest and trade in securities of
every kind, including, without limitation, capital stock, limited
partnership interests, bonds, notes, debentures, securities convertible
into other securities, trust receipts and other obligations, instruments or
evidences of indebtedness, as well as in rights, warrants and options to
purchase securities;
(2) to make and perform all contracts and engage in all
activities and transactions necessary or advisable to carry out the
purposes of the Company, including, without limitation, the purchase, sale,
transfer, pledge and exercise of all rights, privileges and incidents of
ownership or possession with respect to any Company asset or liability; the
borrowing or lending of money and the securing of payment of any Company
obligation by hypothecation or pledge of, or grant of a security interest
in, Company assets; and the guarantee of or becoming surety for the debts
of others; and
(3) otherwise to have all the powers available to it as a
limited liability company under the Act.
1.4. Registered Office and Agent. The initial address of the Company's
registered office in Delaware is 15 East North Street, Dover, Wilmington, County
of Kent, and its initial agent at such address for service of process is
Incorporating Services Limited. The Managing Members may change the registered
office and agent for service of process as they from time to time may determine.
1.5. Principal Office. The principal office of the Company shall
initially be located at 4500 Bohannon Street, Menlo Park, California 94025. The
Managing Members may change the location of the principal office of the Company
at any time.
1.6. Definitions.
(a) Additional Members. This term shall have the meaning
------------------
ascribed to it in Paragraph 3.2.
(b) Affiliate. With reference to any person, any other person
---------
controlling, controlled by or under direct or indirect common control with such
person.
(c) Agreement. This Operating Agreement of E*Trade Ventures I,
---------
LLC, a Delaware limited liability company.
(d) Assignee. This term shall have the meaning ascribed to it
--------
in Paragraph 5.4.
(e) Bankruptcy. A person or entity shall be deemed bankrupt if:
----------
2.
<PAGE>
(1) any proceeding is commenced against such person or
entity as "debtor" for any relief under bankruptcy or insolvency laws, or
laws relating to the relief of debtors, reorganizations, arrangements,
compositions or extensions and such proceeding is not dismissed within
ninety (90) days after such proceeding has commenced, or
(2) such person or entity commences any proceeding for
relief under bankruptcy or insolvency laws or laws relating to the relief
of debtors, reorganizations, arrangements, compositions or extensions.
(f) Book Value. This term shall have the meaning ascribed to it
----------
in Paragraph 6.2(a).
(g) Capital Account. This term shall have the meaning ascribed
---------------
to it in Paragraph 6.2(b).
(h) Capital Commitment. This term shall have the meaning
------------------
ascribed to it in Paragraph 5.1.
(i) Capital Contribution. This term shall have the meaning
--------------------
ascribed to it in Paragraph 5.1(b).
(j) Carry. The Company's 20% carried interest in the income of
-----
the Fund.
(k) Certificate. The Certificate of Formation of E*Trade
-----------
Ventures I, LLC, a Delaware limited liability company.
(l) Code. The Internal Revenue Code of 1986, as amended from
----
time to time (and any corresponding provisions of succeeding law).
(m) Defaulting Member. This term shall have the meaning
-----------------
ascribed to it in Paragraph 5.4(a).
(n) Fiscal Quarter. This term shall have the meaning ascribed
--------------
to it in Paragraph 6.2(c).
(o) Fiscal Year. This term shall have the meaning ascribed to
-----------
it in Paragraph 6.2(d).
(p) Management Fee. The management fee receivable by the
--------------
Company from the Fund.
(q) Net Income or Net Loss. This term shall have the meaning
----------------------
ascribed to it in Paragraph 6.2(e).
(r) Percentage Interest. This term shall have the meaning
-------------------
ascribed to it in Paragraph 6.2(f).
3.
<PAGE>
(s) Sale or Exchange. This term shall have the meaning ascribed
----------------
to it in Paragraph 6.2(g).
(t) Securities Act. The Securities Act of 1933, as amended from
--------------
time to time.
(u) Securities. Securities of every kind and nature and rights
----------
and options with respect thereto, including stock, notes, bonds, debentures,
evidences of indebtedness and other business interests of every type, including
interests in partnerships, joint ventures, proprietorships and other business
entities.
(v) TMP. This term shall have the meaning ascribed to it in
---
Paragraph 13.16.
(w) Termination Date. This term shall have the meaning ascribed
----------------
to it in Paragraph 2.1.
(x) Treasury Regulations. The Income Regulations promulgated
--------------------
under the Code, as such Regulations may be amended from time to time (including
corresponding provisions of succeeding Regulations).
ARTICLE II
TERM AND TERMINATION OF THE COMPANY
2.1. Term. The term of the Company shall continue until one (1) year
after the dissolution of the Fund unless sooner terminated as provided in
Paragraph 2.2 or by operation of law or extended as provided in Paragraph 2.3.
The last day of the term of the Company, as such may be extended as provided
herein, is referred to herein as the "Termination Date."
2.2. Termination. The Company shall terminate prior to the end of the
period specified in Paragraph 2.1 at the election of the Managing Members. The
Managing Members shall deliver notice of such termination to the Non-Managing
Members.
2.3. Extension of Term. The term of the Company may be extended by
the Managing Members. The Managing Members shall provide notice of any such
extension to the Non-Managing Members.
ARTICLE III
INITIAL MEMBERS; CHANGES IN MEMBERSHIP
3.1. Name and Address. The persons listed on Exhibit A are hereby
admitted as Members of the Company. Exhibit A shall be amended from time to time
to reflect changes in the membership of the Company (including the admission of
Additional Members). Any such amended Exhibit A shall supersede all prior
Exhibit A's and become part of this Agreement and shall be kept on file at the
principal office of the Company.
4.
<PAGE>
3.2. Admission of Additional Members. Persons may be admitted to the
Company as additional members ("Additional Members") on such terms and
conditions as shall be determined by the Managing Members, in their sole
discretion. Each Additional Member shall be admitted only if he shall have
executed this Agreement or an appropriate amendment to it in which he agrees to
be bound by the terms and provisions of this Agreement as they may be modified
by that amendment. Admission of a new Member shall not cause the dissolution of
the Company.
3.3. Death, Disability or Withdrawal of a Managing Member.
(a) In the case of a Managing Member's death, permanent physical
or mental disability or withdrawal from the Company, the Company shall not
dissolve or terminate, but its business shall be continued without interruption
or without any break in continuity by the remaining Members, with the remaining
Managing Member continuing to serve as the sole Managing Member unless he
appoints an additional Managing Member, in his sole discretion. Any deceased,
disabled or withdrawn Managing Member (or the holder of his interest) shall
become a Non-Managing Member, and the interest of such Managing Member shall
become a Non-Managing Member's interest. Such former Managing Member or the
holder of such interest shall have no right to participate in the management of
the Company and no right to consent to or vote upon any matter, except as
provided in Paragraph 13.7.
(b) If such change in the former Managing Member's status shall
result in multiple ownership of any Non-Managing Member's interest, one or more
trustees or nominees may be required to be designated to represent a portion of
or the entire Non-Managing Member's interest for the purpose of receiving all
notices which may be given and all payments which may be made under this
Agreement, and for the purpose of exercising all rights which such Non-Managing
Member has pursuant to the provisions of this Agreement.
3.4. Withdrawal of a Member.
(a) Except with the consent of the Managing Members, the
interest of a Member may not be withdrawn from the Company in whole or in part
except in the event of the death or declaration of legal incompetency of such
Member and in such event only if the election to withdraw is given by the
personal representative or representatives of such Member in writing to the
Managing Members within three (3) months after the date of the appointment of
such personal representative or representatives, or within six (6) months from
the date of death or declaration of legal incapacity of such Member, whichever
is earlier. In the event of such election to withdraw, the interest of such
Member shall be withdrawn in its entirety and shall be valued as of the date of
withdrawal pursuant to the provisions of Paragraph 12.2 and paid for in the
manner hereinafter provided by this paragraph. The Managing Members shall be
entitled, in their sole discretion, to make the distribution in respect of the
interest of the withdrawing Member in cash, in kind or pursuant to a promissory
note due upon termination of the Company, or in any combination thereof. If any
distribution is to be made in kind and if such distribution cannot be made in
full because of restrictions on the transfer of Securities or for any other
reason, distribution may be delayed until an effective transfer and distribution
may be made, and Securities that will be transferred in respect of the
withdrawing Member's interest shall be designated. Such designated Securities
will nevertheless be subject to the full right and power of the
5.
<PAGE>
Managing Members to deal with them in the best interests of the Company,
including the right to substitute other Securities of equivalent value.
(b) In the event of the withdrawal of any Member pursuant
hereto, the Percentage Interests and Capital Accounts of the withdrawing Member
and the remaining Members shall be appropriately adjusted, including any
adjustments required as a result of any vesting provisions applicable to the
withdrawing Member's interest.
(c) The withdrawal of a Member shall not be cause for
dissolution of the Company.
ARTICLE IV
MANAGEMENT, DUTIES AND RESTRICTIONS
4.1. Management. The Managing Members shall have the sole and
exclusive control of the management and conduct of the affairs of the Company.
Any action shall, unless otherwise specified by the Managing Members, require
approval of both Managing Members (or the sole remaining Managing Member). The
right, power and authority of the Managing Members to carry on the affairs of
the Company and to do any and all acts on behalf of the Company shall, subject
to any specific limitations set forth in this Agreement and the Limited
Partnership Agreement of the Fund, include without limitation the following:
(a) To cause the Company to perform the duties and exercise the
rights of the general partner of the Fund.
(b) To purchase, hold, sell or otherwise effect transactions in
Securities (whether marketable or unmarketable) and other investments of the
Company.
(c) To incur indebtedness on behalf of the Company and the Fund.
(d) To guarantee indebtedness on behalf of the Company and the
Fund.
(e) To loan money to any of the Members upon such terms and
conditions as the Managing Members may prescribe.
(f) To deposit or hold Securities and other assets of the
Company in the Company's name or in such street or nominee names as may be
determined from time to time by the Managing Members, at such securities firms,
banks or depositories as shall be designated by the Managing Members. All
withdrawals therefrom or directions with respect thereto shall be made on the
signature of either Managing Member.
(g) To provide management services or to designate an entity or
entities to manage the Fund and to receive fees from the Fund and to enter into
an agreement or agreements with such an entity or entities upon such terms and
conditions as the Managing Members shall deem appropriate for the management of
the Fund. Such an agreement or agree-
6.
<PAGE>
ments may be entered into with firms or business entities controlled by or
comprised of either or both Managing Members or an Affiliate of either or both
Managing Members.
(h) Generally, to perform all acts deemed by the Managing
Members appropriate or incidental to the foregoing and to carry out the purposes
and business of the Company and the Fund.
4.2. Conversion of Status as Managing Member. Any Managing Member who
has become a Non-Managing Member shall not participate in the control,
management and direction of the business of the Company or the Fund.
4.3. Liability of Members to the Company and the Other Members. No
Member shall be liable to any other Member for honest mistakes in judgment or
for action or inaction taken in good faith for a purpose that was reasonably
believed to be in the best interests of the Company, or for losses due to such
mistakes, action or inaction, or for the negligence, dishonesty or bad faith of
any employee, broker or other agent of the Company; provided that such employee,
broker or agent was selected, engaged or retained with reasonable care. Each
Managing Member and, with the consent of the Managing Members, a Non-Managing
Member, may consult with counsel and accountants on matters relating to Company
affairs and shall be fully protected and justified in acting in accordance with
the advice of counsel or accountants, provided that such counsel or accountants
shall have been selected with reasonable care. Notwithstanding any of the
foregoing to the contrary, the provisions of this Paragraph 4.3 shall not be
construed so as to relieve (or attempt to relieve) any person of any liability
incurred (i) as a result of recklessness or intentional wrongdoing, or (ii) to
the extent (but only to the extent) that such liability may not be waived,
modified or limited under applicable law, provided that this Paragraph 4.3 shall
be construed so as to effectuate the provisions hereof to the fullest extent
permitted by law.
4.4. Restrictions on the Members.
(a) Except with the consent of the Managing Members or as
otherwise specifically permitted by this Agreement, no Member shall mortgage,
encumber, pledge or otherwise dispose of his or her interest in the Company or
in the Company's assets or property or enter into any agreement as a result of
which any other person shall have rights as a Member of the Company.
(b) No Member may buy from or sell to the Company any Securities
without the prior written consent of the Managing Members except purchases or
sales explicitly permitted by this Agreement.
(c) No Member shall do any act in contravention of this
Agreement or the Fund's Limited Partnership Agreement.
4.5. Additional Restrictions on Non-Managing Members.
(a) The Non-Managing Members shall take no part in the control
or management of the affairs of the Company nor shall Non-Managing Members have
any power or
7.
<PAGE>
authority to act for or on behalf of the Company as a result of this Agreement
except as expressly authorized from time to time by the Managing Members.
(b) Except as otherwise required by law or as expressly provided
herein, the Non-Managing Members shall have no rights to vote, call meetings of
the Members or otherwise exercise any similar rights or powers.
4.6. Officers. The Managing Members may appoint such officers of the
Company as they shall deem advisable and shall have the discretion to remove any
officers at any time.
ARTICLE V
CAPITAL CONTRIBUTIONS
5.1. Capital Commitments and Membership Interests of the Members. Set
forth opposite the name of each Member listed on Exhibit A attached hereto is
such Member's "Capital Commitment" to the Company and its resulting percentage
membership interest in the Company ("Percentage Interest"). Each Member's
Capital Commitment represents the aggregate amount of capital that such Member
has agreed to contribute to the Company in accordance with the terms hereof in
order to fund the Company's capital commitment to the Fund.
(a) In the event that the capital commitment of the Company to
the Fund is increased, the Capital Commitments of the Members shall be increased
in an amount, in the aggregate, equal to such increased obligation to the Fund.
Such aggregate increased commitment shall be shared between the Members in
proportion to their Capital Commitments.
(b) The Managing Members shall provide at least twelve (12)
business days' prior written notice of any required contribution to the capital
of the Company, specifying the amount thereof. The Members shall make their
contributions to the Company's capital in cash, except as otherwise determined
by the Managing Members. No Member shall be required to contribute any amount in
excess of such Member's Capital Commitment (as such Capital Commitment may be
increased pursuant to subparagraph (a)) without such Member's written consent.
Any capital contributions hereunder with respect to the Capital Commitments of
the Members (each a "Capital Contribution") shall be made in such amount as
shall be specified by the Managing Members and any such contributions required
hereunder shall be in proportion to the Members' respective Capital Commitments.
(c) In addition to the Capital Commitments set forth on Exhibit
A, E*Trade shall make Capital Contributions (up to a maximum of $250,000) to
fund any excess of the Company's operating expenses in excess of the Management
Fee. E*Trade's Percentage Interest shall not be increased as a result of such
Capital Contributions.
5.2. Liability of the Members.
(a) Except as expressly set forth herein, or as otherwise
required by law, no Member shall be liable for any debts or obligations of the
Company.
8.
<PAGE>
(b) Each Member acknowledges the obligation of the Company
pursuant to the Limited Partnership Agreement of the Fund to contribute to the
capital of the Fund cash or Securities to satisfy the Company's "clawback"
obligation to the Fund. Each Member agrees that, in the event the Company is
required to make a "clawback" payment pursuant to the Limited Partnership
Agreement of the Fund, he or she will return any or all distributions made to
him or her pursuant to this Agreement attributable to the Company's carried
interest in the Fund as may be required to satisfy such obligation, with each
Member being severally (but not jointly) liable, in proportion to their
respective shares in such distributions.
5.3. Liability of Transferees. For purposes of this Agreement, any
transferee of an interest in the Company, whether or not admitted as a
substitute Member or treated as a transferee or successor in interest who has
not been admitted as a substitute Member (an "Assignee") hereunder, shall be
treated as having contributed the amounts contributed to the Company by the
transferor, as having received distributions made to the transferor, and as
having been allocated any Net Income or Net Loss allocated to the transferor of
the interest in the Company held by the transferee. In addition, the transferee
shall be liable for the transferor's liability for future contributions to the
Company. Notwithstanding the above, the transfer of an interest shall not
relieve the transferor from any liability hereunder except to the extent that
the transferee has actually made all contributions or payments required of the
transferor.
5.4. Defaulting Members.
(a) If a Non-Managing Member fails to pay any amount which it is
required to pay to the Company on or before the date when such amount is due and
payable, such Non-Managing Member shall be deemed to be in default hereunder (a
"Defaulting Member"), and written notice of default shall be given to such Non-
Managing Member by the Managing Members. The Company shall be entitled to
enforce the obligations of each Non-Managing Member to make the contributions to
capital specified in this Agreement, and the Company shall have all remedies
available at law or in equity in the event any such contribution is not so made.
In the event of any legal proceedings relating to a default by a Defaulting
Member, such Defaulting Member shall pay all costs and expenses incurred by the
Company, including attorneys' fees, if the Company shall prevail. Further, such
Defaulting Member shall be obligated to pay the Company interest with respect to
the amount of any capital contribution not made when required by this Agreement,
with such interest commencing on the date such contribution is initially due and
ending on the date such contribution is made to the Company. Such interest shall
be calculated on the basis of the then current reference rate announced by Wells
Fargo Bank, N.A., or by any other U.S. commercial bank with capital in excess of
Five Hundred Million Dollars ($500,000,000) selected by the Managing Members,
plus two percent (2%) per annum.
(b) In addition to the remedies provided under Paragraph 5.4(a),
if the Defaulting Member does not remedy a default in the payment of a required
contribution within ten (10) business days of the receipt of the notice
specified in Paragraph 5.4(a): (i) the Defaulting Member shall no longer have
the right (if any) to vote on any Company matter, and (ii) if the Managing
Members so elect, the other Members shall have the option to pay the remaining
capital contributions of the Defaulting Member in accordance with any procedures
and in such proportions as may be established by the Managing Members. In such
event, such
9.
<PAGE>
Defaulting Member shall be deemed to have withdrawn from the Company and to have
forfeited its interest in the Net Income and Net Losses of the Company. Such
Defaulting Member shall be entitled to receive only the amount of its Capital
Account at the time of the default, with such amount payable, without interest,
to the Defaulting Member upon the dissolution of the Company.
ARTICLE VI
CAPITAL ACCOUNTS AND ALLOCATIONS
6.1. Capital Accounts. A Capital Account shall be maintained on the
Company's books for each Member. In the event any interest in the Company is
transferred in accordance with the terms of this Agreement, the transferee shall
succeed to the Capital Account of the transferor to the extent it relates to the
transferred interest.
6.2. Definitions. Unless the context requires otherwise, the following
terms have the meanings specified below for purposes of this Agreement:
(a) Book Value. The Book Value with respect to any asset shall
----------
be the asset's adjusted basis for federal income tax purposes, except as
follows:
(1) The initial Book Value of any asset contributed by a
Member to the Company shall be the fair market value of such asset at the
time of contribution, as determined by the contributing Member and the
Company.
(2) In the discretion of the Managing Members, the Book
Values of all Company assets may be adjusted to equal their respective fair
market values, as determined by the Managing Members, and the amount of
such adjustment shall be treated as Net Income or Net Loss and allocated to
the Capital Accounts of the Members, as of the following times: (A) the
acquisition of an additional interest in the Company by any new or existing
Member in exchange for more than a de minimis capital contribution; and (B)
the distribution by the Company to a Member of more than a de minimis
amount of Company assets in connection with an adjustment of such Member's
interest in the Company.
(3) The Book Values of all Company assets shall be adjusted
to equal their respective fair market values, as determined by the Managing
Members, and the amount of such adjustment shall be treated as Net Income
or Net Loss and allocated to the Capital Accounts of the Members, as of the
following times: (A) the date the Company is liquidated within the meaning
of Treasury Regulation Section 1.704-1(b)(2)(ii)(g); and (B) the
termination of the Company pursuant to the provisions of this Agreement.
(4) The Book Values of the Company's assets shall be
increased or decreased to the extent required under Treasury Regulation
Section 1.704-1(b)(2)(iv)(m) in the event that the adjusted tax basis of
the Company's assets is adjusted pursuant to Code Section 732, 734 or 743.
10.
<PAGE>
(5) The Book Value of a Company asset shall be adjusted by
the depreciation, amortization or other cost recovery deductions, if any,
taken into account by the Company with respect to such asset in computing
Net Income or Net Loss.
(b) Capital Account. An account maintained by the Company with
---------------
respect to each Member in accordance with the following provisions:
The Capital Account of each Member shall be increased by:
---------
(1) the amount of money and the fair market value of any property
contributed to the Company by such Member (in the case of a
contribution of property, net of any liabilities secured by such
property that the Company is considered to assume or hold subject to
for purposes of Section 752 of the Code),
(2) such Member's share of Net Income (or items thereof) allocated to his
Capital Account pursuant to this Agreement, and
(3) any other amounts required by Treasury Regulation Section 1.704-1(b),
provided the Managing Member determines that such increase is
consistent with the economic arrangement among the Members as
expressed in this Agreement.
and shall be decreased by:
---------
(A) the amount of money and the fair market value of any property
distributed by the Company (determined pursuant to Paragraph 12.2
hereof as of the date of distribution) to such Member pursuant to the
provisions of this Agreement (net of any liabilities secured by such
property that such Member is considered to assume or hold subject to
for purposes of Section 752 of the Code),
(B) such Member's share of or Net Loss (or items thereof) allocated to his
Capital Account pursuant to this Agreement, and
(C) any other amounts required by Treasury Regulation Section 1.704-1(b),
provided the Managing Member determines that such decrease is
consistent with the economic arrangement among the Members as
expressed in this Agreement.
(c) Fiscal Quarter. The Fiscal Quarters of the Company shall
--------------
begin on January l, April 1, July 1 and October 1, and end on March 31, June 30,
September 30 and December 31, respectively, except that the Company's first
Fiscal Quarter shall begin on the date of this Agreement and end on the next
regular quarterend.
(d) Fiscal Year. The Company's first Fiscal Year shall begin on
-----------
the date of this Agreement and end on December 31, 1999. Thereafter, the
Company's Fiscal Year shall commence on January 1 of each year and end on
December 31 of such year or, if earlier, the date the Company terminated during
such year. The Managing Members may at any time elect a different Fiscal Year if
permitted by the Code and the applicable Treasury Regulations.
11.
<PAGE>
(e) Net Income and Net Loss. The net book income or loss of the
-----------------------
Company for any relevant period, as computed in accordance with federal income
tax principles and as adjusted pursuant to the following provisions, under the
method of accounting elected by the Company for federal income tax purposes. The
Net Income or Loss of the Company shall be computed, inter alia, by:
(1) including as income or deductions, as appropriate, any
tax-exempt income and related expenses that are neither properly included
in the computation of taxable income nor capitalized for federal income tax
purposes;
(2) including as a deduction when paid or incurred
(depending on the Company's method of accounting) any amounts utilized to
organize the Company or to promote the sale of (or to sell) an interest in
the Company, except that amounts for which an election is properly made by
the Company under Section 709(b) of the Code shall be accounted for as
provided therein;
(3) including as a deduction any losses incurred by the
Company in connection with the sale or exchange of property notwithstanding
that such losses may be disallowed to the Company for federal income tax
purposes under the related party rules of Code Section 267(a)(1) or 707(b);
and
(4) calculating the gain or loss on disposition of Company
assets and the depreciation, amortization or other cost recovery
deductions, if any, with respect to the Company's assets by reference to
their Book Value rather than their adjusted tax basis.
(f) Percentage Interest. The Percentage Interest for each Member
-------------------
shall generally be as set forth on Exhibit A, as it may be amended from time to
time, and shall generally be determined by dividing the amount of each Member's
Capital Commitment by the sum of the Capital Commitments of all of the Members
(except as otherwise specifically provided in this Agreement). The sum of the
Members' Percentage Interests shall be one hundred percent (100%).
(g) Sale or Exchange. A sale, exchange, liquidation or similar
----------------
transaction, event or condition with respect to any assets (except realizations
of purchase discounts on commercial paper, certificates of deposit or other
money-market instruments) of the Company of the type that would cause any
realized gain or loss to be recognized for income tax purposes under the Code
(as determined without giving effect to the related party rules of Code Sections
267(a)(1) and 707(b)).
6.3. Allocation of Net Income or Loss.
(a) All Net Income or Loss of the Company attributable to the
Company's investment in the Fund shall be allocated among the Members in
proportion to their Percentage Interests.
(b) All Net Income or Loss attributable to the Company's Carry
shall be allocated among the Members in proportion to their Percentage
Interests; provided that the
12.
<PAGE>
Managing Members may, in their discretion, determine to allocate up to 20% of
E*Trade's allocable share of the Net Income attributable to the Carry realized
in a particular year to other Members. The Managing Members shall make any
determination to make such an allocation within two months after the end of each
Fiscal Year.
(c) All Net Income or Loss attributable to the Company's
operations shall be allocated entirely to E*Trade. For this purpose, Net Income
or Loss attributable to the Company's operations shall mean the Management Fee
received by the Company reduced by all expenses of the Company other than
expenses directly attributable to the Company's investment in the Fund or the
Company's Carry, as determined by the Managing Members, in their discretion.
ARTICLE VII
EXPENSES
The Company will pay all costs and expenses incurred in connection
with its activities. The Members shall be entitled to reimbursement by the
Company for expenses incurred by them relating to the Company's business, as
determined by the Managing Members in their discretion.
ARTICLE VIII
DISTRIBUTIONS
8.1. Interest. No interest shall be paid to any Member on account of
his interest in the capital of, or on account of his investment in, the Company.
8.2. Mandatory Distributions. Promptly upon receipt of any tax
distributions from the Fund, the Managing Members shall distribute such tax
distributions to the Members in proportion to their interests in the taxable
income of the Company for the period to which such distributions relate.
8.3. Discretionary Distributions. The Managing Members may in their
discretion make additional distributions of cash or Securities among the Members
(not including any Defaulting Members).
(a) The distribution pursuant to this Paragraph 8.3 shall be
made among the Members as follows (with the source of a particular distribution
being in the discretion of the Managing Members):
(1) To E*Trade to the extent attributable to any excess of
the Management Fee received over the Company's operating expenses (taking
into account as current or projected expenses any payments of compensation
to the Managing Members for their management of the Company if they are no
longer employed by E*Trade).
13.
<PAGE>
(2) Among the Members in proportion to their respective
shares of the cumulative amount of undistributed Net Income attributable to
the Company's Carry to the extent made from such undistributed Net Income.
(3) Among the Members in proportion to their respective
shares of the cumulative amount of undistributed Net Income attributable to
the Company's investment in the Fund to the extent made from such
undistributed Net Income.
(4) Among the Members in proportion to their Capital
Contributions to the extent constituting a return of capital.
(b) Immediately prior to any distribution in kind of Securities
(or other assets) pursuant to any provision of this Agreement, the difference
between the fair market value and the Book Value of any Securities (or other
assets) distributed shall be allocated to the Capital Accounts of the Members as
Net Income or Net Loss pursuant to Article VI.
(c) Securities distributed in kind pursuant to this Paragraph
8.3 shall be subject to such conditions and restrictions as the Managing Members
determine are legally required.
ARTICLE IX
ASSIGNMENT OR TRANSFER OF MEMBERS' INTERESTS
9.1. Restrictions on Transfer of Members' Interests. No Member may
sell, assign, pledge, mortgage or otherwise dispose of all or any portion of his
interest in the Company without the consent of the Managing Members.
9.2. Opinion of Counsel. Notwithstanding any other provision of this
Agreement, no transfer or other disposition of an interest in the Company shall
be permitted until the Managing Members shall have received, or waived receipt
of, an opinion of counsel reasonably satisfactory to them that the effect of
such transfer or disposition would not:
(a) result in a violation of the Securities Act;
(b) require the Company to register as an investment company
under the Investment Company Act of 1940, as amended;
(c) require the Company or the Fund to register as an investment
adviser under the Investment Advisers Act of 1940, as amended;
(d) result in a termination of the Company for tax purposes, if
such termination would have a material adverse effect on the Members;
(e) result in a violation of any law, rule or regulation by the
Members or the Company;
14.
<PAGE>
(f) cause the Company to be characterized as a "publicly traded
partnership" (within the meaning set forth in Sections 512, 7704(b) and 469(k)
of the Code) or materially increase the risk that the Company will be so
characterized.
Such legal opinion shall be provided to the Managing Members by the
Company's counsel. All costs associated with such opinion shall be borne by the
transferring Member.
9.3. Violation of Restrictions. In the event of any purported
transfer or other disposition of any Member's interest in the Company in
violation of the provisions of this Article IX, without limiting any other
rights of the Company, the Managing Members shall have the option, in their sole
discretion, to treat the Member as having withdrawn from the Company and to
purchase or cause the Company to purchase such Member's interest for cash at a
price equal to the value thereof determined by the Managing Members as of a date
selected by them. In the event of purchase, the terminated Member's and the
remaining Members' interests in the Company shall be appropriately adjusted, and
the subject Member (and his purported transferee) shall have no further interest
in the Company except to receive the purchase price, if any, for his interest as
determined by the Managing Members. Such option must be exercised, if at all, by
written notice to the affected Member (or his successor(s) in interest) given
not later than ninety (90) days after the Managing Members are advised in
writing of the purported transfer or disposition, and the purchase or withdrawal
shall be consummated on the date specified in such notice, which shall not be
later than sixty (60) days after it is given.
9.4. Agreement Not to Transfer. Each of the Members agrees with all
other Members that he, she or it will not make any disposition of his, her or
its interest in the Company, except as permitted by the provisions of this
Article IX.
9.5. Multiple Ownership. In the event of any disposition which shall
result in multiple ownership of any Member's interest in the Company, the
Managing Members may require one or more trustees or nominees to be designated
to represent a portion of or the entire interest transferred for the purpose of
receiving all notices which may be given and all payments which may be made
under this Agreement and for the purpose of exercising all rights which the
transferor as a Member had pursuant to the provisions of this Agreement.
9.6. Substitute Members. No transferee of a Member's interest may be
admitted to the Company as a substitute Member without the consent of the
Managing Members, which consent shall be subject to the sole discretion of the
Managing Members and shall not be subject to challenge by any transferor or
transferee.
ARTICLE X
VESTING OF PERCENTAGE INTERESTS
10.1. Vesting of Managing Members' and E*Trade's Interests. The
Managing Members' and E*Trade's interests in the Company shall be one hundred
percent (100%) vested as of the date hereof.
15.
<PAGE>
10.2. Vesting of Other Non-Managing Members' and Additional Members'
Interests. The interest in the Company of any Non-Managing Member (other than
E*Trade) and of any Additional Member shall vest in accordance with a vesting
schedule (if any) established by the Managing Members for such other Non-
Managing Member or Additional Member. Any amounts allocated Non-Managing Members
or Additional Members that, for any reason, do not vest shall revert to the
Members whose interest in such amounts were diluted by the original allocation
of such amounts to such Non-Managing Member or Additional Member.
ARTICLE XI
DISSOLUTION AND LIQUIDATION OF THE COMPANY
11.1. Liquidation Procedures. Upon termination of the Company in
accordance with Article II:
(a) The affairs of the Company shall be wound up and the Company
shall be dissolved. The Managing Members shall serve as the liquidators.
(b) Distributions in dissolution may be made in cash or in kind
or partly in cash and partly in kind.
(c) The Managing Members shall use their best judgment as to the
most advantageous time for the Company to sell investments or to make
distributions in kind provided that any such sales shall be made as promptly as
is consistent with obtaining the fair value thereof.
(d) The proceeds of dissolution shall be applied to payment of
liabilities of the Company and distributed to the Members in the following
order:
(1) to the creditors of the Company in the order of
priority established by law;
(2) to the Members, in respect of the positive balances in
their Capital Accounts, after all Net Income or Net Loss arising upon the
liquidation (including amounts arising in connection with a distribution of
Securities) has been allocated among the Members.
ARTICLE XII
FINANCIAL ACCOUNTING AND REPORTS
12.1. Tax Accounting and Reports. The Managing Members shall cause the
Company's tax return and IRS Form 1065, Schedule K-1, to be prepared and
delivered in a timely manner to the Non-Managing Members (but in no event later
than ninety (90) days after the close of each of the Company's Fiscal Years).
16.
<PAGE>
12.2. Valuation of Securities and Other Assets Owned by the Company.
(a) Subject to the specific standards set forth below, the
valuation of Securities and other assets and liabilities under this Agreement
shall be at fair market value. In determining the value of the interest of any
Member or in any accounting between the Members, no value shall be placed on the
goodwill or the name of the Company. Upon dissolution of the Company, the
Company's name and any goodwill associated with the name shall be distributed to
E*Trade.
(b) The following criteria shall be used for determining the
fair market value of Securities.
(1) Securities not subject to investment letter or other
similar restrictions on free marketability:
(A) If traded on one (1) or more securities exchanges
or traded on NASDAQ, the value of each Security shall be deemed to be
the Security's closing price as reported in the Wall Street Journal or
-------------------
another nationally recognized publication or service that reports such
data for the valuation date.
(B) If actively traded over-the-counter (but not on
NASDAQ), the value shall be deemed to be the closing bid price of such
Security on the valuation date.
(C) If there is no active public market, the Managing
Members shall make a determination of the fair market value on the
valuation date, taking into consideration developments concerning the
issuing company subsequent to the acquisition of its Securities, the
pricing of other private placements of Securities by the issuer, the
price of the Securities of other companies comparable to the issuer,
any financial data and projections of the issuing company provided to
the Managing Members and such other factor or factors as the Managing
Members may deem relevant.
(2) In the case of Securities subject to legal or
contractual restrictions on free marketability, appropriate adjustments to
the value determined under Paragraph 12.2(b)(1) above shall be made to
reflect the effect of the restrictions on transfer.
(3) The value of the Company's interest in the Fund shall
be the fair market value of the Company's interest in the Securities (and
other assets) of the Fund.
(4) If the Managing Members in good faith determine that,
because of special circumstances, the valuation methods set forth in this
Paragraph 12.2 do not fairly determine the value of a Security, the
Managing Members shall make such adjustments or use such alternative
valuation method as they deem appropriate.
17.
<PAGE>
12.3. Supervision; Inspection of Books. Proper and complete books of
account of the affairs of the Company shall be kept under the supervision of the
Managing Members at the principal office of the Company. Such books shall be
open to inspection by a Non-Managing Member, at any reasonable time, upon
reasonable notice, during normal business hours.
12.4. Confidentiality. All information provided to Non-Managing
Members under this Article XII shall be used by Non-Managing Members in
furtherance of their interests as Non-Managing Members and, subject to
disclosures required by applicable law, each Non-Managing Member hereby agrees
to maintain the confidentiality of such financial statements and other
information provided to Non-Managing Members hereunder.
ARTICLE XIII
OTHER PROVISIONS
13.1. Execution and Filing of Documents. The Managing Members shall
execute and file a Certificate conforming to the requirements of the Act in the
office of the Secretary of State for the State of Delaware and shall execute a
fictitious business name statement and file or cause such statement to be filed
if required by Delaware law.
13.2. Other Instruments and Acts. The Members agree to execute any
other instruments or perform any other acts that are or may be necessary to
effectuate and carry on the Company.
13.3. Binding Agreement. This Agreement shall be binding upon the
transferees, successors, assigns and legal representatives of the Members.
13.4. Governing Law. This Agreement shall be governed by and construed
under the laws of the State of Delaware as applied to agreements among Delaware
residents made and to be performed entirely within Delaware.
13.5. Notices. Any notice or other communication that a Member desires
to give to another Member shall be in writing and shall be deemed effectively
given upon personal delivery or upon deposit in any United States mail box, by
registered or certified mail, postage prepaid, or upon transmission by telegram
or telecopy, addressed to the other Member at the address shown in the exhibits
attached to this Agreement or at such other address as a Member may designate by
fifteen (15) days' advance written notice to the other Members.
13.6. Power of Attorney. By signing this Agreement, each Non-Managing
Member designates and appoints each of the Managing Members as its true and
lawful attorney, in its name, place and stead to make, execute, sign and file
such instruments, documents or certificates that may from time to time be
required of the Company by the laws of the United States of America, the laws of
the State of Delaware or any other state in which the Company shall conduct its
investment activities in order to qualify or otherwise enable the Company to
conduct its affairs in such jurisdictions; provided, however, that in no event
shall the Managing Members be deemed to have the authority under this Paragraph
13.6 to take any action that would result in any Non-Managing Member losing the
limitation on liability afforded hereunder.
18.
<PAGE>
13.7. Amendment Procedure. This Agreement (and any exhibits to this
Agreement) may be amended only with the written consent of the Managing Members.
No amendment shall, however, (i) enlarge the obligations of any Member under
this Agreement without the written consent of such Member, (ii) dilute the
relative interest of any Member in the Net Income, Net Loss, distributions or
capital of the Company without the written consent of such Member (except such
dilution as may result from additional capital contributions from the Members or
the admission of Additional Members as specifically permitted pursuant to this
Agreement or as a result of a termination or withdrawal of a Non-Managing
Member), or (iii) alter or waive the terms of this Paragraph 13.7 or Paragraphs
13.14 and 13.17. The Managing Members shall promptly furnish copies of any
amendments to this Agreement and the Company's Certificate to all Members.
13.8. Effective Date. This Agreement shall be effective on the date
set forth in the first paragraph of this Agreement.
13.9. Entire Agreement. This Agreement constitutes the entire
agreement of the Members and supersedes all prior agreements between the Members
with respect to the Company.
13.10. Titles; Subtitles. The titles and subtitles used in this
Agreement are used for convenience only and shall not be considered in the
interpretation of this Agreement.
13.11. Company Name. The Company shall have the exclusive ownership
and right to use the Company name (and any name under which the Company shall
elect to conduct its affairs) as long as the Company continues.
13.12. Exculpation. Neither the Managing Members nor their Affiliates
shall be liable to a Non-Managing Member or the Company for honest mistakes of
judgment, for action or inaction taken reasonably and in good faith for a
purpose that was reasonably believed to be in the best interests of the Company,
for losses due to such mistakes, action or inaction, or to the negligence,
dishonesty or bad faith of any employee, broker or other agent of the Company,
the Managing Members or their Affiliates provided that such employee, broker or
agent was selected, engaged or retained and supervised with reasonable care,
provided that this Paragraph 13.12 shall not extend to any action which
constitutes fraud, willful misconduct or gross negligence. The Managing Members
may consult with counsel and accountants in respect of Company affairs and be
fully protected and justified in any action or inaction that is taken in
accordance with the advice or opinion of such counsel or accountants, provided
that they shall have been selected with reasonable care. Notwithstanding any of
the foregoing to the contrary, the provisions of this Paragraph 13.12 and of
Paragraph 13.13 hereof shall not be construed so as to relieve (or attempt to
relieve) any person of any liability by reason of recklessness or intentional
wrongdoing or to the extent (but only to the extent) that such liability may not
be waived, modified or limited under applicable law, but shall be construed so
as to effectuate the provisions of this Paragraph 13.12 and of Paragraph 13.13
to the fullest extent permitted by law.
13.13. Indemnification. The Company agrees to indemnify, out of the
assets of the Company only, the Managing Members and their Affiliates (and their
agents), to the fullest extent permitted by law and to save and hold them
harmless from and in respect of all (a) reason-
19.
<PAGE>
able fees, costs, and expenses paid in connection with or resulting from any
claim, action or demand against the Managing Members, their Affiliates or any
agent thereof, the Company or their agents that arise out of or in any way
relate to the Company, its properties, business or affairs and (b) such claims,
actions and demands and any losses or damages resulting from such claims,
actions and demands, including amounts paid in settlement or compromise of any
such claim, action or demand; provided, however, that this indemnity shall not
extend to conduct not undertaken in good faith nor to any fraud, willful
misconduct or gross negligence. Any person receiving an advance with respect to
expenses shall be required to agree to return such advance to the Company in the
event it is subsequently determined that such person was not entitled to
indemnification hereunder. Any indemnified party shall promptly seek recovery
under any other indemnity or any insurance policies by which such indemnified
party may be indemnified or covered or from any portfolio company in which the
Company has an investment, as the case may be. No payment or advance may be made
to any person under this Paragraph 13.13 to any person who may have a right to
any other indemnity (by insurance or otherwise) unless such person shall have
agreed, to the extent of any other recovery, to return such payments or advances
to the Company.
13.14. Limitation of Liability of Members. Except as otherwise
expressly provided herein or as required by Delaware law, no Member shall be
bound by, nor be personally liable for, the expenses, liabilities or obligations
of the Company in excess of the balance of such Member's Capital Commitment to
the Company.
13.15. Arbitration. Any controversy or claim arising out of or
relating to this Agreement, or the breach thereof, shall be settled by
arbitration in San Francisco, California, in accordance with the rules, then
obtaining, of the American Arbitration Association. Any award shall be final,
binding and conclusive upon the parties. A judgment upon the award rendered may
be entered in any court having jurisdiction thereof.
13.16. Tax Matters Partner. Thomas A. Bevilacqua shall be the
Company's Tax Matters Partner under the Code ("TMP"). The TMP shall have the
right to resign by giving thirty (30) days' written notice to the Members. Upon
the resignation, dissolution or Bankruptcy of the TMP, a successor TMP shall be
elected by a majority in interest of the other Members. The TMP shall employ
experienced tax counsel to represent the Company in connection with any audit or
investigation of the Company by the Internal Revenue Service ("IRS") and in
connection with all subsequent administrative and judicial proceedings arising
out of such audit. The fees and expenses of such, and all expenses incurred by
the TMP in serving as the TMP, shall be Company expenses and shall be paid by
the Company. Notwithstanding the foregoing, it shall be the responsibility of
the Members, at their expense, to employ tax counsel to represent their
respective separate interests. If the TMP is required by law or regulation to
incur fees and expenses in connection with tax matters not affecting each of the
Members, then the TMP may, in his sole discretion, seek reimbursement from or
charge such fees and expenses to the Members on whose behalf such fees and
expenses were incurred. The TMP shall keep the Members informed of all
administrative and judicial proceedings, as required by Section 6223(g) of the
Code, and shall furnish a copy of each notice or other communication received by
the TMP from the IRS to each Member, except such notices or communications as
are sent directly to such Member by the IRS. The relationship of the TMP to the
Members is that of a fiduciary, and the TMP has a fiduciary obligation to
perform his duties as TMP in such manner as will serve the
20.
<PAGE>
best interests of the Company and all of the Company's Members. To the fullest
extent permitted by law, the Company agrees to indemnify the TMP and his agents
and save and hold them harmless from and in respect to all (i) reasonable fees,
costs and expenses in connection with or resulting from any claim, action or
demand against the TMP, the Managing Members or the Company that arise out of or
in any way relate to the TMP's status as TMP for the Company, and (ii) all such
claims, actions and demands and any losses or damages therefrom, including
amounts paid in settlement or compromise of any such claim, action or demand;
provided that this indemnity shall not extend to conduct by the TMP adjudged (i)
not to have been undertaken in good faith to promote the best interests of the
Company or (ii) to have constituted recklessness or intentional wrongdoing by
the TMP.
13.17. Taxation as Company. The Managing Members, while serving as
such, agree to use their best efforts to avoid taking any action that would
cause the Company to be classified as other than a partnership for federal
income tax purposes.
ARTICLE XIV
MISCELLANEOUS TAX COMPLIANCE PROVISIONS
14.1. Substantial Economic Effect. The provisions of this Agreement
are intended to comply generally with the provisions of Treasury Regulation
Section 1.704-1, and shall be interpreted and applied in a manner consistent
with such Regulations; and, to the extent the subject matter thereof is
otherwise not addressed by this Agreement, the provisions of Treasury
Regulations Section 1.704-1 are hereby incorporated by reference unless the
Managing Members shall determine that such incorporation will result in economic
consequences inconsistent with the economic arrangement among the Members as
expressed in this Agreement. In the event the Managing Members shall determine
that it is prudent to modify the manner in which the Capital Accounts, or any
debits or credits thereto, are computed or allocated or the manner in which
distributions and contributions upon liquidation (or otherwise) of the Company
(or any Member's interest therein) are effected in order to comply with such
Regulations and other applicable tax laws, or to assure that the Company is
treated as a partnership for tax purposes, or to achieve the economic
arrangement of the Members as expressed in this Agreement, then, notwithstanding
anything in this Agreement to the contrary, the Managing Members may make such
modification, provided that it is not likely to have a material detrimental
effect on the tax consequences and total amounts distributable to any Non-
Managing Member pursuant to Articles VIII and XI as applied without giving
effect to such modification. The Managing Members shall also (i) make any
adjustments that are necessary or appropriate to maintain equality between the
Capital Accounts of the Members and the amount of Company capital reflected on
the Company's balance sheet, as computed for book purposes pursuant to this
Agreement, in accordance with Regulations Section 1.704-1(b)(2)(iv)(g), and (ii)
make any appropriate modifications in the event unanticipated events (such as
the incurrence of nonrecourse indebtedness) might otherwise cause the
allocations under this Agreement not to comply with Treasury Regulations Section
1.704, provided in each case that the Managing Members determine that such
adjustments or modifications shall not result in economic consequences
inconsistent with the economic arrangement among the Members as expressed in
this Agreement.
21.
<PAGE>
14.2. Income Tax Allocations.
(a) Except as otherwise provided in this paragraph or as
otherwise required by the Code and the rules and Treasury Regulations
promulgated thereunder, income, gain, loss, deduction, or credit of the Company
for income tax purposes shall be allocated in the same manner the corresponding
book items are allocated pursuant to this Agreement.
(b) In accordance with Code Section 704(c) and the Treasury
Regulations thereunder, income, gain, loss and deduction with respect to any
asset contributed to the capital of the Company shall, solely for tax purposes,
be allocated between the Members so as to take account of any variation between
the adjusted basis of such property to the Company for federal income tax
purposes and its initial Book Value.
(c) In the event the Book Value of any Company asset is
adjusted pursuant to the terms of this Agreement, subsequent allocations of
income, gain, loss and deduction with respect to such asset shall take account
of any variation between the adjusted basis of such asset for federal income tax
purposes and its Book Value in the same manner as under Code Section 704(c) and
the Treasury Regulations thereunder.
14.3. Withholding.
The Company shall at all times be entitled to make payments with
respect to any Member in amounts required to discharge any obligation of the
Company to withhold or make payments to any governmental authority with respect
to any federal, state, local or other jurisdictional tax liability of such
Member arising as a result of such Member's interest in the Company. Any such
withholding payment shall be charged to the Member's Capital Account.
[The remainder of this page is intentionally left blank.]
22.
<PAGE>
IN WITNESS WHEREOF, the Members have executed this Agreement as of the
date first above written.
MANAGING MEMBERS
/s/ CHRISTOS M. COTSAKOS
__________________________________
Christos M. Cotsakos
/s/ THOMAS A. BEVILACQUA
__________________________________
Thomas A. Bevilacqua
NON-MANAGING MEMBER
E*Trade Group, Inc.
By: /s/ THOMAS A. BEVILACQUA
-------------------------------
Title:____________________________
23.
<PAGE>
EXHIBIT A
MEMBERS' CAPITAL COMMITMENTS
AND PERCENTAGE INTERESTS
Capital Percentage
Name/Address Commitment Interest
- ----------------------------------------------------------------------------
Managing Members:
Christos M. Cotsakos $ 87,500 25%
Thomas A. Bevilacqua 87,500 25%
Non-Managing Member:
E*Trade Group, Inc. 175,000 50%*
-------- ------
$350,000 100%
____________________
* Subject to reduction (but not below 40%), with respect to the allocation of
the Company's Carry, as described in Section 6.3(b) of the Agreement.
A-1
<PAGE>
EXHIBIT 10.6
Execution Copy
E*Trade eCommerce Fund, L.P.
A Delaware Limited Partnership
AMENDED AND RESTATED
LIMITED PARTNERSHIP AGREEMENT
October 8, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I NAME, PURPOSE AND PRINCIPAL OFFICE OF PARTNERSHIP;
DEFINITIONS.................................................................................... 1
1.1. Partnership Name....................................................................... 1
1.2. Partnership Purpose; Powers............................................................ 1
1.3. Registered Office and Agent............................................................ 2
1.4. Principal Office....................................................................... 2
1.5. Definitions............................................................................ 2
ARTICLE II TERM AND TERMINATION OF THE PARTNERSHIP.................................................. 9
2.1. Term of Partnership.................................................................... 9
2.2. Termination............................................................................ 9
2.3. Extension of Term...................................................................... 10
2.4. Events Affecting a Member of the General Partner....................................... 10
2.5. Events Affecting a Limited Partner of the Partnership.................................. 10
ARTICLE III CAPITAL CONTRIBUTIONS................................................................... 10
3.1. Capital Commitment of the Limited Partners............................................. 10
3.2. Capital Contributions by the Limited Partners.......................................... 11
3.3. Capital Commitment of the General Partner.............................................. 11
3.4. Capital Contributions of the General Partner........................................... 11
3.5. Defaulting Partners.................................................................... 12
ARTICLE IV CAPITAL ACCOUNTS AND ALLOCATIONS......................................................... 13
4.1. Capital Accounts....................................................................... 13
4.2. Adjustments to Capital Accounts........................................................ 13
4.3. Allocation of Capital Transaction Gain or Loss......................................... 14
4.4. Allocation of Net Income or Loss....................................................... 15
4.5. Reallocation of Losses................................................................. 15
4.6. Allocation Among Partners as a Group................................................... 15
4.7. Special Allocation Among Late-Entering Limited Partners of Organization
and Operating Expenses................................................................. 15
4.8. Allocations and Distributions Attributable to Removed General Partner.................. 16
ARTICLE V MANAGEMENT FEE; EXPENSES.................................................................. 16
5.1. Entitlement to Management Fee.......................................................... 16
5.2. Payment of Management Fee.............................................................. 16
5.3. Payment of Expenses.................................................................... 17
5.4. No Salaries to General Partner......................................................... 17
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
ARTICLE VI WITHDRAWALS BY AND DISTRIBUTIONS TO THE PARTNERS......................................... 17
6.1. Interest............................................................................... 17
6.2. Withdrawals by the Partners............................................................ 18
6.3. Mandatory Cash Distributions........................................................... 18
6.4. Additional Distributions............................................................... 18
ARTICLE VII MANAGEMENT, DUTIES AND RESTRICTIONS..................................................... 19
7.1. Management by General Partner.......................................................... 19
7.2. Indebtedness; Restrictions; Reinvestments.............................................. 20
7.3. Investment Representation of the Limited Partners...................................... 21
7.4. Accredited Investor Representation..................................................... 22
7.5. No Control by the Limited Partners; Rights of the Limited Partners..................... 22
7.6. Admission of Additional Partners....................................................... 23
7.7. Assignment or Transfer of Partnership Interests........................................ 24
7.8. Investment Opportunities; Conflicts of Interest........................................ 25
ARTICLE VIII DISSOLUTION AND LIQUIDATION OF THE PARTNERSHIP......................................... 26
8.1. Liquidation Procedures................................................................. 26
8.2. Liability of General Partner to Return Excess Distributions............................ 27
8.3. Liquidating Trust...................................................................... 28
ARTICLE IX FINANCIAL ACCOUNTING AND REPORTS......................................................... 29
9.1. Financial and Tax Accounting and Reports............................................... 29
9.2. Valuation of Securities and Other Assets Owned by the Partnership...................... 29
9.3. Supervision; Inspection of Books....................................................... 30
9.4. Quarterly Reports...................................................................... 30
9.5. Confidentiality........................................................................ 31
ARTICLE X OTHER PROVISIONS.......................................................................... 31
10.1. Execution and Filing of Documents...................................................... 31
10.2. Other Instruments and Acts............................................................. 31
10.3. Binding Agreement...................................................................... 31
10.4. Governing Law.......................................................................... 31
10.5. Notices................................................................................ 31
10.6. Power of Attorney...................................................................... 32
10.7. Amendment.............................................................................. 32
10.8. Effective Date......................................................................... 32
10.9. Entire Agreement....................................................................... 32
10.10. Titles; Subtitles...................................................................... 32
10.11. Partnership Name....................................................................... 33
10.12. Exculpation............................................................................ 33
10.13. Indemnification........................................................................ 33
10.14. Limitation of Liability of the Limited Partners........................................ 33
10.15. Arbitration............................................................................ 34
10.16. Tax Matters Partner.................................................................... 34
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
10.17. Taxation as Partnership................................................................ 34
10.18. Deliveries of Opinions................................................................. 34
ARTICLE XI MISCELLANEOUS TAX COMPLIANCE PROVISIONS.................................................. 35
11.1. Substantial Economic Effect............................................................ 35
11.2. Other Allocations...................................................................... 35
11.3. Income Tax Allocations................................................................. 36
11.4. Withholding............................................................................ 37
EXHIBIT A Partners' Capital Commitments; Partnership Percentages
EXHIBIT B Securities Contributed by E*Trade
</TABLE>
iii
<PAGE>
E*Trade eCommerce Fund, L.P.
a Delaware limited partnership
AMENDED AND RESTATED
LIMITED PARTNERSHIP AGREEMENT
E*Trade Ventures I, LLC, a Delaware limited liability company (the
"General Partner"), as general partner, and E*Trade Group, Inc., Christos M.
---------------
Cotsakos and Thomas A. Bevilacqua, as limited partners, entered into a Limited
Partnership Agreement dated September 23, 1999. By their execution of this
Agreement, said original Partners hereby amend and restate that Limited
Partnership Agreement to read as provided herein.
Each of the individuals, corporations and other entities whose names
are set forth under the heading "Limited Partners" on Exhibit A attached hereto
who execute a counterpart of this Agreement, as limited partners (the "Limited
-------
Partners" and, together with the General Partner, the "Partners") hereby enter
- --------
into this Amended and Restated Limited Partnership Agreement effective as of
October 8, 1999;
The Partners, in consideration of their mutual covenants contained
herein, agree to carry on a limited partnership pursuant to the terms of this
Agreement and the Delaware Revised Uniform Limited Partnership Act (the
"Delaware Act").
ARTICLE I
NAME, PURPOSE AND
PRINCIPAL OFFICE OF PARTNERSHIP; DEFINITIONS
1.1. Partnership Name. The name of the Partnership is "E*Trade
----------------
eCommerce Fund, L.P." The affairs of the Partnership shall be conducted under
such name or such other name as the General Partner may, in its discretion,
determine. The General Partner will provide prompt written notice to the Limited
Partners of any change in the name of the Partnership. E*Trade Group, Inc.
hereby grants the Partnership, at no cost, the right to use the "E*Trade" name
for the term of the Partnership.
1.2. Partnership Purpose; Powers.
---------------------------
(a) Purpose. The purpose of the Partnership is to (i) seek
-------
capital appreciation through the acquisition, holding, sale, distribution or
other disposition of investments in Portfolio Companies and (ii) engage in any
other lawful activities determined by the General Partner to be necessary or
advisable in connection with the foregoing.
<PAGE>
(b) Powers. Subject to all of the terms and provisions hereof,
------
the Partnership shall have all powers necessary, suitable or convenient for the
accomplishment of the purposes of the Partnership, including, without
limitation, the following:
(1) to purchase, sell, invest and dispose of Securities of
every kind, including, without limitation, capital stock, limited
partnership interests, bonds, notes, debentures, securities convertible
into other securities, trust receipts and other obligations, instruments or
evidences of indebtedness, as well as in rights, warrants and options to
purchase securities;
(2) to make and perform all contracts and engage in all
activities and transactions necessary or advisable to carry out the
purposes of the Partnership, including, without limitation, the purchase,
sale, transfer, pledge and exercise of all rights, privileges and incidents
of ownership or possession with respect to any Partnership asset or
liability; and the guarantee of or becoming surety for the debts of others;
and
(3) otherwise to have all the powers available to it as a
limited partnership under the Delaware Act.
1.3. Registered Office and Agent. The initial address of the
---------------------------
Partnership's registered office in Delaware is 15 East North Street, Dover,
County of Kent, and its initial agent at such address for service of process is
Incorporating Services Limited. The General Partner shall provide prompt written
notice to the Limited Partners of any change of the Partnership's registered
offices.
1.4. Principal Office. The principal office of the Partnership shall
----------------
initially be located at 4500 Bohannon Drive, Menlo Park, California 94025. The
General Partner may change the location of the principal office of the
Partnership at any time upon prompt written notice to the Limited Partners
indicating the new location of such principal office.
1.5. Definitions. As used in this Agreement, the following terms
-----------
shall have the following meanings:
Adjusted Capital Balance. As of any date, the balance of the
------------------------
General Partner's Capital Account as of such date computed without regard to any
such balance created as a result of any interest as a Limited Partner held by
the General Partner.
After-Tax Distribution Amount shall have the meaning set forth in
-----------------------------
Paragraph 8.2.
Agreement. This Amended and Restated Limited Partnership Agreement of
---------
E*Trade eCommerce Fund, L.P., a Delaware limited partnership, as it may be
amended in accordance with the terms hereof.
Bankruptcy. A person or entity shall be deemed bankrupt if such
----------
person:
(1) makes an assignment for the benefit of creditors;
2.
<PAGE>
(2) files a voluntary petition in bankruptcy;
(3) is adjudicated as bankrupt or insolvent or has entered
against such person an order for relief in any bankruptcy or insolvency
proceeding;
(4) files a petition or answer seeking for himself or
itself any reorganization, arrangement, composition, readjustment,
liquidation, dissolution or similar relief under any statute, law or
regulation;
(5) files an answer or other pleading admitting or failing
to contest the material allegations of a petition filed against him or it
in any proceeding of this nature; or
(6) seeks, consents to or acquiesces in the appointment of
a trustee, receiver or liquidator or of all or any substantial part of his
or its properties.
Book Value. The Book Value with respect to any asset shall be the
----------
asset's adjusted basis for federal income tax purposes, except as follows:
(1) The initial Book Value of any property other than money
contributed by a Partner to the Partnership shall be the fair market value
of such asset at the time of contribution, as determined by the
contributing Partner and the Partnership The initial Book Value of the
Securities contributed by E*Trade shall be as set forth on Exhibit B.
(2) In the discretion of the General Partner, the Book
Values of all Partnership assets may be adjusted to equal their respective
fair market values, as determined by the General Partner consistent with
the principles of Paragraph 9.2, and the amount of such adjustment shall be
treated as Capital Transaction Gain or Loss and allocated to the Capital
Accounts of the Partners pursuant to Paragraph 4.3, as of the following
times: (A) the acquisition of an additional interest in the Partnership by
any new or existing Partner (other than pursuant to Paragraph 7.6(b)) in
exchange for more than a de minimis Capital Contribution; and (B) the
distribution by the Partnership to a Partner of more than a de minimis
amount of Partnership assets in connection with an adjustment of such
Partner's Partnership Percentage.
(3) The Book Values of all Partnership assets shall be
adjusted to equal their respective fair market values, as determined by the
General Partner consistent with the principles of Paragraph 9.2, and the
amount of such adjustment shall be treated as Capital Transaction Gain or
Loss and allocated to the Capital Accounts of the Partners pursuant to
Paragraph 4.3, as of the following times: (A) the date the Partnership is
liquidated within the meaning of Treasury Regulation Section 1.704-
1(b)(2)(ii)(g); and (B) the termination of the Partnership pursuant to the
provisions of this Agreement.
(4) The Book Values of Partnership assets shall be
increased or decreased to the extent required under Treasury Regulation
Section 1.704-1(b)(2)(iv)(m) in the event that the adjusted tax basis of
Partnership assets is adjusted pursuant to Code Section 732, 734 or 743.
3.
<PAGE>
(5) The Book Value of a Partnership asset shall be adjusted
by the depreciation, amortization or other cost recovery deductions, if
any, taken into account by the Partnership with respect to such asset in
computing Net Income or Loss.
Capital Commitment shall have the meaning set forth in Paragraph 3.1.
------------------
Capital Transaction Gain or Loss. An amount computed for any relevant
--------------------------------
period, as of the last day thereof, that is equal to the total of (i) the
aggregate amount recognized on the Sale or Exchange of Securities or other
assets held by the Partnership during such period less the sum of (A) the Book
Value of such Securities or other assets as of the date of such Sale or
Exchange, plus (B) the Partnership's expenses associated with the Sale or
Exchange of such Securities or other assets; (ii) the Partnership's distributive
share of income, gain, loss, deduction or credit (or item thereof) derived from
its interest in partnerships, limited liability companies and other pass-through
entities to the extent such amounts would be Capital Transaction Gain or Loss if
realized directly by the Partnership; (iii) dividend income of the Partnership
during such period with respect to Securities of Portfolio Companies, whether
derived from actual or constructive distributions of cash or property; (iv)
interest (and original issue discount) income of the Partnership during such
period from Securities of Portfolio Companies; (v) the aggregate adjustment to
the Book Value of Partnership assets during such period computed under
subparagraphs (2), (3) and (4) of the definition "Book Value"; and (vi) any
other amount specifically designated as Capital Transaction Gain or Loss in this
Agreement, including (without limitation) such amounts so designated pursuant to
Paragraph 6.4(f).
Capital Contributions means a Partner's capital contributions
---------------------
theretofore made to the Partnership at any point in time. For purposes of
Paragraph 6.4(b), the General Partner's Capital Contributions shall include
solely its Capital Contributions made with respect to its interest as General
Partner.
Certificate of Limited Partnership. The Certificate of Limited
----------------------------------
Partnership of E*Trade eCommerce Fund, L.P., a Delaware limited partnership,
filed with the Secretary of State of Delaware, as it may be amended in
accordance with the terms hereof.
Code. The Internal Revenue Code of 1986, as amended from time to time
----
(and any corresponding provisions of succeeding law).
Defaulting Partner shall have the meaning set forth in Paragraph
------------------
3.5(a).
Delaware Act means the Delaware Revised Uniform Limited Partnership
------------
Act.
Drawdown shall have the meaning set forth in Paragraph 3.2.
--------
Drawdown Date shall have the meaning set forth in Paragraph 3.2.
-------------
Drawdown Notice shall have the meaning set forth in Paragraph 3.2.
---------------
E*Trade. E*Trade Group, Inc. a Delaware corporation.
-------
Excess Distribution Amount shall have the meaning set forth in
--------------------------
Paragraph 8.2.
4.
<PAGE>
Excess Negative Balance shall have the meaning set forth in Paragraph
-----------------------
11.2(e).
Fair Value Capital Accounts means the Partners' Capital Accounts
---------------------------
computed in accordance with Article IV, but treating each security and each
other asset owned by the Partnership as if, on the date as of which such
computation is being made, such security or other asset had been sold as its
fair market value (determined in accordance with Paragraph 9.2) and any
resulting Capital Transaction Gain or Loss had been allocated to the Partners'
Capital Accounts in accordance with Article IV.
Fair Value Test means that, with respect to each Limited Partner and
---------------
any proposed Partnership distribution, the sum of (i) the amount of the
cumulative distributions which such Limited Partner has received from the
Partnership, plus (ii) the amount of such Limited Partner's Fair Value Capital
Account, in each case after giving effect to the proposed distribution, is equal
to at least one hundred percent (100%) of such Limited Partner's Capital
Contributions.
Final Closing Date shall have the meaning set forth in Paragraph
------------------
7.6(b).
Fiscal Quarter. The Fiscal Quarters of the Partnership shall begin on
--------------
January 1, April 1, July 1, and October 1, and end on March 31, June 30,
September 30, and December 31, respectively, except that the Partnership's first
Fiscal Quarter shall begin on the date of this Agreement and end on the next
regular quarter end.
Fiscal Year. The Partnership's first Fiscal Year shall begin on the
-----------
date of this Agreement and end on December 31, 1999. Thereafter, the
Partnership's Fiscal Year shall commence on January 1 of each year and end on
December 31 of such year or, if earlier, the date the Partnership terminated
during such year. The General Partner at any time may, in its discretion, elect
a different Fiscal Year. The General Partner shall provide prompt written notice
to the Limited Partners of any such election to change the Fiscal Year.
Follow-On Investment. An investment in the Securities of any existing
--------------------
Portfolio Company in which the Partnership has previously made an investment.
Foreign Entity shall have the meaning set forth in Paragraph 7.2(i).
--------------
General Partner. E*Trade Ventures I, LLC.
---------------
General Partner Distributions shall have the meaning set forth in
-----------------------------
Paragraph 8.2(d).
Insulated Limited Partner shall have the meaning set forth in
-------------------------
Paragraph 7.5(b).
Interim Period. If a Partnership interest is transferred, the General
--------------
Partner converts to a Limited Partner, the Partnership Percentage of any Partner
changes, a Partner withdraws or a new Partner is admitted to the Partnership
other than on the first day of any Fiscal Year, if the General Partner shall so
elect, the date of such event or election shall commence an Interim Period. An
Interim Period shall end on the last day of the Fiscal Year in which the
5.
<PAGE>
Interim Period began or on the day immediately preceding the beginning of a new
Interim Period, whichever is earlier.
Investment Period. The period beginning as of the date of this
-----------------
Agreement and ending December 31, 2005.
Limited Liability Entity Opinion shall have the meaning set forth
--------------------------------
in Paragraph 7.2(i).
Limited Partners. Each of the persons listed under the heading
----------------
"Limited Partners" on Exhibit A attached hereto and each other person duly
admitted to the Partnership as a limited partner subsequent to the date hereof.
Majority in Interest of the Limited Partners. Limited Partners
--------------------------------------------
having Capital Contributions the sum of which is at least a majority of the
aggregate Capital Contributions of the Partners (excluding, for the purpose of
calculating such requisite percentage, the Capital Contributions of the General
Partner, including interests held by the General Partner as a Limited Partner).
Management Fee shall have the meaning set forth in Paragraph 5.1.
--------------
Marketable Securities. Securities that are (i) actively traded on
---------------------
a national securities exchange or through the National Association of Securities
Dealers, Inc. Automated Quotation System and the aggregate total of all such
Securities then held by the Partnership would, if distributed in kind to the
Limited Partners, be freely transferable pursuant to SEC Rule 144 (without
regard to any volume limitations thereunder), an effective registration under
the Securities Act or an exemption therefrom, (ii) direct obligations of, or
obligations guaranteed as to principal and interest by, the United States, or
(iii) certificates of deposit maturing within one (1) year or less issued by an
institution insured by the Federal Deposit Insurance Corporation, or similar
securities.
Media Company. An entity that, directly or indirectly, owns,
-------------
controls or operates or has an attributable interest in (i) a U.S. broadcast
radio or television station or a U.S. cable television system, (ii) a "daily
newspaper" (as such term is defined in Section 73.3555 of the Federal
Communication Commission's ("FCC") rules and regulations), (iii) any U.S.
communications facility operated pursuant to a license granted by the FCC and
subject to the provisions of Section 310(b) of the Communications Act of 1934,
as amended, or (iv) any other business that is subject to FCC regulations under
which the ownership of the Partnership in such entity may be attributed to a
Limited Partner or under which the ownership of a Limited Partner in another
business may be subject to limitation or restriction as a result of the
ownership of the Partnership in such entity.
Net Capital Gain. With respect to a Partner, the aggregate amount
----------------
of net taxable income and net taxable gain allocated to such Partner for federal
income tax purposes under this Agreement to the extent such allocations of
taxable income and gain are effected as a result of the allocation to the
Capital Account of such Partner under this Agreement of corresponding items of
Capital Transaction Gain (net of items of Capital Transaction Loss). In
calculating Net
6.
<PAGE>
Capital Gain for any year, capital losses of the Partnership in prior years
shall be deemed to be carried over and to offset Net Capital Gain in later
years.
Net Income and Net Loss. Except as otherwise specifically
-----------------------
provided in this Agreement, the net book income or loss of the Partnership for
any relevant period computed without taking into account items comprising
Capital Transaction Gain or Loss. The net book income or loss of the Partnership
shall be computed in accordance with Federal income tax principles, as adjusted
pursuant to the following provisions, under the method of accounting elected by
the Partnership for federal income tax purposes. The net book income or loss of
the Partnership shall be computed, inter alia, by:
(1) including as income or deductions, as
appropriate, any tax-exempt income and related expenses that are
neither properly included in the computation of taxable income nor
capitalized for federal income tax purposes;
(2) including as a deduction when paid or incurred
(depending on the Partnership's method of accounting) any amounts
utilized to organize the Partnership or to promote the sale of (or to
sell) an interest in the Partnership, except that amounts for which an
election is properly made by the Partnership under Section 709(b) of
the Code shall be accounted for as provided therein;
(3) including as a deduction any losses incurred by
the Partnership in connection with the sale or exchange of property
notwithstanding that such losses may be disallowed to the Partnership
for federal income tax purposes under the related party rules of Code
Section 267(a)(1) or 707(b); and
(4) calculating the gain or loss on disposition of
Partnership assets and the depreciation, amortization or other cost
recovery deductions, if any, with respect to Partnership assets by
reference to their Book Value rather than their adjusted tax basis.
Nonmarketable Securities. All Securities other than Marketable
------------------------
Securities.
One-Third in Interest of the Limited Partners. Limited Partners
---------------------------------------------
having Capital Contributions the sum of which is at least one third of the
aggregate Capital Contributions of the Partners (excluding for the purpose of
calculating such requisite percentage, the Capital Contributions of the General
Partner, including interests held by the General Partner as a Limited Partner).
Operating Expenses shall have the meaning set forth in Paragraph
------------------
4.6.
Original Partners. Each of the persons listed as of the date
-----------------
hereof as Limited Partners on Exhibit A attached hereto, and any transferee of
all or any portion of such Limited Partner's interest in the Partnership.
Partners. The General Partner and the Limited Partners.
--------
7.
<PAGE>
Partnership. E*Trade eCommerce Fund, L.P., the partnership
-----------
formed pursuant to this Agreement.
Partnership Percentage. The Partnership Percentage for each
----------------------
Partner shall be determined by dividing the amount of each Partner's Capital
Commitment by the sum of the Capital Commitments of all of the Partners. The sum
of the Partners' Partnership Percentages shall be one hundred percent (100%).
The aggregate Partnership Percentage of the Limited Partners as a group shall be
the sum of the Partnership Percentages of each of the Limited Partners as
limited partners.
Payout means the time when each Limited Partner has received
------
cumulative distributions from the Partnership in an amount equal to its Capital
Commitment, as adjusted pursuant to any provision of this Agreement (less any
portion thereof which such Limited Partner has failed to pay the Partnership
when due or subsequently pursuant to Paragraph 3.5). In the event a distribution
of cash or Securities causes the Partnership to reach and exceed Payout, the
portion of the amount distributed which was necessary to reach Payout will be
deemed to have been distributed before Payout, and any remaining amount will be
deemed to have been distributed after Payout.
Portfolio Company. Any company in which the Partnership makes an
-----------------
investment.
Principals shall have the meaning set forth in Paragraph 7.8.
----------
Reallocated Loss shall have the meaning set forth in Paragraph
----------------
4.4.
Sale or Exchange. A sale, exchange, liquidation or similar
----------------
transaction, event, or condition with respect to any assets (except realizations
of purchase discounts on commercial paper, certificates of deposit, or other
money-market instruments) of the Partnership of the type that would cause any
realized gain or loss to be recognized for income tax purposes under the Code
(as determined without giving effect to the related party rules of Code Sections
267(a)(1) and 707(b)).
Securities. Securities of every kind and nature and rights and
----------
options with respect thereto, including stock, notes, bonds, debentures,
evidences of indebtedness and other business interests of every type, including
interests in partnerships, joint ventures, proprietorships and other business
entities.
Securities Act. The Securities Act of 1933, as amended.
--------------
Shortfall Amount shall have the meaning set forth in Paragraph
----------------
3.5(d).
Tax Distribution shall have the meaning set forth in Paragraph
----------------
6.3.
Termination Date shall have the meaning set forth in Paragraph
----------------
2.3.
TMP shall have the meaning set forth in Paragraph 10.16.
---
Total Committed Capital shall have the meaning set forth in
-----------------------
Paragraph 3.1.
8.
<PAGE>
Total General Partner Net Gain or Loss shall have the meaning set
--------------------------------------
forth in Paragraph 8.2(c).
Treasury Regulations. The Income Tax Regulations promulgated
--------------------
under the Code, as such Regulations may be amended from time to time (including
corresponding provisions of succeeding Regulations).
Two-Thirds in Interest of the Limited Partners. Limited Partners
----------------------------------------------
having Capital Contributions the sum of which is at least sixty-six and two-
thirds percent (66-2/3%) of the aggregate Capital Contributions of the Partners
(excluding, for the purpose of calculating such requisite percentage, the
Capital Contributions of the General Partner, including interests held by the
General Partner as a Limited Partner).
Two-Thirds Invested shall have the meaning set forth in Paragraph
-------------------
7.8(b).
Zero Balance Amount means, with respect to any Partner and at any
-------------------
time, the amount of such Partner's Capital Commitment which such Partner has not
paid to the Partnership in cash on or before such time, and in addition, solely
with respect to the General Partner: the aggregate amount of distributions
received by the General Partner from the Partnership, but only to the extent
that such distributions exceed the aggregate amount of distributions the General
Partner would have received if it had made its Capital Contribution as a Limited
Partner and did not hold an interest as a General Partner.
ARTICLE II
TERM AND TERMINATION OF THE PARTNERSHIP
2.1. Term of Partnership. The Partnership shall continue until
-------------------
the tenth (10th) anniversary of the Final Closing Date unless sooner terminated
as provided in Paragraph 2.2 or by operation of law or extended as provided in
Paragraph 2.3.
2.2. Termination. The Partnership shall terminate prior to the
-----------
tenth (10th) anniversary of the Final Closing Date:
(a) Ninety (90) days after the Bankruptcy or dissolution
of the General Partner unless within thirty (30) days after such event Two-
Thirds in Interest of the Limited Partners consent in writing to a continuation
of the Partnership and the appointment of a successor general partner;
(b) One hundred twenty (120) days after the commencement
of any proceeding against the General Partner seeking reorganization,
arrangement, composition, readjustment, liquidation, dissolution or similar
relief under any statute, law or regulation, if the proceeding has not been
dismissed, or if within ninety (90) days after the appointment without its
consent or acquiescence of a trustee, receiver or liquidator of the General
Partner or of all or any substantial part of his properties, the appointment is
not vacated or stayed, or within ninety (90) days after the expiration of any
such stay, the appointment is not vacated, unless Two-Thirds in Interest of the
Limited Partners consent in writing to a continuation of the Partnership and the
appointment of a successor general partner;
9.
<PAGE>
(c) Ninety (90) days after Christos M. Cotsakos ceases to
be actively involved in the management of the Partnership for any reason unless
within such period a Majority in Interest of the Limited Partners (calculated by
treating the interest of E*Trade as a non-voting interest) elect to continue the
Partnership, with such additional personnel being involved in the management of
the Partnership as shall be acceptable to the General Partner and a Majority in
Interest of the Limited Partners (calculated by treating the interest of E*Trade
as a non-voting interest);
(d) Upon the vote of Two-Thirds in Interest of the
Limited Partners after a final determination of a court of competent
jurisdiction that the General Partner intentionally or willfully breached any
material provision of this Agreement or that the General Partner was grossly
negligent in the performance of its duties hereunder; or
(e) Upon the consent of the General Partner and One-Third
in Interest of the Limited Partners.
2.3. Extension of Term. The term of the Partnership may be
-----------------
extended for up to one year after the tenth (10th) anniversary of the Final
Closing Date in the discretion of the General Partner. The General Partner shall
deliver written notice of any such extension to the Limited Partners. The term
of the Partnership may be extended thereafter only with the consent of the
General Partner and Two-Thirds in Interest of the Limited Partners. Any such
extension shall be subject to the earlier termination of the Partnership as
provided in Paragraph 2.2. The last day of the term of the Partnership, as such
may be extended as provided herein, is referred to herein as the "Termination
-----------
Date."
- ----
2.4. Events Affecting a Member of the General Partner. The
------------------------------------------------
death, temporary or permanent incapacity, insanity, incompetency, Bankruptcy,
expulsion, retirement, withdrawal or removal of any member of the General
Partner or the admission of additional members to the General Partner shall not
dissolve the Partnership.
2.5. Events Affecting a Limited Partner of the Partnership. The
-----------------------------------------------------
death, temporary or permanent incapacity, insanity, incompetency, Bankruptcy,
liquidation, dissolution, reorganization, merger, sale of substantially all the
stock or assets of, or other change in the ownership or nature of a Limited
Partner shall not terminate the Partnership.
ARTICLE III
CAPITAL CONTRIBUTIONS
3.1. Capital Commitment of the Limited Partners. Set forth
------------------------------------------
opposite the name of each Limited Partner listed on Exhibit A attached hereto is
such Limited Partner's capital commitment to the Partnership. (The capital
commitment of each Partner (as it may be subsequently adjusted pursuant to the
terms hereof) is referred to herein as the Partner's "Capital Commitment" and
------------------
the total Capital Commitments of the Partners shall be referred to herein as the
"Total Committed Capital.") Each Limited Partner's Capital Commitment represents
-----------------------
the aggregate amount of capital that such Limited Partner has agreed to
contribute to the Partnership in accordance with the terms hereof. No Limited
Partner shall be obligated to contribute capital to the Partnership an amount in
excess of its Capital Commitment. E*Trade's Capital Commit-
10.
<PAGE>
ment set forth in Exhibit A reflects the agreed fair market value of the
Securities being contributed by E*Trade to the Partnership and shall be the sole
Capital Commitment of E*Trade.
3.2. Capital Contributions by the Limited Partners
---------------------------------------------
(a) As its sole Capital Contribution, E*Trade has
contributed the Securities listed in Exhibit B, which Securities had the agreed
values when contributed set forth thereon. The Limited Partners (other than
E*Trade) shall make their Capital Contributions to the Partnership, payable by
wire transfer or check, in installments (each such payment being referred to as
a "Drawdown"). Such Capital Contributions shall be made upon no less than
--------
fourteen (14) days' prior written notice from the General Partner (a "Drawdown
--------
Notice"), in such amounts as may be determined in the sole discretion of the
- ------
General Partner and at such time, subject to the fourteen (14) day notice
period, as the General Partner shall specify in the Drawdown Notice (the
"Drawdown Date"). All Drawdowns shall be in U.S. dollars. No Limited Partner
-------------
shall have the right to make partial payments of a required Capital
Contribution. Each Drawdown Notice shall be given to each Limited Partner of the
Partnership. The additional capital required of the respective Limited Partners
upon any Drawdown shall be based on the relative amounts of the unpaid balances
of their respective Capital Commitments.
(b) After the expiration of the Investment Period, the
General Partner shall not be authorized to call (and the Partners shall not be
obligated to make) any Capital Contributions to fund investments which the
Partnership is not contractually obligated to make at such time other than for:
(1) Investments reasonably expected to close within
ninety (90) days after the expiration of the Investment Period;
(2) Investments as to which, prior to the
expiration of the Investment Period, the Partnership and the
prospective company or entity in which such investment is to be made
have a letter of intent or a definitive agreement setting forth the
material terms and conditions of such investment;
(3) Investments in partnerships, limited liability
companies and other pass-through entities pursuant to capital
commitments made during the Investment Period; or
(4) Follow-On Investments (including Follow-On
Investments with respect to investments in which the initial investment
by the Partnership is made pursuant to clause (1), (2) or (3) of this
Paragraph 3.2(b)).
3.3. Capital Commitment of the General Partner. The General
-----------------------------------------
Partner's Capital Commitment shall be an aggregate amount of $350,000.
3.4. Capital Contributions of the General Partner. On any date
--------------------------------------------
on which a Limited Partner makes a contribution to the capital of the
Partnership, the General Partner shall contribute to the Partnership in such
amount as may be necessary to cause the percentage of the General Partner's
Capital Commitment actually contributed to the Partnership to be the same as the
percentage of the Capital Commitments of the Limited Partners (other than
E*Trade) actually
11.
<PAGE>
contributed to the Partnership as of such date. Such contribution may be made,
at the General Partner's discretion, in the form of a promissory note.
3.5. Defaulting Partners
-------------------
(a) If a Partner fails to pay any amount which it is
required to pay to the Partnership on or before the date when such amount is due
and payable, such Partner shall be deemed to be in default hereunder (a
"Defaulting Partner"), and written notice of default shall be given to such
------------------
Limited Partner by the General Partner by certified or registered mail. The
Partnership shall be entitled to enforce the obligations of each Partner to make
the contributions to capital required in this Agreement and shall have all
remedies available at law or in equity in the event any such contribution is not
so made. In the event of any legal proceedings relating to a default by a
Defaulting Partner, such Defaulting Partner shall pay all costs and expenses
incurred by the Partnership, including attorneys' fees, if the Partnership shall
prevail. Further, such Defaulting Partner shall be obligated to pay the
Partnership interest with respect to the amount of any Capital Contribution not
made when required by this Article, with such interest commencing on the
Drawdown Date for such contribution and ending on the date such contribution is
made to the Partnership. Such interest shall be calculated on the basis of the
then current reference rate announced by Wells Fargo Bank, N.A., or by any other
U.S. commercial bank with capital in excess of Five Hundred Million Dollars
($500,000,000) selected by the General Partner, plus five percent (5%) per
annum, but not in excess of the amount allowable by law.
(b) In addition to the remedies provided under Paragraph
3.5(a), if the Defaulting Partner does not cure a default in the payment of a
required contribution within ten (10) business days of the receipt of the notice
specified in Paragraph 3.5(a), the General Partner (in its sole discretion) may,
as liquidated and agreed current damages to the non-defaulting Partners for such
default (it being agreed that it would be difficult to fix the actual damages to
such Partners), cause and treat the Defaulting Partner's Capital Account to be
reduced by an amount equal to fifty percent (50%), which amount shall thereupon
become unrestricted assets of the Partnership and shall be allocated pro rata to
and among the respective Capital Accounts of the non-defaulting Partners in such
proportion as the Capital Account of each such non-defaulting Partner then bears
to the sum of the Capital Accounts of all non-defaulting Partners. The
Defaulting Partner's remaining fifty percent (50%) interest in its Capital
Account shall automatically be converted into a general unsecured obligation of
the Partnership, which obligation shall not bear any interest and shall be due
six (6) months after the Termination Date of the Partnership. Upon the
expiration of the ten (10) day period after the mailing of the notice of default
and the election by the General Partner to exercise its remedy under this
subparagraph (b), a Defaulting Partner shall automatically cease to be a Partner
under this Agreement and shall have no further interest, right or claim in or
against the Partnership, including any right or obligation to make subsequent
Capital Contributions when called.
(c) Notwithstanding the foregoing, if, at any time before
a Capital Contribution required by Paragraph 3.2 becomes due, a Partner obtains
and delivers to the Partnership an opinion of counsel (which opinion shall be
reasonably acceptable to the General Partner) to the effect that the payment by
such Partner of any portion of any remaining Capital Contributions required by
this Agreement will be unlawful or that there is a material likelihood that such
payment will be unlawful, then (A) such Partner shall have no further right or
obliga-
12.
<PAGE>
tion to pay the pertinent portion of such Capital Contribution (depending on
whether the Partner is withdrawing from or simply reducing its interest in the
Partnership), (B) such Partner's Capital Commitment specified on Exhibit A shall
be reduced by an amount equal to such Capital Contribution, and (C) such Partner
shall not, by reason of his or her failure to make such Capital Contribution, be
deemed or treated as a Defaulting Partner for purposes of this Paragraph 3.5.
(d) The General Partner may seek to fund the amount of
any Capital Contribution that a Defaulting Partner has failed to contribute or
that is not contributed pursuant to Paragraph 3.5(c) (the "Shortfall Amount") as
----------------
follows:
(1) The General Partner may in its discretion
determine to increase the amount of the Capital Contributions required
from each Partner to fund such Shortfall Amount ratably in accordance
with the Partners' relative unpaid Capital Commitments (not to exceed
any Partner's remaining Capital Commitment).
(2) Alternatively, the General Partner may offer
the Partners who have made Capital Contributions the opportunity to
make additional Capital Contributions to fund such Shortfall Amount. If
any such Partner declines to invest in all or any portion of its share
of the Shortfall Amount, such uncommitted amount will be offered to any
other Partner who has invested its share of the Shortfall Amount and
concurrently advised the General Partner of its willingness to make a
Capital Contribution in excess of such share, and the General Partner
shall allocate such uncommitted amount among all such other Partner on
a basis the General Partner determines in its discretion is, under the
circumstances, equitable and practicable.
(3) To the extent any Shortfall Amount has not been
fully funded by the Partners, the General Partner may seek to fund the
remaining Shortfall Amount by offering Limited Partner interests to any
other person on substantially the same economic terms and conditions as
are provided to the Partners.
ARTICLE IV
CAPITAL ACCOUNTS AND ALLOCATIONS
4.1. Capital Accounts. A Capital Account shall be maintained
----------------
on the Partnership's books for each Partner. In the event any interest in the
Partnership is transferred in accordance with the terms of this Agreement, the
transferee shall succeed to the Capital Account of the transferor to the extent
it relates to the transferred interest.
4.2. Adjustments to Capital Accounts
-------------------------------
(a) The Capital Account of each Partner shall be
increased by:
- ---------
(1) the amount of money and the fair market value
of any property other than money contributed to the Partnership by such
Partner (in the case of a contribution of property, net of any
liabilities secured by such property that the Partnership is considered
to assume or hold subject to for purposes of Section 752 of the Code),
13.
<PAGE>
(2) such Partner's share of Capital Transaction
Gain and Net Income (or items thereof) allocated to its Capital Account
pursuant to this Agreement, and
(3) any other amounts required by Treasury
Regulation Section 1.704-1(b), provided the General Partner determines
that such increase is consistent with the economic arrangement among
the Partners as expressed in this Agreement.
(b) The Capital Account of each Partner shall be
decreased by:
- ---------
(1) the amount of money and the fair market value
of any property other than money distributed by the Partnership
(determined pursuant to Paragraph 9.2 hereof as of the date of
distribution) to such Partner pursuant to the provisions of this
Agreement (net of any liabilities secured by such property that such
Partner is considered to assume or hold subject to for purposes of
Section 752 of the Code),
(2) such Partner's share of Capital Transaction
Loss and Net Loss (or items thereof) allocated to its Capital Account
pursuant to this Agreement, and
(3) any other amounts required by Treasury
Regulation Section 1.704-1(b), provided the General Partner determines
that such decrease is consistent with the economic arrangement among
the Partners as expressed in this Agreement.
4.3. Allocation of Capital Transaction Gain or Loss
----------------------------------------------
(a) Allocation of Capital Transaction Gain. Capital
--------------------------------------
Transaction Gain of the Partnership for each Fiscal Year or Interim Period shall
be allocated as follows:
(1) Twenty percent (20%) of the Partnership's
Capital Transaction Gain shall be allocated to the General Partner.
(2) The remaining eighty percent (80%) of the
Partnership's Capital Transaction Gain shall be allocated to all
Partners as a group.
(3) Notwithstanding the foregoing, if one or more
Limited Partners have been allocated a Reallocated Loss pursuant to
Paragraph 4.5, then Partnership Capital Transaction Gain that would
otherwise be allocated entirely to the General Partner pursuant to
Paragraph 4.3(a)(1) shall instead be allocated first to the Limited
Partners (in proportion to the amount of Reallocated Loss previously
allocated to them) until the Limited Partners have been allocated an
aggregate amount of Capital Transaction Gain equal to the previously
allocated Reallocated Loss that has not been restored by prior
allocations pursuant to this subparagraph and then any such remaining
Capital Transaction Gain shall be allocated to the General Partner.
(b) Allocation of Capital Transaction Loss. Capital
--------------------------------------
Transaction Loss of the Partnership for each Fiscal Year or Interim Period shall
be allocated as follows:
14.
<PAGE>
(1) Twenty percent (20%) of the Partnership's
Capital Transaction Loss shall be allocated to the General Partner.
(2) The remaining eighty percent (80%) of such
Capital Transaction Loss shall be allocated to all Partners as a group.
4.4. Allocation of Net Income or Loss. Net Income or Loss of
--------------------------------
the Partnership for each Fiscal Year or Interim Period shall be allocated to all
Partners as a group.
4.5. Reallocation of Losses. If for any Fiscal Year or Interim
----------------------
Period after the Partnership's Capital Transaction Gain or Loss and Net Income
or Loss has been allocated pursuant to Paragraphs 4.3 and 4.4 the closing
Adjusted Capital Balance of the General Partner has been reduced to less than
zero by more than the amount necessary to properly reflect the General Partner's
obligation to recontribute amounts to the Partnership pursuant to Paragraph 8.2
upon termination of the Partnership, then an amount of Capital Transaction Loss
and, to the extent necessary, Net Loss (the "Reallocated Loss") for such Fiscal
----------------
Year or Interim Period shall be reallocated from the General Partner to the
Limited Partners as a group so that the General Partner's closing Adjusted
Capital Balance is not reduced below zero by more than the amount necessary to
properly reflect the General Partner's obligation to recontribute amounts to the
Partnership pursuant to Paragraph 8.2 upon termination of the Partnership. A
Reallocated Loss may be restored only from future Capital Transaction Gain.
4.6. Allocation Among Partners as a Group. Except as otherwise
------------------------------------
specifically provided in this Agreement, all Capital Transaction Gain or Loss
and Net Income and Loss (and items thereof) allocated to the Partners (or a
group of Partners) as a group for any period shall be allocated among such
Partners in proportion to their respective Partnership Percentages as of the end
of such period. In making such allocations, any changes in Partnership
Percentages as a result of changes in the Capital Commitments of the Partners,
any exclusion of any Partners from particular investments, any contributions of
Partners to fund any Shortfall Amount and similar matters shall be taken into
account.
4.7. Special Allocation Among Late-Entering Limited Partners of
----------------------------------------------------------
Organization and Operating Expenses. The following items of Net Income or Loss
- -----------------------------------
are collectively referred to herein as "Operating Expenses":
(a) The Management Fee and other payments and
reimbursements of expenses paid pursuant to Article V other than amounts
capitalized as part of the cost of Securities or other assets for federal income
tax purposes; and
(b) All expenditures of the Partnership classified for
federal income tax purposes as organization or syndication expenses.
Notwithstanding Paragraph 4.6, if additional Limited Partners are
admitted to the Partnership pursuant to Paragraph 7.6(b) hereof during a
particular period, the Operating Expenses for such period allocable to the
Limited Partners shall be allocated among the Original Partners and the Limited
Partners admitted pursuant to Paragraph 7.6(b) hereof so that, to the extent
possible, the cumulative amount of Operating Expenses allocated to each Limited
Partner is proportionate to such Limited Partner's Partnership Percentage as
compared to the Partnership
15.
<PAGE>
Percentages of the Limited Partners as a group (taking into account the
additional Limited Partners admitted pursuant to Paragraph 7.6(b)).
4.8. Allocations and Distributions Attributable to Removed
General Partner. Notwithstanding the foregoing sections of this Article IV, if
the initial General Partner ceases to be the General Partner and a successor
General Partner is appointed pursuant to Paragraph 2.2, such initial General
Partner shall continue to receive the allocations and distributions otherwise
attributable to the General Partner pursuant to this Article IV, Article VI and
Article VIII both in its capacity as a General Partner and in its capacity as a
Limited Partner; provided, however, that on or after the date a successor
General Partner is appointed pursuant to Paragraph 2.2, such allocations and
distributions attributable to the initial General Partner in its capacity as a
General Partner shall be calculated only with respect to investments that were
made or as to which the Partnership was committed to invest or had reserved
capital to invest at such time. Notwithstanding the foregoing if the General
Partner is removed as a result of committing an act of fraud or willful
misconduct against the interest of the Limited Partners, the General Partner's
rights to further allocations pursuant to Paragraphs 4.3(a)(1) and 4.3(b)(1)
shall cease upon such removal. The General Partner shall nevertheless continue
to be subject to any obligations to the Partnership pursuant to Paragraph 8.2.
ARTICLE V
MANAGEMENT FEE; EXPENSES
5.1. Entitlement to Management Fee. As compensation for its
-----------------------------
services rendered in managing the Partnership, the General Partner shall be
entitled to recover a fee calculated as prescribed in this Article V (the
"Management Fee"). The Management Fee shall not be considered a distribution of
profits or a return of capital for the purpose of any provision of this
Agreement, but shall be considered an expense of the Partnership, and shall be
deducted from Partnership Net Income or added to Partnership Net Loss in
determining the Net Income or Net Loss of the Partnership pursuant to Article IV
hereof.
5.2. Payment of Management Fee. The Management Fee shall be at
-------------------------
an annual rate of 1.75% of the Total Committed Capital of the Partnership
through the end of the Investment Period. After the end of the Investment
Period, the Management Fee shall be at an annual rate of 1.75% of the total cost
of the Portfolio Securities held by the Partnership, with the cost of the
Portfolio Securities being redetermined for this purpose on January 1 and July 1
of each Fiscal Year after the end of the Investment Period. The Management Fee
shall commence to accrue on the date of this Agreement. Payment of the
Management Fee shall be made (i) with respect to the first Fiscal Quarter of the
Partnership (ending September 30, 1999), at any time on or prior to September
30, 1999, in an amount equal to the percentage of the annual Management Fee as
reflects the number of days from the date of this Agreement through September
30, 1999, divided by 365 days, and (ii) thereafter quarterly in advance on the
first day of each Fiscal Quarter of the Partnership in an amount equal to 25% of
the annualized Management Fee. Additional Management Fees resulting from an
increase in the Total Committed Capital shall be payable promptly after the
acceptance of additional Capital Commitments (with such payment being prorated
to reflect the remaining term of the then current fiscal period). The Management
Fee shall be reduced by the amount of any transaction fees (but not including
director options or
16.
<PAGE>
director fees) received by the General Partner or its members or Affiliates (net
of associated expenses) from Portfolio Companies. Such reduction shall be made
in each installment of the Management Fee until the entire net amount of the
transaction fees have offset the Management Fees.
5.3. Payment of Expenses.
-------------------
(a) Except as set forth in Paragraph 5.3(b) hereof, the
General Partner agrees to incur on behalf of the Partnership and to otherwise
assume all expenses attributable to the management and administration of the
investment activities of the Partnership. Such expenses include (but are not
limited to) consulting fees, compensation and expenses of the employees of the
General Partner, including any salaries of members of the General Partner in
their capacity as employees of the General Partner, expenses for administrative,
bookkeeping, clerical and related support services, insurance, office space and
facilities, utilities, telephone and travel insofar as they relate to the
investment activities of the Partnership.
(b) The Partnership shall pay, or reimburse the General
Partner (or E*Trade if and to the extent it incurs expenses on behalf of the
Partnership) for all expenses of the Partnership (or incurred by the General
Partner or E*Trade for or on behalf of the Partnership) which (i) relate to the
management and administration of the Partnership itself as a going concern (as
opposed to operating expenses incurred in connection with the Partnership's
investment activities), or (ii) are incurred in the purchase, holding, sale,
exchange or other disposition of investments. Such expenses include (without
limitation) organizational and offering expenses of the Partnership up to an
aggregate of two hundred thousand dollars ($200,000); any taxes which may be
assessed against the Partnership; commissions or brokerage fees or similar
charges incurred in connection with the purchase and sale of securities
(including any merger or transaction fees payable to third parties); interest
expense and financing charges for borrowed money; all expenses relating to
litigation and threatened litigation involving the Partnership; normal
investment banking, legal, custodial, registration, auditing and accounting
services provided to the Partnership; and any other expenses associated with the
acquisition, holding or disposition of investments. The Partnership also shall
pay or reimburse the General Partner (or E*Trade) for all payments to third
parties related to the investment activities of the Partnership in developing,
negotiating and structuring prospective or potential investments with respect to
which the Partnership enters into a purchase agreement, letter of intent or
memorandum of understanding, but that are not ultimately made.
5.4. No Salaries to General Partner. The General Partner and
------------------------------
its members shall receive no salaries from the Partnership. This paragraph shall
not restrict the payment of salaries by the General Partner.
ARTICLE VI
WITHDRAWALS BY AND DISTRIBUTIONS TO THE PARTNERS
6.1. Interest. No interest shall be paid to any Partner on
--------
account of its interest in the capital of, or on account of its investment in,
the Partnership.
17.
<PAGE>
6.2. Withdrawals by the Partners. No Partner may withdraw any
---------------------------
amount from its Capital Account except as specifically provided in this
Agreement.
6.3. Mandatory Cash Distributions. Within ninety (90) days
----------------------------
after the end of each Fiscal Year, the Partnership shall distribute to each
Partner cash in an amount equal to the aggregate federal and state income tax
liability such Partner would have incurred as a result of such Partner's
ownership of an interest in the Partnership, calculated: (i) as if allocations
from the Partnership of any Net Capital Gain and any Net Loss were, for such
Fiscal Year, the sole source of taxable income and loss for such Partner; (ii)
as if such Partner were an individual taxable at the combined maximum marginal
rate provided with respect to such Net Capital Gain and Net Loss (taking into
account the character of the items of Net Capital Gain and Net Loss for tax
purposes) under applicable federal and state income tax laws applicable to
individuals residing in California; and (iii) taking into account the
deductibility of state taxes in the calculation of federal income taxes (a "Tax
---
Distribution"). Any Tax Distributions to a Partner shall reduce the amounts
- ------------
otherwise distributable to the Partner pursuant to Paragraph 6.4.
6.4. Additional Distributions. The General Partner (i) shall
------------------------
distribute any proceeds from the Sale or Exchange of Securities of Portfolio
Companies as soon as practicable following such Sale or Exchange, subject to the
retention of such amounts as are necessary to pay Partnership expenses and
obligations (including the Management Fee) and/or for permitted reinvestments
and (ii) may in its discretion make distributions of Securities of Portfolio
Companies. All distributions under this Paragraph 6.4 shall be made as follows:
(a) At any time prior to achievement of Payout if the
Fair Value Test is not satisfied, all such distributions will be made to the
Partners as a group in proportion to their respective Partnership Percentages.
(b) At any time prior to achievement of Payout if the
Fair Value Test is satisfied, all such distributions will be made, in the
General Partner's sole discretion, either (1) to the Partners as a group in
proportion to their respective Partnership Percentages, or (2)(i) first, to the
General Partner until the General Partner has received distributions pursuant to
this Paragraph 6.4(b)(2)(i) and Tax Distributions pursuant to Paragraph 6.3
equal to a maximum of twenty percent (20%) of the total amount distributed and
being distributed to all Partners pursuant to Paragraphs 6.3 and 6.4(a) and this
Paragraph 6.4(b), and (ii) the remainder of such distributions will be made to
the Partners as a group in proportion to their respective Partnership
Percentages; provided, however, that the amount distributable to the General
-----------------
Partner pursuant to Paragraph 6.4(b)(2)(i) will in no event exceed either (x)
the cumulative amount of the Capital Transaction Gain net of Capital Transaction
Loss allocated to the General Partner under Paragraphs 4.3(a)(1) and 4.3(b)(1)
or (y) an amount which would cause the General Partner's Fair Value Capital
Account to be reduced below the amount of the General Partner's Capital
Contributions or would further reduce an existing balance of such Fair Value
Capital Account that is already less than the General Partner's Capital
Contributions; provided, further that the General Partner will not cause or
-----------------
permit the Partnership to make any distribution to the General Partner pursuant
to Paragraph 6.4(b)(2)(i) unless the Partnership has made (and/or provided
through reserves for) distributions to each Partner, with respect to the Fiscal
Year in which any proposed distribution under Paragraph 6.4(b)(2)(i) otherwise
would occur, in aggregate amounts equal to
18.
<PAGE>
the Tax Distribution to which each Partner would be entitled pursuant to
Paragraph 6.3 with respect to such Fiscal Year if such Fiscal Year ended on the
date of the proposed distribution.
(c) After Payout has been achieved, all such
distributions will be made to the Partners in proportion to the positive
balances in their respective Capital Accounts after such Capital Accounts have
been adjusted to reflect all Capital Transaction Gain or Loss (including Capital
Transaction Gain or Loss arising in connection with the distribution and Sale or
Exchange of Securities) through the date of the distribution.
(d) Each class of Securities to be distributed in kind
shall be distributed to the Partners in proportion to their respective shares of
the proposed distribution, except to the extent that a disproportionate
distribution of Securities is necessary in order to avoid distributing
fractional shares. For purposes of the preceding sentence, each lot of stock or
other Securities having a separately identifiable tax basis or holding period
will be treated as a separate class of Securities. Notwithstanding anything
contained in this Agreement: (i) no distribution (other than a Tax Distribution)
will be made to any Partner if, and to the extent that, such distribution would
(x) cause such Partner's Capital Account to be negative by an amount which
exceeds such Partner's Zero Balance Amount or (y) further reduce a balance in
such Partner's Capital Account that is already negative by an amount which
exceeds such Partner's Zero Balance Amount; and (ii) no distribution will be
made unless all liabilities of the Partnership to persons other than Partners
have been satisfied or, in the good faith judgment of the General Partner, there
remains property of the Partnership sufficient to satisfy such liabilities.
(e) Except upon liquidation of the Partnership or with
the approval of the General Partner and a Majority in Interest of the Limited
Partners, no distribution shall be made other than in cash or Marketable
Securities.
(f) Immediately prior to any distribution in kind of
Securities (or other Partnership assets) pursuant to any provision of this
Agreement (including pursuant to Article VIII), the difference between the fair
market value and the Book Value of any Securities (or other Partnership assets)
distributed shall be allocated to the Partners as Capital Transaction Gain or
Loss pursuant to Article IV.
(g) Securities distributed in kind pursuant to this
Paragraph 6.4 shall be subject to such conditions and restrictions as the
General Partner determines are legally required.
(h) For purposes of this Agreement, all distributions of
Securities shall be deemed to have been made on the date on which the
Partnership commences the distribution of the Securities to the Limited
Partners, provided that the delivery of the Securities is promptly completed.
ARTICLE VII
MANAGEMENT, DUTIES AND RESTRICTIONS
7.1. Management by General Partner. The General Partner shall
-----------------------------
have the sole and exclusive right and power to manage, control, and conduct the
affairs of the Partnership and
19.
<PAGE>
to perform any and all acts on behalf of the Partnership that the General
Partner deems necessary, advisable or incidental to carry out any or all of the
objects and purposes of the Partnership.
7.2. Indebtedness; Restrictions; Reinvestments
-----------------------------------------
(a) The Partnership may borrow money and guarantee the
obligations of, and supply letters of credit on behalf of, Portfolio Companies;
provided that at no time shall the Partnership guarantee, directly or
indirectly, obligations of a General Partner or a Limited Partner; and further
provided that the Partnership shall provide a guaranty to a Portfolio Company
only if each member of the General Partner with an interest in that Portfolio
Company provides a guaranty on the same terms and in amount proportional to the
investment of such member as compared to the Partnership. While outstanding, any
guarantee of the obligations of any Portfolio Company shall be considered an
investment in such Portfolio Company for purposes of Paragraph 7.2(b).
Additionally, except with the approval of a Majority in Interest of the Limited
Partners, the Partnership shall not at any point in time be the guarantor (or
the obligor on any letter of credit) of then-current liabilities that, in the
aggregate, amount to more than thirty percent (30%) of the Total Committed
Capital of the Partnership.
(b) Except with the approval of a Majority in Interest of
the Limited Partners and except with respect to the Securities contributed by
E*Trade as described in Exhibit B, the Partnership shall not invest more than
twenty-five percent (25%) of the aggregate amount of the Total Committed Capital
(i) in the Securities of any one issuer or its affiliates, (ii) in any other
investment pool or partnership, or (iii) in Securities purchased by the
Partnership in the over-the-counter market or that are listed on a securities
exchange (with the twenty-five percent (25%) test being applied separately with
respect to each of the foregoing three categories of investments). The
limitations set forth in this Paragraph 7.2(b) shall not apply to any funds of
the Partnership which are invested in investments described in Paragraph 7.2(e).
(c) The Partnership shall not reinvest any proceeds
realized on the Sale or Exchange of Securities of Portfolio Companies in
Securities of other Portfolio Companies except for Follow-On Investments. In no
event shall the Partnership make cumulative investments in Securities of
Portfolio Companies in excess of the Total Committed Capital.
(d) No Partner shall be permitted to borrow money from
the Partnership.
(e) Pending use of funds to make investments in
Securities of Portfolio Companies, to make distributions or to pay expenses or
obligations of the Partnership in accordance with the terms hereof, the funds of
the Partnership shall be invested by the General Partner only in (i) securities
issued by, or backed by the full faith and credit of, the United States
government, (ii) certificates of deposit issued by commercial banks with capital
in excess of Five Hundred Million Dollars ($500,000,000), (iii) commercial paper
rated A-1 or P-1, or (iv) shares in investment companies generally known as
"money market funds" which have assets in excess of Two Hundred Fifty Million
------------------
Dollars ($250,000,000).
(f) The Partnership shall not invest in (i) any
Securities the purchase of which is opposed by the issuer's board of directors;
or (ii) options contracts or futures con-
20.
<PAGE>
tracts, or any other security, the value of which is based upon, or derived
from, any underlying index, reference rate, other security, commodity or other
asset; provided, however, that this restriction shall not be deemed to prohibit
the General Partner from (A) hedging Portfolio Company investments so long as
such transactions are reasonably related to the amount and type of Securities
being hedged and are not undertaken for independent investment purposes, (B)
hedging the currency risk of foreign Portfolio Company investments, (C)
investing in any Security the value of which is based upon, or derived from, any
Security already held by the Partnership, and (D) investing in traditional
options, warrants and other rights to acquire Securities that would otherwise be
permitted Portfolio Company investments under the terms of this Agreement.
(g) The Partnership shall not invest in real estate, oil
or gas investments, commodities or in securities bearing unlimited liability.
(h) The Partnership shall not engage in uncovered short
sales.
(i) The Partnership shall not make any investment in an
issuer which is organized in any jurisdiction outside the United States and
Canada (each such issuer being a "Foreign Entity"), unless the Partnership has
--------------
received, prior to or at the closing of any such investment, a Limited Liability
Entity Opinion with respect to the issuer's form of entity. A "Limited Liability
-----------------
Entity Opinion" shall be an opinion of counsel, licensed or otherwise authorized
- --------------
to practice in the jurisdiction in which a particular Foreign Entity is
organized, which opinion may be relied upon by the Partnership and does not
contain more than reasonable carve-outs by opining counsel, stating (i) that the
Partnership shall not be obligated beyond its committed investment in such
Foreign Entity for any debt, obligation or liability of an entity of the form of
the particular issuer, solely by reason of the Partnership being an investor in
such an entity; and (ii) that no Limited Partner of the Partnership shall be
obligated for any debt, obligation or liability of an entity of the form of the
particular issuer, solely by reason of the Partnership being an investor in such
an entity. Once the Partnership has received such an opinion for investments in
a particular form of entity in a particular jurisdiction, such opinion shall
satisfy the requirements of this paragraph for all investments in other Foreign
Entities of the same form as that which is the subject of the opinion. The
Partnership shall not invest an aggregate of more than thirty percent (30%) of
the Total Committed Capital in Securities of Foreign Entities.
(j) The Partnership shall not make any investment in any
other investment pool or partnership if a management fee and/or "carried
interest" is payable with respect to such investment unless the General Partner
waives its Management Fee and/or "carry" with respect to such investment.
7.3. Investment Representation of the Limited Partners. This
-------------------------------------------------
Agreement is made with each Limited Partner in reliance upon such Limited
Partner's representation to the Partnership, which by executing this Agreement
the Limited Partner hereby confirms, that such Partner's interest in the
Partnership is being acquired for investment, and not with a view to the sale or
distribution of any part thereof, and that such Partner has no present intention
of selling, granting participation in, or otherwise distributing the same. Each
Limited Partner further represents that such Limited Partner does not have any
contract, undertaking, agreement, or arrange-
21.
<PAGE>
ment with any person to sell or transfer to any third person such Limited
Partner's interest in the Partnership.
7.4. Accredited Investor Representation. Each Limited Partner
----------------------------------
represents that such Partner has such knowledge and experience in financial and
business matters as to be capable of evaluating the merits and risks of an
investment in the Partnership and that such Partner is an accredited investor,
as that term is defined in Regulation D promulgated by the Securities and
Exchange Commission.
7.5. No Control by the Limited Partners; Rights of the Limited
---------------------------------------------------------
Partners.
- --------
(a) The Limited Partners shall take no part in the
control or management of the affairs of the Partnership nor shall a Limited
Partner have any authority to act for or on behalf of the Partnership except as
is specifically permitted by this Agreement and as is specifically required by
the Delaware Act.
(b) In addition to any other restrictions applicable to
Limited Partners set forth in this Agreement and notwithstanding any other
provisions thereof, for so long as the Partnership has an investment in a Media
Company, any Limited Partner that elects in writing to be insulated from the
"multiple ownership attribution" rules and policies of the FCC (an "Insulated
Limited Partner") shall not (and if such Limited Partner is not an individual,
each officer, director, partner or equivalent non-corporate official of such
Limited Partner acting on behalf of or as a representative of such Limited
Partner in its capacity as a Limited Partner of the Partnership shall not):
(1) act as an employee of the Partnership if his or
her functions, directly or indirectly, relate to the media business of
the Partnership or any Media Company in which the Partnership has an
investment;
(2) serve, in any material capacity, as an
independent contractor or agent with respect to the media business of
the Partnership or any Media Company in which the Partnership has an
investment;
(3) communicate on matters pertaining to the
day-to-day media operations of the Partnership or a Media Company with
(i) an officer, director, partner, agent, representative or employee of
such Media Company, or (ii) the General Partner;
(4) perform any services for the Partnership
materially relating to the media activities of the Partnership or any
Media Company in which the Partnership has an investment, except that
any Limited Partner may make loans to, or act as a surety for, the
Partnership or any such Media Company;
(5) vote on the admission of any new General
Partner to the Partnership unless such admission is approved by the
General Partner;
(6) become actively involved in the management or
operation of the Partnership's media businesses; or
22.
<PAGE>
(7) vote for the removal of the General Partner
except where the General Partner is subject to Bankruptcy proceedings,
is adjudicated incompetent by a court of competent jurisdiction, or is
removed for any cause which is determined by an independent party to
constitute criminal conduct other such extraordinary conduct with
respect to which a prudent investor would require the right to remove
the General Partner.
7.6. Admission of Additional Partners.
--------------------------------
(a) Subject to Paragraph 7.7 and subparagraph (b) below,
no additional person may be admitted to the Partnership, either as a limited or
general partner, without the prior written consent of both the General Partner
and Two-Thirds in Interest of the Limited Partners.
(b) For a period ending on October 31, 1999 (the "Final
-----
Closing Date"), the General Partner may admit persons as additional Limited
- ------------
Partners without the consent of any of the then Limited Partners, provided that
the Total Committed Capital of the Partnership shall not exceed one hundred
million dollars ($100,000,000). Following the admission of any such subsequently
admitted Limited Partners pursuant to this Paragraph 7.6(b), such Limited
Partners shall be deemed for all purposes of this Agreement (unless expressly
provided to the contrary herein) to have been admitted as of the original date
of this Agreement. Any Limited Partner admitted pursuant to this Paragraph
7.6(b) shall, upon admission, contribute to the Partnership the same portion of
such Limited Partner's Capital Commitment as the previously admitted Limited
Partners have contributed with respect to their Capital Commitments. Upon the
admission of any additional Limited Partners to the Partnership pursuant to this
Paragraph 7.6(b), the assets of the Partnership shall not be revalued except in
the discretion of the General Partner.
(c) In addition to the Capital Contribution required
under Paragraph 7.6(b), each Limited Partner admitted as an additional Limited
Partner pursuant to Paragraph 7.6(b) shall be required to pay to the Partnership
interest at the Wells Fargo Bank, N.A. "prime rate" (in effect at the time the
additional Limited Partner interest was acquired) based on the amount of the
Capital Contribution payable under Paragraph 7.6(b) and the time period(s) from
the existing Limited Partners' prior Capital Contributions to the Partnership to
the date that the Capital Contribution under Paragraph 7.6(b) is made. Such
interest shall accompany the Capital Contribution payable under Paragraph 7.6(b)
and shall be immediately distributed pro rata to and among all existing Partners
(based on their respective Partnership Percentages immediately prior to the
issuance of such additional Limited Partner interests). The payment of such
interest to the Partnership shall not be considered a Capital Contribution and
shall not be considered an item of Capital Transaction Gain or Loss or Net
Income or Loss allocable pursuant to Article IV; furthermore, the distribution
to the existing Partners shall not result in a reduction in their Capital
Accounts.
23.
<PAGE>
7.7. Assignment or Transfer of Partnership Interests
-----------------------------------------------
(a) The General Partner shall not sell, assign, pledge,
mortgage or otherwise dispose of or transfer its interest in the Partnership
without the prior written consent of Two-Thirds in Interest of the Limited
Partners.
(b) No Limited Partner shall sell, assign, pledge,
mortgage, or otherwise dispose of or transfer its interest in the Partnership
without the prior written consent of the General Partner. Notwithstanding the
foregoing, a Limited Partner may sell, assign, pledge, mortgage, or otherwise
dispose of or transfer its interest in the Partnership without such consent (i)
to any affiliate of the Limited Partner; or (ii) as may be required by any law
or regulation; provided, however, that in the case of any permitted transfer,
the General Partner receives at least ten (10) days' prior written notice of
such transfer; and provided further that no transferee of a Limited Partner's
interest may be admitted to the Partnership as a substitute Limited Partner
without the consent of the General Partner.
(c) Notwithstanding any other provision of this
Agreement, no transfer or other disposition of the interest of a Limited Partner
shall be permitted until the General Partner shall have received, or waived
receipt of, an opinion of counsel to the Partnership reasonably satisfactory to
it that the effect of such transfer or disposition would not:
(1) result in a violation of the Securities Act;
(2) require the Partnership to register as an
investment company under the Investment Company Act of 1940, as
amended;
(3) require the Partnership, the General Partner or
any partner of the General Partner to register as an investment adviser
under the Investment Advisers Act of 1940, as amended;
(4) result in a termination of the Partnership for
tax purposes if the General Partner determines that such termination
would result in a material adverse tax consequence to any of the
Partners;
(5) result in a violation of any law, rule, or
regulation by the Limited Partner, the Partnership, the General Partner
or any partner of the General Partner;
(6) increase the number of Limited Partners;
(7) cause the Partnership to be characterized as a
"publicly traded partnership" taxable as a corporation (within the
meaning set forth in Sections 512 and 7704(b) of the Code) or
materially increase the risk that the Partnership will be so
characterized.
All costs associated with such opinion shall be borne by the
transferring Limited Partner.
24.
<PAGE>
7.8. Investment Opportunities; Conflicts of Interest
-----------------------------------------------
(a) Christos M. Cotsakos and Thomas A. Bevilacqua (the
"Principals") are the current principal members of the General Partner. Subject
----------
to Paragraph 7.8(b), the Principals may serve as the general partners, sponsors,
principals of the general partners or investment advisers of other venture
funds. The Principals are employed by E*Trade and shall devote significant and
substantial time and effort to E*Trade. The Principals shall be free to conduct
any and all such activities.
(b) So long as the Partnership is less than Two-Thirds
Invested, neither of the Principals may, directly or indirectly, organize or act
as a general partner or managing member of any other entity that is a private
equity fund. For purposes of this Agreement, the Partnership shall be deemed to
be "Two-Thirds Invested" when at least sixty-six and two-thirds percent (66-
-------------------
2/3%) of the Partners' Capital Commitments (other than any Capital Commitments
that have been terminated) have been invested by the Partnership in Portfolio
Companies (with E*Trade's Capital Contribution made in Securities being deemed
to have been so invested), reserved for investments in such Portfolio Companies
based upon the General Partner's good faith estimate of the anticipated capital
requirements of each Portfolio Company, or paid or reserved for the payment of
reasonably anticipated partnership liabilities and obligations, including
payment of the Management Fee.
(c) The General Partner and the members of the General
Partner shall be permitted to receive fees (director's, consulting, break-up,
financial advisory or other), commissions and other compensation (in whatever
form, including stock and options) from entities other than the Partnership,
including Portfolio Companies.
(d) Except as expressly provided otherwise in this
Agreement, the Partners and the members and affiliates of the General Partner
may engage in, invest in or possess an interest in, business activities of every
kind and description, independently or with others.
(e) The Limited Partners hereby agree that E*Trade may
have investment opportunities that are not made available to the Partnership. In
addition, the General Partner may offer the right to participate in investment
opportunities of the Partnership to other private investors, groups,
partnerships, or corporations. No Limited Partner shall be required to make any
investment opportunity available to the Partnership.
(f) The General Partner may enter, on behalf of the
Partnership, into contracts, agreements, undertakings and transactions with any
Partners, or with any person, firm or corporation having any business, financial
or other relationship with any Partner, provided that such transactions with
such persons and entities are on terms no less favorable to the Partnership than
are generally afforded to unrelated third parties in comparable transactions.
25.
<PAGE>
ARTICLE VIII
DISSOLUTION AND LIQUIDATION OF THE PARTNERSHIP
8.1. Liquidation Procedures. Upon termination of the
----------------------
Partnership in accordance with Article II:
(a) The affairs of the Partnership shall be wound up and
the Partnership shall be dissolved. The General Partner shall serve as the
liquidator; provided that in the event of a termination of the Partnership
pursuant to Paragraph 2.2(a),(b), or (c) another person or entity may be
designated by Two-Thirds in Interest of the Limited Partners to serve as
liquidator.
(b) Distributions in dissolution may be made in cash or
in kind or partly in cash and partly in kind. Each Security (and each class of
Securities, or portion of a class of Securities having a tax basis per share or
unit different from other portions of such class) distributed in kind shall be
distributed ratably in accordance with the General Partner's and the Limited
Partners' Capital Accounts unless such distribution would result or there is a
material likelihood that such distribution would result (i) in a violation of a
law or regulation applicable to a Limited Partner or a tax penalty to a Limited
Partner, in which event, upon receipt by the General Partner of notice to such
effect, such Limited Partner may designate a different entity to receive the
distribution, or designate, subject to the approval of the General Partner, an
alternative distribution procedure or (ii) in a distribution of fractional
shares. Each such Security shall be valued at fair market value in accordance
with Paragraph 9.2 as of the date of distribution and shall be subject to
reasonable conditions and restrictions necessary or advisable in order to
preserve the value of the assets distributed, or for legal reasons.
(c) The General Partner (or other liquidator) shall in
its sole discretion determine the most advantageous time for the Partnership to
sell investments or to make distributions in kind provided that any such sales
shall be made as promptly as is consistent with obtaining the fair value
thereof.
(d) The proceeds of dissolution shall be applied to
payment of liabilities of the Partnership and distributed to the Partners in the
following order:
(1) to the creditors of the Partnership in the
order of priority established by law; and
(2) to the Partners, in respect of the positive
balances in their Capital Accounts, after all Capital Transaction Gain
or Loss and Net Income or Loss (including amounts arising in connection
with a distribution of Securities) has been allocated among the
Partners.
In the discretion of the General Partner, a pro rata portion of
the distributions that would otherwise be made to the Partners pursuant to this
Paragraph 8.1 may be withheld to provide a reasonable reserve for Partnership
liabilities (contingent or otherwise) and to reflect the unrealized portion of
any installment obligations owed to the Partnership, provided that such withheld
amounts (to the extent not used to pay partnership liabilities) shall be
distributed to the Partners as soon as practicable.
26.
<PAGE>
(e) If the General Partner's Capital Account has a deficit
balance (after giving effect to all contributions, distributions and allocations
for all taxable years, including the year during which such liquidation occurs),
then except as otherwise required pursuant to Paragraph 8.2, the General Partner
shall have no obligation at any time to repay or restore to the Partnership all
or any part of any distribution made to it from the Partnership or make any
contribution to the capital of the Partnership with respect to such deficit. If
any Limited Partner has a deficit balance in his Capital Account (after giving
effect to all contributions, distributions and allocations for all taxable
years, including the year during which such liquidation occurs), then other than
required by law or Paragraph 10.14, such Limited Partner shall have no
obligation to repay or restore to the Partnership any distribution made to it
from the Partnership or make any contribution to the capital of the Partnership
with respect to such deficit, and such deficit shall not be considered a debt
owed to the Partnership or to any other person for any purpose whatsoever.
8.2. Liability of General Partner to Return Excess Distributions. If
-----------------------------------------------------------
after effecting the distributions provided for in this Article VIII the Excess
Distribution Amount is greater than zero, then the General Partner shall
forthwith contribute to the capital of the Partnership cash or Marketable
Securities (with any such contributed Marketable Securities being valued
pursuant to Paragraph 9.2 on the date of contribution) in an amount equal to the
lesser of (i) the Excess Distribution Amount, or (ii) the After-Tax Distribution
Amount. Such contribution shall be distributed to the Partners to the extent of
and in proportion to their positive Capital Account balances.
For purposes of this Paragraph 8.2:
(a) The "After-Tax Distribution Amount" shall be equal to the
-----------------------------
General Partner Distributions less all federal, state and other jurisdictional
(including non-United States taxes) actual marginal tax liabilities that the
members of the General Partner have incurred by reason of having been members of
the General Partner, but only to the extent attributable to (i) items of taxable
income, gain, loss, deduction and credit allocated to the General Partner by the
Partnership and (ii) net capital gains realized by the General Partner or by
such members (offset by any capital losses realized by the General partner or by
such members) upon the sale or exchange of Securities distributed by the
Partnership to the General Partner (with such net capital gains being limited to
an amount based on the value as of the distribution date of the Securities
distributed). The After-Tax Distribution amount shall be increased by all
federal, state or other jurisdictional tax benefits actually realized by the
General Partner's members in the year of a contribution required by this
Paragraph 8.2 as a result of such contribution.
(b) The "Excess Distribution Amount" shall equal the lesser of
--------------------------
(i) the amount by which the General Partner Distributions exceed the sum of the
Total General Partner Net Gain or Loss plus the aggregate contributions made to
the Partnership by the General Partner or (ii) the amount of the General Partner
Distributions.
27.
<PAGE>
(c) "Total General Partner Net Gain or Loss" shall be calculated
--------------------------------------
as follows:
(1) First, the Partnership's aggregate Capital Transaction
Gain for all accounting periods shall be netted against the Partnership's
aggregate Capital Transaction Loss for all accounting periods and the
result shall be multiplied by the sum of (x) twenty percent (20%) plus (y)
eighty percent (80%) of the General Partner's Partnership Percentage. The
resulting product shall be considered a positive number if such aggregate
Capital Transaction Gain exceeded aggregate Capital Transaction Loss and a
negative number if such aggregate Capital Transaction Loss exceeded
aggregate Capital Transaction Gain;
(2) Second, the Partnership's aggregate Net Income for all
accounting periods shall be netted against the Partnership's aggregate Net
Loss for all accounting periods and the result shall be multiplied by the
General Partner's Partnership Percentage. The result shall be considered a
positive number if such aggregate Net Income exceeded such aggregate Net
Loss and a negative number if such aggregate Net Loss exceeded such
aggregate Net Income;
(3) Third, the amount computed in clause (2) shall be added
to the amount computed in clause (1). If the result of such computation is
a positive number it shall be considered Total General Partner Net Gain and
if the result of such computation is a negative number it shall be
considered Total General Partner Net Loss.
(d) "General Partner Distributions" shall equal the sum of all
-----------------------------
distributions received by the General Partner pursuant to Article VI and this
Article VIII.
(e) All in-kind distributions shall be valued as provided in
Paragraph 9.2 as of the date of the distribution.
(f) Only allocations and distributions made to the General
Partner in its capacity as general partner of the Partnership (including
allocations and distributions resulting from the General Partner's Capital
Contributions made in such capacity) shall be considered for purposes of the
foregoing computations (such distributions shall, however, in no way be
construed so as to include amounts paid or otherwise received by the General
Partner pursuant to Article V hereof).
(g) Each of the members of the General Partner shall be
severally, but not jointly, liable to the Partnership for any unpaid liability
of the General Partner determined pursuant to this Paragraph 8.2, based on their
relative distributions received from the General Partner. The Principals hereby
agree to obtain the written agreement of each member of the General Partner as
to the liability to the Partnership described in the preceding sentence.
8.3. Liquidating Trust. In the discretion of the General Partner, any
-----------------
Nonmarketable Securities and other assets that would otherwise be distributed to
the Partners pursuant to this Article VIII may be distributed to a trust
established for the benefit of the Partners for the purposes of holding and
liquidating such Nonmarketable Securities (and any other Partnership assets),
collecting amounts owed to the Partnership, and paying any contingent
28.
<PAGE>
or unforeseen liabilities or obligations of the Partnership. The trustee of such
trust shall be the General Partner or other person appointed by a Two-Thirds in
Interest of the Limited Partners. During the term of the trust, any
Nonmarketable Securities held in the trust shall continue to be held until they
become Marketable Securities except to the extent otherwise determined by the
General Partner. Subject to the foregoing, the net assets of the trust shall be
distributed to the Partners from time to time, in the discretion of the General
Partner (or other trustee), in the same proportions as such assets would have
been distributed if they had continued to be held (and disposed of) by the
Partnership. The term of the trust shall be for no more than two years, subject
to two one-year extensions with the approval of Two-Thirds in Interest of the
Limited Partners.
ARTICLE IX
FINANCIAL ACCOUNTING AND REPORTS
9.1. Financial and Tax Accounting and Reports. The General Partner
----------------------------------------
shall cause the Partnership's tax returns and IRS Form 1065, Schedule K-1's, to
be prepared and delivered in a timely manner to the Limited Partners. The
General Partner shall use its best efforts to cause the Schedule K-1's for each
Fiscal Year to be delivered to the Limited Partners within ninety (90) days
after the end of the Fiscal Year. The books and records of the Partnership and
the General Partner shall be kept in accordance with the provisions of this
Agreement and otherwise in accordance with generally accepted accounting
principles consistently applied. The Partnership's financial statements for each
Fiscal Year shall be prepared in accordance with such principles consistently
applied and shall be audited at the end of each Fiscal Year by an independent
certified public accounting firm of recognized national standing selected by the
General Partner. The General Partner shall transmit to each Limited Partner as
soon as practicable after the close of each of the Partnership's Fiscal Years
(but in no event later than ninety (90) days after the end of each Fiscal Year),
beginning with the Fiscal Year ending December 31, 1999, the audited financial
statements of the Partnership accompanied by a report from the General Partner
to the Limited Partners, which shall include a status report on investments then
held, a valuation of each such investment, and a brief statement on the affairs
of the Partnership during the Fiscal Year then ended. In addition, the General
Partner shall, within a reasonable time following the completion of the report
referred to above and following reasonable notice to each Partner, hold an
annual meeting of the Partners at which the General Partner shall present the
affairs of the partnership and provide the Limited Partners with the opportunity
to ask questions and discuss the Partnership's affairs.
9.2. Valuation of Securities and Other Assets Owned by the
-----------------------------------------------------
Partnership.
- -----------
(a) Subject to the specific standards set forth below, the
valuation of Securities and other assets and liabilities under this Agreement
shall be at fair market value, as determined by the General Partner in its
discretion. In determining the value of the interest of any Partner or in any
accounting between the Partners, no value shall be placed on the goodwill or the
name of the Partnership.
29.
<PAGE>
(b) The following criteria shall be used for determining the
fair market value of Securities.
(1) Securities not subject to legal or contractual
restrictions on free marketability:
(A) If traded on one (1) or more securities exchanges
or on NASDAQ, the value of each Security shall be deemed to be the
average closing price of such Security for the five (5) trading days
immediately preceding the valuation date as reported in the Wall
Street Journal or another nationally recognized publication or service
that reports such data for the valuation date.
(B) If actively traded over-the-counter (but not on
NASDAQ), the value shall be deemed to be the closing bid price of such
Security for the five (5) trading days immediately preceding the
valuation date.
(C) If there is no active public market, the General
Partner shall make a determination of the fair market value on the
valuation date, taking into consideration the tax basis of the
Securities, developments concerning the issuing company subsequent to
the acquisition of the Securities, the pricing of other private
placements of Securities by the issuer, the price of the Securities of
other companies comparable to the issuer, any financial data and
projections of the issuing company provided to the General Partner and
such other factor or factors as the General Partner may deem relevant.
(2) In the case of Securities subject to legal or
contractual restrictions on free marketability, appropriate adjustments to
the value determined under Paragraph 9.2(b)(1) above shall be made to
reflect the effect of the restrictions on transfer.
(3) If the General Partner in good faith determines that,
because of special circumstances, the valuation methods set forth in this
paragraph do not fairly determine the value of a Security, the General
Partner shall make such adjustments or use such alternative valuation
method as it deems appropriate.
9.3. Supervision; Inspection of Books. Proper and complete books of
--------------------------------
account of the affairs of the Partnership shall be kept under the supervision of
the General Partner at the principal office of the Partnership. Such books shall
be open to inspection by a Limited Partner, at any reasonable time, upon
reasonable notice, during normal business hours. A copy of a current list of
Partners, with telephone numbers, shall be provided to any Partner upon request.
The General Partner shall provide any Limited Partner with information
reasonably requested by such Limited Partner for any purpose reasonably related
to such Limited Partner's interest as a partner in the Partnership.
9.4. Quarterly Reports. Beginning with the first Fiscal Quarter
-----------------
commencing after the date of this Agreement, the General Partner shall transmit
to each Limited Partner within forty-five (45) days after the close of each of
the first three (3) Fiscal Quarters of each Fiscal Year, financial statements of
the Partnership prepared in accordance with the terms of this
30.
<PAGE>
Agreement and otherwise in accordance with generally accepted accounting
principles from its books without audit and subject to year-end adjustments, a
valuation of each of the Partnership's investments, a valuation of the
Partnership interest of the Limited Partner (based upon the interest of the
Limited Partner in the Partnership's assets), the amount of each Partner's
Capital Account and a list of investments then held with a brief description of
each Portfolio Company.
9.5. Confidentiality. Each Limited Partner agrees to maintain the
---------------
confidentiality of the Partnership's records and affairs, agrees not to provide
to any other person copies of any financial statements, tax returns or other
records or reports provided or made available to such Limited Partner, and
agrees not to disclose to any other person any information contained therein
(including, without limitation, information respecting Portfolio Companies),
without the express prior written consent of the General Partner; provided, that
any Limited Partner may make disclosure and may provide financial statements,
tax returns and other records (i) to its accountants, internal and external
auditors, legal counsel, financial advisors and other fiduciaries and
representatives as long as it instructs such persons to maintain the
confidentiality thereof and not to disclose to any other person any information
contained therein, (ii) to potential transferees of such Limited Partner's
Partnership interest who agree in writing, for the benefit of the Partnership,
to maintain the confidentiality thereof, but only after reasonable advance
notice to the Partnership, (iii) if, and to the extent, required by law,
including judicial or administrative order (provided, that, to the extent
possible, the Partnership is given prior notice to enable it to seek a
protective order or similar relief), (iv) in order to enforce rights under this
Agreement, (v) to any regulatory body having jurisdiction over the Limited
Partner and such of its advisors as need to or customarily have access to such
information, and (vi) to any of its equity holders, provided that it shall use
all commercially reasonable efforts to cause such persons to observe the
provisions of this Paragraph 9.5.
ARTICLE X
OTHER PROVISIONS
10.1. Execution and Filing of Documents. The General Partner shall
---------------------------------
execute and file a Certificate of Limited Partnership conforming to the
requirements of the Delaware Act in the office of the Secretary of State for the
State of Delaware and shall execute a fictitious business name statement and
file or cause such statement to be filed if required by Delaware law.
10.2. Other Instruments and Acts. The Partners agree to execute any
--------------------------
other instruments or perform any other acts that are or may be necessary to
effectuate and carry on the partnership created by this Agreement.
10.3. Binding Agreement. This Agreement shall be binding upon the
-----------------
transferees, successors, assigns, and legal representatives of the Partners.
10.4. Governing Law. This Agreement shall be governed by and
-------------
construed under the laws of the State of Delaware as applied to agreements among
Delaware residents made and to be performed entirely within Delaware.
10.5. Notices. Any notice or other communication that a Partner
-------
desires to give to another Partner shall be in writing, and shall be deemed
effectively given upon personal
31.
<PAGE>
delivery or upon deposit in any United States mail box, by registered or
certified mail, postage prepaid, or upon transmission by telegram or telecopy,
addressed to the other Partner at the address shown on Exhibit A or at such
other address as a Partner may designate by fifteen (15) days' advance written
notice to the other Partners.
10.6. Power of Attorney. By signing this Agreement, each Limited
-----------------
Partner designates and appoints the General Partner its true and lawful
attorney, in its name, place and stead to make, execute, sign, and file such
instruments, documents, or certificates that may from time to time be required
of the Partnership by the laws of the United States of America, the laws of the
State of Delaware, or any other state in which the Partnership shall conduct its
investment activities in order to qualify or otherwise enable the Partnership to
conduct its affairs in such jurisdictions; provided, however, that in no event
shall the General Partner be deemed to have the authority under this Paragraph
10.6 to take any action that would result in any Limited Partner losing the
limitation on liability afforded hereunder. Such attorney is not hereby granted
any authority on behalf of the Limited Partner to amend this Agreement except
that as attorney for each Limited Partner, the General Partner shall have the
authority to amend this Agreement and the Certificate of Limited Partnership as
may be required to effect:
(a) Admissions of additional partners pursuant to Paragraph 7.6
or 7.7 above; or
(b) Transfers of Limited Partnership interests pursuant to
Paragraph 7.7 above.
10.7. Amendment. This Agreement (and any exhibits to this Agreement)
---------
may be amended only with the written consent of the General Partner and Majority
in Interest of the Limited Partners. No amendment shall, however, (i) increase
the Capital Commitment of a Limited Partner or modify the allocation of Capital
Transaction Gain or Loss or Net Income or Loss or the distributions allocable to
any Limited Partner without the written consent of such Limited Partner, (ii)
increase the Management Fee or alter or waive the terms of Paragraph 8.2 without
the unanimous consent of the Limited Partners, (iii) alter or waive the terms of
this Paragraph 10.7(a), or (iv) alter or waive the terms of Paragraphs 7.6,
10.14, or 10.17 without the written consent of each affected Limited Partner.
Any proposed amendment that would change the requisite percentage of Limited
Partner interests required to take any action shall require the approval of such
existing requisite percentage. The General Partner shall promptly furnish copies
of all amendments to this Agreement and the Partnership's Certificate of Limited
Partnership to all Partners.
10.8. Effective Date. The Limited Partnership Agreement shall be
--------------
effective on the date set forth in the first paragraph of this Agreement.
10.9. Entire Agreement. This Agreement constitutes the entire
----------------
agreement of the Partners and supersedes all prior agreements between the
Partners with respect to the Partnership.
10.10. Titles; Subtitles. The titles and subtitles used in this
-----------------
Agreement are used for convenience only and shall not be considered in the
interpretation of this Agreement.
32.
<PAGE>
10.11. Partnership Name. The Partnership shall have the exclusive
----------------
right to use the Partnership name (and any name under which the Partnership
shall elect to conduct its affairs) as long as the Partnership continues.
10.12. Exculpation. Neither the General Partner, nor its members,
-----------
employees or affiliates shall be liable to a Limited Partner or the Partnership
for honest mistakes of judgment, or for action or inaction, taken reasonably and
in good faith for a purpose that was reasonably believed to be in the best
interests of the Partnership, or for losses due to such mistakes, action, or
inaction, or to the negligence or dishonesty of any employee, broker, or other
agent of the Partnership or the General Partner, provided that such employee,
broker, or agent was selected, engaged or retained and supervised with
reasonable care. This Paragraph 10.12 shall not extend to any action which
constitutes fraud, willful misconduct or gross negligence. The General Partner
may consult with counsel and accountants in respect of Partnership affairs and
be fully protected and justified in any action or inaction that is taken in
accordance with the advice or opinion of such counsel or accountants, provided
that they shall have been selected with reasonable care. Notwithstanding any of
the foregoing to the contrary, the provisions of this Paragraph 10.12 and of
Paragraph 10.13 hereof shall not be construed so as to relieve (or attempt to
relieve) any person of any liability by reason of recklessness or intentional
wrongdoing or to the extent (but only to the extent) that such liability may not
be waived, modified or limited under applicable law, but shall be construed so
as to effectuate the provisions of this Paragraph 10.12 and of Paragraph 10.13
to the fullest extent permitted by law.
10.13. Indemnification. The Partnership agrees to indemnify, out
---------------
of the assets of the Partnership only, the General Partner, the members of the
General Partner and their agents, employees and affiliates (and each such
person's heirs and legal and personal representatives) to the fullest extent
permitted by law and to save and hold them harmless from and in respect of all
(a) reasonable fees, costs, and expenses paid in connection with or resulting
from any claims, actions, or demands against the General Partner, the members of
the General Partner, the Partnership, or their agents or affiliates to the
extent that they arise out of or in any way relate to the Partnership, its
properties, business, or affairs and (b) such claims, actions, and demands and
any losses or damages resulting from such claims, actions, and demands,
including amounts paid in settlement or compromise (if recommended by attorneys
for the Partnership) of any such claim, action or demand; provided, however,
that this indemnity shall not extend to any action which constitutes fraud,
willful misconduct or gross negligence. Any person receiving an advance with
respect to expenses shall be required to agree to return such advance to the
Partnership in the event it is subsequently determined that such person was not
entitled to indemnification hereunder. Any indemnified party shall promptly seek
recovery under any other indemnity or any insurance policies by which such
indemnified party may be indemnified or covered or from any Portfolio Company in
which the Partnership has an investment, as the case may be. No payment or
advance may be made to any person under this Paragraph 10.13 to any person who
may have a right to any other indemnity (by insurance or otherwise) unless such
person shall have agreed, to the extent of any other recovery, to return such
payments or advances to the Partnership.
10.14. Limitation of Liability of the Limited Partners. No
-----------------------------------------------
Limited Partner shall be bound by, nor be personally liable for, the expenses,
liabilities, or obligations of the Partnership in excess of the balance of such
Partner's Capital Commitment to the Partnership.
33.
<PAGE>
10.15. Arbitration. Any controversy or claim arising out of or
-----------
relating to this Agreement, or the breach hereof, shall be settled by
arbitration in San Francisco, California, in accordance with the rules, then
obtaining, of the American Arbitration Association. Any award shall be final,
binding and conclusive upon the parties. A judgment upon the award rendered may
be entered in any court having jurisdiction thereof.
10.16. Tax Matters Partner. The General Partner shall be the
-------------------
Partnership's Tax Matters Partner ("TMP"). The TMP may be removed by Two-Thirds
---
in Interest of the Limited Partners. Upon the removal, dissolution or Bankruptcy
of the TMP, a successor TMP shall be elected by Two-Thirds in Interest of the
Limited Partners. The TMP shall employ experienced tax counsel to represent the
Partnership in connection with any audit or investigation of the Partnership by
the Internal Revenue Service ("IRS") and in connection with all subsequent
---
administrative and judicial proceedings arising out of such audit. The fees and
expenses incurred by the TMP in serving as the TMP shall be Partnership expenses
pursuant to Paragraph 5.2 and shall be paid by the Partnership. Notwithstanding
the foregoing, it shall be the responsibility of the General Partner and of each
Limited Partner, at their expense, to employ tax counsel to represent their
respective separate interests. If the TMP is required by law or regulation to
incur fees and expenses in connection with tax matters not affecting each of the
Partners, then the TMP may, in its sole discretion, seek reimbursement from or
charge such fees and expenses to the Capital Accounts of those Partners on whose
behalf such fees and expenses were incurred. The TMP shall keep the Limited
Partners informed of all administrative and judicial proceedings, as required by
Section 6223(g) of the Code, and shall furnish a copy of each notice or other
communication received by the TMP from the IRS to each Limited Partner, except
such notices or communications as are sent directly to such Partner by the IRS.
The relationship of the TMP to the Limited Partners is that of a fiduciary, and
the TMP has a fiduciary obligation to perform its duties as TMP in such manner
as will serve the best interests of the Partnership and all of the Partnership's
partners. To the fullest extent permitted by law, the Partnership agrees to
indemnify the TMP and its agents and save and hold them harmless, from and in
respect to all (i) reasonable fees, costs and expenses in connection with or
resulting from any claim, action, or demand against the TMP, the General Partner
or the Partnership that arise out of or in any way relate to the TMP's status as
TMP for the Partnership, and (ii) all such claims, actions, and demands and any
losses or damages therefrom, including amounts paid in settlement or compromise
of any such claim, action, or demand; provided that this indemnity shall not
extend to conduct by the TMP determined (i) not to have been undertaken in good
faith to promote the best interests of the Partnership or (ii) to have
constituted recklessness, fraud, gross negligence or intentional wrongdoing by
the TMP.
10.17. Taxation as Partnership. The General Partner, while
-----------------------
serving as such, agrees to use its best efforts to avoid taking any action that
would cause the Partnership to be classified as other than a partnership or to
be taxable as a corporation for federal income tax purposes. In the event the
Partnership should ever be taxable as a corporation, any resulting tax imposed
on the Partnership shall be treated as a reduction in Net Income or an increase
in Net Loss.
10.18. Deliveries of Opinions. In the event that any opinion is
----------------------
required hereunder from a Limited Partner, the General Partner will reasonably
cooperate with such Limited Partner's counsel to provide factual information in
the possession of the General Partner which
34.
<PAGE>
information is necessary to allow such counsel to provide the opinion. Any
expense related thereto shall be borne by such Limited Partner.
ARTICLE XI
MISCELLANEOUS TAX COMPLIANCE PROVISIONS
11.1. Substantial Economic Effect. The provisions of Article IV
---------------------------
and the other provisions of this Agreement relating to the maintenance of
Capital Accounts and procedures upon liquidation of the Partnership are intended
to comply generally with the provisions of Treasury Regulation Section 1.704-1,
and shall be interpreted and applied in a manner consistent with such
Regulations and, to the extent the subject matter thereof is otherwise not
addressed by this Agreement, the provisions of Treasury Regulations Section
1.704-1 are hereby incorporated by reference unless the General Partner shall
determine that such incorporation will result in economic consequences
inconsistent with the economic arrangement among the Partners as expressed in
this Agreement. In the event the General Partner shall determine that it is
prudent to modify the manner in which the Capital Accounts, or any debits or
credits thereto, are computed or allocated or the manner in which distributions
and contributions upon liquidation (or otherwise) of the Partnership (or any
Partner's interest therein) are effected in order to comply with such
Regulations and other applicable tax laws, or to assure that the Partnership is
treated as a partnership for tax purposes, or to achieve the economic
arrangement of the Partners as expressed in this Agreement, then notwithstanding
Paragraph 10.7 hereof, the General Partner may make such modification, provided
that it is not likely to have more than an insignificant detrimental effect on
the tax consequences and total amounts distributable to any Limited Partner
pursuant to Articles VI and VIII as applied without giving effect to such
modification. The General Partner shall also (i) make any adjustments that are
necessary or appropriate to maintain equality between the Capital Accounts of
the Partners and the amount of Partnership capital reflected on the
Partnership's balance sheet, as computed for book purposes pursuant to this
Agreement, in accordance with Regulations Section 1.704-1(b)(2)(iv)(g), and (ii)
make any appropriate modifications in the event unanticipated events (such as
the incurrence of nonrecourse indebtedness) might otherwise cause the
allocations under this Agreement not to comply with Treasury Regulations Section
1.704, provided in each case that the General Partner determines that such
adjustments or modifications shall not result in economic consequences
inconsistent with the economic arrangement among the Partners as expressed in
this Agreement.
11.2. Other Allocations. Notwithstanding the provisions of
-----------------
Article IV, the allocations provided therein shall be subject to the following
exceptions:
(a) In the event any Partner's Capital Account has an
Unadjusted Excess Negative Balance (as defined in subparagraph (f)) at the end
of any Fiscal Year, such Partner will be reallocated items of Capital
Transaction Gain and Net Income for such Fiscal Year (and, if necessary, future
Fiscal Years) in the amount necessary to eliminate such Unadjusted Excess
Negative Balance as quickly as possible.
(b) In the event any Partner unexpectedly receives any
adjustments, allocations or distributions described in Treasury Regulations
Sections 1.704-1(b)(2)(ii)(d)(4) through (d)(6), items of Capital Transaction
Gain and Net Income shall be specially allocated to
35.
<PAGE>
such Partner's Capital Account in an amount and manner sufficient to eliminate,
to the extent required by Treasury Regulations Section 1.704-1(b)(2)(ii)(d), the
Excess Negative Balance (as defined in subparagraph (e)) in such Partner's
Capital Account created by such adjustments, allocations or distributions as
quickly as possible. This subparagraph (b) is intended to and shall in all
events be interpreted so as to constitute a "qualified income offset" within the
-----------------------
meaning of Treasury Regulations Section 1.704-1(b)(2)(ii)(d).
(c) A Partner's Capital Account shall not be allocated
any item of Capital Transaction Loss or Net Loss to the extent such allocation
would cause such Capital Account to have an Excess Negative Balance (as defined
in subparagraph (e)).
(d) Any special allocations pursuant to this Paragraph
11.2 shall be taken into account as soon as possible in computing subsequent
allocations, so that over the term of the Partnership the net amount of any
items so allocated and the profit, gain, loss, income and expense and all other
items allocated to each Partner shall, to the extent possible, be equal to the
net amount that would have been allocated to each such Partner if such original
allocations pursuant to this Paragraph 11.2 had not occurred.
(e) For purposes of this Paragraph 11.2, "Excess Negative
---------------
Balance" shall mean the excess of the negative balance in a Partner's Capital
- -------
Account (computed with any adjustments which are required for purposes of
Treasury Regulations Section 1.704-1(b)(2)(ii)(d)) over the amount such Partner
is obligated to restore to the Partnership (computed under the principles of
Treasury Regulations Section 1.704-1(b)(2)(ii)(c)) inclusive of any addition to
such restoration obligation pursuant to application of the provisions of
Treasury Regulations Sections 1.704-2), or any successor provisions thereto.
(f) For purposes of this Paragraph 11.2 "Unadjusted
----------
Excess Negative Balance" shall have the same meaning as Excess Negative Balance,
- -----------------------
except that the Unadjusted Excess Negative Balance of a Partner shall be
computed without effecting the reductions to such Partner's Capital Account
which are described in Treasury Regulations Section 1.704-1(b)(2)(ii)(d).
11.3. Income Tax Allocations.
----------------------
(a) Except as otherwise provided in this Paragraph 11.3
or as otherwise required by the Code and the rules and Treasury Regulations
promulgated thereunder, Partnership income, gain, loss, deduction, or credit for
income tax purposes shall be allocated in the same manner the corresponding book
items are allocated pursuant to this Agreement.
(b) In accordance with Code Section 704(c) and the
Treasury Regulations thereunder, income, gain, loss and deduction with respect
to any asset contributed to the capital of the Partnership shall, solely for tax
purposes, be allocated between the Partners so as to take account of any
variation between the adjusted basis of such property to the Partnership for
federal income tax purposes and its initial Book Value.
(c) In the event the Book Value of any Partnership asset
is adjusted pursuant to the terms of this Agreement, subsequent allocations of
income, gain, loss and deduction with respect to such asset shall take account
of any variation between the adjusted
36.
<PAGE>
basis of such asset for federal income tax purposes and its Book Value in the
same manner as under Code Section 704(c) and the Treasury Regulations
thereunder.
11.4. Withholding. The Partnership shall at all times be
-----------
entitled to make payments with respect to any Partner in amounts required to
discharge any obligation of the Partnership to withhold or make payments to any
governmental authority with respect to any federal, state, local or other
jurisdictional tax liability of such Partner arising as a result of such
Partner's interest in the Partnership. Any such withholding payment shall be
charged to the Capital Account of the Partner subject to such withholding and
shall reduce the amounts otherwise distributable to such Partner hereunder.
[Remainder of This Page Intentionally Left Blank]
37.
<PAGE>
IN WITNESS WHEREOF, the Partners have executed this Agreement as
of the date first above written.
GENERAL PARTNER: E*TRADE VENTURES I, LLC, a Delaware
limited liability company
By /s/ THOMAS A. BEVILACQUA
__________________________________
Title: Managing Member
ORIGINAL LIMITED PARTNERS: E*TRADE GROUP INC.,
By /s/ THOMAS A. BEVILACQUA
__________________________________
Title _______________________________
/s/ CHRISTOS M. COTSAKOS
_____________________________________
Christos M. Cotsakos
/s/ THOMAS A. BEVILACQUA
_____________________________________
Thomas A. Bevilacqua
ADDITIONAL LIMITED PARTNERS: E*TRADE VENTURES I, LLC, a Delaware
limited liability company, as their
authorized attorney-in-fact
By /s/ THOMAS A. BEVILACQUA
__________________________________
Title: Managing Member
38.
<PAGE>
The undersigned members of E*Trade Ventures I, LLC, hereby specifically
acknowledge their obligation pursuant to Paragraph 8.2(g) of the Agreement.
E*TRADE GROUP, INC.
By /s/ THOMAS A. BEVILACQUA
_________________________________
Title: _____________________________
/s/ CHRISTOS M. COTSAKOS
_____________________________________
Christos M. Cotsakos
/s/ THOMAS A. BEVILACQUA
____________________________________
Thomas A. Bevilacqua
39.
<PAGE>
EXHIBIT A
PARTNERS' CAPITAL COMMITMENTS;
PARTNERSHIP PERCENTAGES
<TABLE>
<CAPTION>
Partnership
Capital Percentage*
Name Commitment (Rounded)
=================================================================================
<S> <C> <C>
GENERAL PARTNER:
E*Trade Ventures I, LLC $ 350,000 0.35%
LIMITED PARTNERS:
E*Trade Group, Inc. 25,169,800 25.08%
Cotsakos Venture, LLC 1,000,000 1.00%
Thomas A. Bevilacqua 500,000 .50%
Other Limited Partners 73,350,000 73.07%
(Aggregate Interests)
--------------------------------------
TOTAL $ 100,369,800 100.00%
</TABLE>
__________________________
* Actual Percentages are based on the relative amounts of the Partners' Capital
Commitments.
A-1
<PAGE>
EXHIBIT B
SECURITIES CONTRIBUTED BY E*TRADE
<TABLE>
<CAPTION>
Approximate
Company Agreed Fair Value* Percentage of Company
======================================================================
<S> <C> <C>
PlanetRx.com, Inc. $ 3,419,800 1.4%
Webvan Group, Inc. 10,000,000 1.4%
Equinix, Inc. 3,500,000 1.5%
LoanCity.com, Inc. 8,250,000 8.1%
------------------
$25,169,800
</TABLE>
__________________________
* Agreed Fair Value equals E*Trade's cost basis in the listed securities.
B-1
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS INCLUDED IN THIS REGISTRATION STATEMENT FILING AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 297,298
<RECEIVABLES> 6,510,753
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 396,829
<INSTRUMENTS-OWNED> 1,086,944
<PP&E> 194,351
<TOTAL-ASSETS> 11,738,637
<SHORT-TERM> 1,867,943
<PAYABLES> 4,455,555
<REPOS-SOLD> 0
<SECURITIES-LOANED> 3,434,902
<INSTRUMENTS-SOLD> 0
<LONG-TERM> 0
0
0
<COMMON> 2,883
<OTHER-SE> 1,946,754
<TOTAL-LIABILITY-AND-EQUITY> 11,738,637
<TRADING-REVENUE> 23
<INTEREST-DIVIDENDS> 157,197
<COMMISSIONS> 152,312
<INVESTMENT-BANKING-REVENUES> 0
<FEE-REVENUE> 0
<INTEREST-EXPENSE> 94,312
<COMPENSATION> 0
<INCOME-PRETAX> (4,993)
<INCOME-PRE-EXTRAORDINARY> (4,791)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,791)
<EPS-BASIC> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
