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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(X) Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Fiscal year ended September 25, 1998
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _________ to _________
Commission file number: 0-22163
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AMERITRADE HOLDING CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 47-0642657
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4211 SOUTH 102ND STREET, OMAHA, NEBRASKA
68127
(Address of principal executive offices)
(Zip Code)
(402) 331-7856
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Title of class
--------------------------------------
Class A Common Stock - $0.01 par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes (X) No ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.(X)
As of December 15, 1998, the aggregate market value of the Class A Common Stock
held by non-affiliates of the registrant was approximately $513 million computed
by reference to the final sale price of the stock on December 15, 1998 on the
Nasdaq stock market. All of the Class B Common Stock is held by affiliates of
the registrant.
The number of shares of Class A Common Stock outstanding as of December 15, 1998
was 26,299,918 shares. The number of shares of Class B Common Stock outstanding
as of December 15, 1998 was 2,728,800 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1998 Annual Report to Stockholders (incorporated into Part II
hereof) Definitive Proxy Statement relating to the Company's 1999 Annual Meeting
to be filed hereafter (incorporated into Part III hereof)
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AMERITRADE HOLDING CORPORATION
INDEX
<TABLE>
<CAPTION>
Page No.
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PART I
<S> <C>
Item 1. Business 3
Item 2. Properties 6
Item 3. Legal Proceedings 6
Item 4. Submission of Matters to a Vote of Security Holders 7
Executive Officers of the Registrant 7
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 9
Item 6. Selected Financial Data 10
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 11
Item 8. Financial Statements and Supplementary Data 11
Quarterly Financial Data (Unaudited) 11
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure 11
PART III
Item 10. Directors and Executive Officers of the Registrant 11
Item 11. Executive Compensation 11
Item 12. Security Ownership of Certain Beneficial Owners and Management 12
Item 13. Certain Relationships and Related Transactions 12
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 12
Exhibit Index 12
Signatures 19
</TABLE>
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UNLESS OTHERWISE INDICATED, REFERENCES TO "COMPANY" MEAN AMERITRADE HOLDING
CORPORATION AND ITS SUBSIDIARIES AND REFERENCES TO "FISCAL" MEAN THE COMPANY'S
FISCAL YEAR ENDED THE LAST FRIDAY OF SEPTEMBER.
Except for historical information contained herein, the matters discussed in
this report contain certain forward-looking statements that involve risks and
uncertainties that could cause actual results to differ materially from those
anticipated in such forward looking statements. Factors that may cause such
differences include, but are not limited to: the effect of customer trading
patterns on Company revenues and earnings; computer system failures; risks
associated with the Year 2000 computer systems conversions; the effects of
competitors' pricing, product and service decisions and intensified competition;
evolving regulation and changing industry customs and practices adversely
affecting the Company; adverse results of litigation; changes in revenues and
profit margin due to cyclical securities markets and interest rates; and a
significant downturn in the securities markets over a short period of time or a
sustained decline in securities prices and trading volumes.
PART I
ITEM 1. BUSINESS
Ameritrade Holding Corporation and its subsidiaries (collectively referred to as
the "Company") provide discount securities brokerage and clearing execution
services to their customers. The Company's primary focus is serving retail
customers by providing products and services at prices that are significantly
less than traditional full-commission securities brokers. The Company's retail
brokerage customers are able to trade securities through a variety of means,
including the Internet. The Company provides its customers with investment news
and information as well as educational services. The Company also provides
clearing and execution services for both its own brokerage operations as well as
for unaffiliated broker-dealers. During fiscal 1998, over 95 percent of the
Company's net revenues were derived from its retail discount brokerage
activities and clearing and execution service.
The Company was established in 1971 and has been engaged in the discount
brokerage industry since 1975. The Company's primary subsidiaries include: its
discount brokerage operating units: Ameritrade (Inc.), Accutrade, Inc.
("Accutrade") and AmeriVest, Inc. ("AmeriVest"); its securities clearing firm,
Advanced Clearing, Inc. ("Advanced Clearing"), formerly known as AmeriTrade
Clearing, Inc.; and its development-stage on-line financial services company,
OnMoney Financial Services Corporation ("OnMoney").
RETAIL DISCOUNT BROKERAGE
The Company provides retail discount brokerage services under two separate
operating subsidiaries, Ameritrade (Inc.) and Accutrade. At the end of fiscal
1998, the Company had approximately 306,000 core discount brokerage accounts
which represents an increase of approximately 212 percent from the number of
accounts at the end of fiscal 1997. The Company's average trading volume during
the fourth quarter of fiscal 1998 increased to approximately 24,000 executed
trades per day. This compares to approximately 9,000 and 3,500 trades executed
per day during the fourth quarters of fiscal 1997 and 1996, respectively. The
rapid increase in the number of accounts and trading activity is due in large
part to an extensive national advertising campaign undertaken by the Company
during fiscal 1998. During fiscal 1998, the Company spent over $40 million in a
nationwide advertising and promotion program for the Ameritrade (Inc.) brand.
This program resulted in 225,000 new accounts and added a net $4 billion to
assets in customer accounts during fiscal 1998, as well as significant brand
awareness and press coverage.
Retail customers have the ability to trade equity securities, options, mutual
funds and bonds through the Internet, PC-based software, personal digital
assistant, touchtone telephone and facsimile as well as through a traditional
registered representative. During the quarter ended September 25, 1998,
approximately 80 percent of the trades executed by the Company were made
electronically compared with approximately 50 percent of the trades made during
the quarter ended September 26, 1997. Depending on the medium used by the
customer, trades may be executed for as little as $8 regardless of the number of
shares bought or sold. This represents considerable savings over the trading
fees charged by traditional full-commission brokers. In addition to lower
transaction costs, the Company's retail discount brokerage customers are able to
access a broad range of services designed to meet their individual needs,
including real-time quotes, investment news, research and information. The
Company also strives to provide educational services for its customers in an
effort to make investing understandable and interesting to investors of all
ability levels. During fiscal 1998, the Company released "Darwin(TM): Survival
of the Fittest," the first interactive CD-ROM-based options trading simulator.
Darwin includes a comprehensive options tutorial that is designed to allow
investors to learn basic and advanced option trading strategies, trade fictional
equities and options, formulate investment strategies, track performance with
real-time stock graphs and compete against other players over a LAN or the
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Internet, all in a "real-world" trading environment. Darwin is available at no
cost through the Darwin website (http://darwin.ameritrade.com).
AMERITRADE (INC.)
Ameritrade (Inc.) was formed in 1997 through the consolidation of three
previously independent operating units of the Company - Ceres Securities, Inc.
("Ceres"), K. Aufhauser & Co. and the eBroker division of All American Brokers,
Inc.
The strategy of Ameritrade (Inc.) is to attract, retain and grow the number of
customer accounts and the assets held within those accounts. The national
advertising and marketing program that was launched in October 1997 was very
successful in building brand awareness, helping the Company open 225,000 new
accounts and add a net $4 billion to assets in customer accounts during the
fiscal year. The advertising and marketing program will continue in the future
with the expectation of distinguishing the Ameritrade (Inc.) brand, as well as
its products and services, from its competitors.
During fiscal 1998, Ameritrade (Inc.) launched the redesign of its Internet
website. The new site (www.ameritrade.com) incorporates real-time quotes,
expanded news and research resources as well as industry-leading trading
features. Ameritrade (Inc.) has implemented an innovative three-tiered order
ticket offering basic, intermediate and advanced trading options. Ameritrade
(Inc.) also offers online help wizards to guide novice investors through the
process of executing limit orders for both equities and options. In addition,
the Ameritrade (Inc.) trading site facilitates advanced option trading
strategies, including spreads, straddles and buy/writes. The site also allows
mutual fund investors to easily exchange funds within the same fund family.
ACCUTRADE
Accutrade provides value added discount brokerage services to sophisticated
investors. Accutrade introduced a software package known as Accutrade for
Windows in March 1996 to provide investors with an online investing system and
the ability to manage their financial assets. Customers using Accutrade for
Windows may place orders for stocks, mutual funds, options and corporate bonds.
Customers can also review their balances, positions, transaction history, order
status and obtain quotes. In addition, the program enables customers to track
multiple portfolios and tax lots and generates a variety of reports, including a
Schedule D for income tax purposes. One of the advanced features of Accutrade
for Windows is the ability to make program investments. This feature permits
customers to create conditions under which orders will be placed and then have
their personal computer monitor the market to automatically place the order.
Customers can also design baskets of stocks to track and trade. A price history
of the basket can be tracked to determine how the basket is performing and a
single order can buy or sell the basket. In October 1997, Accutrade for Windows
was named a finalist by PC Computing magazine in its annual Most Valuable
Product competition.
During fiscal 1998, Accutrade also launched the redesign of its website. The new
site (www.accutrade.com) incorporates many of the same features of the
Ameritrade (Inc.) site described above.
CLEARING AND EXECUTION SERVICES
The Company provides clearing and execution services to its discount brokerage
businesses, as well as to independent broker-dealers, depository institutions,
registered investment advisors and financial planners through its subsidiary,
Advanced Clearing. Clearing services include the confirmation, receipt,
settlement, delivery and record-keeping functions involved in the processing of
securities transactions. The clearing function involves a sharing of
responsibilities between the clearing broker and the introducing broker.
Advanced Clearing's correspondents, as introducing brokers, are responsible for
all customer contact, including opening customer accounts, responding to
customer inquiries and placing customer orders with the clearing broker. As a
clearing broker, Advanced Clearing provides the following back office functions:
maintaining customer accounts; extending credit (in a margin account) to the
customer; settling security transactions with clearing houses (e.g., the
Depository Trust Company and the National Securities Clearing Corporation);
settling commissions and clearing fees; preparing customer trade confirmations
and statements; performing designated cashiering functions, including the
delivery and receipt of funds and securities to or from the customer;
safeguarding funds and securities in customer accounts; transmitting tax
accounting information to the customer and to the applicable tax authority;
forwarding prospectuses, proxies and other shareholder information to customers;
preparing books and records in support of the above; and other related
activities.
Included as a part of the clearing function is the assumption of responsibility
for the possession and control of customer securities and other assets. As a
result, the Company records on its balance sheet amounts receivable from
customers that are a result of margin loans (loans made to customers that are
collateralized by securities held in customer's trading accounts at the
Company). In addition, the Company records on its balance sheet amounts payable
to its customers and correspondent broker-
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dealers related to cash balances maintained by the Company on behalf of those
customers and correspondents (free credit balances).
The Company makes loans to customers collateralized by customer securities.
Margin lending by the Company is subject to the margin rules of the Board of
Governors of the Federal Reserve System ("Federal Reserve"), National
Association of Securities Dealers ("NASD") margin requirements and the Company's
internal policies, which are more stringent than the Federal Reserve and NASD
requirements. By permitting customers to purchase on margin, the Company takes
the risk of a market decline that could reduce the value of the collateral held
by the Company to below the customers' indebtedness before the collateral can be
sold. Under applicable NASD rules, in the event of a decline in the market value
of the securities in a margin account, the Company is obligated to require the
customer to deposit additional securities or cash in the account so that at all
times the customer's equity in the account is at least 25 percent of the value
of the securities in the account. The Company's current internal requirement,
however, is that the customer's equity not fall below 30 percent of the value of
the securities in the account. If it does, the customer will be required to
increase the account's equity to 35 percent of the value of the securities in
the account. These requirements can be, and often are, raised as the Company
deems necessary for certain accounts, groups of accounts, securities, or groups
of securities.
OTHER FINANCIAL SERVICES
The Company also provides other financial services through two wholly-owned
subsidiaries: AmeriVest and OnMoney.
AmeriVest is a wholesale provider of discount brokerage services to depository
institutions, including banks, savings and loans and credit unions. AmeriVest
provides these institutions with a vehicle with which to provide brokerage
services to their retail customers without the need for the institutions
themselves to register as broker-dealers.
OnMoney is in the process of developing an Internet-based financial management
system. The OnMoney system is envisioned to provide its system users with
comprehensive access to all of their personal finance needs from their personal
computers. OnMoney is currently testing its system and expects to initiate
service in fiscal 1999.
INVESTMENTS
As of September 25, 1998, the Company owned approximately 3.95 million shares
(approximately 7.7 percent) of the common stock of Knight/Trimark Group, Inc.
("Knight/Trimark"). Knight/Trimark is a publicly traded market maker in
over-the-counter equity securities for those securities traded in the Nasdaq
stock market, the OTC Bulletin Board and those listed on the New York and
American Stock Exchanges. The customer base of Knight/Trimark consists primarily
of registered broker-dealers and financial institutions. The Company has
executed a portion of its securities transactions through subsidiaries of
Knight/Trimark since March 1995 and expects to continue to use Knight/Trimark
for execution of securities transactions in the future.
The Company has a minority interest in Comprehensive Software Systems, Ltd.
("CSS"). CSS is a partnership formed for the purpose of developing a variety of
software for broker-dealers, banks and other financial institutions. The Company
also has a minority interest in Adirondack Trading Partners LLC, a development
stage company formed to trade listed equity and index options.
COMPETITION
The market for discount brokerage services, particularly electronic brokerage
services, is new, rapidly evolving, intensely competitive and has few barriers
to entry. The Company has seen a dramatic increase in competition during 1998
and expects competition to continue and intensify in the future. The Company
encounters direct competition from approximately 100 other discount brokerage
firms, many of which provide electronic brokerage services. These competitors
include such discount brokerage firms as Charles Schwab & Co., Inc., Fidelity
Brokerage Services, Inc., National Discount Brokers Group, Inc., Quick & Reilly,
Inc., Waterhouse Securities, Inc. and E*Trade Group, Inc. The Company also
encounters competition from established full-commission brokerage firms as well
as financial institutions, mutual fund sponsors and other organizations, some of
which provide electronic brokerage services.
In addition, price competition intensified significantly in 1998. Ameritrade
(Inc.) was launched in October 1997 with $8 commissions for market equity trades
executed over the Internet. Within a few months, several competitors had lowered
their commissions. According to a report published by Credit Suisse First
Boston, the average commission charged by the ten largest online trading firms
decreased to $15.75 at the end of the June 1998 quarter from over $50 two years
earlier.
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REGULATION
The securities industry is subject to extensive regulation under federal and
state law. In general, broker-dealers are required to register with the
Securities and Exchange Commission ("SEC") and to be members of the NASD. As
such, the Company is subject to the requirements of the Securities Exchange Act
of 1934 and the rules promulgated thereunder relating to broker-dealers and to
the Rules of Fair Practice of the NASD. Such regulations establish, among other
things, minimum net capital requirements for the Company and its operating
subsidiaries. The Company is also subject to regulation under various state laws
in all 50 states and the District of Columbia, including registration
requirements.
In its capacity as a securities clearing firm, Advanced Clearing is a member of
the National Securities Clearing Corporation, the Depository Trust Corporation
and The Options Clearing Corporation, each of which is registered as a clearing
agency with the SEC. As a member of these clearing agencies, Advanced Clearing
is required to comply with the rules of such clearing agencies, including rules
relating to possession and control of customer funds and securities, margin
lending and execution and settlement of transactions.
Margin lending activities are subject to limitations imposed by the Federal
Reserve and the NASD. In general, these regulations provide that in the event of
a decline in the value of securities collateralizing a margin account, the
Company is required to obtain additional collateral from the borrower.
RESEARCH AND DEVELOPMENT
The Company views development of new products and services as essential to its
future growth and, therefore, devotes substantial resources to it. In fiscal
1998, the Company spent approximately $6.1 million on research and development,
compared to $2.8 million in fiscal 1997 and $1.5 million in fiscal 1996.
EMPLOYEES
As of September 25, 1998, the Company employed a total of 985 full-time
equivalent employees, of which 223 were registered representatives. The number
of employees has grown from the 412 full-time equivalent employees as of the end
of fiscal 1997 in response to the growth in the number of accounts and
transaction volume experienced by the Company in fiscal 1998. The Company does
not expect the increase in employees, on a percentage basis, to be as
significant in fiscal 1999 as it was in fiscal 1998. None of the Company's
employees are covered under a collective bargaining agreement. The Company
believes that its relations with its employees are good.
ITEM 2. PROPERTIES
The Company's headquarters are located in Omaha, Nebraska and occupy
approximately 74,000 square feet of leased space. The existing lease expires in
December 2017. During the third quarter of fiscal 1998, the Company leased an
additional facility in Bellevue, Nebraska with approximately 132,000 square
feet. This additional facility is used as an operations center for Ameritrade
(Inc.). The Bellevue facility has a lease that expires in January 2008. The
Company also leases four other locations in Omaha, White Plains, New York and
New York City totaling approximately 25,000 square feet. The leases on these
properties expire from November 1999 through August 2001.
ITEM 3. LEGAL PROCEEDINGS
On September 16, 1998, a putative class action complaint was filed in the
District Court, Douglas County, Nebraska, seeking injunctive and equitable
relief due to the Company's alleged breach of contract, violation of the
Consumer Protection Act, fraudulent inducement, negligent misrepresentation,
negligence and unjust enrichment regarding the Company's alleged inability to
handle the volume of subscribers to its Internet brokerage services. The
complaint seeks injunctive relief enjoining alleged deceptive, fraudulent and
misleading practices and unspecified compensatory damages. The Company believes
that it has viable defenses to the allegations raised in the complaint. However,
because this proceeding is at a preliminary phase and the amount of damages
sought has not been quantified, the Company is not presently able to predict the
ultimate outcome of this matter.
The Company and its operating units are parties to a number of other legal
matters arising in the ordinary course of its business. In management's opinion,
the Company has adequate legal defenses respecting each of these actions and
does not believe that any such matters, either individually or in the aggregate,
will materially affect the Company's results of operations or its financial
position.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders during the
fourth quarter of fiscal 1998.
EXECUTIVE OFFICERS OF THE REGISTRANT
The Company's executive officers are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
J. Joe Ricketts 57 Chairman and Chief Executive Officer
Robert T. Slezak 41 Vice President, Chief Financial Officer and Treasurer
Susan M. Hohman 56 Vice President, Infrastructure and Facilities
Peter D. Horst 36 Vice President, Marketing
David D. Jones 37 Vice President, Human Resources
Joseph A. Konen 51 Chief Executive Officer, OnMoney Financial Services Corporation
J. Peter Ricketts 34 President of Accutrade, Secretary of Ameritrade Holding Corporation
Kurt D. Halvorson 36 President of Advanced Clearing
Michael J. Anderson 42 President of Ameritrade (Inc.)
</TABLE>
J. Joe Ricketts has served as a director and as Chairman and Chief Executive
Officer of the Company since 1981. In 1975 Mr. Ricketts became associated with
the Company and served as an employee, director, officer and 25 percent
investor. From 1976 to 1981 the other partners retired, allowing Mr. Ricketts to
acquire majority control of the Company. Prior to 1975, Mr. Ricketts was a
registered representative with a national brokerage firm, an investment advisor
with Ricketts & Co. and a branch manager with Dun & Bradstreet. Mr. Ricketts is
a director of CSS Management. Mr. Ricketts currently serves as a member of the
District Committee for District 4 of the NASD. Mr. Ricketts is a member of the
Board of Trustees for Father Flanagan's Boys' Home (Boys Town) and on the Board
of Directors of Creighton University. Mr. Ricketts received his B.A. in
economics from Creighton University.
Robert T. Slezak has served as Vice President, Chief Financial Officer and
Treasurer of the Company since January 1989 and has served as a director since
October 1996. Mr. Slezak joined the Company in March 1987 and served as
Operations Manager at Advanced Clearing until January 1989. Prior to that time,
Mr. Slezak was a Senior Financial Analyst for Peter Kiewit Sons, Inc., an
international construction and mining company, from August 1985 to March 1987.
From January 1980 to August 1985, Mr. Slezak was on the audit staff of Deloitte
& Touche, a big five accounting firm. Mr. Slezak served as a member of the
District Committee for District 4 of the NASD from 1990 to 1992 and as a member
of its Nominating Committee from 1993 to 1994. Mr. Slezak is a Certified Public
Accountant. Mr. Slezak holds a B.S. in business from the University of Nebraska
at Omaha and an M.B.A. from Creighton University.
Susan M. Hohman was appointed Vice President, Infrastructure and Facilities
effective September 1998. Mrs. Hohman had served as Vice President, Human
Resources, of the Company since August 1986. Mrs. Hohman was a member of the
Human Resources Committee of the Securities Industry Association in 1993. Mrs.
Hohman received a B.S. in management from Bellevue University.
Peter D. Horst has served as Vice President of Marketing since December 1997.
Prior to joining The Company, Mr. Horst held various marketing and strategy
related roles at U S WEST, a provider of communications, entertainment and
information services, from August 1994 until November 1997. From June 1988 to
August 1994, Mr. Horst served as Marketing Manager at General Mills, a leading
packaged foods company, with responsibility for some of its larger consumer
brands. Mr. Horst holds a B.A. from Harvard University and an M.B.A. from the
Tuck School at Dartmouth College.
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David D. Jones has served as Vice President of Human Resources since September
1998. Prior to joining The Company, Mr. Jones was the Executive Director of
Human Resources for the University of Nebraska Medical Center from September
1994 until August 1998. From March of 1986 to July 1992, Mr. Jones served as
Assistant Director of Personnel at West Virginia University United Hospital
Center. He was later promoted to Vice President of Human Resources. He then
became Vice President of Human Development at the Beaver Valley Medical Center
in Beaver, Pennsylvania. Mr. Jones was also an Adjunct Faculty at Fairmont State
College in Fairmont, West Virginia where he taught Personnel and Human Resources
Management. Mr. Jones received his B.A. in Psychology and M.A. in Industrial and
Labor Relations from West Virginia University. He is certified as a Senior
Professional in Human Resources (SPHR) and as a Consultant in Managing
Organizational Change.
Joseph A. Konen has served as Chief Executive Officer of OnMoney since November
1, 1998 and has served as a director of the Company since October 1996. Mr.
Konen had served as President and Chief Operating Officer of the Company from
October 1994 to November 1998. From October 1992 to April 1995, Mr. Konen served
as President of Advanced Clearing. Mr. Konen served as Operations Manager of
Advanced Clearing from February 1992 to October 1992. Mr. Konen was a principal
in Joseph A. Konen & Associates, a management consulting firm, from June 1990 to
February 1992. Mr. Konen was President and Chief Executive Officer of Vital
Learning Corporation, a training industry firm, from January 1989 to June 1990
and was President and Chief Executive Officer of its parent, Vital Resources,
Inc., from October 1987 to June 1990. Mr. Konen held various executive
management positions from 1970 to 1987 with responsibility for corporate
finance, including acquisitions, divestitures and strategic planning. Mr. Konen
was a member of the Clearing Firms Committee of the Securities Industry
Association from 1995 to 1996 and was a member of its Membership Committee from
1993 to 1994. Mr. Konen holds a B.A. in economics and an M.B.A. in finance from
Indiana University.
J. Peter Ricketts has served as Secretary of the Company since November 1996 and
as President of Accutrade since November 1997. From October 1997 to November
1997, Mr. Ricketts served as General Manager of Accutrade. From August 1996 to
October 1997, Mr. Ricketts served as Director of Corporate Development of the
Company. From April 1995 to August 1996, Mr. Ricketts served as Project Director
for Accutrade. From January 1995 to March 1995, Mr. Ricketts served as Vice
President of Ceres and from May 1994 to January 1995 as President of Ceres. Mr.
Ricketts was a customer service representative for Accutrade from December 1993
to May 1994. Mr. Ricketts worked as Manager, Business Development, for Woodward
Clyde Consultants, an environmental consulting firm, from October 1992 to
September 1993. Mr. Ricketts served as Account Representative for Union Pacific
Railroad from July 1991 to September 1992. Mr. Ricketts holds a B.A. in biology
and an M.B.A. from the University of Chicago. J. Peter Ricketts is the son of J.
Joe Ricketts.
Kurt D. Halvorson has served as President of Advanced Clearing since April 1997.
Mr. Halvorson served as Vice President and General Manager of Advanced Clearing
April 1996 to March 1997. Mr. Halvorson served as Vice President and Controller
of Advanced Clearing from October 1992 to March 1996 and as Controller of
Advanced Clearing from September 1987 to October 1992. Mr. Halvorson was on the
audit staff of Deloitte & Touche, a big five public accounting firm, from 1984
to September 1987. Mr. Halvorson is a Certified Public Accountant. Mr. Halvorson
received a B.S. in business from the University of Nebraska.
Michael J. Anderson has served as President of Ameritrade, (Inc.) since October
1997. From May 1996 to October 1997, Mr. Anderson was the President of
Accutrade. Mr. Anderson served as General Manager of Accutrade from August 1994
to May 1996 and served as Director of Marketing and Sales of Advanced Clearing
from October 1992 until August 1994. Mr. Anderson was an account executive for
Vital Learning Corporation, a training industry firm, from January 1990 to
October 1992. From 1985 to January 1990, Mr. Anderson served in several
marketing capacities for Majers and A.C. Nielsen. Mr. Anderson served in sales
and sales management capacities from 1979 to 1985 with Procter & Gamble. Mr.
Anderson is President of the National Discount Brokerage Association and is
currently a trustee for the SIA's Security Industry Institute. Mr. Anderson also
has served as the founding President of a local Toastmasters' chapter and as the
Vice President of Marketing with Sales and Marketing Executives of the Midlands.
In addition, he served as President of the Omaha chapter of the American Society
of Training and Development. Mr. Anderson received a B.S. in marketing from Iowa
State University.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF CLASS A COMMON STOCK
The Company's Class A Common Stock (the "Class A Stock") has been traded on the
Nasdaq National Market under the symbol "AMTD" since March 4, 1997. The
following table shows the high and low closing sales prices for the Class A
Stock of the Company for the period indicated, as reported by the Nasdaq
National Market. The prices do not include retail markups, markdowns, or
commissions and may not represent actual transactions. In August 1998, the
Company effected a two-for-one stock split in the form of a stock dividend.
Accordingly, price information for periods prior to the stock split have been
adjusted to reflect the stock split.
<TABLE>
<CAPTION>
CLASS A STOCK PRICE
-----------------------------------------------------
For the fiscal year ended For the fiscal year ended
September 25, 1998 September 26, 1997
------------------------- -------------------------
High Low High Low
------------ ---------- ------------ ---------
<S> <C> <C> <C> <C>
Fourth Quarter $ 22.875 $ 13.500 $ 13.156 $ 7.531
Third Quarter $ 16.375 $ 12.344 $ 8.875 $ 6.063
Second Quarter $ 15.031 $ 11.375 $ 10.625* $ 8.375*
First Quarter $ 18.875 $ 10.813 $ n/a $ n/a
</TABLE>
*Commencing March 4, 1997
The closing sale price of the Company's Class A Stock as reported on the Nasdaq
National Market on December 15, 1998 was $19.50 per share. As of that date there
were 143 holders of record of the Company's Class A Stock based on information
provided by the Company's transfer agent. The number of stockholders does not
reflect the actual number of individual or institutional stockholders of the
Company because certain stock is held in the name of nominees. Based on the best
information available to the Company by the transfer agent, there are
approximately 9,100 beneficial holders of the Company's Class A Stock.
As of December 15, 1998, 2,728,800 shares of the Company's Class B Common Stock
(the "Class B Stock" together with the Class A stock, the "Common Stock") were
outstanding, all of which are held of record by J. Joe Ricketts and Marlene
Ricketts or certain entities controlled by them. The Class B Stock is not listed
on any exchange and is not traded over the counter. Each share of Class B Stock
is convertible into one share of Class A Stock at any time at the election of
the holder thereof. Each share of Class B Stock shall automatically convert into
one share of Class A Stock in the event of a transfer of such share of Class B
Stock to any person other than J. Joe Ricketts, Marlene Ricketts, the lineal
descendants of J. Joe Ricketts and Marlene Ricketts and their spouses, or any
trust or other person or entity that holds Class B Stock for the benefit of any
of the foregoing (the "Control Group"). In addition, the Class B Stock shall
automatically convert on a share for share basis into Class A Stock if the
number of shares of outstanding Common Stock held by the Control Group falls
below 20 percent of the number of shares of outstanding Common Stock.
DIVIDENDS
The Company has not declared or paid cash dividends on its Common Stock. The
Company currently intends to retain all of its earnings, if any, for use in its
business and does not anticipate paying any cash dividends in the foreseeable
future. The Company's revolving credit agreement prohibits the payment of cash
dividends. The payment of any future dividends will be at the discretion of the
Company's Board of Directors, subject to the provisions of the revolving credit
agreement and will depend upon a number of factors, including future earnings,
the success of the Company's business activities, capital requirements, the
general financial condition and future prospects of the Company, general
business conditions and such other factors as the Board of Directors may deem
relevant.
9
<PAGE> 10
ITEM 6. SELECTED FINANCIAL DATA
In thousands, except per share and operating data
<TABLE>
<CAPTION>
Fiscal Year Ended
--------------------------------------------------------------
SEPT. 25, SEPT. 26, SEPT. 27, SEPT. 29, SEPT. 30,
1998 1997 1996 1995 1994
----------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF INCOME DATA:
REVENUES:
Commissions and clearing fees........................... $ 85,644 $ 51,937 $ 36,470 $ 23,977 $ 20,386
Interest revenue........................................ 66,716 36,623 22,518 16,297 9,856
Equity income (loss) from investments................... 5,083 3,444 3,359 543 (575)
Gain from sale of investments........................... 795 - - 584 -
Other................................................... 5,956 3,663 3,032 1,481 1,694
---------- --------- --------- --------- ---------
Total revenues....................................... 164,194 95,667 65,379 42,882 31,361
Interest expense........................................ 29,279 18,429 11,040 7,862 3,912
---------- --------- --------- --------- ---------
Net revenues......................................... 134,915 77,238 54,339 35,020 27,449
Expenses excluding interest:
Employee compensation and benefits...................... 36,083 19,291 14,050 8,482 6,538
Commissions and clearance............................... 5,762 3,320 2,531 2,517 1,717
Communications.......................................... 12,926 5,623 3,686 2,353 1,892
Occupancy and equipment costs........................... 10,622 5,423 2,890 1,627 1,412
Advertising............................................. 43,614 13,971 7,537 4,842 5,987
Other................................................... 25,377 8,185 5,228 4,369 2,453
---------- --------- --------- --------- ---------
Total expenses excluding interest.................... 134,384 55,813 35,922 24,190 19,999
---------- --------- --------- --------- ---------
Income before provision for income taxes................... 531 21,425 18,417 10,830 7,450
Provision for income taxes................................. 321 7,603 7,259 3,799 2,619
---------- --------- --------- --------- ---------
Net income................................................. $ 210 $ 13,822 $ 11,158 $ 7,031 $ 4,831
========== ========= ========= ========= =========
Basic earnings per share................................... $ 0.01 $ 0.50 $ 0.44 $ 0.27 $ 0.19
Diluted earnings per share................................. $ 0.01 $ 0.50 $ 0.44 $ 0.27 $ 0.19
Weighted average shares outstanding - Basic................ 29,031 27,538 25,628 25,628 25,712
Weighted average shares outstanding - Diluted.............. 29,077 27,539 25,628 25,628 25,712
OPERATING DATA:
Average customer trades per day............................ 18,407 6,571 3,670 2,055 1,519
Assets in customer accounts (In billions).................. $ 11.4 $ 7.3 $ 4.0 $ 2.4 $ 1.7
Number of core accounts (1)................................ 306,000 98,000 52,000 38,000 18,000
Net revenue per trade...................................... $ 29.20 $ 46.65 $ 58.76 $ 67.09 $ 70.31
Pre-advertising operating expense per trade................ $ 19.65 $ 25.27 $ 30.69 $ 37.07 $ 35.89
Operating margin (2)....................................... 0% 28% 34% 31% 27%
Pre-advertising operating margin (3)....................... 33% 46% 48% 45% 49%
Return on average equity (4)............................... 0% 28% 44% 47% 49%
<CAPTION>
SEPT. 25, SEPT. 26, SEPT. 27, SEPT. 29, SEPT. 30,
1998 1997 1996 1995 1994
----------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEETS DATA:
Cash and segregated investments............................ $ 527,982 $ 373,286 $ 191,436 $ 125,456 $ 101,352
Receivable from customers and correspondents, net.......... 647,122 325,407 166,075 130,187 99,627
Total assets............................................... 1,290,402 757,357 401,679 287,105 216,991
Payable to customers and correspondents.................... 1,136,082 666,279 356,943 251,862 198,539
Notes payable.............................................. 11,000 - 4,853 7,097 -
Stockholders' equity....................................... 84,572 66,989 30,662 19,504 12,473
</TABLE>
- ----------------------
(1) Core accounts consist of open accounts in the Company's discount brokerage
subsidiaries.
(2) Operating margin is computed by dividing income before provision for income
taxes by net revenues.
(3) Pre-advertising operating margin is computed by dividing income before
provision for income taxes plus advertising and promotional expenses by net
revenues.
(4) Return on average equity is computed by dividing net income by
stockholders' equity averaged on a quarterly basis.
* Fiscal 1994 was a 53-week year. All other periods presented are 52-week years.
10
<PAGE> 11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required to be furnished pursuant to this item is set forth
under the caption "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in the Company's 1998 Annual Report to Stockholders,
which is incorporated herein by reference to Exhibit No. 13.1 of this report.
The discussion of the financial condition and results of operations of the
Company should be read in conjunction with the Selected Financial Data in Item 6
and the Consolidated Financial Statements and Notes thereto in the Company's
1998 Annual Report to Stockholders. This discussion contains forward-looking
statements that involve risks and uncertainties that could cause actual results
to differ materially from those anticipated in such forward looking statements.
Factors that may cause such differences include, but are not limited to: the
effect of customer trading patterns on Company revenues and earnings; computer
system failures; risks associated with the Year 2000 computer systems
conversions; the effects of competitors' pricing, product and service decisions
and intensified competition; evolving regulation and changing industry customs
and practices adversely affecting the Company; adverse results of litigation;
changes in revenues and profit margin due to cyclical securities markets and
interest rates; and a significant downturn in the securities markets over a
short period of time or a sustained decline in securities prices and trading
volumes.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required to be furnished pursuant to this item is set forth
under the caption "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in the Company's 1998 Annual Report to Stockholders,
which is incorporated herein by reference to Exhibit No. 13.1 of this report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required to be furnished pursuant to this item is set forth in
the Consolidated Financial Statements and under the caption "Quarterly Financial
Data (Unaudited)" in the Company's 1998 Annual Report to Stockholders, which is
incorporated herein by reference to Exhibit No. 13.1 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information about Directors required to be furnished pursuant to this item
is incorporated by reference from portions of the Company's definitive proxy
statement for its 1999 annual meeting of stockholders to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A within 120 days
after September 25, 1998 (the "Proxy Statement"). Information about Executive
Officers is shown on pages 7 and 8 of this filing.
ITEM 11. EXECUTIVE COMPENSATION
The information required to be furnished pursuant to this item is incorporated
by reference from portions of the Proxy Statement.
11
<PAGE> 12
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required to be furnished pursuant to this item is incorporated
by reference from portions of the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required to be furnished pursuant to this item is incorporated
by reference from portions of the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report
1. Financial Statements
The financial statements and independent auditors' report are set forth
in the Company's 1998 Annual Report to Stockholders, which are
incorporated herein by reference to Exhibit No. 13.1 of this report and
are listed below:
Independent Auditors' Report
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Cash Flows
Consolidated Statements of Stockholders' Equity
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Condensed Parent Company Only Financial Statements are included in
14(d) below.
3. Exhibits
3.1 Certificate of Incorporation (incorporated by reference to
Exhibit 3.1 of the Company's Registration Statement on Form
S-1 (Registration No. 333-17495) filed on February 7, 1997)
3.2 Bylaws (incorporated by reference to Exhibit 3.2 of the
Company's Registration Statement on Form S-1 (Registration No.
333-17495) filed on February 7, 1997)
3.3 Certificate of Amendment of Certificate of Incorporation of
Ameritrade Holding Corporation dated February 10, 1998
(incorporated by reference to Exhibit 3.3 of the Company's
quarterly report on Form 10-Q filed on May 12, 1998)
3.4 Certificate of Correction of Certificate of Amendment of
Certificate of Incorporation of Ameritrade Holding Corporation
dated December 11, 1998
4.1 Form of Certificate for Class A Stock (incorporated by
reference to Exhibit 4.1 of the Company's Registration
Statement on Form S-1 (Registration No. 333-17495) filed on
February 7, 1997)
10.1 Agreement of Limited Partnership, dated as of February 4,
1993, of Comprehensive Software Systems, Ltd. (incorporated by
reference to Exhibit 10.1 of the Company's Registration
Statement on Form S-1 (Registration No. 333-17495) filed on
February 7, 1997)
12
<PAGE> 13
10.2 Amendment to Agreement of Limited Partnership, dated as of
September 1993, of Comprehensive Software Systems, Ltd.
(incorporated by reference to Exhibit 10.33 of the Company's
Registration Statement on Form S-1 (Registration No.
333-17495) filed on February 7, 1997)
10.3 Second Amendment to Agreement of Limited Partnership, dated as
of December 1994, of Comprehensive Software Systems, Ltd.
(incorporated by reference to Exhibit 10.34 of the Company's
Registration Statement on Form S-1 (Registration No.
333-17495) filed on February 7, 1997)
10.4 Third Amendment to Agreement of Limited Partnership, dated as
of December 31, 1995, of Comprehensive Software Systems, Ltd.
(incorporated by reference to Exhibit 10.35 of the Company's
Registration Statement on Form S-1 (Registration No.
333-17495) filed on February 7, 1997)
10.5 Sale of Minority Interest Agreement between Comprehensive
Software Systems, Ltd. and ADP Financial Information Services,
Inc., dated as of June 3, 1998
10.6 Broker Loan Pledge and Security Agreement, dated as of October
24, 1989, made by AmeriTrade, Inc. (now known as Advanced
Clearing, Inc.) in favor of the First National Bank of Chicago
(incorporated by reference to Exhibit 10.18 of the Company's
Registration Statement on Form S-1 (Registration No.
333-17495) filed on February 7, 1997)
10.7 Master Broker Loan Note, dated as of October 24, 1989, made by
AmeriTrade, Inc. (now known as Advanced Clearing, Inc.) in
favor of the First National Bank of Chicago (incorporated by
reference to Exhibit 10.19 of the Company's Registration
Statement on Form S-1 (Registration No. 333-17495) filed on
February 7, 1997)
10.8 Lease, dated as of July 14, 1993, between John Joe and Marlene
M. Ricketts and TransTerra Co. (now known as Ameritrade
Holding Corporation) (incorporated by reference to Exhibit
10.20 of the Company's Registration Statement on Form S-1
(Registration No. 333-17495) filed on February 7, 1997)
10.9 Amendment to Lease, dated as of September 27, 1996, between
John Joe and Marlene M. Ricketts and TransTerra Co. (now known
as Ameritrade Holding Corporation) (incorporated by reference
to Exhibit 10.21 of the Company's Registration Statement on
Form S-1 (Registration No. 333-17495) filed on February 7,
1997)
10.10 Lease, dated as of October 5, 1995, between A.C. Nielsen
Company and TransTerra Co. (now known as Ameritrade Holding
Corporation) (incorporated by reference to Exhibit 10.22 of
the Company's Registration Statement on Form S-1 (Registration
No. 333-17495) filed on February 7, 1997)
10.11 First Amendment to Lease, dated as of August 23, 1996, between
A.C. Nielsen Company and TransTerra Co. (now known as
Ameritrade Holding Corporation) (incorporated by reference to
Exhibit 10.23 of the Company's Registration Statement on Form
S-1 (Registration No. 333-17495) filed on February 7, 1997)
10.12 Second Amendment to Lease, dated as of October 5, 1997,
between A.C. Nielsen Company and AmeriTrade Holding
Corporation (incorporated by reference to Exhibit 10.12 of the
Company's annual report on Form 10-K filed on December 23,
1997)
10.13 Lease, dated as of March 10, 1996, between New York Executive
Office Network and K. Aufhauser & Company, Inc. (incorporated
by reference to Exhibit 10.24 of the Company's Registration
Statement on Form S-1 (Registration No. 333-17495) filed on
February 7, 1997)
10.14 Lease, dated as of June 20, 1996, between Christ Community
Church and TransTerra Co. (now known as Ameritrade Holding
Corporation) (incorporated by reference to Exhibit 10.25 of
the Company's Registration Statement on Form S-1 (Registration
No. 333-17495) filed on February 7, 1997)
10.15 Employment Contract, dated as of December 3, 1996, between J.
Joe Ricketts and AmeriTrade Holding Corporation (incorporated
by reference to Exhibit 10.26 of the Company's Registration
Statement on Form S-1 (Registration No. 333-17495) filed on
February 7, 1997)
10.16 Employment Contract, dated as of December 3, 1996, between
Joseph A. Konen and AmeriTrade Holding Corporation
(incorporated by reference to Exhibit 10.27 of the Company's
Registration Statement on Form S-1 (Registration No.
333-17495) filed on February 7, 1997)
10.17 Employment Contract, dated as of December 3, 1996, between
Robert T. Slezak and AmeriTrade Holding Corporation
(incorporated by reference to Exhibit 10.28 of the Company's
Registration Statement on Form S-1 (Registration No.
333-17495) filed on February 7, 1997)
13
<PAGE> 14
10.18 Form of Executive Bonus Plan (incorporated by reference to
Exhibit 10.29 of the Company's Registration Statement on Form
S-1 (Registration No. 333-17495) filed on February 7, 1997)
10.19 1996 Long-Term Incentive Plan (incorporated by reference to
Exhibit 10.30 of the Company's Registration Statement on Form
S-1 (Registration No. 333-17495) filed on February 7, 1997)
10.20 Amendment to 1996 Long-Term Incentive Plan dated November 11,
1997
10.21 1996 Directors Incentive Plan, as amended February 10, 1998.
This plan supercedes plan filed February 7, 1997
10.22 Loan Agreement, dated as of January 16, 1998, made by
Ameritrade Holding Corporation in favor of a bank group
(incorporated by reference to Exhibit 10.22 of the Company's
quarterly report on Form 10-Q filed on February 13, 1998)
10.23 Lease, dated as of January 19, 1998, between United Investment
Joint Venture and Ameritrade Holding Corporation (incorporated
by reference to Exhibit 10.23 of the Company's quarterly
report on Form 10-Q filed on May 12, 1998)
10.24 Lease, dated as of February 3, 1998, between Southroads Mall
and Ameritrade Holding Corporation (incorporated by reference
to Exhibit 10.24 of the Company's quarterly report on Form
10-Q filed on May 12, 1998)
10.25 Operating Agreement of Adirondack Trading Partners LLC
13.1 Ameritrade Holding Corporation 1998 Annual Report to
Stockholders
21.1 Subsidiaries of the Registrant (incorporated by reference to
Exhibit 21.1 of the Company's Registration Statement on Form
S-1 (Registration No. 333-17495) filed on February 7, 1997)
24.1 Power of Attorney authorizing Robert T. Slezak to sign the
annual report on Form 10-K on behalf of Gene L. Finn
24.2 Power of Attorney authorizing Robert T. Slezak to sign the
annual report on Form 10-K on behalf of Thomas Y. Hartley
24.3 Power of Attorney authorizing Robert T. Slezak to sign the
annual report on Form 10-K on behalf of Charles L. Marinaccio
24.4 Power of Attorney authorizing Robert T. Slezak to sign the
annual report on Form 10-K on behalf of Mark L. Mitchell
24.5 Power of Attorney authorizing Robert T. Slezak to sign the
annual report on Form 10-K on behalf of John W. Ward
24.6 Power of Attorney authorizing Robert T. Slezak to sign the
annual report on Form 10-K on behalf of David W. Garrison
24.7 Power of Attorney authorizing Robert T. Slezak to sign the
annual report on Form 10-K on behalf of Joseph A. Konen
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of fiscal 1998.
14
<PAGE> 15
(d) Condensed Parent Company Only Financial Statements
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Ameritrade Holding Corporation and
Subsidiaries Omaha, Nebraska
We have audited the consolidated financial statements of Ameritrade Holding
Corporation and subsidiaries (collectively, the "Company") as of September 25,
1998 and September 26, 1997 and for each of the three years in the period ended
September 25, 1998 and have issued our report thereon dated October 27, 1998;
such consolidated financial statements and report are included in the Company's
1998 Annual Report to Stockholders and are incorporated herein by reference. Our
audits also included the financial statement schedule of Ameritrade Holding
Corporation, listed in Item 14. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits. In our opinion, such financial statement schedule,
when considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly in all material respects the information set forth
therein.
DELOITTE & TOUCHE LLP
Omaha, Nebraska
October 27, 1998
15
<PAGE> 16
AMERITRADE HOLDING CORPORATION (PARENT COMPANY ONLY)
CONDENSED BALANCE SHEETS
AS OF SEPTEMBER 25, 1998 AND SEPTEMBER 26, 1997
<TABLE>
<CAPTION>
ASSETS 1998 1997
------------ -----------
<S> <C> <C>
Cash and cash equivalents................................................................... $ 876 $13,102,890
Investments in subsidiaries................................................................. 66,930,299 41,790,733
Furniture, equipment and leasehold improvements - net of accumulated
depreciation and amortization: 1998 - $1,146,505; 1997 - $441,802......................... 13,572,089 2,246,178
Investments................................................................................. 30,760,729 12,597,972
Deferred income taxes....................................................................... - 1,128,759
Other assets................................................................................ 1,153,834 787,465
------------ -----------
Total assets.......................................................................... $112,417,827 $71,653,997
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued liabilities.................................................. 6,379,954 4,664,903
Notes payable............................................................................. 11,000,000 -
Deferred income taxes..................................................................... 10,465,789 -
------------ -----------
Total liabilities..................................................................... 27,845,743 4,664,903
------------ -----------
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, $1 par value; authorized 3,000,000 shares, none issued................... - -
Common stock, $0.01 par value:
Class A - 60,000,000 shares authorized; 26,306,846 shares issued...................... 263,068 263,068
Class B - 60,000,000 shares authorized; 2,728,800 shares issued and
outstanding........................................................................... 27,288 27,288
------------ -----------
Total common stock.................................................................... 290,356 290,356
Additional paid in capital.................................................................. 23,135,653 23,152,328
Retained earnings........................................................................... 43,756,848 43,546,410
Treasury stock - Class A shares at cost (9,442 shares at Sept. 25, 1998).................... (133,388) -
Net unrealized investment gain.............................................................. 17,522,615 -
------------ -----------
Total stockholders' equity............................................................ 84,572,084 66,989,094
------------ -----------
Total liabilities and stockholders' equity............................................ $112,417,827 $71,653,997
============ ===========
</TABLE>
16
<PAGE> 17
AMERITRADE HOLDING CORPORATION (PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF INCOME
FOR THE YEARS ENDED SEPTEMBER 25, 1998, SEPTEMBER 26, 1997
AND SEPTEMBER 27, 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- ------------
<S> <C> <C> <C>
Revenues:
Interest revenue................................................ $ 44,785 $ 399,526 $ 30,722
Equity income from investments.................................. 5,083,172 3,443,807 3,358,871
Gain from sale of investment.................................... 794,634 - -
Management Fee.................................................. 9,360,000 5,374,640 3,668,000
Other........................................................... 252,318 155,251 188,636
----------- ----------- -----------
Total revenues................................................ 15,534,909 9,373,224 7,246,229
Interest expense................................................ 688,727 219,680 679,143
----------- ----------- -----------
Net revenues.................................................. 14,846,182 9,153,544 6,567,086
Expenses excluding interest:
Employee compensation and benefits.............................. 6,625,585 5,411,298 3,384,859
Other........................................................... 7,804,500 3,136,674 990,589
----------- ----------- -----------
Total expenses excluding interest............................. 14,430,085 8,547,972 4,375,448
----------- ----------- -----------
Income from operations before provision for income
taxes and equity in earnings of subsidiaries................... 416,097 605,572 2,191,638
Provision for income taxes...................................... 169,565 222,143 806,015
----------- ----------- -----------
Income before equity in earnings (loss) of subsidiaries......... 246,532 383,429 1,385,623
Equity in earnings (loss) of subsidiaries....................... (36,094) 13,438,720 9,772,722
----------- ----------- -----------
Net Income...................................................... $ 210,438 $13,822,149 $11,158,345
=========== =========== ===========
</TABLE>
17
<PAGE> 18
AMERITRADE HOLDING CORPORATION (PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 25, 1998, SEPTEMBER 26, 1997 AND SEPTEMBER 27,
1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income...................................................... $ 210,438 $13,822,149 $11,158,345
Adjustments to reconcile net income to net cash from
operating activities:
Equity in earnings of subsidiaries.............................. 36,094 (13,438,720) (9,772,722)
Depreciation and amortization................................... 714,950 200,348 123,006
Deferred income taxes........................................... 435,631 (319,714) (152,165)
Equity income from investments.................................. (5,083,172) (3,443,807) (3,358,871)
Gain from sale of investment.................................... (794,634) - -
Changes in operating assets and liabilities:
Other assets.................................................. (373,021) (232,494) 75,990
Accounts payable and accrued liabilities...................... 1,715,051 1,384,655 1,328,204
----------- ----------- -----------
Net cash provided by (used in) operating activities........... (3,138,663) (2,027,583) (598,213)
----------- ----------- -----------
Cash Flows From Investing Activities:
Acquisition of subsidiary....................................... - - (188,953)
Investment in subsidiaries...................................... (40,569,727) (9,710,640) (640,081)
Dividends from subsidiaries..................................... 15,350,000 5,970,000 7,140,000
Purchase of furniture, equipment and leasehold improvements..... (12,034,209) (1,784,386) (98,396)
Purchase of investments......................................... (1,652,740) (659,613) (6,272,361)
Distributions received from investments......................... 12,264,993 3,663,231 2,902,004
Proceeds from sale of investments............................... 5,828,395 - -
----------- ----------- -----------
Net cash provided by (used in) investing activities........... (20,813,288) (2,521,408) 2,842,213
----------- ----------- -----------
Cash Flows From Financial Activities:
Issuance of Class A common stock................................ - 33,750 -
Proceeds from initial public offering, net of offering costs.... - 22,471,131 -
Proceeds from notes payable..................................... 22,500,000 - -
Principal payments on notes payable............................. (11,500,000) (4,853,000) (2,244,000)
Purchase of treasury stock...................................... (286,375) - -
Reissuance of treasury stock.................................... 136,312 - -
----------- ----------- -----------
Net cash provided by (used in) financial activities............. 10,849,937 17,651,881 (2,244,000)
----------- ----------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents............ (13,102,014) 13,102,890 -
Cash and Cash Equivalents at Beginning of Year.................. 13,102,890 - -
----------- ----------- -----------
Cash and Cash Equivalents at End of Year........................ $ 876 $13,102,890 $ -
=========== =========== ===========
Supplemental Cash Flow Information:
Interest paid................................................. $ 590,522 $ 259,369 $ 640,398
Income taxes paid (refunds received).......................... $ (266,066) $ 541,857 $ 958,180
Supplemental Investing Activities:
Unrealized investment gain, net of deferred taxes of
$11,202,984.................................................. $17,522,615 $ - $ -
Noncash Financial Activities:
Retirement of treasury stock.................................. $ - $ - $ 1,437,399
</TABLE>
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the city of Omaha,
State of Nebraska, on the 18th day of December, 1998.
Ameritrade Holding Corporation
By: /s/ J. Joe Ricketts
-------------------
J. Joe Ricketts
Chairman, Chief Executive Officer and Director
(Principal Executive Officer)
By: /s/ Robert T. Slezak
--------------------
Robert T. Slezak
Vice President, Chief Financial Officer, Treasurer and Director
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on this 18th day of December, 1998.
<TABLE>
<S> <C>
/s/ J. Joe Ricketts /s/ Thomas Y. Hartley (1)
- ------------------- --------------------------
J. Joe Ricketts Thomas Y. Hartley
Chairman, Chief Executive Officer and Director Director
/s/ Robert T. Slezak /s/ Charles L. Marinaccio (1)
- -------------------- ------------------------------
Robert T. Slezak Charles L. Marinaccio
Vice President, Chief Financial Officer, Treasurer and Director Director
/s/ Joseph A. Konen (1) /s/ Mark L. Mitchell (1)
- ------------------------ -------------------------
Joseph A. Konen Mark L. Mitchell
Director Director
/s/ Gene L. Finn (1) /s/ John W. Ward (1)
- --------------------- ---------------------
Gene L. Finn John W. Ward
Director Director
/s/ David W. Garrison (1)
- --------------------------
David W. Garrison
Director
</TABLE>
(1) By: /s/ Robert T. Slezak
--------------------
Robert T. Slezak, Attorney-In-Fact
19
<PAGE> 1
EXHIBIT 3.4
CERTIFICATE OF CORRECTION
OF
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
AMERITRADE HOLDING CORPORATION
The undersigned hereby certify that the Certificate of Amendment of the
Certificate of Incorporation of Ameritrade Holding Corporation, a Delaware
corporation (the "Corporation") should be corrected as follows in accordance
with the provisions of Section 103(f) of the Delaware General Corporation Law:
That Article I of the Certificate of Amendment of the Certificate of
Incorporation of the Corporation as filed on February 26, 1998 incorrectly
stated that Article Fourth of the Certificate of Incorporation was to be amended
and restated in its entirety when it was intended that only the first paragraph
of Article Fourth of the Certificate of Incorporation was to be amended and
restated. Accordingly, Article I of the Certificate of Amendment of the
Certificate of Incorporation of the Corporation is corrected to read as follows:
That it is advisable and in the best interests of the Corporation that
the first paragraph of Article Fourth of the Certificate of Incorporation be
amended; and that the Directors of the Corporation have duly adopted and
presented to the shareholders entitled to vote thereon the following resolution
setting forth a proposed amendment to the Certificate of Incorporation of such
corporation:
RESOLVED, that it is advisable and hereby proposed that the
first paragraph of Article Fourth of the Certificate of incorporation of
Ameritrade Holding Corporation be revoked and the following be and it
hereby is adopted in substitution of the first paragraph of Article
Fourth:
FOURTH: The total number of shares of capital stock which the
Corporation has authority to issue is 69,000,000 shares, consisting of:
(1) 3,000,000 shares of Preferred Stock, par value $1.00 per
share (the "Preferred Stock");
(2) 60,000,000 shares of Class A Common Stock, par value $.01
per share (the "Class A Stock"); and
<PAGE> 2
(3) 6,000,000 shares of Class B Common Stock, par value $.01 per
share (the "Class B Stock").
The remainder of Article Fourth as it was originally filed on
September 25, 1996.
IN WITNESS WHEREOF, the undersigned Chairman and Chief Executive
Officer and Secretary of Ameritrade Holding Corporation, hereby certify that
the facts hereinabove stated are true and that the execution hereof is their
voluntary act and deed and the voluntary act and deed of said Corporation,
under penalties or perjury of the Corporation, has caused this Certificate of
Correction to be executed this 11th day of December, 1998.
AMERITRADE HOLDING CORPORATION
By /s/ J. Joe Ricketts
---------------------------------------
J. Joe Ricketts
Chairman and Chief Executive Officer
Attest:
By: /s/ J. Peter Ricketts
---------------------------
J. Peter Ricketts
Secretary
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<PAGE> 1
EXHIBIT 10.5
COMPREHENSIVE SOFTWARE SYSTEMS LTD.
SALE OF MINORITY INTEREST
TO
ADP FINANCIAL INFORMATION SERVICES, INC.
June 3, 1998
<PAGE> 2
INTRODUCTION
On June 3, 1998, ADP Financial Information Services, Inc. ("ADP")
acquired a minority, ten percent (10%) interest, in Comprehensive Software
Systems, Ltd. ("CSS"). CSS is organized as a Colorado limited partnership. The
general partner is a Colorado corporation, CSS Management, Inc. Accordingly, the
acquisition involved the purchase of a new partnership interest from CSS as well
as shares of treasury stock from the general partner all as set forth in the
attached Securities Purchase Agreement. The Agreement of Limited Partnership and
the Participation and Shareholder Agreement existing at the time of the
acquisition were amended as attached.
In addition, ADP obtained an option to acquire additional interests in
CSS and the general partner as set forth in the Securities Purchase Agreement.
Finally, ADP acquired certain rights to market products of CSS as set forth in
the Marketing and License Agreement, also attached.
ADP was represented in the transaction by its in-house counsel, Adam
S. T. Behar, Two Journal Square Plaza, Jersey City, New Jersey 07306, telephone
(201) 714-3500; facsimile (201) 714-3506.
CSS was represented by Marc J. Musyl, Rothgerber Johnson & Lyons, 1200
Seventeenth Street, Suite 3000, Denver, Colorado 80202, telephone (303)
623-9000; facsimile (303) 623-9222.
<PAGE> 3
EXECUTION COPY
SECURITIES PURCHASE AGREEMENT
By and Among
ADP FINANCIAL INFORMATION SERVICES, INC.,
AUTOMATIC DATA PROCESSING., INC.,
COMPREHENSIVE SOFTWARE SYSTEMS LTD.,
CSS MANAGEMENT, INC.,
THE SELLING SHAREHOLDERS LISTED ON EXHIBIT A HERETO
and
THE SELLING LIMITED PARTNERS LISTED ON EXHIBIT B HERETO
Dated as of June 3, 1998
<PAGE> 4
SECURITIES PURCHASE AGREEMENT, dated as of June 3, 1998, by and among
ADP Financial Information Services, Inc., a Delaware corporation ("ADP"),
Automatic Data Processing, Inc., a Delaware corporation ("Automatic"),
Comprehensive Software Systems Ltd., a Colorado Limited Partnership (the
"Partnership"), CSS Management, Inc., a Colorado corporation and the general
partner of the Partnership (the "General Partner"), the entities listed on
Exhibit A hereto (the "Selling Shareholders"), who are the holders of all the
outstanding shares of common stock, par value $0.01 per share (the "Common
Stock"), of the General Partner, and the entities listed on Exhibit B hereto
(the "Selling Partners"), who are the holders of all the outstanding limited
partnership interests (the "Partnership Interests") in the Partnership. The
Partnership, the General Partner, the Selling Shareholders and the Selling
Partners are collectively referred to herein as the "Sellers".
W I T N E S S E T H :
WHEREAS, the Selling Shareholders are the beneficial and record owners
of an aggregate of 28,367 shares of Common Stock, which (i) constitute all of
the issued and outstanding capital stock of the General Partner and (ii) are
owned by the Selling Shareholders in the amounts set forth on Schedule 3.6
hereto; and
WHEREAS, the Selling Partners are the beneficial and record owners of
all of the issued and outstanding Partnership Interests in the Partnership,
which Partnership Interests are owned by the Selling Partners in the amounts set
forth on Schedule 3.6 hereto; and
WHEREAS, each of the Selling Shareholders desires to cause the General
Partner to sell to ADP the number of shares of Common Stock set forth next to
its name on Exhibit A hereto, which in the aggregate constitutes 10% of the
issued and outstanding capital stock of the General Partner (the "Initial
Shares"), and ADP desires to purchase such Initial Shares from the General
Partner, in each case on the terms and conditions and for the consideration
described in this Agreement; and
WHEREAS, each of the Selling Partners and/or the Partnership desires to
sell to ADP the Partnership Interests set forth next to its name on Exhibit B
hereto, which in the aggregate constitutes 10% of the issued and outstanding
Partnership Interests in the Partnership (the "Initial Partnership Interests"),
and ADP desires to purchase such Initial Partnership Interests from the
Partnership and/or the Selling Partners, in each case on the terms and
conditions and for the consideration described in this Agreement; and
WHEREAS, each of the Selling Shareholders desires to grant to ADP the
right, and ADP desires the right, to purchase, on or about the fifth anniversary
of this Agreement (which date may be accelerated or postponed in accordance with
the terms and conditions of this Agreement), all of the shares of Common Stock
then owned by such Selling Shareholders, which in the aggregate (together with
the Initial Shares) shall constitute all of the issued and outstanding capital
stock of the General Partner (the "Subsequent Shares"); and
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<PAGE> 5
WHEREAS, each of the Selling Partners desires to grant to ADP the
right, and ADP desires the right, to purchase, on or about the fifth anniversary
of this Agreement (which date may be accelerated or delayed in accordance with
the terms and conditions of this Agreement), all of the Partnership Interests
then owned by such Selling Partners, which in the aggregate (together with the
Initial Partnership Interests) shall constitute all of the issued and
outstanding Partnership Interests in the Partnership (the "Subsequent
Partnership Interests"); and
WHEREAS, in connection with the sale of the Initial Shares and the
Initial Partnership Interests and the grant to ADP of the right to purchase the
Subsequent Shares and the Subsequent Partnership Interests, the Partnership and
ADP are concurrently with the execution of this Agreement entering into an
agreement whereby the Partnership is granting to ADP the right to offer to its
clients the Partnership's BrokerView(TM) product, on the terms and conditions
set forth therein (the "BrokerView(TM) Agreement").
NOW, THEREFORE, in consideration of the mutual promises, covenants,
representations and warranties made herein and of the mutual benefits to be
derived herefrom, the parties hereto agree as follows:
SECTION 1
DEFINITIONS
1.1 Defined Terms. As used in this Agreement and in the Schedules and
Exhibits attached hereto, the defined terms set forth below have the respective
meanings set forth below (each such meaning to be equally applicable to both the
singular and plural forms of the respective terms so defined).
"ADP": the meaning specified in the heading to this Agreement.
"Affiliate": any Person directly or indirectly controlling or
controlled by, or under direct or indirect common control with, the Person
specified.
"Automatic": the meaning specified in the heading to this Agreement.
"Balance Sheets": the balance sheets of the General Partner and the
Partnership as of February 28, 1998, previously provided to ADP.
"Board": the meaning specified in Section 5.2 hereof.
"Bona Fide Offer": a written offer which is honest in fact, not
collusive and, to the best knowledge of the Person receiving the offer, not a
sham.
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<PAGE> 6
"BrokerView(TM) Agreement": the meaning specified in the seventh
recital to this agreement.
"Business Day": any day on which trading occurs on the NYSE.
"Business Intellectual Property": collectively, the Owned Software,
Databases and Documentation, the Licensed Software, Databases and Documentation,
and all other Intellectual Property Rights.
"Call": the meaning specified in Section 6.1(a) hereof.
"Call Exercise Date": the meaning specified in Section 6.1(c) hereof.
"Call Notice": the meaning specified in Section 6.1(c) hereof.
"Call Termination Date": the meaning specified in Section 6. l(b)
hereof.
"Certificate": the meaning specified in Section 8.3(a) hereof.
"Claims": any claim, cause of action, investigation, suit or
proceeding, whether at law or in equity, or before any governmental department,
commission, board, agency or instrumentality, which involves a demand for any
judgment or liability.
"Code": the Internal Revenue Code of 1986, as amended.
"Common Stock": the meaning specified in the heading to this
Agreement.
"Contracts": the meaning specified in Section 3.18 hereof.
"Employee Benefit Plans": the meaning specified in Section 3.27(a)
hereof.
"Employee Co.": Comprehensive Securities Systems, Inc., a Colorado
corporation.
"Environmental Laws": any federal, state, local or foreign statute,
law, rule, regulation, ordinance, code, permit, policy, Order or rule of common
law now in effect and in each case as amended to date and any judicial or
administrative interpretation thereof relating to Hazardous Materials,
environmental matters, the protection of public health and safety from
environmental or health concerns or otherwise relating to environmental
conditions.
"ERISA": the Employee Retirement Income Security Act of 1974, as
amended.
"General Partner": the meaning specified in the heading to this
Agreement.
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<PAGE> 7
"Hazardous Materials": all hazardous substances, wastes, materials or
constituents, solid wastes, special wastes, toxic substances, pollutants,
contaminants, petroleum or petroleum derived substances or wastes, radioactive
materials, urea formaldehyde, polychlorinated biphenyls, radon gas and related
materials, and including, without limitation, any materials defined, listed,
identified under or described in any Environmental Laws.
"Historical Financial Statements": the audited combined balance sheets
of the General Partner and the Partnership as of December 31, 1996, December 31,
1995, December 31, 1994 and December 31, 1993, the audited combined statements
of operations, owners' equity and cash flows of the General Partner and the
Partnership (including the notes and supporting information and schedules
thereto) for the years ended December 31, 1996, December 31, 1995, December 31,
1994 and December 31, 1993, and for the period from inception (October 22, 1992)
to December 31, 1996, December 31, 1995, December 31, 1994 and December 31,
1993, the balance sheets of the General Partner and the Partnership as of
December 31, 1997 and February 28, 1998, and the income statements of the
General Partner and the Partnership for the year ended December 31, 1997 and the
2-month period ended February 28, 1998.
"Indemnified Party": the meaning specified in Section 8.3(a) hereof.
"Indemnifying Party": the meaning specified in Section 8.3(a) hereof.
"Initial Partnership Interests": the meaning specified in the fourth
recital to this Agreement.
"Initial Purchase Price": $20 Million.
"Initial Shares": the meaning specified in the third recital to this
Agreement.
"Intellectual Property Rights": all intellectual property rights used
by the General Partner or the Partnership, including (i) trademarks, tradenames
or service marks or names including all trademark, tradename or service mark
registrations (and any applications for registration therefor), (ii) customer
lists, advertising and marketing know-how and materials, sales tools and
advertising and other customer and potential customer data, (iii) copyrights,
copyright registrations and copyright applications, (iv) patent rights
including, without limitation, issued patents, applications, divisions,
continuations and continuations-in-part, reissues, patents of additions, utility
models and inventors' certificates, (v) trade secrets, proprietary information
and know-how, processes, inventions, inventors' notes, drawings and designs,
(vi) vendor lists and (vii) goodwill associated with any of the foregoing.
"IRS": the meaning specified in Section 3.27(a) hereof.
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<PAGE> 8
"Licensed Software, Databases and Documentation": all (i) computer
programs, (ii) software, (iii) computer databases (including, without
limitation, databases used in conjunction with such computer programs), (iv)
operating codes, source codes, updates, upgrades, modifications and enhancements
associated therewith and (v) documentation, specifications, manuals and
materials (including all Intellectual Property Rights) associated therewith,
licensed to the General Partner or the Partnership (regardless of whether it is
used internally and/or by customers of the Partnership), excluding generally
available, off-the-shelf microcomputer and workstation software.
"Lien": any lien, pledge, charge, security interest, encumbrance,
title retention agreement, adverse claim, option, mortgage, deed of trust,
indenture or other third-party interest or claim.
"Loan Agreements": the meaning specified in Section 3.20 hereof.
"Loss" or "Losses": the meaning specified in Section 8.2(a) hereof.
"Material Adverse Effect": any event, occurrence, fact, condition,
change, development or effect that is or may be materially adverse to the
business, operations, properties or assets or in the condition (financial or
otherwise), of the General Partner or the Partnership.
"NYSE": the New York Stock Exchange, Inc.
"Order": any order, judgment, ruling, stipulation, injunction, award,
decree or writ.
"Owned Software, Databases and Documentation": all (i) computer
programs, (ii) software, (iii) computer databases (including, without
limitation, databases used in conjunction with such computer programs), (iv)
operating codes, source codes, updates, upgrades, modifications and enhancements
associated therewith and (v) documentation, specifications, manuals and
materials (including all Intellectual Property Rights) associated therewith,
owned by the General Partner or the Partnership (regardless of whether it is
used internally and/or by customers of the Partnership).
"Partnership": the meaning specified in the heading to this
Agreement.
"Partnership Agreement": the Agreement of Limited Partnership of the
Partnership dated as of February 4, 1993, as amended by the Amendment dated
September, 1993, the Second Amendment dated December, 1994, the Third Amendment
dated December 31, 1995, the Fourth Amendment dated April 15, 1997, the Fifth
Amendment dated April 15, 1997, the Sixth Amendment dated November 13, 1997.
"Partnership Interests": the meaning specified in the heading to this
Agreement.
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<PAGE> 9
"Person": a corporation, association, partnership, organization,
company, business, individual, government or political subdivision thereof or
governmental agency.
"Proposed Offer": the meaning specified in Section 5.3 hereof.
"Put": the meaning specified in Section 6.1 (e) hereof.
"Return": any return, report, declaration, form, claim for refund or
information return or statement relating to Taxes, including any schedule or
attachment thereto or any amendment thereof.
"Sellers": the meaning specified in the heading to this Agreement.
"Selling Partners": the meaning specified in the heading to this
Agreement.
"Selling Shareholders": the meaning specified in the heading to this
Agreement.
"Shareholder Agreement": the Participation and Shareholder Agreement
dated as of February 4, 1993 among BHC Securities, Inc., Hanifen, Imhoff Inc.,
Legg Mason, Inc., McDonald & Company Securities, Inc., Raymond James &
Associates, Inc., Stephens Inc., Southwest Securities, Inc., TransTerra Co.,
Comprehensive Securities Systems, Inc., CSS Management, Inc. and Comprehensive
Software Systems, Ltd.
"Subsequent Closing": the meaning specified in Section 6.3 hereof.
"Subsequent Closing Date": the meaning specified in Section 6.3
hereof.
"Subsequent Purchase Agreement": the meaning specified in Section 7.1
hereof.
"Subsequent Shares": the meaning specified in the fifth recital to
this Agreement.
"Subsequent Partnership Interests": the meaning specified in the
sixth recital to this Agreement.
"Subsequent Purchase Price": the aggregate purchase price to be paid
by ADP for the Subsequent Shares and the Subsequent Partnership Interests, as
determined in accordance with Exhibit C hereto.
"Subsidiary": any company, association or other business entity, a
majority of the stock of any class or classes of which is owned, directly or
indirectly, by another Person.
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<PAGE> 10
"Tax": any federal, foreign, state, county, local and other tax
(including, without limitation, net income, gross income, gross receipts,
transfer, excise, property, franchise, profits, license, lease, sales, use, data
processing, ad valorem, goods and services, value added, withholding, estimated,
occupancy, capital, employment, unemployment compensation, payroll related,
social security, severance, stamp, import duties and other governmental charges
and assessments), whether or not measured in whole or in part by net income, and
including deficiencies, interest, additions to tax or interest, and penalties
with respect thereto, and including expenses associated with contesting any
proposed adjustment related to any of the foregoing.
"Tax Actions": the meaning specified in Section 3.11(c) hereof.
"Transaction Expenses": all costs and expenses incurred in connection
with this Agreement and the transactions contemplated hereby (including, without
limitation, the fees and disbursements of the counsel, accountants or auditors
retained by each party in connection with the negotiation, preparation,
execution and performance of this Agreement, or any other document, agreement or
requirement contemplated by or resulting from the transactions contemplated by
this Agreement and all costs related to the parties respective due diligence
review and any broker's or finder's fees of any kind (including, without
limitation, those set forth on Schedule 3.33 hereto).
1.2 Interpretation. As used in this Agreement, the terms "hereof",
"herein", "hereunder" and comparable terms refer to this Agreement in its
entirety and not to any particular article, section or other subdivision hereof.
Unless otherwise indicated, references in this Agreement to any "Section",
"Article", "Schedule" or "Exhibit" means a section or article of this
Agreement or a Schedule or Exhibit attached to this Agreement, as the case may
be.
SECTION 2
SALE AND PURCHASE OF THE INITIAL SHARES
AND INITIAL PARTNERSHIP INTERESTS
2.1 Sale and Purchase of the Initial Shares and Initial Partnership
Interests. Subject to the terms and conditions hereof, on the date hereof the
Sellers shall sell all of the Initial Shares and Initial Partnership Interests
to ADP and ADP shall purchase all of the Initial Shares and Initial Partnership
Interests from the Sellers for the Initial Purchase Price.
2.2 Transactions. On the date hereof, the following actions shall be
taken:
(a) the General Partner shall deliver to ADP, free and
clear of any Liens, one or more certificates representing all of the
Initial Shares, duly endorsed in blank or
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accompanied by stock powers or other instruments of transfer duly
endorsed in blank, and bearing or accompanied by all requisite stock
transfer stamps;
(b) the Selling Partners and the Partnership shall amend
the Partnership Agreement to, among other things, reflect the
admittance of ADP as a limited partner of the Partnership as a result
of the transfer to ADP of the Initial Partnership Interests;
(c) the Selling Shareholders and the General Partner shall
amend the Shareholder Agreement to, among other things, reflect the
admittance of ADP as a shareholder of the General Partner as a result
of the transfer to ADP of the Initial Shares, to include ADP's right
of first refusal in accordance with Section 5.4 below;
(d) the Partnership and ADP shall enter into the Broker-
View(TM) Agreement; and
(e) ADP shall pay to the Sellers, for the Initial Shares
and Initial Partnership Interests, the Initial Purchase Price (which
payment shall be allocated among the Sellers as set forth on Schedule
3.6 hereto) by wire transfer of immediately available funds, or
certified or bank check.
2.3 Consent to Sale. The Partnership and the General Partner hereby
consent to the assignment, transfer and delivery by each of the Sellers of their
respective Initial Shares and Initial Partnership Interests to ADP, and to ADP's
admission to the Partnership as a limited partner.
SECTION 3
REPRESENTATIONS AND
WARRANTIES OF THE SELLERS
The Sellers represent and warrant to ADP that:
3.1 Organization and Standing. The Partnership is a limited
partnership duly organized, validly existing and in good standing under the laws
of the State of Colorado and has all necessary power and authority and all
authorizations, licenses, permits and certificates necessary to own, lease or
license its property and to conduct its business as now conducted. The General
Partner is a corporation duly organized, validly existing and in good standing
under the laws of the State of Colorado and has all necessary power and
authority and all authorizations, licenses, permits and certificates necessary
to conduct its business as now conducted. Each of the Partnership and the
General Partner is duly qualified or licensed to do business and is in good
standing as a foreign corporation in all jurisdictions where it is required by
law to be qualified or licensed or the nature of its business or the properties
owned or leased by it makes such qualification or licensing necessary, except
where the lack of such qualification would not have a Material Adverse Effect.
Schedule 3.1 hereto sets forth (i) a list
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of each jurisdiction in which the Partnership and the General Partner is
qualified or licensed to do business and (ii) a list of each state or province
in which the Partnership and the General Partner owns and/or leases real
property. Upon completion of the transactions contemplated in Section 2 above,
the Partnership shall cause an amended certificate of limited partnership of the
Partnership to be filed in the State of Colorado, reflecting the ownership
changes effected by this Agreement.
3.2 Organization. Correct and complete copies of the Partnership
Agreement, as amended, and the articles of incorporation and by-laws of the
General Partner, as amended, have previously been delivered to ADP. All of the
minute books of the Partnership and the General Partner have been made available
to ADP and contain true and complete minutes and records of all meetings,
proceedings and other actions of the Partnership and the General Partner's
present and former shareholders and boards of directors from the respective
dates of their organization to the date hereof and all such meetings,
proceedings and actions have been duly, legally and properly held or taken;
provided, however, that the parties acknowledge that information regarding
current and future pricing of Partnership products, current and prospective
customers of the Partnership, costs of the Partnership, marketing plans and
materials and other competitively sensitive information has been excluded from
the foregoing and has not been made available to ADP.
3.3 Authorization. (a) Each of the Partnership and the General
Partner has the authority to execute and deliver this Agreement and the
agreements related hereto, to perform their respective obligations hereunder and
thereunder and to consummate the transactions contemplated hereby and thereby.
Such execution, delivery and performance have been duly authorized by the Board
of Directors of the General Partner (for itself and as the general partner of
the Partnership) and all other corporate action of the General Partner necessary
for such authorization has been taken (for itself and as the general partner of
the Partnership). This Agreement has been duly executed and delivered by each of
the Partnership and the General Partner and constitutes the legal, valid and
binding obligation of each of them enforceable against each of them in
accordance with its terms.
(b) This Agreement has been duly executed and delivered by each
Seller and constitutes the legal, valid and binding agreement of such Seller
enforceable against such Seller in accordance with its terms. Each Seller has
all requisite power and authority and full legal capacity to execute and deliver
this Agreement and the agreements related hereto and to perform such Seller's
obligations hereunder and thereunder, including, without limitation, all right,
power, capacity and authority to assign, deliver and transfer the Initial Shares
and Initial Partnership Interests, as the case may be, as provided by this
Agreement.
3.4 Absence of Conflicts. (a) The execution, delivery and performance
of this Agreement and the agreements related hereto by each of the Partnership
and the General Partner will not breach or violate any provision of, nor cause
any event by which a right of termination or acceleration or Lien on any of
their respective properties or assets would be
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created under: (i) any statute or regulation or any Order of any court or other
agency of government or any judgment, award or decree; (ii) the articles of
incorporation or by-laws of the General Partner; (iii) the Partnership
Agreement; or (iv) except as set forth in Schedule 3.4 hereto, any indenture,
contract, instrument or other agreement by which the Partnership or the General
Partner is bound, except in the case of clauses (i) and (iv) for such breaches,
violations or events which, individually or in the aggregate, would not have or
result in a Material Adverse Effect.
(b) The execution, delivery and performance of this Agreement and the
agreements related hereto by each Seller will not breach or violate any
provision of, nor cause any event by which a right of termination or
acceleration or Lien on the Partnership's, the General Partner's or any of such
Seller's properties or assets (including any of the Initial Shares or Initial
Partnership Interests) would be created under: (i) any statute or regulation or
any order of any court or other agency of government or any judgment, award or
decree, or (ii) any indenture, contract, instrument or other agreement by which
such Seller is bound.
3.5 Consents and Approvals. Except as otherwise set forth on Schedule
3.5 hereto, (i) no consent under any indenture, contract, instrument or other
agreement to which the Partnership, the General Partner or any of the Sellers is
a party, is required thereunder to be obtained in connection with the execution,
delivery and performance by the Partnership, the General Partner and the Sellers
of this Agreement or the agreements related hereto and (ii) no consents,
approvals or authorizations, declarations, filings or registrations with, or
notices to, any governmental or regulatory authority are required to be made,
obtained or given by the Partnership, the General Partner or the Sellers in
connection with the execution and delivery of this Agreement and the agreements
related hereto and the performance of the transactions contemplated hereby and
thereby.
3.6 Ownership of the Partnership and the General Partner. (a)
Schedule 3.6 sets forth a complete and correct list of all of the general and
limited partners of the Partnership and all of the partnership interests in the
Partnership (including interests with respect to obligations to make capital
contributions to the Partnership and rights to receive distributions from the
Partnership). Upon the transfer, assignment and delivery to ADP of the Initial
Partnership Interests in accordance with this Agreement, ADP will acquire good
and valid title to 10% of the Partnership Interests, free and clear of any Lien
other than any Lien created by ADP. Except as set forth in this Agreement and
the Partnership Agreement, there are (i) no options, rights, warrants, calls,
commitments (including without limitation any statutory or other legal
commitments) or voting agreements or trusts relating to the Partnership
Interests or obligating any of the Selling Partners or any other Person to
issue, dispose of, acquire, redeem or otherwise transfer any interests in the
Partnership, and (ii) no preemptive or similar rights on the part of any holders
of any interests in the Partnership.
(b) The authorized capital stock of the General Partner consists
solely of 100,000 shares of Common Stock of which only 28,367 shares are issued
and outstanding. All of such
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shares are duly authorized, issued and outstanding, fully paid and nonassessable
and owned beneficially and of record by the Selling Shareholders as set forth on
Schedule 3.6 hereto. Upon the transfer, assignment and delivery to ADP of the
Initial Shares in accordance with this Agreement, ADP will acquire good and
valid title to 10% of the issued and outstanding shares of the Common Stock,
free and clear of any Lien other than any Lien created by ADP. Except as set
forth in this Agreement and the Shareholder Agreement, there are (i) no options,
rights, warrants, calls, commitments (including without limitation any statutory
or other legal commitments) or voting or shareholder agreements or trusts
relating to the authorized or issued shares of stock or other equity interests
of the Companies or obligating any of the Selling Shareholders or the General
Partner or any other Person to issue, dispose of, acquire, redeem or otherwise
transfer any shares of stock or other equity interests in the General Partner,
and (ii) no preemptive or similar rights on the part of any holders of any class
of securities of the General Partner.
3.7 Subsidiaries; Investments. Except as set forth on Schedule 3.7
hereto, neither the General Partner nor the Partnership, directly or indirectly,
owns any shares of stock or any other security or interest in any corporation,
partnership, association or joint venture.
3.8 Financial Statements. The Historical Financial Statements, all of
which have been previously delivered to ADP, (i) are, in each case, true,
complete and accurate in all material respects, (ii) have been prepared in
conformity with generally accepted accounting principles consistently applied
and (iii) in the case of each such balance sheet, fairly presents the financial
condition of the General Partner and the Partnership (either on a combined basis
or separately) as at its respective date and, in the case of each such statement
of earnings and retained earnings, and cash flows, fairly presents the results
of the General Partner's and the Partnership's operations (either on a combined
basis or separately) for the periods covered thereby. The balance sheets of the
General Partner and the Partnership as of December 31, 1997 and February 28,
1998, and the statements of operations, owners' equity and cash flows of the
General Partner and the Partnership for the year ended December 31, 1997 and the
2-month period ended February 28, 1998 have been certified by the General
Partner's president and chief financial officer in their capacity as officers of
the General Partner.
3.9 Conduct of Business; Records and Books of Account. The General
Partner and the Partnership have conducted the business of the Partnership in
the ordinary course, consistent with past practice, since February 28, 1998. The
General Partner does not conduct any business other than in its capacity as the
general partner of the Partnership. The records and books of account of the
General Partner and the Partnership are true, complete and accurate in all
material respects and have been regularly kept and maintained in conformity with
generally accepted accounting principles applied on a consistent basis with
preceding years, subject only to normal year-end adjustments.
3.10 Absence of Undisclosed Liabilities. Except as set forth on
Schedule 3.10 hereto, there were on February 28, 1998 no liabilities, debts or
obligations of the General Partner and
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the Partnership, whether contingent or absolute, direct or indirect, known or
unknown, or matured or unmatured, including, without limitation, liabilities on
account of Taxes, other government charges or Claims which may be subsequently
brought, not shown or provided for in the Balance Sheets, and on the date hereof
there are no other liabilities, debts or obligations of any nature whatsoever,
except those incurred since February 28, 1998 in the ordinary course of business
of the Partnership and consistent with past practices of the Partnership that
would not, individually or in the aggregate, have or result in a Material
Adverse Effect.
3.11 Taxes. (a) Except as disclosed on Schedule 3.11(a) hereto, all
Returns required to be filed by the General Partner and the Partnership on or
before the date hereof have been filed within the time and in the manner
provided by law, and all such Returns are true and correct and accurately
reflect, in all material respects, the Tax liabilities of the General Partner
and the Partnership, respectively. All Taxes required to be paid on or before
the date hereof by the General Partner and the Partnership have been timely
paid.
(b) Schedule 3.11(b) hereto lists all of the jurisdictions in which
the General Partner and the Partnership have filed Returns during the 1997,
1996, 1995, 1994 and 1993 calendar years. The General Partner and the
Partnership have provided to ADP true and complete copies of all such Returns.
(c) Except as disclosed on Schedule 3.11(c) hereto, (i) the General
Partner and the Partnership have not executed any presently effective waiver or
extension of any statute of limitations against assessments and collections of
Taxes, (ii) no authority in a jurisdiction in which the General Partner or the
Partnership does not file Tax Returns has claimed that the General Partner or
the Partnership is or may be subject to taxation by such jurisdiction and (iii)
no Tax Return of the General Partner or the Partnership has been audited. There
are no current, pending or, to the knowledge of the General Partner and the
Partnership, threatened claims, assessments, notices, proposals to assess,
deficiencies, or audits (collectively, "Tax Actions") with respect to any Taxes
owed by the General Partner or the Partnership. Reserves and provisions for
Taxes accrued but not yet due reflected in the Historical Financial Statements
are adequate as of the respective dates of such financial statements in
accordance with generally accepted accounting principles. There is no basis for
any Tax Action against the General Partner or the Partnership. There are no
Liens for Taxes on any of the assets of the General Partner or the Partnership
except for Liens for current Taxes not yet due and payable.
(d) Proper and accurate amounts have been withheld and remitted by
the General Partner and the Partnership from and in respect of its current and
former employees, independent contractors, creditors and other third parties for
all periods in full and complete compliance with the Tax withholding provisions
of all applicable laws and regulations.
(e) Neither the General Partner nor the Partnership has been, or is
currently, a party to any Tax sharing agreement. The General Partner and the
Partnership have not made, and are
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not obligated to make, any payments, and are not parties to any agreement that
could obligate either of them to make any payments that will not be deductible
under Code Section 280G.
(f) The Partnership has charged its customers all sales, goods and
services and other similar Taxes required to be charged under the laws and
regulations of all applicable taxing jurisdictions. All such Taxes have been
collected and remitted to the appropriate taxing authorities in a timely manner.
(g) The General Partner and the Partnership have not agreed to or are
not required to make any adjustments under Section 481(a) of the Code by reason
of a change in accounting method or otherwise.
(h) Schedule 3.11(h) hereto sets forth all Federal, foreign, state,
county and local tax elections under the Code and other applicable provisions of
law that are in effect with respect to the General Partner and the Partnership
for the 1997, 1996, 1995, 1994 and 1993 calendar years and the year beginning
January 1, 1998.
3.12 Good and Marketable Title. Except as otherwise set forth in
Schedule 3.12 and except for inventories sold and receivables and charges
collected in the ordinary course of the business of the Partnership since
February 28, 1998, the General Partner and the Partnership have good and
marketable title, free and clear of any Liens whatsoever, to: (i) all of their
material assets and property including, without limitation, all assets shown on
the Balance Sheets in the amounts and categories set forth therein and (ii) all
of the material assets acquired by the General Partner and the Partnership since
February 28, 1998. The transactions contemplated by this Agreement and the
agreements related hereto will not effect a termination of or otherwise
interfere with the ownership of any or all of such assets by the General Partner
and the Partnership.
3.13 Fixed Assets; Sufficiency of Assets. (a) Schedule 3.13 hereto
sets forth a true and correct list of: (i) all real property, motor vehicles,
and computer equipment owned by the General Partner and the Partnership on the
date hereof, (ii) all other equipment, furniture, fixtures and other fixed
assets owned by the General Partner and the Partnership including, without
limitation, all of such fixed assets that are included on the Balance Sheets and
(iii) the cost (and tax basis if other than cost), accumulated depreciation, and
method of depreciation employed with respect to all such fixed assets.
(b) The tangible and intangible assets of the General Partner and the
Partnership, whether owned, licensed or leased, are sufficient to provide all
services currently offered or committed by the Partnership to its customers and
such tangible assets are in good condition and free from defects, except for
ordinary wear and tear.
3.14 Leased Properties. Schedule 3.14(i) hereto sets forth a true and
correct list of all outstanding realty and personalty leases to which the
General Partner or the Partnership is a
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party or by which either of them is bound, whether as lessee or lessor, on the
date hereof, which leases have previously been provided to ADP. Except as
otherwise set forth in Schedule 3.14(ii) hereto, each of the General Partner and
the Partnership occupies or uses all of the real and personal property leased by
it under and in accordance with such leases, and has neither assigned its
interests under any such lease nor further subleased the property which is the
subject of any such lease. All of such leases are in full force and effect and
either the General Partner or the Partnership holds a valid and enforceable
leasehold interest in all real property listed on Schedule 3.14(i), in each case
free and clear of all Liens. There exists no default or event of default or
event, occurrence, condition or act which, with the giving of notice, the lapse
of time or both, would become a default or event of default thereunder, and,
except as set forth in Schedule 3.14(iii) hereto, the transactions contemplated
by this Agreement or the agreements related hereto will not effect a termination
of or otherwise interfere with the General Partner's or the Partnership's rights
under each such lease, nor violate any term or provision of any such lease or
incur any additional charge thereunder.
3.15 Licensed Properties. Schedule 3.15(i) hereto sets forth a true
and correct list of all outstanding licenses to which the General Partner or the
Partnership is a party or by which it is bound, whether as licensee or licensor,
on the date hereof (including without limitation any software licenses other
than commercial, off-the-shelf software used in the ordinary course of
business), which licenses have previously been provided to ADP. Except as
otherwise set forth in Schedule 3.15(ii) hereto, (i) each of the General Partner
and the Partnership has the right to use all of the property licensed by it
under any such licenses, and (ii) any license granted by the General Partner or
the Partnership to any third-party is non-exclusive and any such licensees are
not and shall not be entitled to further sublicense, assign or transfer the
licensed property to others. Except as set forth in Schedule 3.l5(iii) hereto,
all of such licenses are in full force and effect and enforceable in accordance
with their respective terms. There exists no default or event of default or
event, occurrence, condition or act which, with the giving of notice, the lapse
of time or both, would become a default or event of default thereunder, and the
transactions contemplated by this Agreement and the agreements related hereto
will not effect a termination of or otherwise interfere with the General
Partner's or the Partnership's rights under any such license, nor violate any
term or provision of any such license or incur any additional charge thereunder.
3.16 Intellectual Proprietary Rights. (a) Schedule 3.16(a) hereto
lists and identifies all Owned Software, Databases and Documentation. The
General Partner and the Partnership together have full and exclusive right,
title and ownership, freely transferable, in the Owned Software, Databases and
Documentation, including all Intellectual Property Rights associated therewith,
free and clear of any Liens whatsoever (other than Permitted Liens), and no
other Person has or shall have any claim of ownership with respect to the Owned
Software, Databases and Documentation (or any portion thereof) whatsoever. The
Owned Software, Databases and Documentation include all works in progress
relating to corrections, modifications or enhancements thereto as well as all
current and prior (but only to the extent still maintained) versions of the
Owned Software, Databases and Documentation.
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(b) Schedule 3.16(b) hereto lists and identifies all Owned Software,
Databases and Documentation that have been registered with the United States
Patent and Trademark Office, United States Copyright Office or any other
federal, state or foreign registries, and there are no other registrations,
filings or recordations necessary or required with respect thereto. All required
fees and taxes to record and maintain ownership of patented or registered Owned
Software, Databases and Documentation have been paid.
(c) Schedule 3.16(c) hereto lists and identifies all trademarks,
trade names, service marks, service names, patents and copyrights (and all
applications therefor, if any), presently used in connection with the Business,
other than as set forth in Section 3.16(b) above.
(d) Except as set forth on Schedule 3.16(d), there are no agreements
in effect for the conversion, modification or enhancement of the Owned Software,
Databases and Documentation. There are no marketing agreements or other
agreements including, without limitation, OEM, VAR, distributor, sales agent or
finder's fee arrangements for the direct or indirect marketing of the Owned
Software, Databases and Documentation.
(e) No copy of the Owned Software, Databases and Documentation (or
any portion thereof) is subject to or held in escrow or is in any third party's
possession.
(f) None of the Owned Software, Databases and Documentation infringes
the rights of any person or entity. The General Partner or the Partnership have
not asserted any claim of infringement, misappropriation or misuse, and no
claims have been asserted by any person or entity against the General Partner or
the Partnership or any of their respective directors or officers, with respect
to (i) the General Partner's or the Partnership's use of the Business
Intellectual Property or (ii) challenging or questioning the validity or
effectiveness of any licenses or agreements relating thereto, nor to the
knowledge of the General Partner and the Partnership is there any bona fide
basis for any such claim.
(g) Schedule 3.16(g) hereto lists and identifies all Licensed
Software, Databases and Documentation and the associated licenses. Such licenses
are valid and in full force and effect and enforceable by the General Partner or
the Partnership in accordance with their terms.
(h) The General Partner and the Partnership have taken commercially
reasonable measures to protect the Business Intellectual Property. The Owned
Software, Databases and Documentation have been treated by the General Partner
and the Partnership as trade secrets or are copyrighted.
(i) Except to the extent licensed to partners and customers of the
Partnership in the ordinary course of the Partnership's business, neither the
General Partner nor the Partnership has previously assigned, transferred,
conveyed or otherwise encumbered its right, title and ownership to the Business
Intellectual Property (or any portion thereof). Except as set forth on
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Schedule 3.16(i) hereto, no licensing fees, royalties or payments are due and
payable by the General Partner or the Partnership in connection with the use of
the Business Intellectual Property.
(j) Schedule 3.16(j) hereto lists all licenses, agreements and other
rights granted by the General Partner or the Partnership to any third party with
respect to the Business Intellectual Property and all licenses, agreements and
other rights with respect to the Business Intellectual Property granted by any
third party to the General Partner or the Partnership (other than the Licensed
Software, Databases and Documentation listed on Schedule 3.16(g) hereto), in
each case together with a description of the subject matter licensed.
(k) Neither General Partner nor the Partnership, and to the General
Partner's and the Partnership's knowledge no third party is, in default under
any licenses, agreements or other rights with respect to the Business
Intellectual Property, and there exists no event, occurrence, condition or act
which, with the giving of notice, the lapse of time or the happening of any
other event or condition, would become a default thereunder.
(1) Except pursuant to the Partnership Agreement and the Shareholder
Agreement, no current or former partner, shareholder, officer, director or
employee of the General Partner or the Partnership owns or has any claim or
interest in any of the Business Intellectual Property.
3. l7 Insurance. Schedule 3.17 hereto sets forth a true and correct
list of all insurance policies held by the General Partner and the Partnership
in effect on the date hereof (copies of which have previously been provided to
ADP), including the types and amounts of coverage, limits and deductibles,
inception and expiration dates thereof and insurance carrier. Such policies are
in full force and effect and provide for coverage in amounts deemed by the
General Partner and the Partnership to be adequate in the type of business in
which the Partnership is engaged and are consistent with prudent industry
practice, and all premiums due to the date hereof have been paid in full and no
notice of cancellation or termination has been received with respect to any such
policy. All claims made against the General Partner or the Partnership that are
covered by insurance are either being defended by the relevant insurance
company, or are claims as to which the General Partner or the Partnership has
received the assurance of such insurance company that it will reimburse the
General Partner or the Partnership if such claims are resolved against the
General Partner or the Partnership.
3.18 Contracts and Agreements; No Defaults. Schedule 3.18(i) hereto
sets forth a true and correct list of all oral or written arrangements,
commitments, contracts, agreements, leases, licenses or other documents to which
the General Partner or the Partnership is a party or by which the General
Partner or the Partnership is bound (the "Contracts"), copies of which have
previously been provided to ADP. Except as set forth in Schedule 3.18(i) hereto,
the General Partner or the Partnership is not a party to any written or oral:
(i) lease; (ii) royalty, distribution, agency, territorial or license agreement;
(iii) contract or agreement (for employment or otherwise) with any past, present
or future employee, officer, director,
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professional person or firm, independent contractor or advertising firm or
agency which is not terminable at will on notice from the General Partner or the
Partnership without any payment or penalty whatsoever; (iv) contract or
collective bargaining agreement with any labor union or representative of
employees; (v) commitment, contract or agreement with respect to the repayment
of indebtedness of the General Partner or the Partnership or guaranteeing the
payment or performance of the obligations of others; and (vi) commitment,
contract or agreement not made in the ordinary course of business. Each Contract
is in full force and effect and is enforceable in accordance with its terms and
each of the General Partner and the Partnership, as the case may be, has
performed all obligations required to be performed by it and has not received
notice of any default and to the General Partner's and the Partnership's
knowledge no party is in default under any Contract, and except as set forth in
Schedule 3.18(ii), no event, occurrence, condition, or act which, with the
giving of notice, the lapse of time or both, would become a default or event of
default has occurred (including without limitation any failure to pay any amount
required by any such arrangement, commitment, contract, agreement, lease,
license or other document on a timely basis). Neither the General Partner nor
the Partnership is a party to or bound by any agreement which limits or will
limit the freedom of the General Partner or the Partnership to compete in any
line of business or with any Person.
3.19 Customers. Schedule 3.19(i) hereto sets forth a list of all
customers of the Partnership (including all users of any Business Intellectual
Property), together with a description of the products or services provided to
the customer and the amount of revenues, if any, received from the customer
during the 1997 calendar year. Schedule 3.19(i) hereto also indicates each
customer of the Partnership who has leased computer and other equipment or
licensed any Business Intellectual Property from the Partnership together with a
description of the equipment leased or Business Intellectual Property licensed,
the amount per month owed under the applicable lease or license and the
expiration date of such lease or license. Except as disclosed on Schedule
3.19(ii) hereto, neither the General Partner nor the Partnership has entered
into any customer contracts and agreements or issued any sales proposals or
commitments except in the ordinary and usual course of business pursuant to
arms-length transactions; none of such contracts, agreements, proposals or
commitments contain any material variations to the Partnership's standard terms
and conditions or the standard services provided or to the Partnership's
standard prices for the services being provided. A true and correct copy of each
of the standard form agreements for any and all services provided by the
Partnership to its customers has previously been provided to ADP. Except as set
forth on Schedule 3.19(iv) hereto, no customer or supplier of the General
Partner or the Partnership has given notice to the General Partner or the
Partnership to cancel or otherwise terminate or reduce, or threatened to cancel,
terminate or reduce, its relationship with the General Partner or the
Partnership, and the General Partner and the Partnership have no knowledge of
the intention of any customer or supplier to do so.
3.20 Loan Agreements, Debt Instruments and Guarantees. Schedule
3.20(i) hereto sets forth a summary of the material terms of, together with
photocopies of, all loan agreements,
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debt instruments, guarantees, or any related documents of any nature whatsoever
(collectively, "Loan Agreements") which are outstanding on the date hereof and
to which the General Partner or the Partnership is a party or by which either of
them is bound. Except as otherwise set forth in Schedule 3.20(ii) hereto, (i)
all outstanding liabilities and debts of the General Partner and the Partnership
may be prepaid in whole or in part at any time without penalty, (ii) all of such
liabilities and debts shall continue as liabilities and debts of the General
Partner and the Partnership notwithstanding the transactions contemplated by
this Agreement and the agreements related hereto without mandatory prepayment,
penalty or points, and (iii) the General Partner and the Partnership, as the
case may be, have made all payments currently due under any such Loan
Agreements, neither the General Partner nor the Partnership has received notice,
and neither the General Partner nor the Partnership has any knowledge, of any
default under any such Loan Document and no event, occurrence, condition, or act
has occurred which, with the giving of notice, the lapse of time or both, would
become a default or event of default by either party under any such Loan
Agreement. The principal amount outstanding as of the date hereof under each
Loan Agreement, together with accrued interest thereon, is set forth on Schedule
3.20(i) hereto.
3.21 Labor Relations. Neither the General Partner nor the Partnership
has been notified, and neither the General Partner nor the Partnership are
aware, that either of them has or is engaged in any unfair labor practice with
respect to any employees of the General Partner or the Partnership and no unfair
labor practice complaint has been brought or is pending before the National
Labor Relations Board with respect to any of the employees of the General
Partner or the Partnership. The General Partner and the Partnership are not
currently, and during the past 24 months have not been, involved in any labor
discussions with any unit or group seeking to become a bargaining unit for any
of their employees and neither the General Partner nor the Partnership is
aware of any attempt to organize such a bargaining unit. There are no strikes or
other labor troubles now pending or, to the knowledge of the General Partner and
the Partnership, threatened against the General Partner or the Partnership. The
General Partner and the Partnership have complied in all material respects with
all laws relating to the employment of labor, including provisions thereof
relating to wages, hours, equal employment, collective bargaining and the
payment of social security and other Taxes.
3.22 Claims and Litigation. There are no Claims pending or, to the
knowledge of the General Partner and the Partnership, threatened against or
affecting the General Partner or the Partnership, and the General Partner and
the Partnership do not know of any valid basis for any such Claims. There are no
Claims pending or, to the knowledge of the General Partner and the Partnership,
threatened against the Sellers, the General Partner or the Partnership seeking
to prevent or to challenge the transactions contemplated by this Agreement and
the agreements related hereto. Neither the General Partner nor the Partnership
is subject to any Order entered in any lawsuit or proceeding which has or may
have an adverse effect on the business, operations, condition (financial or
otherwise), results of operations or prospects of the Partnership or the General
Partner's or the Partnership's ability to consummate the transactions
contemplated by this Agreement or any other agreement contemplated herein.
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3.23 Compliance with Laws, Orders, By-Laws, Rules and Regulations.
Neither the General Partner nor the Partnership is in, and neither has received
notice of any, default or non-compliance under, and the General Partner and the
Partnership have complied in all material respects with, all laws, Orders and
regulations of any court, governmental department, commission, board, agency or
instrumentality, domestic or foreign, affecting the General Partner or the
Partnership or affecting the Partnership's customers to the extent that either
the General Partner or the Partnership is obligated to comply on behalf of any
such customers (including, but not limited to, laws, Orders, and regulations
relating to zoning, building codes, antitrust, wage and hour, price guidelines,
the Occupational Safety and Health Act, sexual harassment, hiring, collective
bargaining, and the payment of withholding and social security taxes). All
permits, licenses and other authorizations and approvals necessary for or
material to the conduct of the business of the Partnership have been duly
obtained and are in full force and effect. There are no proceedings pending or,
to the knowledge of the General Partner and the Partnership, threatened that may
result in the revocation, cancellation, suspension or modification of any of
such permits, licenses or other authorizations and approvals which revocation,
cancellation, suspension or modification would have a Material Adverse Effect on
the General Partner or the Partnership.
3.24 Absence of Certain Changes. Except as set forth on Schedule 3.24
hereto, since February 28, 1998, neither the General Partner nor the Partnership
has (i) mortgaged, pledged or subjected to any Lien any of its assets, tangible
or intangible, (ii) sold or transferred any of its assets or canceled any debts
or claims, except for the sale of inventory and the collection of receivables in
the ordinary course of business, (iii) assigned, subleased, sublicensed,
terminated, or received notice of the termination of any lease or license with
respect to any property (except customer agreement terminations in the ordinary
course of business), (iv) suffered any losses or waived any rights (except in
the ordinary course of business), (v) made or guaranteed any loans to any
Person, (vi) entered into any transactions other than in the ordinary course of
business, other than this Agreement, (vii) incurred any obligation to pay
commissions, royalties or other amounts to any party (except in the ordinary
course of business), (viii) incurred any material liability, obligation or
indebtedness, direct or indirect, absolute or contingent, whether due or to
become due, (ii) canceled, without payment in full, any notes, loans or other
obligations receivable from the Sellers, any partner, shareholder, officer,
director or employee of the General Partner or the Partnership or any other
Person, or (x) declared, made, set aside or paid any dividend or any
distributions or payments on, or any purchase or redemption of, any class of
stock or other interest of the General Partner or the Partnership or any
commitments therefor.
3.25 No Material Adverse Change. Since February 28, 1998, there has
been no material adverse change in the business, operations, properties or
assets or in the condition, financial or otherwise, of the General Partner or
the Partnership as shown on the Balance Sheets and the related income statements
other than as expressly permitted by this Agreement.
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3.26 Employees; Employment Practices; Compensation and Vacations.
Schedule 3.26(i) hereto contains a true and complete listing of all employees
and consultants of the General Partner and the Partnership as of the date
hereof, their title, annual salary (including base compensation and additional
compensation or the terms thereof, if determined pursuant to a scale or
formula), date of hire, date of next review and date of last review. Except as
set forth on Schedule 3.26(ii) hereto, on and as of March 31, 1998, there are no
vacation pay, bonuses, commissions, sick pay, or other fees or benefits in
respect of work done earned or due to or expected by any present, former or
prospective employees, not fully paid or accrued on the Balance Sheets. Except
as set forth on Schedule 3.26(iii) hereto, since February 28, 1998, except in
the ordinary course of business and consistent as to timing and amount with past
practices, the General Partner and the Partnership have not: (i) increased the
compensation payable or to become payable to or for the benefit of any of its
employees, (ii) provided any of its employees with increased security or tenure
of employment, (iii) increased the amount payable to any of its employees upon
the termination of any such person's employment, or (iv) increased, augmented
or improved benefits granted to or for the benefit of any of its employees under
any bonus, stock option, profit sharing, pension, retirement, deferred
compensation, insurance or other direct or indirect benefit plan or arrangement.
Except as set forth on Schedule 3.26(iv) hereto, no Employee has given notice to
the General Partner or the Partnership to terminate his or her employment nor
has any Employee threatened to give notice of termination and the General
Partner and the Partnership have no knowledge of the intention of any employee
to do so.
3.27 Employee Benefit Plans. (a) Except as set forth on Schedule
3.27(a) hereto, neither the General Partner nor the Partnership has any actual
or contingent liability or obligation with respect to any employee benefit plan,
policy, arrangement or agreement (including without limitation, any savings,
retirement, fringe benefit, stock option, bonus, incentive compensation,
deferred compensation, excess, supplemental executive compensation, employee
stock purchase, vacation, sickness or disability, severance or separation,
restricted stock plan, policy or arrangement) or employment or consulting
contracts or agreements (including without limitation, any "employee benefit
plan", as defined in ERISA), whether or not subject to ERISA, whether written or
oral ("Employee Benefit Plans"). With respect to each Employee Benefit Plan, the
General Partner or the Partnership has heretofore delivered to ADP true and
complete copies of the following documents, where applicable: (i) the text of
the Employee Benefit Plan (including any amendments thereto) and of any trust or
insurance contract maintained in connection therewith, (ii) the three most
recent annual reports (IRS Form 5500 series), together with required schedules
filed with the Internal Revenue Service ("IRS") and any financial statements or
opinions required under ERISA, (iii) the most recent summary plan description
and all modifications, and (iv) the most recent determination letter issued by
the IRS.
(b) Neither the General Partner, the Partnership nor any other
corporation or other trade or business which is or has been under common control
with the General Partner or the Partnership (as determined under Section 414(b),
(c), (m) or (o) of the Code) has ever
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maintained, contributed to or incurred any obligation or liability with respect
to (i) any "multiemployer plan", as defined in Section 3(37) or 4001(a)(3) of
ERISA or Section 414(f) of the Code (either as an employer or a joint employer)
or (ii) any other plan covered by Title IV of ERISA or subject to the
requirements of Section 412 of the Code and neither the General Partner nor the
Partnership has any actual or contingent liability under Title IV of ERISA or
Section 412 of the Code to any person or entity, including the Pension Benefit
Guaranty Corporation, the IRS, any such plan or the participants (or their
beneficiaries) in any such plan and there is no basis for any such liability as
the result of or after the consummation of the transactions contemplated by this
Agreement.
(c) Each Employee Benefit Plan that is intended to be qualified under
Section 401 of the Code is so qualified and has been so qualified during the
period from its adoption to date, and each trust forming a part thereof is
exempt from tax pursuant to Section 501 of the Code and all contributions made
thereto have been deductible by the General Partner or the Partnership, as the
case may be. A favorable determination letter has been issued by the IRS with
respect to each such plan and trust, which letter includes a determination with
respect to the qualification of the plan under the Code (or if such letter has
not yet been received, an application has been made to the IRS for such
determination within the remedial amendment period so that such letter will have
retroactive effect to the effective date of such legislation) and there are no
facts and nothing has occurred that would adversely affect the qualification of
such plan.
(d) No Employee Benefit Plan is a "voluntary employees' beneficiary
association" within the meaning of Section 501(c)(9) of the Code and there have
been no other "welfare benefit funds" within the meaning of Section 419 of the
Code relating to any of the employees or former employees of the General Partner
or the Partnership. Except as set forth on Schedule 3.27(d) hereto, no Employee
Benefit Plan provides health, dental, life insurance or other welfare benefits
(whether on an insured or self-insured basis) to any of such employees after
their retirement or other termination of employment from the General Partner or
the Partnership (other than continuation coverage required under Section 601
through 609 of ERISA and Section 4980B of the Code that may be purchased at the
sole expense of the employee).
(e) Each Employee Benefit Plan has, in all material respects, been
maintained and administered in compliance with its terms and with the
requirements prescribed by any and all statutes, orders, rules and regulations,
including, but not limited to, ERISA and the Code, which are applicable to such
plan and there is no audit, investigation, dispute, arbitration, claim, suit, or
grievance, pending or, to the knowledge of the General Partner and the
Partnership, threatened, involving an Employee Benefit Plan (other than routine
claims for benefits), and, to the knowledge of the General Partner and the
Partnership, there is no basis for such a claim. There have been no "prohibited
transactions" (within the meaning of Section 4975 of the Code or Section 406 of
ERISA) with respect to any Employee Benefit Plan.
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(f) All contributions have been made under, and all obligations to
any of the employees or former employees of the General Partner and the
Partnership (including vacation entitlements) have been satisfied with respect
to, each Employee Benefit Plan for all periods up to the date hereof, except as
set forth in the Historical Financial Statements. Except as set forth on
Schedule 3.27(f) hereto, the costs of all Employee Benefit Plans are fully
accrued and reflected in the Historical Financial Statements.
(g) Except as otherwise set forth on Schedule 3.27(g) hereof, none of
the Employee Benefit Plans provides for the payment of separation, severance,
termination or similar-type benefits to any person or the acceleration of any
rights to benefits under any Employee Benefit Plan or obligates the General
Partner or the Partnership to pay separation, severance, termination or
similar-type benefits solely as a result of any transaction contemplated by this
Agreement or any agreement related hereto or as a result of a "change in
control" (within the meaning of such term under Section 280G of the Code).
3.28 Notes and Accounts Receivable. All of the notes and accounts
receivable of the General Partner and the Partnership (including, without
limitation, those reflected on the Balance Sheets) are actual and bona fide
notes and accounts receivable, representing obligations for the total dollar
amount thereof shown on the books of the General Partner or the Partnership, as
the case may be (less reserves, if any), that resulted from the ordinary course
of the Partnership's business and are collectible in accordance with their
terms, and there are no Liens on any of such notes or accounts receivable,
except as set forth in Schedule 3.28(i) hereto.
3.29 Casualty Losses. Since February 28, 1998 there has not been any
loss, damage or destruction to or of any of the assets, property or business of
the General Partner or the Partnership nor have any of such assets, properties
or business of the General Partner or the Partnership been affected as a result
of fire, accident or other casualty, war, civil strife or act of God.
3.30 Environmental Compliance. Neither the General Partner nor the
Partnership has received any notification and neither is aware that Hazardous
Materials have been generated, used, treated or stored on, released or disposed
of on, or transported to or from, any real property owned or leased by the
General Partner or the Partnership. The General Partner and the Partnership are
in compliance in all material respects with applicable Environmental Laws and
the requirements of any permits issued under such Environmental Laws with
respect to any such property. There are no pending or, to the knowledge of the
General Partner and the Partnership, threatened claims, suits, demands,
investigations, proceedings or other actions relating to any Environmental Law
with respect to any such property. There are no Environmental laws which would
prevent or delay the transactions contemplated by this Agreement or would create
any liability on behalf of the General Partner or the Partnership.
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3.31 Transactions with Affiliates. (a) Schedule 3.31 hereto sets forth
a summary of the material terms, together with photocopies (if in writing), of
all contracts, agreements or arrangements of any nature whatsoever, whether
written or oral, between the General Partner or the Partnership and any of their
respective Affiliates, including the Sellers (or any of such Sellers'
Affiliates), including without limitation any employment agreement or other
compensation or reimbursement arrangement, any loan or guarantee, and any
purchase or sales agreement.
(b) The Sellers have no present intention of amending their license and
maintenance agreements with the Partnership regarding any Business Intellectual
Property.
3.32 Disclosure. None of this Agreement, the agreements related
hereto, the Historical Financial Statements or any Schedule, Exhibit, agreement
certificate or other document attached hereto or thereto or delivered in
accordance with the terms hereof or thereof or, to the knowledge of the General
Partner and the Partnership, any other written materials furnished or to be
furnished by the General Partner or the Partnership to ADP contains any untrue
statement of a material fact or omits any statement of a material fact necessary
in order to make the statements contained herein or therein not misleading.
3.33 Brokers' and Finders' Fees. Except as set forth on Schedule 3.33
hereto, no agent, broker, Person or firm acting on behalf of the General
Partner, the Partnership, any of the Sellers or any of their respective
Affiliates is, or will be, entitled to any fee, commission, broker's or finder's
fee or similar payment from any of the parties hereto, or from any Affiliate of
any of the parties hereto, in connection with this Agreement or any of the
transactions contemplated hereby.
SECTION 4
REPRESENTATIONS AND WARRANTIES OF ADP
ADP represents and warrants to each of the Sellers that:
4.1 Organization and Standing. ADP is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware
and has all necessary power and authority and all authorizations, licenses,
permits and certificates necessary to own, lease or license its property and to
conduct its business as now conducted.
4.2 Authorization; Consents. (a) ADP has the corporate authority to
execute and deliver this Agreement and the agreements related hereto, to perform
its obligations hereunder and thereunder and to consummate the transactions
contemplated hereby and thereby. Such execution, delivery and performance have
been duly authorized by all necessary corporate action of ADP. This Agreement
has been duly executed and delivered by ADP and constitutes
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the legal, valid and binding obligation of ADP enforceable against it in
accordance with its terms. The execution, delivery and performance of this
Agreement and the agreements related hereto by ADP will not breach or violate
any provision of, nor cause any event by which a right of termination or
acceleration or Lien on any of their properties or assets would be created under
(i) any statute or regulation or any Order of any court or other agency of
government or any judgment, award or decree, (ii) its charter or By-Laws, or
(iii) any indenture, contract, instrument or other agreement by which ADP is
bound.
(b) There are no consents, approvals or authorizations, declarations,
filings or registrations with, or notices to, any governmental or regulatory
authority required to be made or obtained by ADP in connection with the
execution and delivery of this Agreement and the agreements related hereto and
the performance of the transactions contemplated hereby and thereby.
4.3 Brokers' and Finders' Fees. No agent, broker, Person or firm acting
on behalf of ADP or any of its Affiliates is, or will be, entitled to any fee,
commission, broker's or finder's fee or similar payment from any of the parties
hereto, or from any Affiliate of any of the parties hereto, in connection with
this Agreement or any of the transactions contemplated hereby.
SECTION 5
COVENANTS
5.1 Nomination of Director. The Selling Shareholders hereby agree to
nominate for election to the board of directors of the General Partner (the
"Board"), and to elect to such Board, one individual designated by ADP, and to
vote all of their voting shares in the General Partner, and to cause their
Affiliates to vote all voting shares in the General Partner controlled by such
affiliates in favor of the election of such individual to the Board and, to the
extent necessary, to take any and all further action necessary to ensure the
election and maintenance of such individual as a member of the Board throughout
the term of this Agreement. Notwithstanding the foregoing, the individual
designated by ADP shall not participate in any Board matters relating to the
back office products and/or services of the Partnership and the individual
designated by ADP, on the one hand, and the Board, on the other hand, shall not
exchange any information of the type described on Exhibit D with the other
relating to the respective back office products and/or services of ADP and the
Partnership (except for (i) technical information regarding ADP's back office
products and/or services to the extent necessary to interface ADP's back office
products and/or services with the Partnership's BrokerView(TM) product as
contemplated by the BrokerView(TM) Agreement and (ii) information necessary in
connection with ADP's decision as to whether to exercise the Call). Accordingly,
ADP and the Partnership and the director shall comply with the procedures and
the confidentiality provisions described on Exhibit D for Board meetings and for
the exchange of
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information generally to prevent the exchange of any such back office-related
information.
5.2 Annual and Quarterly Financial Statements. The Sellers shall cause
the General Partner and the Partnership to deliver to ADP all information
relating to the General Partner and the Partnership which is required to be
delivered to the shareholders of the General Partner and the partners of the
Partnership under the Shareholder Agreement and the Partnership Agreement,
during the time periods provided for therein, including without limitation, the
financial statements of the Partnership and the General Partner required to be
delivered pursuant to Section 9.6 of the Partnership Agreement. The provisions
of this Section 5.2 shall be subject to the procedures set forth in Exhibit D.
5.3 Right of First Refusal. If, prior to the Call Termination Date, the
Partnership or the General Partner receives a Bona Fide Offer from a Person
which is financially responsible to purchase either all or substantially all of
their assets or an ownership interest in the General Partner and/or the
Partnership for cash (or cash equivalents) payable in full at closing, which
Bona Fide Offer is subject only to contingencies respecting title and the
performance of standard due diligence (a "Proposed Offer") or the Partnership or
the General Partner determine to make a public offering of ownership (a "Public
Offering"), then the General Partner or the Partnership, as the case may be,
shall first offer to sell the same interest to ADP for a consideration and on
terms and conditions equivalent to those of the Proposed Offer or Public
Offering. ADP shall have 30 days after receiving a complete and correct copy of
the terms and conditions of the Proposed Offer or Public Offering to accept or
reject such Proposed Offer or Public Offering and to purchase the same interest
on the same terms and conditions. In the event ADP either fails to timely accept
or reject any such Proposed Offer or Public Offering, ADP's right of first
refusal with respect to such transaction shall be void and of no effect. Prior
to the Call Termination Date, the Partnership and the General Partner shall not
sell all or substantially all of their assets or any ownership interest in the
General Partner and/or the Partnership or make a public offering of ownership
unless they have first complied with the foregoing provisions of this Section
5.3.
5.4 Transfer Subject to this Agreement. Prior to the Call Termination
Date, Sellers shall not Transfer any shares of Common Stock or Partnership
Interests to any Person that has not executed and delivered to ADP, the General
Partner, the Partnership and the other Sellers counterparts of this Agreement,
the Shareholder Agreement and the Partnership Agreement, whereby such transferee
has agreed to be bound by the obligations of the transferring Seller under this
Agreement, the Shareholder Agreement and the Partnership Agreement (to the same
extent that the transferring Seller was bound prior to the Transfer).
5.5 Ordinary Course Transactions. The Sellers shall cause the General
Partner and the Partnership to carry on the business of the Partnership in the
ordinary course. The Sellers shall not allow the General Partner or the
Partnership to dispose of any assets except in the ordinary course of business,
or purchase a material equity interest in, or material portion of the assets of,
or merge with or into or enter into any business combination involving, any
other Person
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prior to the Call Termination Date, except in accordance with the terms of this
Agreement. Except as provided herein and in the Partnership Agreement and the
Shareholder Agreement, neither the General partner nor the Partnership shall
enter into any transactions with any Seller other than on an arm's length basis.
5.6 Licensing Provisions. In addition, the Sellers shall cause the
Partnership to use its best efforts to not include in any licensing agreement
into which it enters a change of control provision (i.e., a provision which
would permit the licensee to terminate the licensing agreement upon a change of
control of the Partnership or the General Partner).
5.7 Sale of Source Code. In no event shall Sellers permit the General
Partner or the Partnership to sell, in any form, all or a portion of the source
code for any software product offered by the Partnership, or any Intellectual
Property Rights relating thereto whatsoever; provided, however, that the General
Partner or the Partnership may (and the Sellers may permit them to) (i) license
to the Partnership's customers who are the end users of such software all or a
portion of the source code for any software product offered by the Partnership,
or any Intellectual Property Rights relating thereto, in the ordinary course of
its business or (ii) sell, in any form, all or a portion of the source code for
any software product offered by the Partnership, or any Intellectual Property
Rights relating thereto, provided that such software product does not comprise a
significant portion of the software products currently contemplated to be
offered by the Partnership and such sale is in the ordinary course of business:
provided further, however, that the General Partner or the Partnership shall not
in any event (and the Sellers shall not permit them to) sell, in any form, a
significant portion of the source code for any software product offered by the
Partnership which is listed on Exhibit 1.5 to the BrokerView(TM) Agreement, or
any Intellectual Property Rights relating thereto.
5.8 Non-Hire: Non-Disclosure. (a) During the period commencing on the
date hereof and ending two years after the later of (i) the Call Termination
Date and (ii) the Call Exercise Date, the Sellers, the General Partner and the
Partnership, on the one hand, and ADP, on the other hand, shall not, directly or
indirectly, hire or employ, or recruit, solicit or encourage to leave the employ
of other or any of their or its, as the case may be, Affiliates, any individual
who is now or hereafter becomes an employee or a consultant of the Sellers, the
General Partner and the Partnership, on the one hand, and ADP, on the other
hand, or any of their or its, as the case may be, Affiliates until such person
has ceased to be an employee or a consultant of any of such entities for a
period of at least two years (the parties acknowledge and agree that the
exercise of the Call by ADP shall not violate this provision).
(b) The Sellers, the General Partner and the Partnership, on the one
hand, and ADP, on the other hand, shall not, directly or indirectly, disclose,
furnish or make accessible to any Person, or other entity whatsoever, or to any
officer, director, shareholder, partner, associate, employee, agent or
representative of any such entity, any proprietary information which is not in
the public domain (including, without limitation, any customer lists, business
methods, procedures, pricing and marketing structure and strategy, source or
object codes, experimental
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or research work, names and addresses of current, former and prospective clients
or employees, or any other trade secrets, technical data, or know-how of any
kind) relating to the businesses of the other which is obtained as a result of
the transactions contemplated by this Agreement.
5.9 Automatic Guaranty. Automatic hereby guarantees full performance of
all of ADP's obligations under this Agreement.
SECTION 6
THE CALL AND THE SUBSEQUENT SHARES
AND THE SUBSEQUENT PARTNERSHIP INTERESTS
6.1 The Call. (a) The Sellers hereby grant to ADP and its Affiliates,
upon the terms and subject to the conditions of this Agreement, an exclusive
call right (the "Call") to purchase the Subsequent Shares and the Subsequent
Partnership Interests at the Subsequent Purchase Price on the fifth anniversary
of this Agreement or as soon thereafter as commercially practicable, subject to
the determination of the Subsequent Purchase Price in accordance with Exhibit C
hereof and subject to Section 6.1(b) below; provided, however, that the Call
shall terminate on the Call Termination Date.
(b) If ADP or its Affiliate elects to exercise the Call but is
prohibited from affecting the exercise of the Call by any statute or regulation
or any Order of any court or other agency of government or any judgment, award
or decree, then payment of the Subsequent Purchase Price by ADP or its Affiliate
shall be conditional upon, and postponed until a date which is 30 days after the
entry of, judgment in favor of permitting the Call to be exercised by ADP or its
Affiliate, from which no appeal is or may be taken; provided, however, that the
Call Exercise Date may not be postponed beyond the date which is six years after
the date hereof (or four years after the date hereof in the event that the
Sellers elect to accelerate the Call in accordance with Section 6.1(e) below),
unless ADP pays to the Partnership an amount equal to $100,000 for each month
that the Call Exercise Date is Postponed beyond such date (all of such amounts
shall be offset against ADP's obligations to pay for the Investment Banks under
Exhibit C, first, and ADP's obligations to pay the Subsequent Purchase Price,
second, and in the event that ADP does not exercise the Call any amounts
remaining after paying for the Investment Banks in accordance with Exhibit C
shall not be refunded to ADP); provided further, however, that the Call Exercise
Date may not be postponed in any event beyond the date which is 7 years after
the date hereof (or 5 years after the date hereof in the event that the Sellers
elect to accelerate the Call in accordance with Section 6.1(e) below). For
purposes of this Agreement, the "Call Termination Date" shall mean the earlier
of (i) the date that ADP or its Affiliate elects not to exercise the Call, (ii)
the date that ADP elects not to exercise its right of first refusal in
accordance with Section 5.3 above (provided that the transaction contemplated by
the Proposed Offer or Public Offering relating to such right of first refusal is
ultimately
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consummated), (iii) the date which is 7 years after the date hereof or (iv) in
the event that the Sellers elect to accelerate the Call in accordance with
Section 6.1(e) below, the date which is 5 years after the date hereof.
(c) If ADP or its Affiliate elects to exercise the Call, ADP or its
Affiliate shall give to each of the Sellers a notice (the "Call Notice") within
15 days after receipt of the determination of the Subsequent Purchase Price in
accordance with Exhibit C hereof, which Call Notice shall specify a date for the
Closing of the purchase and sale of the Subsequent Shares and the Subsequent
Partnership Interests pursuant to the Call (the "Call Exercise Date"). The Call
Exercise Date specified in the Call Notice shall be (i) a Business Day, and (ii)
not less then 10 days nor more than 90 days after the date of the Call Notice
(subject to postponement in accordance with Section 6.1(b) above).
(d) Notwithstanding any other provisions of this Agreement, ADP shall
have no obligation whatsoever to exercise the Call, and shall have no liability
whatsoever for not exercising the Call.
(e) The Sellers may accelerate the Call to the Third Anniversary of
this Agreement subject to the provisions of this Section 6 (the "Put");
provided, however, that the Sellers may accelerate the Call as provided above
only if the Partnership has successfully completed the development and
installation of its back office system in a production environment prior to such
third anniversary. In order to exercise the Put, the Sellers shall notify ADP of
the Put in writing no later than sixty days prior to the third anniversary of
this Agreement. In the event that the Sellers accelerate the Call in this
fashion and ADP does not timely purchase the Subsequent Shares and the
Subsequent Partnership Interests (subject to Section 6.1(b) above), ADP shall
have no further rights to exercise the Call.
6.2 Subsequent Shares and Subsequent Partnership Interests. If and
after ADP or its Affiliate has exercised the Call, subject to the terms and
conditions of this Agreement, at the Subsequent Closing, each of the Sellers
shall sell to ADP or its Affiliate his or its applicable portion of the
Subsequent Shares and Subsequent Partnership Interests, and ADP or its Affiliate
shall purchase all of such Subsequent Shares and Subsequent Partnership
Interests.
6.3 Subsequent Closing. The closing of the sale and purchase of the
Subsequent Shares and Subsequent Partnership Interests (the "Subsequent
Closing") shall take place at a mutually agreed location and time on the date
elected by ADP in accordance with Section 6.1(c) above, or such other date as
may be agreed upon by ADP and the Sellers. The actual date of the Subsequent
Closing shall be referred to as the "Subsequent Closing Date."
6.4 Deliveries at the Subsequent Closing. At the Subsequent Closing:
(a) each of the Sellers shall deliver or cause to be delivered to ADP
or its Affiliate: (i) share certificates representing the number of each such
parties' Subsequent Shares, duly
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endorsed in blank or accompanied by stock powers or other appropriate
instruments of transfer, executed in blank, in proper form for transfer, with
all appropriate stock transfer tax stamps affixed (the cost of which, if any,
shall be borne by ADP), and (ii) such other documents or evidences as may be
required by Section 7 to be delivered on or prior to the Subsequent Closing
Date.
(b) the Sellers and the Partnership shall amend the Partnership
Agreement to reflect the transfer to ADP or its Affiliate of the Subsequent
Partnership Interests.
(c) The Shareholder Agreement shall be terminated.
(d) ADP or its Affiliate shall pay to the Sellers, for the Subsequent
Shares and Subsequent Partnership Interests, the Subsequent Purchase Price
(which payment shall be allocated among the Sellers in accordance with the
allocation provided to ADP by the Sellers) by wire transfer of immediately
available funds, or certified or bank check.
SECTION 7
CONDITIONS TO THE SUBSEQUENT CLOSING
7.1 Conditions Applicable to ADP's Obligations. If ADP or its Affiliate
has exercised the Call, the obligations of ADP or its Affiliate under this
Agreement to enter into and complete the Subsequent Closing are subject to the
Sellers having executed and delivered to ADP or its Affiliate a Subsequent
Purchase Agreement (the "Subsequent Purchase Agreement"), which includes
mutually agreed upon terms and conditions which are standard and customary for
transactions similar to the Subsequent Closing.
7.2 Conditions Applicable to Sellers Obligations. The obligations of
the Sellers under this Agreement to enter into and complete the Subsequent
Closing are subject to ADP or its Affiliate having executed and delivered to
each of the Sellers the Subsequent Purchase Agreement.
SECTION 8
SURVIVAL AND INDEMNIFICATION
8.1 Survival of Representations, Warranties and Covenants. The
respective representations and warranties of the Sellers, on the one hand, and
ADP, on the other hand, contained in this Agreement or in any Exhibit, Schedule,
agreement or other document delivered in connection with the Closing pursuant
hereto or thereto shall survive the date hereof, but shall expire on the third
anniversary of the date hereof, except that (i) each of the
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Sellers' representations and warranties in Sections 3.11, 3.16 and 3.30 hereof
shall expire upon the expiration of all statutes of limitation applicable
thereto and (ii) any of such representations and warranties shall survive with
respect to, and to the extent of, any claim for which a Certificate has been
delivered to the Indemnifying Party prior to such expiration. The respective
covenants and agreements of ADP and the Sellers contained in this Agreement or
in any Exhibit, Schedule, agreement or other document delivered in connection
with this Agreement (including, without limitation, the respective
indemnification obligations of ADP and each of the Sellers set forth in Sections
8.2(a) and 8.2(b) hereof) shall survive the consummation of the transactions
contemplated by this Agreement.
8.2 Indemnification. (a) Each of the Sellers shall indemnify, defend
and hold harmless ADP and its Affiliates, and the officers, directors,
shareholders and employees of ADP and such Affiliates, from and against, and pay
or reimburse ADP and such Affiliates (and such officers, directors, shareholders
and employees) for, any and all costs, losses, damages or liabilities
(including, without limitation, fees and disbursements of counsel incurred by
the Indemnified Party in any action or proceeding between the Indemnified Party
and the Indemnifying Party or between the Indemnified Party and any third party
or otherwise) (collectively, "Losses" and individually, a "Loss"), whether or
not resulting from any third party claims, incurred or suffered by ADP or any
such Affiliates (or any of such officers, directors, shareholders and employees)
with respect to or in connection with:
(i) the failure of any representation or warranty made in or pursuant
to this Agreement or the Schedules or Exhibits hereto or in any other
agreements, certificates or documents delivered in connection with this
Agreement by any of the Sellers to be true and correct in all respects as of the
date of this Agreement; or
(ii) any breach or nonfulfillment of any covenant or obligation of any
of the Sellers under this Agreement or under any other agreements, certificates
or documents delivered in connection with this Agreement by any of the Sellers;
or
(iii) except as may otherwise be provided by this Agreement, any Claim
or other matter arising out of any events, conditions, or occurrences relating
to the General Partner or the Partnership on or prior to the Closing;
provided, however, that, notwithstanding anything to the contrary in this
Agreement or in any agreement or document delivered in connection herewith, the
Sellers shall not be required to indemnify and hold harmless the ADP and its
Affiliates under this Section 8.2(a) unless and until the aggregate amount of
their Losses hereunder exceeds $50,000; and provided, further, that the
aggregate liability of each Seller under this Section 8.2(a) or otherwise
pursuant to this Agreement or the agreements contemplated hereby shall in no
event exceed an amount equal to the aggregate amount(s) actually received by
such Seller pursuant to this Agreement or the agreements contemplated hereby.
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(b) ADP shall indemnify, defend and hold each of the Sellers harmless
from and against, and pay and reimburse each of the Sellers for, any Loss or
Losses, whether or not resulting from any third party claim, incurred or
suffered by any of the Sellers with respect to or in connection with:
(i) the failure of any representation or warranty made in or pursuant
to this Agreement or the Schedules or Exhibits hereto or in any other
agreements, certificates or documents delivered in connection with this
Agreement by ADP to be true and correct in all respects as of the date of this
Agreement; or
(ii) any breach or nonfulfillment of any covenant or obligation of ADP
under this Agreement or under any other agreements, certificates or documents
delivered in connection with this Agreement by ADP.
(c) It is specifically understood and agreed that, notwithstanding any
provision to the contrary in this Agreement or any agreement executed in
connection herewith, in the event a misrepresentation or breach of warranty or
covenant in this Agreement or any agreement executed in connection herewith, the
remedy of the Indemnified Party shall be limited solely to the indemnity set
forth in this Agreement and the Indemnified Party shall not be entitled to any
other damages, including, without limitation, special, incidental or
consequential damages incurred by the other party or anyone claiming through or
on behalf of such other party, even if such party has been advised of the
possibility of such damages.
8.3 Indemnification Procedure. (a) Promptly after the party seeking
indemnification (the "Indemnified Party") learns of any event or circumstance,
including, without limitation, any claim by a third party described in Section
8.3(c) hereof, that, in the judgment of the Indemnified Party, may give rise to
indemnification hereunder, the Indemnified Party shall deliver to the party or
parties from which indemnification is sought (the "Indemnifying Party") a
certificate (the "Certificate"), which Certificate shall:
(i) state that the Indemnified Party has incurred or properly accrued
Losses, or anticipates that it will incur Losses for which such Indemnified
Party is entitled to indemnification pursuant to this Agreement, and the actual
or estimated amount of the Loss or Losses incurred, accrued or anticipated; and
(ii) specify in reasonable detail each individual item of Loss included
in the amount so stated, the date such item was, or is anticipated to be,
incurred or properly accrued, the basis for any anticipated Loss or Losses and
the nature of the misrepresentation, breach of warranty or breach of covenant or
claim to which each such item is related and the computation of the amount to
which such Indemnified Party claims to be entitled hereunder;
provided, however, that any failure or delay by the Indemnified Party in
delivering a Certificate to the Indemnifying Party shall not affect the
Indemnified Party's right to
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indemnification under this Section 8, except to the extent that the Indemnifying
Party is able to establish its damages resulting directly from such failure or
delay.
(b) In case the Indemnifying Party shall object to the indemnification
of an Indemnified Party in respect of any claim described in any Certificate,
the Indemnifying Party shall, within ten Business Days after receipt by the
Indemnifying Party of such Certificate, deliver to the Indemnified Party a
written notice to such effect and the Indemnifying Party and the Indemnified
Party shall, within the thirty-day period beginning on the date of receipt by
the Indemnified Party of such written objection, attempt in good faith to agree
upon the rights of the respective parties with respect to each such claim to
which the Indemnifying Party shall have so objected. In the event such claim is
in respect of a third-party claim against the Indemnified Party, the
Indemnifying Party shall take such actions as are required pursuant to Section
8.3(c) hereof, provided that the Indemnifying Party's objection against such
Indemnifying Party's liability for indemnification shall remain subject to
determination under this Section 8.3(b). If the Indemnified Party and the
Indemnifying Party shall succeed in reaching agreement on their respective
rights with respect to any such claim, the Indemnified Party and the
Indemnifying Party shall promptly prepare and sign a memorandum setting forth
such agreement. Should the Indemnified Party and the Indemnifying Party be
unable to agree as to any particular item or items or amount or amounts, then
the Indemnified Party and the Indemnifying Party shall submit such dispute to a
court of competent jurisdiction.
(c) Promptly after the assertion by any third party of any claim
against any Indemnified Party that, in the judgment of such Indemnified Party,
may result in the incurrence by such Indemnified Party of Losses for which such
Indemnified Party would be entitled to indemnification pursuant to this
Agreement, such Indemnified Party shall deliver a Certificate in accordance with
Section 8.3(a) hereof and the Indemnifying Party may, at its option, assume the
defense of the Indemnified Party against such claim (including the employment of
counsel, who shall be reasonably satisfactory to such Indemnified Party, and the
payment of expenses). Until the Indemnifying Party shall have so assumed the
defense of the Indemnified Party against such claim following the delivery of
such Certificate, the Indemnified Party may, but shall not be obligated to,
undertake the defense, compromise or settlement of such claim on behalf of and
for the account and risk of the Indemnifying Party, and if such Indemnified
Party is entitled to indemnification under this Section 8, all legal or other
expenses reasonably incurred by the Indemnified Party shall be borne by the
Indemnifying Party. Any Indemnified Party shall have the right to employ
separate counsel in any such action or claim and to participate in the defense
thereof, but the fees and expenses of such counsel shall not be at the expense
of the Indemnifying Party unless (i) the Indemnifying Party shall have failed,
within ten Business Days after receipt of a Certificate in respect of such
claim, to assume the defense of such claim or to notify the Indemnified Party in
writing that it will assume the defense of such claim, (ii) the employment of
such counsel has been specifically authorized in writing by the Indemnifying
Party, which authorization shall not be unreasonably withheld, or (iii) the
named parties to any such action (including any impleaded parties) include both
such Indemnified Party and the Indemnifying Party and such Indemnified Party
shall have been
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advised in writing by such counsel that there may be one or more legal defenses
available to either party and that the assertion (or nonassertion) by the
Indemnifying Party of any of such defenses will be adverse to the interests of
the Indemnified Party. No Indemnifying Party shall be liable to indemnify any
Indemnified Party for any settlement of any such action or claim effected
without the consent of the Indemnifying Party, but if settled with the consent
of the Indemnifying Party, or if there be final judgment for the plaintiff in
any such action, the Indemnifying Party shall indemnify and hold harmless each
Indemnified Party from and against any Loss or Losses by reason of such
settlement or judgment. After any such claim has been filed or initiated, each
party shall make available to the other and its attorneys and accountants all
pertinent information under its control relating to such claim which is not
confidential or proprietary in nature or which is made available under the terms
of a confidentiality agreement or is delivered or obtained under appropriate
protective orders satisfactory to such party and the parties agree to render to
each other such assistance as they may reasonably require of each other in order
to facilitate the proper and adequate defense of any such claim.
(d) Within five Business Days of the determination of the amount of any
(i) claims for Losses specified in any Certificate to which an Indemnifying
Party shall not object in writing within ten Business Days of receipt of such
Certificate, (ii) claims for Losses covered by a memorandum of agreement of the
nature described in Section 8.3(b) hereof, (iii) claims for Losses the validity
and amount of which have been the subject of judicial determination as described
in such Section 8.3(b) or (iv) claims for Losses the validity and amount of
which shall have been the subject of a final judicial determination as described
in Section 8.3(c) hereof, in each case, the Indemnifying Party shall pay such
determined amount in immediately available funds to the Indemnified Party by
such means of payment as shall be requested by the Indemnified Party not less
than one Business Day prior to such payment.
SECTION 9
MISCELLANEOUS
9.1 Further Assurances. Each party shall, at the request of the other,
at any time and from time to time following the date hereof, execute and deliver
to the requesting party such further instruments, take or cause to be taken all
actions and do or cause to be done all other things as may be reasonably
necessary or appropriate in order more effectively to confirm or carry out the
provisions of this Agreement.
9.2 Non-Disclosure of the Terms of this Agreement. The General Partner,
the Partnership and each of the Sellers, on the one hand, and ADP, on the other
hand, agree that without the consent of the other they will not disclose any of
the terms, conditions or other facts with respect to this Agreement, except
pursuant to a subpoena or other court process or at the express direction of any
other authorized government agency (provided that the party who
33
<PAGE> 37
receives such a demand promptly notifies the other party of the existence, terms
and circumstances surrounding such demand).
9.3 Notices. All notices, requests, demands and other communications
pursuant to this Agreement shall be in writing and shall be deemed to have been
given and received: (i) the same day, if by hand delivery, (ii) the next day, if
by overnight courier, (iii) five days after mailed, in any general or branch
United States Post Office, enclosed in a registered or certified post-paid
envelope, return receipt requested, addressed to the address of the parties
stated below or to such changed address as such party may have fixed by notice,
or (iv) upon confirmation of receipt, if by facsimile transmission:
If to the Partnership, to:
William W. Simpson
Comprehensive Software Systems, Ltd.
25178 Genesee Trail Road
Golden, CO 80401
With a copy to:
Marc J. Musyl, Esq.
Rothgerber, Appel, Powers & Johnson LLP
One Tabor Center, Suite 3000
1200 Seventeenth Street
Denver, CO 80202
If to the General Partner, to:
William W. Simpson
CSS Management, Inc.
25178 Genesee Trail Road
Golden, CO 80401
With a copy to:
Marc J. Musyl, Esq.
Rothgerber, Appel, Powers & Johnson LLP
One Tabor Center, Suite 3000
1200 Seventeenth Street
Denver, CO 80202
34
<PAGE> 38
If to any of the Sellers, to
With a copy to:
Marc J. Musyl, Esq.
Rothgerber, Appel, Powers & Johnson LLP
One Tabor Center, Suite 3000
1200 Seventeenth Street
Denver, CO 80202
If to ADP, to:
ADP Financial Information Services, Inc.
Two Journal Square Plaza
Jersey City, New Jersey 07306
Attention: Group President
Telecopy No. (201) 714-3506
With a copy to:
Automatic Data Processing, Inc.
One ADP Boulevard
Roseland, New Jersey 07068
Attention: General Counsel
Telecopy No. (201) 535-6199
Any notice of change of address in accordance with the foregoing shall
be effective only upon receipt.
9.4 Entire Agreement. This Agreement, including the Schedules and
Exhibits hereto, sets forth the entire agreement and understanding between the
parties as to the subject matter hereof and thereof and merges and supersedes
all prior discussions, agreements and understandings of every kind and nature
between them (other than any non-disclosure or confidentiality agreement between
the General Partner, the Partnership or any of their respective Affiliates,
including the Sellers, and ADP and any of its Affiliates), and no party hereto
shall be bound by any representation, warranty, covenant, term or condition
other than as expressly provided for herein or therein.
9.5 Governing Law. This Agreement and its validity, construction and
performance shall be governed in all respects by the laws of the State of
Colorado, without giving effect to principles of conflicts of law.
35
<PAGE> 39
9.6 Severability. If any provision of this Agreement or the application
of any provision hereof to any person or circumstance is held invalid, the
remainder of this Agreement and the application of such provision to other
persons or circumstances shall not be affected thereby.
9.7 Assignability. Neither this Agreement, nor any of the rights or
obligations hereunder, may be assigned by any party hereto without the prior
written consent of ADP, the Company and each of the Sellers. This Agreement and
its rights and obligations shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and permitted assigns.
9.8 Counterparts; Headings. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument. The headings contained in
this Agreement are for reference purposes only and shall not affect the meaning
or interpretation of this Agreement.
9.9 Amendment. This Agreement may not be amended or modified except by
an instrument in writing executed on behalf of the General Partner, the
Partnership, ADP and each of the Sellers.
9.10 Waiver. Any extension or waiver hereunder shall not operate as a
waiver of, or estoppel with respect to, any subsequent or other failure of any
party to perform its obligations under this Agreement.
9.11 Expenses. All Transaction Expenses shall be paid by the party
incurring such Transaction Expenses.
IN WITNESS WHEREOF, ADP, the General Partner, the Partnership and each
of the Sellers have duly executed and delivered this Agreement as of the day and
year first above written.
ADP FINANCIAL INFORMATION SERVICES, INC.
By /s/ JAMES B. BENSON
------------------------------------
James B. Benson, President
COMPREHENSIVE SOFTWARE SYSTEMS LTD.
By CSS Management, Inc., its general partner
by /s/ WILLIAM W. SIMPSON
---------------------------------------
Name: William W. Simpson
Title: President
36
<PAGE> 40
CSS MANAGEMENT, INC.
By /s/ WILLIAM W. SIMPSON
------------------------------------
Name: William W. Simpson
Title: President
COMPREHENSIVE SECURITIES SYSTEMS, INC.
By /s/ WILLIAM W. SIMPSON
------------------------------------
Name: William W. Simpson
Title: President
AMERITRADE HOLDING CORPORATION
By /s/ JOSEPH A. KONEN
------------------------------------
Name: Joseph A. Konen
Title: President and COO
BHC SECURITIES, INC.
By
------------------------------------
Name: William Spane, Jr.
Title:
MCDONALD & COMPANY SECURITIES, INC.
By
-------------------------------------
Name: William B. Summers
Title:
MORGAN STANLEY & CO., INCORPORATED
By
-------------------------------------
Name: Robert F. Garland
Title:
37
<PAGE> 41
CSS MANAGEMENT, INC.
By
------------------------------------
Name: William W. Simpson
Title: President
COMPREHENSIVE SECURITIES SYSTEMS, INC.
By
------------------------------------
Name: William W. Simpson
Title: President
AMERITRADE HOLDING CORPORATION
By
------------------------------------
Name: J. Joe Rickets
Title:
BHC SECURITIES, INC.
By /s/ WILLIAM SPANE, JR.
------------------------------------
Name: William Spane, Jr.
Title: President
MCDONALD & COMPANY SECURITIES, INC.
By
-------------------------------------
Name: William B. Summers
Title:
MORGAN STANLEY & CO., INCORPORATED
By
-------------------------------------
Name: Robert F. Garland
Title:
37
<PAGE> 42
CSS MANAGEMENT, INC.
By
------------------------------------
Name: William W. Simpson
Title: President
COMPREHENSIVE SECURITIES SYSTEMS, INC.
By
------------------------------------
Name: William W. Simpson
Title: President
AMERITRADE HOLDING CORPORATION
By
------------------------------------
Name: J. Joe Rickets
Title:
BHC SECURITIES, INC.
By
------------------------------------
Name: William Spane, Jr.
Title:
MCDONALD & COMPANY SECURITIES, INC.
By /s/ DENNIS J. DONNELLY
-------------------------------------
Name: Dennis J. Donnelly
Title: Senior Managing Director
MORGAN STANLEY & CO., INCORPORATED
By
-------------------------------------
Name: Robert F. Garland
Title:
37
<PAGE> 43
CSS MANAGEMENT, INC.
By
------------------------------------
Name: William W. Simpson
Title: President
COMPREHENSIVE SECURITIES SYSTEMS, INC.
By
------------------------------------
Name: William W. Simpson
Title: President
AMERITRADE HOLDING CORPORATION
By
------------------------------------
Name: J. Joe Rickets
Title:
BHC SECURITIES, INC.
By
------------------------------------
Name: William Spane, Jr.
Title:
MCDONALD & COMPANY SECURITIES, INC.
By
-------------------------------------
Name: William B. Summers
Title:
MORGAN STANLEY & CO., INCORPORATED
By /s/ CEDRIC G. FOSTER
-------------------------------------
Name: Cedric G. Foster
Title: Managing Director
37
<PAGE> 44
RAYMOND, JAMES & ASSOCIATES, INC.
By
-----------------------------
Name: Thomas A. James
Title:
SOUTHWEST SECURITIES, INC.
By
-----------------------------
Name: Don A. Buchholz
Title:
STEPHENS INC.
By /s/ C. RAY GASH
-----------------------------
Name: C. Ray Gash
Title: Senior Vice President
Solely for purposes of Section 5.9:
AUTOMATIC DATA PROCESSING., INC
By
---------------------------------------
Name: James B. Benson
Title: Vice President
38
<PAGE> 45
RAYMOND, JAMES & ASSOCIATES, INC.
By
-----------------------------
Name: Thomas A. James
Title:
SOUTHWEST SECURITIES, INC.
By /s/ DAVID GLATSTEIN
-----------------------------
Name: David Glatstein
Title: President
STEPHENS INC.
By
-----------------------------
Name: Warren A. Stephens
Title:
Solely for purposes of Section 5.9:
AUTOMATIC DATA PROCESSING., INC
By
---------------------------------------
Name: James B. Benson
Title: Vice President
38
<PAGE> 46
RAYMOND, JAMES & ASSOCIATES, INC.
By /s/ THOMAS A. JAMES
-----------------------------
Name: Thomas A. James
Title:
SOUTHWEST SECURITIES, INC.
By
-----------------------------
Name: Don A. Buchholz
Title:
STEPHENS INC.
By
-----------------------------
Name: Warren A. Stephens
Title:
Solely for purposes of Section 5.9:
AUTOMATIC DATA PROCESSING., INC
By
---------------------------------------
Name: James B. Benson
Title: Vice President
38
<PAGE> 47
RAYMOND, JAMES & ASSOCIATES, INC.
By
-----------------------------
Name: Thomas A. James
Title:
SOUTHWEST SECURITIES, INC.
By
-----------------------------
Name: Don A. Buchholz
Title:
STEPHENS INC.
By
-----------------------------
Name: Warren A. Stephens
Title:
Solely for purposes of Section 5.9:
AUTOMATIC DATA PROCESSING., INC
By /s/ JAMES B. BENSON
---------------------------------------
Name: James B. Benson
Title: Vice President
38
<PAGE> 48
EXHIBITS
<TABLE>
<S> <C>
Exhibit A Selling Shareholders
Exhibit B Selling Partners
Exhibit C Determination of Subsequent Purchase Price
Exhibit D Procedures for Board Meetings and Exchange of Information
</TABLE>
SCHEDULES
<TABLE>
<S> <C>
Schedule 3.1 Qualifications to Do Business; Real Property Jurisdictions
Schedule 3.4 Conflicts
Schedule 3.5 Contract Consents
Schedule 3.6 Capitalization of the Company
Schedule 3.7 Investments
Schedule 3.10 Undisclosed Liabilities
Schedule 3.11(a) Tax Returns
Schedule 3.11(b) Tax Jurisdictions
Schedule 3.11(c) Tax Waivers, Extensions or Jurisdiction Notifications
Schedule 3.11(h) Tax Elections
Schedule 3.12 Title to Assets
Schedule 3.13 Fixed Assets
Schedule 3.14(i) Leases
Schedule 3.14(ii) Assigned or Sublet Leases
Schedule 3.14(iii) Lease Defaults
Schedule 3.15(i) Licensed Properties
Schedule 3.15(ii) Certain License Rights
Schedule 3.15(iii) License Defaults
Schedule 3.16(a) Owned Software, Databases and Documentation
Schedule 3.16(b) Owned Software, Databases and Documentation Registrations
Schedule 3.16(c) Trademarks, Tradenames, Etc.
Schedule 3.16(d) Agreements for the Conversion, Modification or Enhancement of the
Schedule 3.16(g) Licensed Software, Databases and Documentation
Schedule 3.16(i) Licensing Fees, Royalties and Other Payments
Schedule 3.16(j) Contract Rights with respect to the Business Intellectual Property
Schedule 3.17 Insurance Policies
Schedule 3.18(i) Contracts
Schedule 3.18(ii) Contract Defaults
Schedule 3.19(i) Customers
Schedule 3.19(ii) Special Customer terms
Schedule 3.19(iv) Customer or Supplier Terminations
Schedule 3.20(i) Loan Agreements
</TABLE>
39
<PAGE> 49
<TABLE>
<S> <C>
Schedule 3.20(ii) Liability and Debt Exceptions
Schedule 3.24 Absence of Certain Changes
Schedule 3.26(i) Employees
Schedule 3.26(ii) Unpaid Salary, Etc.
Schedule 3.26(iii) Changes in Employment
Schedule 3.26(iv) Employee Terminations
Schedule 3.27(a) Employee Benefit Plans
Schedule 3.27(d) Post-Employment Benefits
Schedule 3.27(f) Unpaid Employee Benefit Plan Costs
Schedule 3.27(g) Parachute Payment Benefits
Schedule 3.28(i) Notes and Accounts Receivable
Schedule 3.31 Transactions with Affiliates
Schedule 3.33 Brokers' and Finders' Fees
</TABLE>
40
<PAGE> 50
SECURITIES PURCHASE AGREEMENT
<TABLE>
<CAPTION>
Exhibit A Selling Shareholders
No. of Shares
Owned No. of Shares
(or Treasury) Sold to ADP
<S> <C> <C> <C>
CSS Management, Inc. 71,633.07 3,152.00
Comprehensive Software Systems, Ltd. 13,067.00 0.00
Ameritrade Holding Corporation 2,226.18 0.00
BHC Securities, Inc. 2,226.18 0.00
McDonald & Company Securities, Inc. 2,226.18 0.00
Morgan Stanley & Co. Incorporated 1,942.85 0.00
Raymond, James & Associates, Inc. 2,226.18 0.00
Southwest Securities, Inc. 2,226.18 0.00
Stephens Inc. 2,226.18 0.00
100,000.00 3,152.00
</TABLE>
(At $5.00 per share = $15,760.00)
<PAGE> 51
SECURITIES PURCHASE AGREEMENT
Exhibit B Selling Partners and/or Partnership
% Interest
Sold to ADP
Comprehensive Software Systems, Ltd. 10%
<TABLE>
<CAPTION>
10%
Distribution Subsequent
of ADP $10M Sharing Ratios
Limited Partners of CSS, Ltd. $10,000,000 (W/ ADP $10M)
6/2/98 6/2/98
<S> <C> <C> <C>
1 CSS, Inc. $ 5,963,717 37.4672%
2 BHC Securities $ 828,395 7.2204%
3 Hanifen Imhoff, Inc. $ 0 0.0000%
4 Legg Mason, Inc. $ 0 0.0000%
5 McDonald & Co. Securities $ 828,395 7.2204%
6 Raymond James and Assoc. $0 8.1849%
7 Southwest Securities, Inc. $0 8.1849%
8 Stephens, Inc. $ 828,395 7.2204%
9 AmeriTrade, Inc. $ 828,395 7.2204%
10 Morgan Stanley Services $ 722,702 6.2813%
11 ADP $ 0 10.0000%
$ 0 0.0000%
$ 0 0.0000%
General Partner
1 CSS Management, Inc. 1.0000% $ 100,000 1.00%
=================================== ========
Total 100.0000% $10,100,000 100.00%
</TABLE>
<PAGE> 52
EXHIBIT C
Determination of the Subsequent Purchase Price
Within 15 days after the fifth anniversary of this Agreement (or the
third anniversary if Sellers elect to accelerate the Call in accordance with
Section 6.1(e)), upon the request of ADP, ADP and a representative of the
Sellers shall meet and the parties shall mutually endeavor, acting in good
faith, to agree upon the Subsequent Purchase Price which is equal to the fair
market value of the General Partner and the Partnership (less the portions of
the General Partner and the Partnership then owned by ADP). If the parties
cannot agree on the Subsequent Purchase Price within 30 Business Days after
their first meeting (or 45 days after the fifth anniversary of this Agreement if
the parties do not meet as contemplated above), the determination of the
Subsequent Purchase Price shall be made by taking the average of the Subsequent
Purchase Price determined by two nationally recognized major investment banking
houses ("Investment Banks") selected and retained mutually by ADP, on the one
hand, and the Sellers, on the other hand; provided, however, that if the two
Investment Banks' determination of the Subsequent Purchase Price differ by more
than 20%, a third Investment Bank shall be selected and retained mutually by
ADP, on the one hand, and the Sellers, on the other hand, to determine the
Subsequent Purchase Price, and the final determination of the Subsequent
Purchase Price shall be made by taking the average of (i) the Subsequent
Purchase Price determined by the third Investment Bank and (ii) the Subsequent
Purchase Price determined by one of the first two Investment Banks which is
closer to the Subsequent Purchase Price determined by the third Investment Bank.
The parties shall mutually agree upon the valuation methodology which
shall be submitted to the Investment Banks in connection with their
determination of the Subsequent Purchase Price; provided, however, that if the
parties cannot agree upon a valuation methodology, ADP, on the one hand, and the
Sellers, on the other hand, may each submit to the Investment Banks a proposal
for the valuation methodology to be used by them to determine the Subsequent
Purchase Price. The parties may supply the Investment Banks with such materials
as they deem necessary to support their respective proposals. The Investment
Banks shall be instructed to make their determination of the Subsequent Purchase
Price (i) within 45 days of their appointment, (ii) which is equal to the fair
market value of the General Partner and the Partnership (less the portions of
the General Partner and the Partnership then owned by ADP), (iii) utilizing the
valuation methodology which the parties have agreed upon (or if the parties have
not so agreed, the valuation methodology of their choice, which may or may not
include either of the parties proposed valuation methodologies), (iii) taking
into consideration whether any amounts are payable by the General Partner or the
Partnership pursuant to employment agreements, consulting agreements and
non-competition agreements with individuals who are key to the success of the
Partnership's business, as well as whether the Partnership receives the benefit
from any such agreements and the effect on the value of the Partnership if there
are no such agreements.
41
<PAGE> 53
Any determination of the Subsequent Purchase Price in accordance with
the foregoing shall remain in effect (with respect to the exercise of the Call
by ADP) for at least 6 months. After any such 6-month period, the parties shall,
at the request of the Sellers, update the determination of the Subsequent
Purchase Price utilizing the same procedure that was utilized to determine the
original Subsequent Purchase Price.
The fees of the Investment Banks shall be split equally by ADP and the
Sellers (i.e., 50% by ADP and 50% by the Sellers); provided, however, that in
the event that ADP does not exercise the Call, upon ADP's election not to
exercise the Call, ADP shall reimburse the Sellers for any amounts previously
paid by them to the Investment Banks in accordance herewith.
42
<PAGE> 54
EXHIBIT D
GUIDELINES FOR PARTICIPATION IN BOARD MEETINGS
AND FOR EXCHANGE OF CERTAIN INFORMATION
Pursuant to the Securities Purchase Agreement, ADP Financial
Information Services, Inc. ("ADP") is entitled to name a representative to serve
as a member of the Board of Directors of CSS Management, Inc., the general
partner of Comprehensive Software Systems Ltd. (collectively, "CSS"). CSS
presently does not sell back office products but is engaged in research and
development and may offer such products for sale in the future. CSS does design
and create software products for use in the financial services industry. ADP
presently does sell back office systems. ADP and CSS desire that they not obtain
or exchange information concerning their software products that could be deemed
competitively sensitive and could potentially raise concerns under federal and
state antitrust laws.
To prevent exchange of competitively sensitive information relating to
software products currently in being and under consideration or development, ADP
and CSS each adopts the following Guidelines. Guidelines prohibiting the
discussion or exchange of information concerning back office systems apply not
only to CSS directors but to all ADP, Automatic Data Processing, Inc. and CSS
personnel:
Generally, any arrangement that has the effect of or possibility for
restricting competition is potentially problematic. Certain restrictive
arrangements can be found illegal without proof of any actual anticompetitive
effect, in particular, agreements to fix prices, to allocate customers, products
or services or to allocate geographic territories. Prohibited arrangements can
be written or oral, express or implied. Such arrangements can carry severe
criminal and civil penalties
<PAGE> 55
both for individuals involved in such arrangements and for companies with which
they are associated. Therefore, members of the Board of directors of CSS as well
as other ADP, Automatic Data Processing, Inc. and CSS personnel should not enter
into such a arrangements, and should not engage in discussions or exchanges of
information that could be construed as evidence of efforts, offers, or
invitations to enter into such arrangements.
Even in the absence of open and direct discussions concerning price
fixing, customer allocation, or geographic or product market allocation,
discussions about or the exchange of certain information could be deemed
evidence of attempts to engage in anticompetitive collusion. As a result, the
discussion of certain information should not occur in the presence of ADP's
Board representative.
1. a. ADP's Board representative shall not participate in discussions
of or receive information about the following competitively sensitive
topics as they relate to back office or other software products nor
should ADP's representative be informed of the content of such
discussions or be provided with materials relevant to such discussions:
o Non-public information about customers, target customers,
marketing plans, or marketing strategies;
o Prices or pricing policies;
o Terms or conditions of sale;
o Research, development, or production plans, costs, profit
margins or excepted costs or margins;
o Distribution arrangements;
o Non-public market intelligence or information about other
competitors.
<PAGE> 56
b. Other CSS and ADP personnel also will not exchange or discuss such
information in connection with CSS Board of Directors meetings or otherwise.
c. Technical information about ADP's back office products may be disclosed
and discussed to the extent necessary to permit the development of interfaces
between such systems and CSS's BrokerView product.
2. Participation in Board meetings and access to documents and information on
the part of ADP's Board representative will be documented and will be in
accordance with the following procedures:
o all Board meetings will be documented with agendas and minutes;
o Board discussions of topics or involving information of potential competitive
sensitivity will be placed at the end of an agenda or at a convenient break
in the Board's proceedings to enable the ADP representative to be absent for
that portion of the meeting;
o Board meeting minutes will reflect the ADP representative's presence and
absence for any portions of the meetings;
o a record will be kept of all papers circulated in preparation for and during
Board meetings; competitively sensitive documents concerning back office
systems will not be distributed to the ADP representative, and the minutes
will so reflect.
3. Legal counsel for ADP will attend each Board meeting in an ex officio
capacity and will be consulted in the event that questions arise concerning the
content of discussions which may relate to back office or other software
systems.
4. All members of the Board of Directors and the Secretary of the corporation
and of any Board meeting will be provided with a copy of these Guidelines, and
all persons invited to come before the Board of Directors to discuss issues
relating to back office or other software products will be informed of and
observe these Guidelines.
<PAGE> 57
5. Any technical, financial, or other business information which is permissibly
and appropriately exchanged between ADP and CSS will be treated as confidendal
under the terms of the parties' non-disclosure undertakings to each other
contained in an agreement dated as of , 1998, and such of ADP's
representatives that may, from time to time, attend Board meetings shall be
required to execute such agreement.
<PAGE> 1
EXHIBIT 10.20
[AMERITRADE HOLDING CORPORATION LETTERHEAD]
BOARD RESOLUTION
November 11, 1997 Meeting
Omaha, Nebraska
WHEREAS, AmeriTrade Holding Corporation (the "Company") maintains AmeriTrade
Holding Corporation 1996 Long-Term Incentive Plan (the "Plan");
WHEREAS, pursuant to the provisions of Section 13 of the Plan, the Board of
Directors of the Company has the authority to amend the Plan, subject to certain
restrictions; and
WHEREAS, amendment of the Plan is now considered desirable; and
NOW, THEREFORE, IT IS RESOLVED that the Plan be, and its hereby is, amended
effective for awards made after the date this resolution is adopted, by
substituting the following for Section 3 of the Plan:
"3. Participation. Subject to the terms and conditions of the Plan, the
Board or the Committee shall determine and designate, from time to time, from
among the employees of the Company who are key executives or managerial
employees those persons who will be granted one or more Awards under the Plan,
and thereby become "Participants" in the Plan. In the discretion of the Board or
the Committee, and subject to the terms of the Plan, a Participant may be
granted any Award permitted under the provisions of the Plan, and more than one
Award may be granted to a Participant. Except as otherwise agreed by the Board
or the Committee and the Participant, or except as otherwise provided in the
Plan, an Award under the Plan shall not affect any previous Award under the Plan
or an award under any other plan maintained by the Company. For purposes of the
Plan, the term "Award" shall mean any award or benefit granted to any
Participant under the Plan."
11/11/97
- -----------------------------
Date
/s/ J. Peter Ricketts
-----------------------------
J. Peter Ricketts
Corporate Secretary
<PAGE> 1
EXHIBIT 10.21
AMERITRADE HOLDING CORPORATION
1996 DIRECTORS INCENTIVE PLAN
<PAGE> 2
AMERITRADE HOLDING CORPORATION
Certificate
I, J. Peter Ricketts, Secretary, having in my custody and possession
the corporate records of said corporation, do hereby certify that attached
hereto is a true and correct copy of the Ameritrade Holding Corporation 1996
Directors Incentive Plan, as amended and restated effective as of February 10,
1998.
WITNESS my hand this _____ day of February, 1998.
---------------------------
As Aforesaid
<PAGE> 3
AMERITRADE HOLDING CORPORATION
1996 DIRECTORS INCENTIVE PLAN
1. Purpose. Ameritrade Holding Corporation (the "Company")
previously established the Ameritrade Holding Corporation 1996 Directors
Incentive Plan (the "Plan") to attract and retain as non-employee directors of
the Company persons whose abilities, experience and judgment can contribute to
the continued progress of the Company and its subsidiaries and to facilitate the
directors' ability to acquire a proprietary interest in the Company. The
following constitutes an amendment, restatement and continuation of the Plan
effective as of February 10, 1998 (the "Effective Date"), pursuant to which the
Plan is amended to afford the directors the ability to defer a portion of their
income from service as directors of the Company.
2. Administration.
2.1. Administration By Committee. The Plan shall be administered
by the Compensation Committee (the "Committee") of the Board of Directors of the
Company (the "Board"). Notwithstanding the foregoing, no member of the Committee
shall act with respect to the administration of the Plan except to the extent
consistent with the exempt status of the Plan under Rule 16b-3 promulgated under
the Securities Exchange Act of 1934, as amended ("Rule 16b-3").
2.2. Authority. Subject to the provisions of the Plan, the
Committee shall have the authority to (a) interpret the Plan and to adopt, amend
and rescind administrative guidelines and other rules and regulations relating
to the Plan, (b) correct any defect or omission and to reconcile any
inconsistency in the Plan or in any payment made hereunder, and (c) make all
other determinations and to take all other actions necessary or advisable for
the implementation and administration of the Plan. The determination of the
Committee on matters within its authority shall be conclusive and binding on the
Company and all other persons.
3. Participation. Only Non-Employee Directors shall be eligible to
participate in the Plan. As of any applicable date, a "Non-Employee Director" is
a person who is serving as a director of the Company and who is not an employee
of the Company or any subsidiary of the Company as of that date.
4. Definition of Fair Market Value. For purposes of the Plan, the
"Fair Market Value" of a share of common stock of the Company ("Stock") as of
any date shall be the closing market composite price for such Stock as reported
on NASDAQ on that date or, if Stock is not traded on that date, on the next
preceding date on which Stock was traded.
<PAGE> 4
5. Shares Subject to the Plan.
5.1. Number of Shares Reserved. The shares of Stock with respect to
which awards may be made under the Plan or which may be distributed pursuant to
elections under Sections 9 or 10 of the Plan shall be shares currently
authorized but unissued or currently held or subsequently acquired by the
Company as treasury shares, including shares purchased in the open market or in
private transactions. Subject to the provisions of subsection 5.3, the number of
shares of Stock which may be issued with respect to awards under the Plan or
distributed pursuant to elections made in accordance with Section 9 or 10 of the
Plan shall not exceed 80,000 shares in the aggregate.
5.2. Reusage of Shares.
(a) In the event of the exercise or termination (by reason of
forfeiture, expiration, cancellation, surrender or otherwise) of
any award under the Plan, that number of shares of Stock that was
subject to the award but not delivered shall again be available
for awards under the Plan.
(b) In the event that shares of Stock are delivered under the Plan as
a Stock Award (as defined in Section 7) and are thereafter
forfeited or reacquired by the Company pursuant to rights
reserved upon the award thereof, such forfeited or reacquired
shares shall again be available for awards under the Plan.
(c) Notwithstanding the provisions of paragraphs (a) or (b), the
following shares shall not be available for reissuance under the
Plan: (i) shares with respect to which the Non-Employee Director
has received the benefits of ownership (other than voting
rights), either in the form of dividends or otherwise, and (ii)
shares which are surrendered in payment of the Option Price (as
defined in subsection 6.3) upon the exercise of an Option.
5.3. Adjustments to Shares Reserved. In the event of any merger,
consolidation, reorganization, recapitalization, spinoff, stock dividend, stock
split, reverse stock split, exchange or other distribution with respect to
shares of Stock or other change in the corporate structure or capitalization
affecting the Stock, the type and number of shares of stock which are or may be
subject to awards under the Plan and the terms of any outstanding awards
(including the price at which shares of stock may be issued pursuant to an
outstanding award) shall be equitably adjusted by the Committee, in its sole
discretion, to preserve the value of benefits awarded or to be awarded to
Non-Employee Directors under the Plan. In determining what adjustment, if any,
is appropriate pursuant to the preceding sentence, the Committee may rely on the
advice of such experts as they deem appropriate, including counsel, investment
bankers and the accountants of the Company.
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6. Options.
6.1. Definitions. The grant of an "Option" under this Section 6
entitles the Non-Employee Director to purchase shares of Stock at the Option
Price, subject to the terms of this Section 6. Options granted under this
Section 6 shall be non-qualified stock options which are not intended to be
"incentive stock options" as that term is described in section 422(b) of the
Internal Revenue Code of 1986, as amended (the "Code").
6.2. Awards of Options. Each Non-Employee Director shall be awarded
Options under this Section 6 in accordance with the following:
(a) Upon his election to the Board for his first term, each
Non-Employee Director shall be awarded an Option to purchase such
number of shares of Stock as determined by the Chairman of the
Board, provided, however, that such award shall be approved by
the Board.
(b) At such times as the Board shall determine, each Non-Employee
Director shall be awarded an Option to purchase that number of
shares of Stock determined by the Board and approved by the
members of the Board other than those receiving the grant of an
Option pursuant to this paragraph (b). In determining the number
of shares of Stock subject to an Option under this paragraph (b),
the Board may take into account such objective or subjective
factors as it determines appropriate.
6.3. Option Price. The price at which shares of Stock may be purchased
upon the exercise of an Option (the "Option Price") shall be not less than the
greater of (i) the Fair Market Value of a share of Stock as of the date on which
the Option is granted, or (ii) the par value of a share of Stock on such date.
6.4. Exercise. Except as otherwise provided in the Plan, each Option
granted to a Non-Employee Director under this Section 6 shall become exercisable
in substantially equal annual installments over a period of three years,
beginning with the first anniversary of the date of grant and no Option shall be
exercisable after the Expiration Date (as defined in Section 8). The full Option
Price of each share of Stock purchased upon the exercise of any Option shall be
paid at the time of such exercise and, as soon as practicable thereafter, a
certificate representing the shares so purchased shall be delivered to the
person entitled thereto. The Option Price shall be payable in cash or in shares
of Stock (valued at Fair Market Value as of the day of exercise), or in any
combination thereof.
7. Stock Awards.
7.1. Definition. Subject to the terms of this Section 7, a "Stock
Award" under the Plan is a grant of shares of Stock to a
Non-Employee Director, the vesting of which is subject to the
conditions described in subsection 7.3. The period beginning on
the date of the grant of
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<PAGE> 6
a Stock Award and ending on the vesting or forfeiture of such Stock (as
applicable) is referred to as the "Restricted Period".
7.2. Non-Discretionary Awards. Upon his election to the Board for his
first term, each Non-Employee Director shall be awarded such number of shares of
Stock pursuant to this Section 7 as determined by the Chairman of the Board;
provided, however, that such award shall be approved by the Board; and provided
further that, the Fair Market Value of the Stock awarded to a Non-Employee
Director pursuant to this subsection 7.2 shall be approximately $20,000 or such
other amount determined by the Board from time to time.
7.3. Vesting. Except as otherwise provided in the Plan, the shares of
Stock subject to an award under this Section 7 shall become vested in
substantially equal annual installments over a period of three years, beginning
with the first anniversary of the date of grant and all shares of Stock awarded
pursuant to this Section 7 which are not vested on the Expiration Date shall be
forfeited
7.4. Rights with Respect to Stock. Beginning on the date of the grant
of shares of Stock comprising a Stock Award, and including any applicable
Restricted Period, the Non-Employee Director, as owner of such shares, shall
have the right to vote such shares; provided, however, that payment of dividends
with respect to Stock Awards shall be subject to the following:
(a) On and after date that a Non-Employee Director has a fully earned
and vested right to the shares comprising a Stock Award, and the
shares have been distributed to the Non-Employee Director, the
Non-Employee Director shall have all dividend rights (and other
rights) of a stockholder with respect to such shares.
(b) Prior to the date that a Non-Employee Director has a fully earned
and vested right to the shares comprising a Stock Award, the
Committee, in its sole discretion, may award Dividend Rights (as
defined below) with respect to such shares.
(c) On and after the date that a Non-Employee Director has a fully
earned and vested right to the shares comprising a Stock Award,
but before the shares have been distributed to the Non-Employee
Director, the Non-Employee Director shall be entitled to Dividend
Rights with respect to such shares, at the time and in the form
determined by the Committee.
A "Dividend Right" with respect to shares comprising a Stock Award shall entitle
the Non-Employee Director, as of each dividend payment date, to an amount equal
to the dividends payable with respect to a share of Stock multiplied by the
number of such shares. Dividend Rights shall be settled in the same form (either
cash or in shares of Stock) as dividends paid to shareholders of the Company.
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<PAGE> 7
8. Expiration of Awards. The "Expiration Date" with respect to an
award under the Plan means the earlier of the following dates:
(a) the ten-year anniversary of the date on which the award is
granted; or
(b) the one-year anniversary of the date on which the Non-Employee
Director's service as a director of the Company terminates for
cause.
9. Pavment of Retainers: Elections.
9.1. Payment of Retainer. Subject to the terms and conditions of the
Plan, for each fiscal year of the Company commencing after November 11, 1997
(the "Award Year"), each individual who is a Non-Employee Director shall be paid
a retainer in an amount determined from time to time by the Board (the
"Retainer") in accordance with and subject to the following:
(a) For each Award Year, a "Cash Retainer" shall be payable to each
individual who is a Non-Employee Director as of the first day of
the Award Year in an amount equal to one-half of the Retainer for
the Award Year; and
(b) For each Award Year, a "Stock Retainer" shall be payable to each
individual who is a Non-Employee Director as of the first day of
the Award Year in an amount equal to one-half of the Retainer for
the Award Year, which Stock Retainer shall be payable in shares
of Stock having a Fair Market Value equal to the Stock Retainer,
with the Fair Market Value of any fractional share payable in
cash.
Notwithstanding the foregoing, the Board, in its sole discretion, may determine
that an Award Year of less than 12 months is appropriate, in which case, the
amount of the Retainer for such Award Year shall be equitably adjusted as
determined by the Board.
9.2. Elections to Receive Stock. Subject to the terms and conditions
of the Plan, each Non-Employee Director may elect to forego receipt of all or
any portion of the Eligible Cash Payments (as defined below) payable to him in
any calendar year after the date of his election and instead to receive whole
shares of Stock of equivalent value to the Eligible Cash Payments so foregone
(determined in accordance with subsection 9.4); provided, however, that
elections made with respect to Eligible Cash Payments payable during the 1998
calendar year may be made after December 31, 1997 in accordance with uniform and
nondiscriminatory rules established by the Committee. An election under this
subsection 9.2 to have Eligible Cash Payments paid in shares of Stock shall be
valid only if it is in writing, signed by the Non-Employee Director, and filed
with the Committee in accordance with uniform and nondiscriminatory rules
adopted by the Committee, including, but not limited to, rules required to cause
the receipt of Stock pursuant to any such election to be exempt under Rule
16b-3. For purposes of the Plan, the term "Eligible Cash Payments" means the
Cash Retainer
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<PAGE> 8
and meeting fees and committee fees that would otherwise be payable to the
Non-Employee Director by the Company in cash as established, from time to time,
by the Board or any committee thereof.
9.3. Revocation of Election to Receive Stock. Once effective, an
election pursuant to subsection 9.2 to receive Stock shall remain in effect for
successive calendar years until it is revised or revoked. Any such revision or
revocation shall be in writing, signed by the Non-Employee Director, shall be
effective for the calendar year next following the date on which it is received
by the Committee, or such later date specified in such notice, and shall be
filed with the Committee in accordance with uniform and nondiscriminatory rules
established by the Committee, including, but not limited to, rules required to
cause the receipt of Stock (or the receipt of cash in lieu of Stock as
previously elected) to be exempt under Rule 16b-3.
9.4. Equivalent Amount of Stock. The number of whole shares of Stock
to be distributed to any Non-Employee Director by reason of his election
pursuant to subsection 9.2 to receive Stock in lieu of Eligible Cash Payments
shall be equal to (rounded to the nearest whole number of shares):
(a) the amount of the Eligible Cash Payments which the Non-Employee
Director has elected to have paid to him in shares of Stock;
DIVIDED BY
(b) the Fair Market Value of a share of Stock as of the date on which
such Eligible Cash Payments would otherwise have been payable to
the Non-Employee Director.
10. Deferred Compensation
10.1. Deferral of Compensation. Subject to the terms and conditions of
the Plan, each Non-Employee Director, by filing a written "Deferral Election"
with the Committee in accordance with uniform and nondiscriminatory rules
adopted by the Committee, may elect to defer the receipt of all or any portion
of the Eligible Deferral Amounts (as defined below) otherwise payable to him on
or after the Effective Date until a future date (the "Distribution Date")
specified by the Non-Employee Director in his Deferral Election as of which
payment of his Deferred Compensation Account (as defined in subsection 10.2)
shall commence in accordance with subsection 10.3. If no Distribution Date is
specified in a Non-Employee Director's Deferral Election, the Distribution Date
shall be deemed to be the first business day in January of the year following
the date on which the Non-Employee Director ceases to be a director of the
Company for any reason. A Non-Employee Director's Deferral Election shall be
effective with respect to Eligible Deferral Amounts otherwise payable to him for
services rendered after the last day of the calendar year in which such election
is filed with the Committee; provided, however, that:
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<PAGE> 9
(a) a Deferral Election which is filed within 30 days of the date on
which a director first becomes a Non-Employee Director shall be
effective with respect to all Eligible Deferral Amounts otherwise
payable to him for periods after the date on which the Deferral
Election is filed;
(b) a Deferral Election which relates to Eligible Deferral Amounts
otherwise payable to a Non-Employee Director for the 1998
calendar year after the Effective Date shall be effective if
made in accordance with uniform and nondiscriminatory rules
established by the Committee; and
(c) by notice filed with the Committee in accordance with uniform and
nondiscriminatory rules established by it, a director may
terminate or modify any Deferral Election as to Eligible Deferral
Amounts payable for services rendered after the last day of the
calendar year in which such notice is filed with the Committee;
provided, however, that no modification may be made to the
Distribution Date unless the Non-Employee Director shall file
such notice with the Committee at least one year prior thereto.
Notwithstanding the provisions of paragraph (c) next above, the Committee may,
in its sole discretion, after considering all of the pertinent facts and
circumstances, approve a change to the Distribution Date which is requested by a
Non-Employee Director less than one year prior thereto. For purposes of the
Plan, the term "Eligible Deferral Amounts" shall mean the Retainer (including
both the Cash Retainer and the Stock Retainer) and meeting fees and committee
fees that would otherwise be payable to the Non-Employee Director by the
Company, all as established from time to time by the Board or any committee
thereof
10.2. Crediting and Adjustment of Deferred Amounts. The amount of any
Eligible Deferral Amounts deferred pursuant to a Non-Employee Director's
Deferral Election in accordance with subsection 10.1 ("Deferred Compensation")
shall be credited to a bookkeeping account maintained by the Company in the name
of the Non-Employee Director (the "Deferred Compensation Account"), which
account shall consist of two subaccounts, one known as the "Cash Subaccount" and
the other as the "Company Stock Subaccount." Any portion of the Stock Retainer
and any Eligible Cash Payments that the Non-Employee Director has elected to
receive in Stock pursuant to subsection 9.2 and, in each case, with respect to
which the Non-Employee Director has made a Deferral Election pursuant to
subsection 10.1 shall be credited to his Company Stock Subaccount. Any other
Deferred Compensation shall be credited to his Cash Subaccount. A Non-Employee
Director's Deferred Compensation Account shall be adjusted as follows:
(a) As of the first day of each calendar quarter (which dates are
referred to herein as "Accounting Dates"), the Non-Employee
Director's Cash Subaccount shall be adjusted as follows:
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<PAGE> 10
(i) first, the amount of any distributions from the Cash Sub-
account made since the last preceding Accounting Date shall
be charged to the Cash Subaccount
(ii) next. the balance of the Cash Sub-account after adjustment
in accordance with subparagraph (i) above shall be credited
with interest since the last preceding Accounting Date
computed at the prime rate as reported by The Wall Street
Journal for such date, or if such date is not a business
day, for the next preceding business day; and
(iii) finally, after adjustment in accordance with the-foregoing
provisions of this subsection 10.2, the Cash Subaccount
shall credited with the Deferred Compensation otherwise
payable to the Non-Employee Director since the last
preceding Accounting Date which is to be credited to the
Cash Subaccount
(b) The Non-Employee Director's Company Stock Sub-account shall be
adjusted as follows:
(i) as of any date on or after the Effective Date on which
Eligible Deferral Amounts would have been payable to the
Non-Employee Director in Stock but for his or her Deferral
Election, the Non-Employee Director's Company Stock Sub-
account shall be credited with that number of stock units
("Stock Units") equal to the number of shares of Stock to
which he would have been entitled as of the applicable
date;
(ii) as of the date on which shares of Stock are distributed to
the Non-Employee Director in accordance with subsection
10.3 below, the Company Stock Subaccount shall be charged
with an equal number of Stock Units; and
(iii) as of the record date for any dividend paid on Stock, the
Company Stock Subaccount shall be credited with that
number of additional Stock Units which is equal to the
number obtained by multiplying the number of Stock Units
then credited to the Company Stock Subaccount by the
amount of the cash dividend or the fair market value (as
determined by the Board of Directors) of any dividend in
kind payable on a share of Stock, and dividing that
product by the then Fair Market Value of a share of Stock.
In the event of any merger, consolidation, reorganization,
recapitalization, spinoff, stock split, reverse stock split,
rights offering, exchange or other change in the corporate
structure or capitalization of the Company affecting the
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<PAGE> 11
Stock, each Non-Employee Director's Company Stock Subaccount shall
be equitably adjusted in such manner consistent with subsection
5.3
10.3. Payment of Deferred Compensation Account. Except as otherwise
provided in this subsection 10.3 or subsection 10.4, the balances credited to a
Non-Employee Director's Deferred Compensation Account shall each be payable to
the Non-Employee Director in 10 annual installments commencing as of the
Distribution Date and continuing on each annual anniversary thereof.
Notwithstanding the foregoing, a Non-Employee Director may elect, by filing a
notice with the Committee at least one year prior to the Distribution Date, to
change the number of payments to a single payment or to any number of annual
payments not in excess of ten. Each such payment shall include a cash portion,
if applicable, and a Stock portion, if applicable, as follows:
(a) The cash portion to be paid as of the Distribution Date or any
anniversary thereof and charged to the Cash Subaccount shall be
equal to the balance of the Cash Subaccount multiplied by a
fraction, the numerator of which is one and the denominator of
which is the number of remaining payments to be made, including
such payment.
(b) The Stock portion to be paid as of the Distribution Date or any
anniversary thereof and charged to the Company Stock Subaccount
shall be distributed in whole shares of Stock, the number of
shares of which shall be determined by rounding to the next
highest integer the product obtained by multiplying the number
of Stock Units then credited to the Non-Employee Director's
Company Stock Subaccount by a fraction, the numerator of which
is one and the denominator of which is the number of remaining
payments to be made, including such payment.
Notwithstanding the foregoing, the Committee, in its sole discretion, may
distribute all balances in any Deferred Compensation Account to a Non-Employee
Director (or former Non-Employee Director) in a lump sum as of any date.
10.4. Payments in the Event of Death. If a Non-Employee Director dies
before payment of his Deferred Compensation Account commences, all amounts then
credited to his Deferred Compensation Account shall be distributed to his
Beneficiary (as described below), as soon as practicable after his death, in a
lump sum. If a Non-Employee Director dies after payment of his Deferred
Compensation Account has commenced but before the entire balance of such account
has been distributed, the remaining balance thereof shall be distributed to his
Beneficiary, as soon as practicable after his death, in a lump sum. Any amounts
in the Cash Subaccount shall be distributed in cash and any amounts in the Stock
Subaccount shall be distributed in whole shares of Stock determined in
accordance with paragraph 10.3(b). For purposes of the Plan, the Non-Employee
Director's "Beneficiary" is the person or persons the Non-Employee Director
designates, which designation shall be in writing, signed by the Non-Employee
Director and filed with the Committee prior to the Non-Employee Director's
death.
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<PAGE> 12
A Beneficiary designation shall be effective when filed with the Committee in
accordance with the preceding sentence. If more than one Beneficiary has been
designated, the balance in the Non-Employee Director's Deferred Compensation
Account shall be distributed to each such Beneficiary per capita. In the absence
of a Beneficiary designation or if no Beneficiary survives the Non-Employee
Director, the Beneficiary shall be the Non-Employee Director's estate.
11. Miscellaneous.
11.1. Effective Date. The Plan shall be effective upon the consummation
of the initial public offering of the Stock. The Plan shall be unlimited in
duration and, in the event of Plan termination, shall remain in effect as long
as any awards under it are outstanding.
11.2. Withholding Payments. the extent that any Non-Employee Director
would incur an obligation for Nebraska state income taxes on account of an award
or payment to him under the Plan or the exercise of any award under the Plan
(referred to as the "Withholding Obligation"), the Company, in its sole
discretion, may make a cash payment to such Non-Employee Director in an amount
such that, after payment of all federal; state or local taxes on such cash
payment, the Non-Employee Director retains a cash payment equal to the
Withholding Obligation.
11.3. Limit on Distribution. Distribution of shares of Stock or other
amounts under the Plan shall be subject to the following:
(a) Notwithstanding any other provision of the Plan, the Company shall
have no liability to deliver any shares of Stock under the Plan or
make any other distribution of benefits under the Plan unless such
delivery or distribution would comply with all applicable laws and
the applicable requirements of any securities exchange or similar
entity.
(b) To the extent that the Plan provides for issuance of certificates
to reflect the transfer of shares of Stock, the transfer of such
shares may be effected on a non-certificated basis, to the extent
not prohibited by applicable law or the rules of any stock
exchange.
11.4. Transferabilitv. Awards under the Plan are not transferable except
as designated by a Non-Employee Director by will or by the laws of descent and
distribution. To the extent that the Non-Employee Director who receives an award
under the Plan has the right to exercise such award, the award may be exercised
during the lifetime of the Non-Employee Director only by the Non-Employee
Director.
11.5. Notices. Any notice or document required to be filed with the
Committee under the Plan will be properly filed if delivered or mailed by
registered mail, postage prepaid, to the Committee, in care of the Company, at
its principal executive offices. The Committee
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<PAGE> 13
may, by advance written notice to affected persons, revise such notice procedure
from time to time. Any notice required under the Plan (other than a notice of
election) may be waived by the person entitled to notice.
11.6. Form and Time of Elections. Unless otherwise specified herein,
each election required or permitted to be made by any Non-Employee Director or
other person entitled to benefits under the Plan, and any permitted modification
or revocation thereof, shall be in writing filed with the Committee at such
times, in such form, and subject to such restrictions and limitations, not
inconsistent with the terms of the Plan, as the Committee shall require. Any
notice required under the Plan may be waived by the person entitled thereto.
11.7. Agreement With the Company. At the time of an award to a
Non-Employee Director under the Plan, the Committee may require a Non-Employee
Director to enter into an agreement with the Company in a form specified by the
Committee, agreeing to the terms and conditions of the Plan and to such
additional terms and conditions, not inconsistent with the Plan, as the
Committee may, in its sole discretion, prescribe.
11.8. Limitation of Implied Rights.
(a) Neither a Non-Employee Director nor any other person shall, by
reason of the Plan, acquire any right in or title to any assets,
funds or property of the Company whatsoever, including, without
limitation, any specific funds, assets, or other property which
the Company, in its sole discretion, may set aside in
anticipation of a liability under the Plan. A Non-Employee
Director shall have only a contractual right to the amounts, if
any, payable under the Plan, unsecured by any assets of the
Company. Nothing contained in the Plan shall constitute a
guarantee by the Company that the assets of such companies shall
be sufficient to pay any benefits to any person.
(b) The Plan does not constitute a contract of continued service, and
participation in the Plan shall not give any Non-Employee
Director the right to be retained as a director of the Company,
nor any right or claim to any benefit under the Plan, unless such
right or claim has specifically accrued under the terms of the
Plan. Except as otherwise provided in the Plan, no award under
the Plan shall confer upon the holder thereof any right as a
shareholder of the Company prior to the date on which he all
service requirements and other conditions for receipt of such
rights.
11.9. Evidence. Evidence required of anyone under the Plan may be by
certificate, affidavit, document or other information which the person acting on
it considers pertinent and reliable, and signed, made or presented by the proper
party or parties.
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<PAGE> 14
11.10. Gender and Number. Where the context admits, words in one
gender shall include the other gender, words in the singular shall include the
plural and the plural shall include the singular.
11.11. Source of Pavements. The provisions of this Sections 9 and 10
constitute only unfunded, unsecured promises of the Company to make payments to
directors (or other persons) in the future in accordance with the terms of the
Plan.
11.12. Nonassignment. Neither a director's nor any other person's
rights to payments under the Plan are subject in any manner to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance, attachment or
garnishment by creditors of the director.
12. Amendment and Termination.
The Board may, at any time, amend or terminate the Plan, provided
that, subject to subsection 5.3 (relating to certain adjustments to shares) and
subsection 10.3 (relating to lump sum payments of amounts held in a Non-Employee
Director's Deferred Compensation Account), no amendment or termination may,
without the consent of the Non-Employee Director or beneficiary, if applicable,
materially adversely affect the rights of any Non-Employee Director or
beneficiary under any award made under the Plan or rights already accrued
hereunder prior to the date such amendment is adopted by the Board.
13. Chance in Control. Notwithstanding any provision in the Plan to
the contrary, upon a Change in Control, all outstanding Options will become
fully exercisable and all outstanding Stock Awards shall become fully vested.
For purposes of the Plan, the term "Change in Control" means a change the
beneficial ownership of the Company's voting stock or a change in the
composition of the Board which occurs as follows:
(a) Any "person" (as such term is used in Section 13(d) and
14(d)(2) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act")) is or becomes a beneficial owner,
directly or indirectly, of stock of the Company representing 30
percent or more of the total voting power of the Company's then
outstanding stock.
(b) A tender offer (for which a filing has been made with the
Securities Exchange Commission ("SEC") which purports to comply
with the requirements of Section 14(d) of the Exchange Act and
the corresponding SEC rules) is made for the stock of the
Company, which has not been negotiated and approved by the Board.
In case of a tender offer described in this paragraph (b), the
Change in Control will be deemed to have occurred upon the first
to occur of (i) any time during the offer when the person (using
the definition in (a) above) making the offer owns or has
accepted for payment stock of the Company with 25 percent or
more of the total voting power of the Company's stock, or (ii)
three business days before the offer is to terminate unless the
offer is withdrawn first, if the person making the offer
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<PAGE> 15
could own, by the terms of the offer plus any shares owned by
this person, stock with 50 percent or more of the total voting
power of the Company's stock when the offer terminates.
(c) Individuals who were the Board's nominees for election as
directors of the Company immediately prior to a meeting of the
shareholders of the Company involving a contest for the
election of directors shall not constitute a majority of the
Board following the election."
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<PAGE> 1
EXHIBIT 10.25
AMENDED AND RESTATED
OPERATING AGREEMENT
OF
ADIRONDACK TRADING PARTNERS LLC
A NEW YORK LIMITED LIABILITY
COMPANY
Amended and Restated Operating Agreement, dated as of October
1, 1998, by and among the persons have executed the signature page(s) hereto as
Members, together with such other persons who from time to time hereafter are
added as Members and agree to be bound by this Agreement as Members of
ADIRONDACK TRADING PARTNERS LLC (the "COMPANY") in accordance with the terms of
this Agreement.
WITNESSETH:
WHEREAS, the Company has heretofore been formed as a limited
liability company under the New York Limited Liability Company Law pursuant to
Articles of Organization filed with the Secretary of State of New York on
January 27, 1998 and pursuant to an Operating Agreement dated as of June 30,
1998, entered into among the Members as amended by letter amendment dated in or
around June 1998 (the "INITIAL OPERATING AGREEMENT"); and
WHEREAS, the Members of the Company wish hereby to amend and
restate the Initial Operating Agreement in order to increase from twenty (20) to
twenty-five (25) the maximum number of Combined B Units authorized hereunder and
to make the other changes incorporated herein, in each case on the terms
expressly set forth herein;
NOW THEREFORE, in consideration of the mutual promises
contained herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree as
follows:
ARTICLE I
FORMATION AND BUSINESS OF THE COMPANY
1.1 FORMATION. The Company was organized on January 27, 1998,
in accordance with and pursuant to the New York Limited Liability Company Law.
1.2 NAME. The name of the Company is Adirondack Trading
Partners LLC. The Company may do business under that name and, as permitted by
applicable law, under any other name determined from time to time by the Board.
1.3 PURPOSE OF THE COMPANY. The purpose of the Company shall
be to conduct any lawful business or activity whatsoever, as permitted by
applicable law and as determined from time to time by the Board of Directors.
The Company may exercise all powers necessary to or reasonably connected with
the Company's business from time to time, and may engage in all activities
necessary, customary, related or incidental to any of the foregoing.
<PAGE> 2
1.4 PRINCIPAL OFFICE. The Company's principal place of
business shall be located at 47 Laurel Hill Road, Centerport, New York 11721 or
such other place determined from time to time by the Board. The Company may have
such other business offices within or without the State of New York as
determined from time to time by the Board.
1.5 REGISTERED AGENT. The name and address of the Company's
registered agent in the State of New York is CT Corporation Systems, New York,
New York 10019. The registered agent may be changed from time to time by the
Board upon the filing of the name and address of the new registered agent with
the New York Secretary of State pursuant to the LLC Act.
1.6 TERM. The term of the Company shall commence on the date
hereof and continue until December 31, 2098 unless the Company is earlier
dissolved in accordance herewith and with the LLC Act.
1.7 MEMBERS. The Company shall maintain at its principal place
of business a record of the name, address, facsimile number, and taxpayer
identification number of each Member, and such record shall be available to the
Members upon reasonable notice and during normal business hours.
ARTICLE II
DEFINITIONS
The following terms shall have the meaning set forth below
when used in this Agreement:
2.1 The term "ADJUSTED CAPITAL ACCOUNT" of a Member shall mean
such Member's Capital Account, after giving effect to the following:
(a) increasing such Capital Account for any amount
required to be restored under Treas. Reg. Section
1.704-1(b)(2)(ii)(c), as well as any amounts in addition thereto
pursuant to Treas. Reg. Sections 1.704-2(g)(1) and (i)(5), after
taking into account any changes during such Fiscal Year in Company
Minimum Gain and Member Nonrecourse Debt Minimum Gain; and
(b) decreasing such Capital Account for the items
described in Treas. Reg. Sections 1.704-l(b)(2)(ii)(d)(4), (5) and
(6).
2.2 The term "AFFILIATE" shall mean, as to any person, any
other person that, directly or indirectly, is in control of, is controlled by,
or is under common control with such person. For purposes of this definition, a
person shall be deemed to be "controlled by" another person if such other person
possesses, directly or indirectly, power either to (a) vote ten percent (10%) or
more of the securities having ordinary voting power for the election of
directors of such person or (b) direct or cause the direction of the management
and policies of such person, whether by contract or otherwise.
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2.3 The term "AGREEMENT" mean this Amended and Restated
Operating Agreement, as originally executed and as amended from time to time in
accordance herewith and with the LLC Act.
2.4 The term "ARTICLES OF ORGANIZATION" shall mean the
Articles of Organization of the Company, as filed with the New York Secretary of
State, as amended from time to time in accordance herewith and with the LLC Act.
2.5 The term "BANKRUPTCY" of any Person shall mean (a) the
entry of an order for relief with respect to that Person in a proceeding under
the United States Bankruptcy Code, as amended from time to time, or (b) the
Person's initiation, whether by filing a petition, beginning a proceeding or in
answer to a proceeding commenced by another person, of any action for
liquidation, dissolution, receivership or other similar relief, or the Person's
application for, or consent to the appointment of, a trustee, receiver or
custodian for its assets. For purposes of this definition, a Person's consent
shall be deemed to have been given if an order appointing a trustee, receiver or
custodian is entered by a court of competent jurisdiction and is not dismissed
within ninety (90) days after its entry.
2.6 The term "BOARD OF DIRECTORS" OR "BOARD" shall have the
meaning set forth in Article V of this Agreement.
2.7 The term "BUY-SELL AGREEMENT" shall mean any agreement
between the Company and a Director, officer, employee or independent contractor
of the Company or any Controlled Subsidiary who may be issued Employee Units,
pursuant to which, among other things, vesting rights may be established and the
Company may have the right to purchase the Employee Units under specified
circumstances.
2.8 The term "CAPITAL ACCOUNT" of a Member, as of any date,
shall mean the account maintained for such Member pursuant to Section 3.3 of
this Agreement, as adjusted through such date.
2.9 The term "CAPITAL CONTRIBUTION" of, or attributed to, a
Member shall mean the total contributions to the capital of the Company, whether
in cash, property (net of liabilities) or services, made, performed or to be
performed by, or attributed to, such Member, valued on the date of contribution
in the Company's books and records.
2.10 The term "CODE" shall mean the Internal Revenue Code of
1986, as amended, in effect as of the date hereof and as amended from time to
time hereafter.
2.11 The term "COMBINED A UNIT" shall a group of Units
consisting of one Preferred A Unit and 100,000 Common Units.
2.12 The term "COMBINED B UNIT" shall mean any group of Units
consisting of one Preferred B Unit and 20,000 Common Units.
2.13 The term "COMBINED C UNIT" shall mean any group of Units
consisting of one Preferred C Unit and a fixed number of Common Units to be set
at the discretion of the Board pursuant to Section 3.2(b).
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2.14 The term "COMBINED UNIT" shall mean any of a Combined A
Unit, Combined B Unit or Combined C Unit.
2.15 The term "COMMON MEMBER" shall mean any Member holding
Common Units.
2.16 The term "COMMON UNIT" shall mean any Initial Common Unit
or any other unit representing an Interest designated by the Board as a Common
Unit.
2.17 The term "COMPANY" shall have the meaning set forth in
the preamble to this Agreement.
2.18 The term "COMPANY MINIMUM GAIN" shall mean the amount
determined under Treas. Reg. Sections 1.704-2(i)(3) and 1.704-2(d), and shall be
computed separately for each Member in a manner consistent with Code Section
704(b) and the Treasury Regulations thereunder.
2.19 The term "COMPANY NONRECOURSE DEDUCTIONS" shall mean the
deductions of the Company determined under Treas. Reg. Section 1.704-2(c).
2.20 The term "COMPOUNDED PREFERENCE AMOUNT" shall mean, with
respect to any Preferred Member, an amount, initially zero, adjusted on the last
day of each calendar year by adding to such amount, as it may have been
theretofore adjusted pursuant to this definition (the "Pre-Adjustment Amount"),
any excess of (i) the aggregate amount that would be (or would have been)
distributed, without duplication, to such Preferred Member on such day (or on
the last day of the three preceding calendar quarters) pursuant to Section 4.1
(b)(i) if the Board were to determine (or had determined) to distribute all
amounts distributable under Section 4.1(b)(i) on such day (and on such three
other days), over (ii) the aggregate amount actually distributed to such
Preferred Member on such day (and on such three other days) pursuant to Section
4.1(b)(i).
2.21 The term "DIRECTOR" shall have the meaning set forth in
Article V of this Agreement.
2.22 The term "ECONOMIC INTEREST" shall mean any right to
share in the allocation of one or more of the Company's allocable items,
including, without limitation, Net Income and Net Loss, and/or in distributions
of the Company's assets, in each case pursuant to this Agreement or the LLC Act,
but shall not include any Management Interest.
2.23 The term "EMPLOYEE UNIT" shall mean any Common Unit
issued to a Director, officer, employee or independent contractor out of those
Common Units authorized to be issued to any such Person pursuant to Section 3.1
or 3.2 for services provided or to be provided to the Company, but excluding any
Common Units issued to any such Person for cash consideration comparable to that
being paid contemporaneously by Persons other than Directors, officers,
employees and independent contractors.
2.24 The term "EXCHANGE ACT" shall mean the Securities
Exchange Act of 1934, as amended.
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2.25 The term "FISCAL YEAR" shall mean the Company's
accounting, tax and fiscal year, which shall be the calendar year.
2.26 The term "FISCAL QUARTER" shall mean a fiscal quarter of
the Company ending March 31, June 30, September 30 or December 31.
2.27 The term "FULLY DILUTED BASIS" means, as of any date,
with respect to calculations involving the Common Units outstanding of the
Company, making the assumption that all convertible securities of the Company
then outstanding were converted on such date and that all options, warrants and
similar rights to acquire Common Units were exercised on such date.
2.28 The term "FUNDAMENTAL CHANGE" shall mean the merger of
the Company with another entity, the dissolution of the Company, or the sale or
other disposition of all or substantially all of the business or assets of the
Company, or the incurrence of indebtedness by the Company in excess of
$5,000,000.
2.29 The term "INDEMNITEE" shall mean a Director, officer,
agent or employee of the Company who may be indemnified by the Company as set
forth in Article XI of this Agreement.
2.30 The term "INITIAL COMMON UNITS" shall mean the Common
Units authorized to be issued by the Company under Section 3.1.
2.31 The term "INITIAL PREFERRED UNITS" shall mean the
Preferred Units authorized to be issued by the Company under Section 3.1.
2.32 The term "INTEREST" shall mean any of an Economic
Interest, Management Interest and/or Membership Interest.
2.33 The term "LLC ACT" shall mean the New York Limited
Liability Company Law, as amended from time to time.
2.34 The term "MANAGEMENT INTEREST" of a Member shall mean
such Member's right to participate in the management of the business and affairs
of the Company, including the right to vote on, consent to, or otherwise
participate in, any decision or action of or by the Members hereunder or under
the LLC Act.
2.35 The term "MEMBER" shall mean each person who (a) executes
a counterpart of this Agreement as a Member as of the date hereof or (b) is
admitted as a Member after the date hereof pursuant to this Agreement.
2.36 The term "MEMBER NONRECOURSE DEBT" shall mean nonrecourse
debt of the Company under Treas. Reg. Section 1.704-2(b)(4).
2.37 The term "MEMBER NONRECOURSE DEDUCTIONS" shall mean the
losses, deductions and expenditures attributable to Member Nonrecourse Debt
under Treas. Reg. Section 1.704-2(i)(2).
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2.38 The term "MEMBERSHIP INTEREST" shall mean a Member's
entire interest in the Company, including its Economic Interest (to the extent
not Transferred) and Management Interest.
2.39 The term "NET CAPITAL VIOLATION" shall mean a violation
of any provision of the "net capital" regulations promulgated by the SEC under
Section l5(c)(3) of the Exchange Act, as amended.
2.40 The terms "NET INCOME" and "NET LOSS" shall mean, for
each Fiscal Year (or other period for which they are determined), the income and
gain, and the losses, deductions and credits of the Company, respectively, in
the aggregate or separately stated, as appropriate, as determined for federal
income tax purposes under Section 703(a) of the Code and Treasury Regulations
Section 1.703-1 (for this purpose, all items of income, gain, loss or deduction
required to be stated separately pursuant to Section 703(a)(1) of the Code shall
be included in income or loss), with the following adjustments:.
(a) Any tax-exempt income, as described in Section
705(a)(1)(B) of the Code, realized by the Company during such
taxable year shall be taken into account in computing such
income or loss;
(b) Any expenditures of the Company described in
Section 705(a)(2)(B) of the Code for such taxable year,
including any items treated under Treasury Regulations Section
1.704-1(b)(2)(iv)(i) as items described in Section
705(a)(2)(B) of the Code, shall be taken into account in
computing such income or loss as if they were deductible
items;
(c) Any item of income, gain, loss or deductions that
is required to be allocated specially to the Members under
Section 4.5, 4.6, or 4.7 shall not be taken into account in
computing such income or loss;
(d) In lieu of any depreciation, amortization and cost
recovery deductions taken into account in computing such
income or loss, the Company shall compute such deductions
based on the book value of Company property, in accordance
with Treasury Regulations Section 1.704-1(b)(2)(iv)(g)(3);
(e) Gain or loss resulting from any disposition of
Company property with respect to which gain or loss is
recognized for federal income tax purposes shall be computed
by reference to the book value of the property disposed of (as
adjusted for "book" depreciation computed in accordance with
Treasury Regulations Section 1.704-1(b)(2)(iv)(g)(3)),
notwithstanding that the adjusted tax basis of such property
differs from its book value; and
(f) If the book value of Company assets is adjusted to
equal fair market value as provided in Section 3.4 hereof,
then income or loss shall include the amount of any increase
or decrease in such book values attributable to such
adjustment.
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2.41 The term "OFFERED INTERESTS" shall have the meaning set
forth in Section 9.2(a). Agreement.
2.42 The term "OFFICER" shall have the meaning set forth in
Article VIII of this
2.43 The term "PERCENTAGE INTEREST" of a Member shall mean the
number of Common Units of the Member expressed as a percentage of the aggregate
number of Common Units of all Members.
2.44 The term "PERSON" shall mean any individual, partnership,
limited liability company, corporation, joint venture, trust, association or any
other entity, domestic or foreign, and its respective heirs, executors,
administrators, legal representatives, successors and assigns where the context
of this Agreement so permits.
2.45 The term "PREFERENCE AMOUNT" of a Preferred Member shall
mean, with respect to each Preferred Member, on any given date, (i) in respect
of any Preferred A Units, Preferred B Units or Preferred C Units, an amount
equal to six percent (6%), multiplied by the sum of (a) such Preferred Member's
applicable Preferred Payment Account, plus (b) such Preferred Member's
Compounded Preference Amount and (ii) in respect of any other class or series of
Preferred Units authorized by the Board, an amount determined in the manner
established by the Board.
2.46 The term "PREFERRED A MEMBER" shall mean any Member
holding Preferred A Units.
2.47 The term "PREFERRED A PAYMENT ACCOUNT" shall mean the
memorandum account established and maintained for each Preferred A Member
pursuant to Section 3.3(f).
2.48 The term "PREFERRED A UNITS" shall mean the Preferred A
Units authorized to be issued by the Company pursuant to Sections 3.1 and
3.2(b).
2.49 The term "PREFERRED B MEMBER" shall mean any Member
holding Preferred B Units.
2.50 The term "PREFERRED B PAYMENT ACCOUNT" shall mean the
memorandum account established and maintained for each Preferred B Member
pursuant to Section 3.3(f).
2.51 The term "PREFERRED B UNITS" shall mean any Preferred B
Units authorized to be issued by the Company pursuant to Sections 3.1 and
3.2(b).
2.52 The term "PREFERRED C MEMBER" shall mean any Member
holding Preferred C Units.
2.53 The term "PREFERRED C PAYMENT ACCOUNT" shall mean the
memorandum account established and maintained for each Preferred C Member
pursuant to Section 3.3(f).
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2.54 The term "PREFERRED C UNITS" shall mean the Preferred C
Units authorized to be issued by the Company pursuant to Sections 3.1 and
3.2(b).
2.55 The term "PREFERRED MEMBER" shall mean any Preferred A
Member, Preferred B Member or Preferred C Member.
2.56 The term "PREFERRED PAYMENT ACCOUNT" shall mean any
Preferred A Payment Account, Preferred B Payment Account, Preferred C Payment
Account or a comparable memorandum account maintained by the Company for a
Preferred Member pursuant to Section 3.3(f) in respect of any other class or
series of Preferred Units.
2.57 The term "PREFERRED UNIT" shall mean any Preferred A
Unit, Preferred B Unit, Preferred C Unit or other Unit of a class or series of
Units authorized by the Board pursuant to this Agreement and designated as a
Preferred Unit.
2.58 The term "REGULATORY ALLOCATIONS" shall have the meaning
set forth in Section 4.7 of this Agreement.
2.59 The term "REMAINING INTERESTS" shall have the meaning set
forth in Section 9.2(d).
2.60 The term "SEC" shall mean the U.S. Securities and
Exchange Commission.
2.61 The term "TRANSFER" shall mean any sale, assignment,
transfer, gift, exchange, bequest or other disposition of an Interest, in any
manner, voluntary or involuntary, by operation of law or otherwise.
2.62 The term "TRANSFER NOTICE" shall have the meaning given
in Section 9.2(a).
2.63 The term "TRANSFEREE" shall mean the person to whom a
Member Transfers, or proposes to Transfer, an Interest.
2.64 The term "TRANSFERRING MEMBER" shall mean any Member
which Transfers, or proposes to Transfer, an Interest.
2.65 The term "TREASURY REGULATIONS" OR "TREAS. REG" shall
mean regulations promulgated under the Code in effect as of the date hereof or
hereafter amended or adopted.
2.66 The term "UNALLOCATED PREFERENCE AMOUNT" of a Preferred
Member as of any date shall mean the excess of such Preferred Member's aggregate
Preference Amount accumulated from the inception of the Company to such date
(including portions thereof which may have been distributed previously and any
portion not yet distributed) over the aggregate amount of Net Income allocated
to such Member pursuant to Section 4.3(a)(i) from the inception of the Company
to such date.
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2.67 The term "UNITS" shall mean any of the Common Units or
Preferred Units.
ARTICLE III
CAPITAL CONTRIBUTIONS, CAPITAL ACCOUNTS
AND PREFERRED CAPITAL AMOUNTS
3.1 AUTHORIZED MEMBERSHIP INTERESTS. The Company shall be
authorized to accept Capital Contributions in respect of, and to issue, one
million three hundred ninety thousand (1,390,000) Common Units (the "INITIAL
COMMON UNITS"), provided one hundred forty thousand (140,000) of the Common
Units shall be reserved and held for issuance to Directors, officers, employees
or independent contractors, from time to time, for services provided or to be
provided to the Company and for such other consideration and on such other terms
as the Board may deem appropriate. The Company is authorized to accept Capital
Contributions in respect of, and to issue, five (5) Preferred Units designated
Series A (the "PREFERRED A UNITS"), twenty (25) Preferred Units designated
Series B (the "PREFERRED B UNITS") and thirty-five (35) Preferred Units
designated Series C (the "PREFERRED C UNITS"; and, together with the Preferred A
Units and the Preferred B Units, the "INITIAL PREFERRED UNITS"). In addition,
the Company shall be authorized to issue additional Interests and Units to the
extent so authorized by the Board, subject to Section 3.2(c).
3.2 INITIAL CAPITAL CONTRIBUTIONS; COMBINED UNITS; ADDITIONAL
INTERESTS.
(a) All Initial Common Units (other than the Employee
Units), to the extent issued, shall be issued and sold for a price of
$0.10 per Common Unit (or such greater price as may be determined by
the Board). All Initial Preferred Units, to the extent issued, shall
be issued and sold for the price of $1,000,000 per Preferred Unit.
(b) All Units (other than Employee Units) authorized under
Section 3.1 shall be issued as part of Combined Units in accordance
with this Section 3.2(b). Five hundred thousand (500,000) Common
Units and five (5) Preferred A Units shall be issued to KAP Group LLC
as five (5) Combined A Units, each Combined A Unit consisting of one
hundred thousand (100,000) Common Units and one (1) Preferred A Unit.
Up to five hundred thousand (500,000) Common Units and up to
twenty-five (25) Preferred B Units may be issued as up to twenty-five
(25) Combined B Units, each Combined B Unit to consist of twenty
thousand (20,000) Common Units and one Preferred B Unit. A number of
Common Units up to the excess of seven hundred and fifty thousand
(750,000) over the number of Common Units actually issued as part of
Combined B Units and a number of Preferred C Units up to the excess
of fifty (50) over the number of Preferred B Units actually issued as
part of Combined B Units will be issued as a number of Combined C
Units up to the excess of fifty (50) over the number of Combined B
Units actually issued. No Combined B Units may be issued after any
Combined C Units are issued. The Board shall have the power and
authority (subject to this Section 3.2(b)) prior to the issuance of
Combined C Units to fix the number of Common Units issuable with a
Preferred C Unit as a Combined C Unit, provided, that each Combined C
Unit shall include the same number of Common Units. The Units
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described in this section 3.2(b) shall be issued to such persons as
the Board shall determine in its sole discretion at any time and from
time to time.
(c) In the event that the Board determines that it is in
the best interest of the Company to offer and issue additional
Interests and Units other than those specifically authorized and
issued pursuant to Sections 3.1, 3.2(a) and 3.2(b), and except as
otherwise set forth below, each Member shall be given prompt written
notice of such offering and issuance of additional Interests and
Units and a reasonable opportunity to commit to contribute additional
capital and to contribute additional capital in respect of such
Interests and Units, in proportion to the number of Common Units held
by it, on the same terms as those offered. Any such Interests which
are not acquired by Members may be sold by the Company to other
Persons. The foregoing provisions shall not apply to the issuance of
Common Units to the Directors, officers, employees and independent
contractors of the Company or any of its Controlled Subsidiaries for
services provided or to be provided, which Common Units in the
aggregate do not exceed ten percent (10%) of the number of all Common
Units that would be outstanding upon such issuance on a Fully Diluted
Basis. Notwithstanding the foregoing provisions, so long as KAP Group
LLC shall hold Common Units, at any time that the Company issues
Common Units to Members or other persons pursuant to this Section
3.2(c), KAP Group LLC shall have the right to purchase Common Units
in a number sufficient to permit KAP Group LLC to maintain its
Percentage Interest in the Company at the same purchase price as that
being offered to other persons (but without any requirement that
might apply to other purchasers to acquire Preferred Units in
conjunction with their acquisition of Common Units or any other
terms).
(d) Subject to the provisions of Section 3.2(c), the Board
in its discretion may authorize and issue additional Interests and
Units, and accept Capital Contributions in respect of additional
Interests and Units, from time to time, for such consideration and on
such other terms as the Board may deem appropriate, provided that no
additional Preferred Units shall have any right to receive
distributions representing a return of capital or a return on capital
in priority to such rights of any class or series of Preferred Units
then outstanding, without the approval of the Members holding a
majority of the Preferred Units comprising each class or series of
Preferred Units so affected (it being understood that the foregoing
proviso shall not prohibit the Board from authorizing Preferred Units
entitling the Preferred Members holding such Units to distributions
representing a return of capital on a pro rata basis with other
Preferred Members in proportion to the number of Common Units held by
all Preferred Members or distributions representing a return on
capital on a pro rata basis (based on undistributed Preference
Amounts) with other Preferred Members.
3.3 CAPITAL ACCOUNTS; PREFERRED PAYMENT ACCOUNTS.
(a) The Company shall establish and maintain a Capital
Account for each Member.
(b) The Capital Account of each Member shall be increased
by the amount of the income and gain allocated to such Member, and
shall be decreased by any
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losses and deductions allocated, or distributions made, to such Member pursuant
to the terms of this Agreement. It is the intention of the Members that Capital
Accounts be maintained strictly in accordance with Treas. Reg. Section
1.704-l(b)(2)(iv).
(c) Notwithstanding anything contained herein to the contrary,
the manner in which Capital Accounts are maintained shall be modified, if
necessary, in the opinion of the Company's accountants, to comply with
applicable law, provided that no such change shall materially alter the economic
agreement between or among the Members.
(d) Except as otherwise required by the LLC Act or permitted
under this Agreement, no Member shall have any liability to restore all or any
portion of any Capital Account having a deficit balance.
(e) No Member shall be paid interest on the balance of its
Capital Account unless otherwise determined by the Board, except as otherwise
provided in this Agreement.
(f) The Company shall establish and maintain a memorandum
account designated a Preferred A Payment Account, Preferred B Payment Account
and Preferred C Payment Account for each Member holding Preferred A Units,
Preferred B Units and Preferred C Units, respectively, which shall be increased
by the amount paid for Preferred Units of such class purchased by such Member,
and decreased by any distributions made to such Member pursuant to Sections 4.1
(b)(ii).
3.4 ADJUSTMENTS TO CAPITAL ACCOUNTS.
(a) The Board may, in its discretion, adjust the Capital
Accounts to reflect a revaluation of the Company's assets upon the occurrence of
any of the following events:
(i) a Capital Contribution by a new or existing Member
as consideration for the issuance of a Unit;
(ii) the distribution of cash or other property by the
Company to a retiring or continuing Member as consideration for the
repurchase or redemption of a Unit; or
(iii) events described in Treas. Reg. Section
1.704-1(b)(2)(iv)(f).
(b) Any adjustment pursuant to Section 3.4(a) of this
Agreement shall be based on the fair market value of Company property on the
date of adjustment, and shall reflect the manner in which the unrealized income,
gain, loss or deduction inherent in the property, not previously reflected in
Capital Accounts, would be allocated among the Members if there were a taxable
disposition of the property for fair market value on that date.
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(c) If there is any basis adjustment pursuant to an
election under Code Section 754, the Capital Accounts shall be
adjusted to the extent required by Treas. Reg. Section
1.704-l(b)(2)(iv)(m).
3.5 RETURN OF CAPITAL CONTRIBUTIONS. Except as otherwise
provided in this Agreement, no Member shall have any right to demand or receive
(a) any cash or property of the Company in return of its Capital Contribution or
in respect of its Interest until the dissolution of the Company, or (b) any
distribution from the Company-in any form other than cash.
3.6 TRANSFER OF INTEREST. If an Interest is Transferred as
permitted by this Agreement, the Transferee shall succeed to the Capital Account
of the Transferring Member to the extent the Capital Account relates to the
Transferred Interest in accordance with Treas. Reg. Section 1.704-1
(b)(2)(iv)(1).
3.7 ADMISSION OF ADDITIONAL MEMBERS. Each Member admitted
after the effective date of the Initial Operating Agreement shall execute and
deliver a written instrument satisfactory to the Board whereby such Member
becomes a party to this Agreement, as well as any other documents (including a
Subscription Agreement) required by the Board. Upon execution and delivery of a
counterpart of this Agreement and acceptance thereof by the Board, and upon
payment for the Interest and/or Units acquired, such Person shall be admitted as
a Member of the Company and shall thereafter be entitled to all the rights and
subject to all the obligations of Members as set forth herein.
ARTICLE IV
DISTRIBUTIONS AND ALLOCATIONS
4.1 DISTRIBUTIONS.
(a) Distributions of cash shall be made no less than three
days prior to April 15 of each year, to each Member an amount equal
to fifty percent (50%) of the excess of (i) the cumulative taxable
income (as determined for federal income tax purposes) of the Company
for all tax years (to and including the preceding tax year) allocated
to such Member over (ii) the sum of all amounts previously
distributed to such Member pursuant to this Section 4.1(a) and any
amount allocated to such Member pursuant to Section 4.3(a)(i) with
respect to the preceding tax year; provided, however, that the
distributions to Members (other than to Members in respect of
Employee Units) that would otherwise be required by this Section
4.1(a) shall not be made to the extent that such distributions would
result in a Net Capital Violation.
(b) Distributions may be made, at the discretion of the
Board, as set
(i) on the last day of each calendar quarter, to each
Preferred Member an amount not exceeding such Preferred
Member's undistributed
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Preference Amount, such amounts to be distributed to all
Preferred Members in proportion to their respective
undistributed Preference Amounts;
(ii) on June 30 of each year, so long as no
undistributed Preference Amounts remain, to each Preferred
Member in proportion to the Common Units held by such
Preferred Member, in an amount equal to (or in such larger
amount as the Board may determine) fifty percent (50%) of the
excess of Net Income over the sum of (A) fifty percent (50%)
of the total amount distributed pursuant to Section
4.1(b)(i), plus (B) the total amount distributed pursuant to
Section 4.1(a); provided that no Preferred Member shall have
the right to receive distributions under this Section
4.1(b)(ii) if such Preferred Member's Preferred Payment
Account has been reduced to zero, and that any distributions
under this Section 4.1 (b)(ii) shall be made to other
Preferred Members in proportion to the Common Units held by
each of them without regard to the Common Units held by any
Preferred Members whose Preferred Payment Accounts have been
reduced to zero;
(iii) on June 30 of each year, so long as a
distribution has been made on such date pursuant to Section 4.
l(b)(ii) and in such aggregate amount as the Board may
determine and no undistributed Preference Amounts remain, to
each Member in proportion to the Common Units held by such
Member.
4.2 LIMITATION ON DISTRIBUTIONS. No distribution shall be
declared and paid unless, after giving effect thereto, the assets of the Company
exceed the Company's liabilities.
4.3 ALLOCATIONS OF NET INCOME AND NET LOSS.
(a) After giving effect to the special allocations set
forth in Section 4.5 and 4.6, Net Income for each taxable period and
all items of income and gain taken into account in computing Net
Income for such taxable period shall be allocated to the Members in
the following order and priority:
(i) first, among the Preferred Members in proportion
to their respective Unallocated Preference Amounts;
(ii) second, among the Members in an amount equal to
the excess, if any, of Net Loss allocated to such Member
pursuant to Section 4.3(b)(iii) over Net Income previously
allocated to such Member under this Section 4.3(a)(ii), in
proportion to the amount of such excesses;
(iii) third, among the Members in an amount equal to
the excess, if any, of Net Loss allocated to such Member
pursuant to Section 4.3(b)(ii) over Net Income previously
allocated to such Member under this Section 4.3(a)(iii), in
proportion to the amount of such excesses. Net Income shall be
allocated pursuant to this Section 4.3(a)(iii) in a manner
that reverses the allocation of Net Loss allocated pursuant to
Section 4.3(b)(ii) in reverse order, i.e., taking into account
allocations pursuant to the second sentence of Section
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4.3(b)(ii) before taking into account allocations made under
the first sentence of Section 4.3(b)(ii);
(iv) fourth, among the Members in an amount equal to
the excess, if any, of Net Loss allocated to such Member
pursuant to Section 4.3(b)(i) over Net Income previously
allocated to such Member under this Section 4.3(a)(iv), in
proportion to the amount of such excesses,
(v) thereafter, among the Members in proportion to
their respective Common Units.
(b) After giving effect to the special allocations set
forth in Sections 4.5 and 4.6, Net Loss for each taxable period and
all items of loss and deduction taken into account in computing Net
Loss for such taxable period shall be allocated to the Members in the
following order and priority:
(i) first, among all the Members in proportion to
their respective Common Units, but only to the extent such
amount when so allocated would not result in, or cause an
increase in, a deficit balance in any Member's Adjusted
Capital Account;
(ii) second, among all the Members that do not have an
Adjusted Capital Account with a deficit balance in proportion
to their respective Common Units, but only to the extent such
amount when so allocated would not result in, or cause an
increase in, a deficit balance in any Member's Adjusted
Capital Account. This Section 4.3(b)(ii) shall be applied,
mutatis until the allocation of Net Loss would cause each of
the Members to have a deficit balance for such Member's
Adjusted Capital Account;
(iii) thereafter, among the Members in proportion to
their respective Common Units.
(c) Notwithstanding Sections 4.3(a) and (b), Net Income
or Net Loss arising from transactions in connection with or in
contemplation of a liquidation of the Company or upon a sale of
substantially all of the assets of the Company shall be allocated
such that, to the extent possible, the amount of cash each Member
shall receive on account of its Interests pursuant to Section 10.2(b)
shall equal the amount of cash such Member would receive if the net
proceeds of such sale or other transactions available for
distribution to the Members were distributed pursuant to Section 4.1
hereof.
4.4 [INTENTIONALLY DELETED].
4.5 QUALIFIED INCOME OFFSET. Notwithstanding anything in this
Article IV to the contrary, in the event any Member unexpectedly receives any
adjustments, allocations, or distributions described in Treas. Reg.
ss.1.704-l(b)(2)(ii)(d)(4),(5)or(6) which cause a deficit or increase the
deficit in the Member's Capital Account, items of Company gross income and gain
shall be allocated to the Member in an amount and manner sufficient to eliminate
the deficit in its Capital Account as quickly as possible; provided, however,
that for this purpose, a Capital
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Account shall be increased by the Member's share of Company Minimum Gain as of
the end of the Fiscal Year. It is the intention of the Members that this Section
4.5 be treated as a "qualified income offset" within the meaning of Treas. Reg.
Section 1.704-l(b)(2)(ii)(d). Such Section of the Treasury Regulations shall
control in the case of any conflict between that Section of the Treasury
Regulations and this Section 4.5.
4.6 MINIMUM GAIN.
(a) Nonrecourse Deductions. Company Nonrecourse Deductions
shall be allocated to the Capital Accounts as set forth in Section 4.3
of this Agreement. Member Nonrecourse Deductions shall be allocated to
the Member that bears the economic risk of loss with respect to the
debt to which such Member Nonrecourse Deduction is attributable.
(b) Distributions of Nonrecourse Financing Proceeds. If the
Company makes a distribution to the Members that is allocable to the
proceeds of any nonrecourse liability of the Company, or of any other
entity in which the Company has an interest, such distribution shall be
allocable to an increase in Company Minimum Gain as provided in Treas.
Reg. Sections 1.704-2(h) and (i)(6).
(c) Company Minimum Gain. Each Member's share of Company
Minimum Gain shall be determined as provided in Treas. Reg. Sections
1.704-2(g) and (i)(5)
(d) Minimum Gain Chargeback. If there is a net decrease in
Company Minimum Gain for a Fiscal Year, items of Company income and
gain shall be allocated to the Capital Accounts as provided in Treas.
Reg. Section 1.704-2(f). Notwithstanding the foregoing, to the extent
such net decrease is attributable to a Member Nonrecourse Debt, then
any Member with a share of the minimum gain attributable to such debt
shall be allocated items of income and gain as provided in Treas. Reg.
Section 1.704-2(i)(4).
4.7 REGULATORY ALLOCATIONS. The allocations set forth in
Sections 4.5 and 4.6 of this Agreement (the "REGULATOR ALLOCATIONS") are
intended to comply with certain requirements of Treas. Reg. Sections 1.704-l(b)
and 1.704-2. The Regulatory Allocations might not be consistent with the manner
in which the Members intend to divide Company distributions. Accordingly, the
Board is hereby authorized to allocate other items of income, gain, loss, and
deduction among the Members so as, to the extent possible, to prevent the
Regulatory Allocations from causing the manner in which Company distributions
will be divided between the Members pursuant to this-Agreement to be different
from the division intended by the Members. In general, the Members anticipate
that this will be accomplished by specially allocating other items of Company
income, gain, loss and deduction among the Members so that, to the extent
possible, the net amount of the Regulatory Allocations and such other items to
each Member shall be equal to the net amount that would have been allocated to
each such Member if the Regulatory Allocations had not been required.
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4.8 ALLOCATION OF NONRECOURSE LIABILITIES. For purposes of
Treas. Reg. Section 1.752-3(a), the Members' interests in Net Income shall be
equal to their respective Common Units.
4.9 ALLOCATION OF TAXABLE INCOME AND LOSS. The income, gains,
losses, credits and deductions of the Company shall be allocated among the
members in the same manner as such items are allocated to the Capital Accounts
of the members, to the extent permitted under the Code and applicable Treasury
Regulations.
4.10 DISTRIBUTIONS IN KIND. All distributions of Company
property in kind shall be valued at their fair market value as of the date of
distribution, and the amount of any gain or loss that would be realized by the
Company if it were to sell such property at such fair market value shall be
allocated to the Members in accordance with Section 4.3 of this Agreement.
4.11 TAX RETURNS AND OTHER ELECTIONS. The Board shall cause
the preparation and timely filing of all tax returns required to be filed by the
Company pursuant to the Code and all applicable laws of each jurisdiction in
which the Company does business. Copies of all such returns, or summaries
thereof, shall be furnished to the Members within a reasonable time after the
end of each Fiscal Year. All elections permitted to be made by the Company under
federal or state laws shall be made by the Board, in its sole discretion. All
matters concerning allocations for income tax purposes not expressly provided
for by the terms of this Agreement shall be determined by the Board. William
Porter is designated the "TAX MATTERS PARTNER" pursuant to Section 6231(a)(7) of
the Code.
4.12 TRANSFERS OF INTEREST. If an Interest is Transferred
during the Fiscal Year as permitted by this Agreement,
(a) Net Income and Net Loss allocable to such Interest
shall be proportioned between the Transferring Member and Transferee
as of the date of Transfer of the Interest on the last day of the
Fiscal Quarter in which the Transfer occurred, and the portion of Net
Income and Net Loss allocated to the Transferring Member shall be
determined by multiplying the Net Income and Net Loss allocable to
such Interest by a fraction, the numerator of which is the number of
calendar days the Transferring Member owned the Interest (not
including the day the Transfer was effected) and the denominator of
which is the total number of calendar days in the Fiscal Quarter, and
the portion of Net Income and Net Loss allocated to the Transferee
shall be the remainder of the Net Income and Net Loss; and
(b) tax credits, if any, shall be allocated among the
Interest holders as determined at the time the property with respect
to which the credit is claimed is placed in service
4.13 PARTNERSHIP TAX STATUS. The Members intend that the
Company will be treated as a partnership for U.S. Federal, state and local
income tax purposes, and no election to the contrary shall be made unless
approved by the Board of Directors.
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ARTICLE V
BOARD OF DIRECTORS
5.1 NUMBER; MANAGEMENT AND AUTHORITY.
(a) The Company shall have up to eight (8) managers serving on
a Board of Directors, each of which shall be referred to individually
as a "DIRECTOR" and collectively as the "BOARD OF DIRECTORS" or the
"BOARD." The number of Directors shall be fixed from time to time by
action of the Board. A Director shall serve until any meeting of
Members that may be called pursuant to Section 5.2 for the purpose of
electing Directors or until its successor shall have been elected and
qualified.
(b) The property, business and affairs of the Company shall be
managed by the Directors. Except where the Members' approval is
expressly required by this Agreement or by the Act, the Directors shall
have full authority, power and discretion to make all decisions with
respect to the Company's business and to perform such other services
and activities as set forth in this Agreement; provided, however, that
except as otherwise provided in this Agreement, any determination of
the Directors shall be made by a majority of the Directors. The
Directors shall be agents of the Company for its business purposes and
any Director may bind the Company in the ordinary course, provided that
(i) the Directors shall have approved such action in accordance with
this Agreement or the Act and (ii) the Person with whom such Director
is dealing has no knowledge that the action has not been so approved.
Unless otherwise expressly authorized by this Agreement or the Members
as set forth herein, the act of a Director that is not apparently for
carrying on the Company's business in the ordinary course shall not
bind the Company.
(c) If any action by the Company requires the approval of the
Directors under this Agreement, such action shall require approval by a
majority of the Directors. Except as otherwise expressly provided in
this Agreement or the Act, the Members shall have no right to control
or manage, nor shall they take any part in the control or management
of, the property, business or affairs of the Company, but they may
exercise the rights and powers of Members under this Agreement,
including, without limitation, the right to approve certain matters as
provided herein.
5.2 ELECTION AND TENURE OF DIRECTORS. Each Director shall be
elected by a vote of Members holding a majority of the Common Units then
outstanding. Each Director shall be entitled to hold office until his or her
death, resignation or removal pursuant to Section 5.5 below.
5.3 CERTAIN POWERS OF THE DIRECTORS. Without limiting the
generality of Section 5.1, but subject to Section 5.4, the Directors shall have
the power and authority, on behalf of the Company, to:
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(a) acquire property in the ordinary course of the Company's
business from any Person (including Members, Directors or affiliates of any
thereof);
(b) purchase life, liability and other insurance to protect
the Company's property and business;
(c) establish bank accounts in the name of the Company and
establish the identity of all signatories entitled to draw against such accounts
for the benefit of the Company;
(d) employ, and fix the terms of employment and termination of
employment of, employees of the Company (including Members or affiliates of
Members or Directors), and accountants, legal counsel and other consultants for
the Company (but not including Directors in their capacity as such);
(e) invest Company funds in time deposits, short-term
governmental obligations, commercial paper or other similar investments or in
any other capital asset or investment in the ordinary course;
(f) execute on behalf of the Company all instruments and
documents, including, without limitation, checks, drafts, notes and other
negotiable instruments, mortgages or deeds of trust, security agreements,
financing statements, documents providing for the acquisition or disposition of
the Company's property, assignments, bills of sale, leases, partnership
agreements, and any other instruments or documents necessary, in the opinion of
the Directors, to the business of the Company and relating to transactions that
have been approved in accordance with this Agreement;
(g) except as otherwise set forth in Section 5.4, borrow money
for the Company in the ordinary course, on a secured or unsecured basis, from
banks or any other Person (including Members, Directors or affiliates of any
thereof);
(h) enter into any and all other agreements on behalf of the
Company with any other Person (including Members, Directors or affiliates of any
thereof), for any purpose in the ordinary course, in such forms as the Directors
may approve;
(i) institute, prosecute and defend legal, administrative or
other suits or proceedings in the Company's name;
(j) cause the Company to issue additional Interests as
contemplated under Section 3.2(d), subject to Section 3.2(c); and
(k) establish pension, benefit and incentive plans for any or
all current or former Members, Directors, employees, and/or agents of the
Company, on such terms and conditions as the Directors may approve, and make
payments pursuant thereto.
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5.4 DECISIONS REQUIRING APPROVAL OF COMMON MEMBERS. The
approval of Members holding at least two-thirds of the Common Units then
outstanding shall be required to authorize any act or transaction by one or more
Directors that will result in a Fundamental Change.
5.5 RESIGNATION OR REMOVAL. A Director may resign at any time
by giving notice to the Members, effective upon receipt thereof or at such later
time specified therein. Unless otherwise specified in the notice, acceptance of
a resignation shall not be necessary to make it effective. The resignation of a
Director shall not affect its rights as a Member. Any Director may be removed,
with or without cause, only by a vote of the Members holding a majority of the
Common Units then outstanding.
5.6 MEETINGS OF BOARD.
(a) Notice of the time and place of each meeting of the Board
of Directors shall be delivered to each Board member, either personally
(including by courier) or by telephone, telegraph or facsimile, at least
twenty-four (24) hours before the time at which such meeting is to be held,
or shall be mailed to each Director by first-class mail, postage prepaid,
addressed to it at its mailing address set forth in the records of the
Company, at least three (3) days before the day on which such meeting is to
be held. Attendance of a Director at a meeting shall constitute a waiver of
notice of such meeting, except where a Director attends a meeting for the
express purpose of objecting, at the beginning of such meeting, to the
transaction of any business on the ground that the meeting is not lawfully
called or convened. Minutes of all meetings of the Board shall be kept and
retained in the records of the Company.
(b) Any action permitted or required by applicable law or this
Agreement to be taken at a meeting of the Board may be taken without a
meeting if a consent is in writing, setting forth the action to be taken, is
signed by each of the Directors. Such consent shall have the same force and
effect as a vote at a meeting and may be stated as such in any document or
instrument filed with the Secretary of State of New York, and the execution
of such consent shall constitute attendance or presence in person at a
meeting of the Board. Subject to the requirements of this Agreement for
notices of special meetings, Directors may participate in and hold a meeting
of the Board, by means of a telephone conference or similar communications
equipment by means of which all Directors participating in the meeting can
hear and speak to each other, and participation in such meeting shall
constitute attendance and presence in person at such meeting, except where a
Director participates in the meeting for the express purpose of objecting,
at the beginning of such meeting, to the transaction of any business on the
ground that the meeting is not lawfully called or convened.
(c) The Board shall be entitled to appoint the Chairman of the
Board (the "CHAIRMAN"). The Chairman shall preside over all meetings of the
Board and shall have such other powers, authority and responsibility ad the
Board may, from time to time, delegate to such Chairman. The Chairman shall
(subject to the right of the Board to designate the Chairman as provided
above) be entitled to hold office until death, resignation or removal. The
person who is serving as Chairman may be removed as
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Chairman, with or without cause, only by the Board and the right of removal
may be exercised at any time.
5.7 VACANCIES. In the event that the position of a Director
becomes vacant, (including as a result of an increase in the number of
Directors) a replacement shall be nominated by agreement of the Board and shall
be elected by a vote of the Members holding a majority of Common Units then
outstanding, provided that Members holding Common Units that have not vested
pursuant to a Buy-Sell Agreement shall not have the right to vote for or against
such replacement.
5.8 LIMITATION OF LIABILITY. Notwithstanding anything
contained herein to the contrary, to the fullest extent permitted by applicable
law from time to time, the Directors shall not have any liability to the Company
or any Member by reason of being or having been a Director or for any breach of
their duties in such capacity, provided that this Section 5.8 shall not affect
the Directors' liability:
(a) if an adverse judgment or other final adjudication
establishes that (i) his acts or omissions were in bad faith, or involved,
intentional misconduct, (ii) he gained financial or other advantages to
which he was not entitled, or (iii) he did not perform his duties as
required under the LLC Act with respect to a distribution made in violation
of the LLC Act; or
(b) for any act or omission prior to June 30, 1998.
5.9 RELIANCE ON INFORMATION. In performing their duties, the
Directors shall be entitled to rely on information, opinions, reports or
statements, including financial statements, in each case prepared or presented
by:
(a) one or more agents or employees of the Company; or
(b) counsel, public accountants or other persons, as to
matters that the Board believes to be within such person's respective
professional or expert competence.
5.10 NO EXCLUSIVE DUTY. The Directors may have other business
interests and may engage in other activities in addition to those relating to
the Company. Neither the Company nor any Member shall have any right, by virtue
of this Agreement, to share or participate in such other investments or
activities of the Directors or in any income or revenues derived therefrom.
5.11 EXECUTION OF DOCUMENTS.
(a) Except as otherwise determined by the Board or the
Members or as set forth herein or in the LLC Act, any document or
instrument may be executed and delivered on behalf of the Company by any
Director expressly authorized by the Board of Directors, including, without
limitation, any deed, mortgage, note or other evidence of indebtedness,
lease, security agreement, financing statement, contract of sale or other
instrument purporting to convey or encumber, in whole or in part, any or
all of the assets of the Company at any time held in its name, or any
compromise or settlement with
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respect to accounts receivable or claims of the Company; and, subject to
the authorization requirements set forth herein or in the LLC no other
signature shall be required for any such instrument to bind the Company.
(b) Any third person dealing with the Company, the Board
or the Members may rely upon a certificate signed by a majority of the
Directors as to (i) the identity of the Members or the Board, (ii) acts by
the Members or the Board, (iii) any act or failure to act by the Company,
or (iv) any other matter involving the Company or any Director.
5.12 POWERS OF THE BOARD IN BANKRUPTCY. The Board shall have
the power and authority, on behalf of the Company and any Controlled Subsidiary,
to:
(a) represent the Company or a Controlled Subsidiary in
any bankruptcy or insolvency proceedings to which it is a party, in
whatever capacity;
(b) determine whether the Company or a Controlled
Subsidiary shall file any petition under the United States Bankruptcy Code
or other applicable insolvency law; and the Board:
(c) execute and deliver, in the name of the Company or
otherwise, any and all documents and instruments, including, without
limitation, petitions and requests for relief, necessary or desirable in
connection with actions under Section 5.11(a) or (b) of this Agreement, as
determined by the Board.
5.13 COMPENSATION AND EXPENSES. The compensation of the
Directors shall be fixed from time to time by the Board.
5.14 DELEGATION TO AGENTS AND OFFICERS. The Board may delegate
functions relating to the day-to-day operations of the Company to such officers,
agents, consultants or employees as the Board may from time to time designate.
Such officers, agents, consultants and employees need not be Members or
Directors, and shall have such duties, powers, responsibilities and authority as
may from time to time be prescribed by the Board, and may be removed at any
time, with or without cause, by the Board.
5.15 OTHER DUTIES OF THE BOARD. In addition to its other
duties set forth herein,
(a) shall determine, from time to time, the method of
accounting and the independent accountants for the Company;
(b) may make, on behalf of the Company, the election
permitted by Code Section 754 with respect to adjustments to the basis of
the Company property; and
(c) shall, promptly following receipt thereof, give notice
to the Members of any proposed audit or adjustment of any Company tax
return.
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ARTICLE VI
MEMBERS
6.1 RIGHTS OF MEMBERS.
(a) Common Members shall have only such voting rights and powers
as may be specifically provided under the LLC Act, the Articles of
Organization and Sections 3.2, 5.2, 5.4, 5.5, 5.7, 9.4 and 12.4 of this
Agreement; provided, however, that for the purposes of said sections of
this Agreement no Member shall be entitled to voting rights in respect of
any Common Units which remain unvested pursuant to the terms of any
applicable Buy-Sell Agreement (but shall be entitled to vote in respect of
any vested Common Units) and all Common Units which remain unvested shall
be deemed not to be outstanding for purposes of said sections.
(b) Preferred Members shall have no voting rights other than
those arising by virtue of ownership of Common Units, as conferred by the
preceding Section 6.l(a).
6.2 MEETINGS OF MEMBERS.
(a) An annual meeting of the Members shall be held during each
calendar year on a date determined at the discretion of the Board. Unless
otherwise determined by the Directors, no other periodic meetings of the
Members shall be required to be called or conducted.
(b) Special meetings of the Members may be called by the
Directors or any Member or Members holding at least twenty-five per cent
(25 %) of all Common Units, for any purpose or purposes, including the
election or removal of Directors, unless otherwise prescribed by the LLC
Act, and shall be held at such times and places within or without the State
of New York as the Persons calling such meeting may from time to time
determine.
(c) Notice of the time, place and purpose or purposes of each
meeting of the Members shall be delivered to each Member entitled to vote
at the meeting either personally (including by courier) or by telephone,
telegraph, facsimile or first class mail, postage prepaid, addressed to it
at its mailing address, at least ten (10) but not more than sixty (60) days
before the date of the meeting. An affidavit of a Person giving such notice
shall, absent fraud, be prima facie evidence that notice of a meeting has
been given. Notice of a meeting need not be given to any Member who, either
before or after the meeting, executes a waiver of notice, or who attends
such meeting without objecting, at its beginning, to the transaction of any
business because the meeting is not lawfully called or convened.
(d) Except as otherwise provided in this Agreement or as required
by the LLC Act, Members holding a majority of the Units entitled to vote
on, or take action with respect to, any matter shall constitute a quorum
for the transaction of
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business at such meeting. In the absence of a quorum, a majority in
interest of Members present and entitled to vote thereat may adjourn any
meeting from time to time for a period not to exceed sixty (60) days
without further notice. If the adjournment is for more than sixty (60)
days, or if after the adjournment a new record date is fixed for the
adjourned meeting, notice of the adjourned meeting shall be given to each
Member of record entitled to vote on, or take action with respect to, any
matter at such meeting. At any adjourned meeting at which a quorum is
present, any business that might have been transacted at the meeting as
originally noticed may be transacted. The Members present at a duly
organized meeting may continue to transact business until adjournment,
notwithstanding the withdrawal during the meeting of that number of Members
whose absence would result in less than a quorum being present.
6.3 PROXIES AND VOTING ARRANGEMENTS. At all meetings of
Members, a Member may vote in person or by proxy executed in writing by the
Member or by a duly authorized attorney-in-fact. The proxy shall be filed with
the Company before or at the time of the meeting. No proxy shall be valid after
eleven (11) months from the date of its execution, unless otherwise provided in
the proxy. Any proxy, or other arrangement, by contract or otherwise, by which a
Member grants to a non-Member any right to exercise any Management Interest,
shall be null and void.
6.4 ACTION WITHOUT A MEETING. Any action required or permitted
to be taken at any meeting of the Members may be taken without a meeting,
without prior notice and without a vote, if Members holding voting interests
sufficient to authorize such action at a meeting at which all of the Members
entitled to vote thereon were present and voted consent thereto in writing. Such
consent shall be delivered to the Company by hand or by certified or registered
mail, return receipt requested, for filing with the Company records. Action
taken under this Section 6.4 shall be effective when all necessary Members have
signed a consent, unless the consent specifies a different effective date.
6.5 PARTICIPATION IN MEETINGS BY TELEPHONE AND OTHER
EQUIPMENT. Members may participate in a meeting by conference telephone or
similar communications equipment, by means of which all persons participating in
the meeting can hear each other, and such participation shall constitute
presence in person at such meeting.
6.6 RECORD DATES. For the purpose of determining (a) Members
entitled to notice of, or to vote at, any meeting of Members or (b) the identity
of Members for any other purpose, the date on which notice of the meeting is
mailed, or on which the declaration of such distribution is adopted, as the case
may be, shall be the record date for such determination. When a determination of
Members entitled to vote at any meeting has been made as provided in this
Section 6.6, the determination shall apply to any adjournment of the meeting.
The record date for determining Members entitled to take action without a
meeting pursuant to Section 6.4 shall be the date the first Member signs a
written consent
6.7 LIABILITY FOR WRONGFUL DISTRIBUTIONS. A Member who
receives a distribution from the Company which the Member knows to be in
violation of this Agreement or
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the LLC Act shall be liable to the Company for the amount of such distribution
for a period of three years after it was made.
6.8 LIMITED PREEMPTIVE RIGHTS. Except as otherwise set forth
in Section 3.2(c), no Member shall have any preemptive, preferential or other
right with respect to (a) making additional Capital Contributions, (b) the
issuance or sale of Interests by the Company, (c) the issuance of any
obligations, evidences of indebtedness or securities of the Company convertible
into, exchangeable for, or accompanied by, any rights to receive, purchase or
subscribe to, any Interests, (d) the issuance of any right of, subscription to
or right to receive, or any warrant or option for the purchase of, any of the
foregoing, or (e) the issuance or sale of any other interests or securities by
the Company.
ARTICLE VII
COMMITTEES
The Board may designate such Committees of the Board, and such
Committees shall have such powers and consist of such persons, or shall consist
of persons selected in such manner, as may be prescribed by the Board.
ARTICLE VIII
OFFICERS
8.1 GENERAL. The Company shall have such officers, and such
officers shall have such duties, powers, responsibilities and authority, as may
be provided by the Board.
8.2 APPOINTMENT, REMOVAL AND RESIGNATION. Officers shall be
appointed and removed, and may resign, as provided by the Board.
ARTICLE IX
TRANSFERABILITY AND WITHDRAWAL OF MEMBERSHIPS
9.1 TRANSFERABILITY. Subject to Section 9.2, a Member may
offer for sale and Transfer all or any portion of, or any rights in, its
Interest, provided that the Transfer will not result in the termination of the
Company pursuant to Code Section 708, and provided further that only Combined
Units may be transferred to each Transferee. Notwithstanding the foregoing
sentence, Members may Transfer Preferred Units to an Affiliate of such Member.
9.2 RIGHT OF FIRST REFUSAL.
(a) If at any time any Member proposes to Transfer to one
or more third parties (other than a proposed transfer to an immediate
family member or a trust established for the benefit of the Member or its
immediate family members), pursuant to an understanding with such third
parties, then such Member (the "TRANSFERRING MEMBER") shall give each other
Member written notice of the Transferring Member's intention to make the
Transfer (the "TRANSFER NOTICE"). The Transfer Notice shall
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include (i) a description of the Interests of the Transferring Member to be
offered (the "OFFERED INTERESTS") including the amount of such Interests, (ii)
the identity of the prospective offeree(s) and (iii) the consideration and the
material terms and conditions upon which the proposed Transfer is to be made.
The Transfer Notice shall certify that the Transferring Member has received a
firm offer from the prospective transferee(s) and in good faith believes a
binding agreement for the Transfer is obtainable on the terms set forth in the
Transfer Notice.
(b) Each Member shall have an option for a period of twenty
(20) days from the Transferring Member's delivery of the Transfer Notice to
elect to purchase its pro rata share of the Offered Interests at the same price
and subject to the material terms and conditions as described in the Transfer
Notice. Each Member may exercise such purchase option and, thereby purchase all
of his, her or its pro rata share of the Offered Interests, by notifying the
Transferring Member in writing, before expiration of the twenty (20) day period.
Each Member shall be entitled to apportion the Offered Interests to be purchased
among its associates and affiliates, provided that such Member notifies the
Transferring Member of such allocation. If a Member gives the Transferring
Member notice that it desires to purchase its pro rata share of the Offered
Interests, then payment for the Offered Interests shall be by check or wire
transfer, against delivery of the Offered Interests to be purchased at a place
agreed upon between the parties and at the time of the scheduled closing
therefor, which shall be no later than forty-five (45) days after the Member's
receipt of the Transfer Notice, unless the value of the purchase price has not
yet been established pursuant to Section 9.2(c).
(c) Should the purchase price specified in the Transfer Notice
be payable in property other than cash or evidences of indebtedness, the Members
shall have the right to pay the purchase price in the form of cash equal in
amount to the value of such property. If the Transferring Member and the Members
cannot agree on such cash value within five (5) days after the Members' receipt
of the Transfer Notice, the valuation shall be made by an appraiser of
recognized standing selected by the Transferring Member and the Members or, if
they cannot agree on an appraiser within the fifteen (15) days after the
delivery of the Transfer Notice), each shall select an appraiser of recognized
standing and the two appraisers shall designate a third appraiser of recognized
standing, whose appraisal shall be determinative of such value. The cost of such
appraisal shall be shared equally by the Transferring Member and the Members,
with the costs pro rata by each based on the number of Interest such parties are
purchasing pursuant to this Section 9.2. If the time for the closing of the
subject Interest has expired but for the determination of the value OF the
purchase price offered by the prospective transferee(s), then such closing shall
be held on or prior to the fifth business day after such valuation shall have
been made pursuant to this subsection.
(d) To the extent that the Members have not exercised their
rights to purchase the Offered Interests within time periods specified in
Section 9.2(b), the Transferring Member shall have a period of forty-five (45)
days from the expiration of rights in which to sell the remaining Offered
Interests (the "REMAINING INTERESTS"), upon terms and conditions (including the
purchase price) no more favorable than those specified in transfer notice to the
third-party transferee(s) identified in the Transfer
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<PAGE> 26
Notice. Prior to transfer the third-party transferee(s) shall agree in
writing that they acquire the Interests subject to the rights of first
refusal under this Agreement and shall become parties to this Agreement in
accordance with the terms hereof. In the event the Transferring Member does
not consummate the sale or disposition of the Remaining Interests within
the sixty (60) day period from the expiration of these rights, the Members'
first refusal rights shall continue to be applicable to any subsequent
disposition of the Offered Interests or Remaining Interests by the
Transferring Member until such right lapses in accordance with the terms of
this Agreement. Furthermore, the exercise or non-exercise of the rights of
the Members under this Section 9.2 to purchase Interests from the
Transferring Member or participate in sales of Interests by the
Transferring Member shall not adversely affect their rights to make
subsequent purchases from the Transferring Members of Interests or
subsequently participate in the sale of Interests by the Transferring
Members.
9.3 WITHDRAWAL. A Member shall have no right or power to
surrender such Member's Interest voluntarily or otherwise take, or permit to be
taken, any action to such effect, except in accordance with the provisions of
this Article IX.
9.4 RESIGNING MEMBER. Prior to the occurrence of any event
specified in Section 10.1, (i) any Member may, by written notice to the Company
(a "Member Notice"), resign as a Member of the Company, effective as of last day
of the fiscal quarter of the Company in which such notice of resignation is
given (the "RESIGNATION DATE"), or (ii) in the event that any Member has engaged
in criminal acts, fraud, acts resulting in material civil liability or bad faith
or for other good cause, the Company (with the consent of Members holding at
least two thirds of the Common Units then outstanding), may, by written notice
to any Member (a "COMPANY") NOTICE"), require such Member to resign as a Member
of the Company, effective as of last day of the fiscal quarter in which such
notice of resignation is given (the "BUY OUT DATE"). As of the Resignation Date
or the Buy Out Date, as applicable, except for the rights set forth in Section
9.5 or expressly set forth in any other agreement (including an employment
agreement), the Member designated in the applicable notice (the "RESIGNING
MEMBER") (and all Persons claiming by, through or under such Member) shall have
no further rights or interests in and in respect of the Company, including any
Membership Interest, any rights in specific Company property, any rights against
the Company or any Member, any rights to any return of the Resigning Member's
capital or any other rights under this Agreement.
9.5 PURCHASE PRICE.
(a) In consideration of the resignation of the Resigning
Member, the Company shall pay to the Resigning Member on a day not later
than ninety (90) after the Resignation Date or Buy-Out Date, a purchase
price (the "Purchase Price") equal to the sum of (i) the balance of any
Preferred Payment Account, together with any undistributed Preference
Amount, in respect of any Preferred Units then held by the resigning
Member, plus (ii) the product obtained by multiplying the Company's
Members' equity attributable to Common Units shown on the Company's balance
sheet as of the Resignation Date or Buy-Out Date, as applicable by a
fraction, the numerator of which shall be the number of Common Units held
by such Resigning Member, and the denominator of which shall be the
aggregate number of Common Units held by all Members.
26
<PAGE> 27
(b) The Purchase Price payable to a Member resigning pursuant
to Section 9.4(i) shall be paid by the Company, in its sole discretion, either
by payment of the Purchase Price in cash or by the delivery of a subordinated
note in a principal amount equal to the Purchase Price, maturing on the fifth
anniversary of the Resignation Date, and otherwise substantially in the form of
Exhibit 9.5(b)-1 hereto (a "SUBORDINATED NOTE"). The Purchase Price payable to a
Member pursuant to Section 9.4(ii) shall be paid by the Company by delivery to
the Resigning Member of the Company's subordinated promissory note maturing on
the fifth anniversary of the Buy-Out Date and otherwise substantially in the
form of Exhibit 9.5(b)-1 hereto. Each Member agrees that if it becomes a
Resigning Member and receives such a subordinated note, that such note shall be
(i) subordinated to the rights of other creditors of the Company pursuant a
"satisfactory subordination agreement" (as such term is used in Rule 15c3-1d
promulgated by the SEC under the Exchange Act), which each such Resigning Member
shall be obligated to execute and deliver upon delivery of such note, and (ii)
paid in relative priority to the rights of Members to receive distributions upon
the terms set forth in Exhibit 9.5(b)-2 hereto.
ARTICLE X
DISSOLUTION AND TERMINATION
10.1 EVENTS CAUSING DISSOLUTION AND WINDING-UP. The Company
shall be dissolved up upon the first to occur of the following events:
(a) the approval of such action by the Members;
(b) the sale or other disposition of all or substantially
all of the business or assets of the Company;
(c) the expiration of the term of the Company; or
(d) the entry of a decree of judicial dissolution under
Section 702 of the LLC Act
10.2 WINDING UP OF THE COMPANY
(a) If the Company is to be dissolved in accordance with
Section 10.1 of this Agreement, then the Board shall wind up the affairs of
the Company, including by selling or otherwise liquidating the Company
assets in a bona fide sale or sales to third persons at such prices and
upon such terms as they may determine. If the Board determines that an
immediate sale would be financially inadvisable, it may defer sale of the
Company assets for a reasonable time, or distribute the assets in kind.
(b) The proceeds of any liquidation of the Company shall
be distributed in the following order of priority (to the extent that such
order of priority is consistent with the laws of the State of New York):
27
<PAGE> 28
(i) first, to the payment of the debts and liabilities of the
Company to persons other than Members with respect to Subordinated Notes and the
expenses of dissolution and liquidation;
(ii) then, to the establishment of any reserves which the
Board shall deem reasonably necessary for payment of such other debts and
liabilities of the Company (contingent or otherwise), as are specified by the
Board, such reserves to be held in escrow by a bank or trust company selected by
the Board, and, to be disbursed as directed by the Board in payment of any of
the specified debts and liabilities or, at the expiration of such period as the
Board may deem advisable, to be distributed in the manner hereinafter provided;
(iii) then, to Members holding Subordinated Notes, in
proportion to (and to the extent of) indebtedness due to such Members under such
Subordinated Notes;
(iv) then, to the Members in proportion to (and to the extent
of) the positive balances of their respective Capital Accounts; and
(v) thereafter, to the Members in proportion to their Common
Units.
(c) Notwithstanding anything contained herein to the contrary, no
Member shall be entitled to receive, upon liquidation, distributions in
excess of the positive balance of such Member's Capital Account, except to
the extent all Members receive such distributions in proportion to their
respective Common Units.
(d) If any assets are distributed in kind, they shall be distributed
on the basis of the fair market value thereof, and shall be deemed to have
been sold at fair market value for purposes of the allocations under
Article IV of this Agreement.
(e) If the Company is liquidated under Treas. Reg. Section
1.7041(b)(2)(ii)(G), the liquidating distribution shall be made by the
later of (i) the end of the Fiscal Year in which liquidation occurs, or
(ii) ninety (90) days after the date of liquidation.
(f) The Company shall terminate when all assets of the Company have
been sold and/or distributed and all affairs of the Company have been wound
up.
10.3 ARTICLES OF DISSOLUTION. Within ninety (90) days
following the dissolution and the commencement of winding up of the Company, or
at any other time when there are no Members, Articles of Dissolution shall be
prepared, executed and filed in accordance with the LLC Act.
ARTICLE XI
INDEMNIFICATION
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<PAGE> 29
11.1 INDEMNIFICATION. To the fullest extent permitted by
applicable law from time to time in effect:
(a) the Company shall indemnify and hold harmless the
Directors, Members and officers, agents and employees of the Company and
their respective directors, trustees, shareholders, officers, employees,
agents and other affiliates, against all costs, liabilities, claims,
expenses, including reasonable attorneys' fees, and damages (collectively,
"LOSSES") paid or incurred by any such Person in connection with the
conduct of the Company's business; and
(b) each Person who at any time is, or has been, a
Director, Member or officer, agent or employee of the Company (an
"INDEMNITEE"), and is threatened to be, or is, made a party to any action,
suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he or it is, or was, a Director,
Member, officer, agent or employee of the Company, or is serving, or has
served, at the request of the Company as a manager, officer, member,
employee or agent of another Person, shall be indemnified against all
Losses actually and reasonably incurred in connection with any such
pending, threatened or completed action, suit or proceeding.
provided, however, that no person shall be entitled to indemnification under
this Section 11.1 for liabilities relating to such person's acts or omissions
that were in bad faith or intentional misconduct.
11.2 SOURCE OF PAYMENT. Notwithstanding anything contained in
this Agreement to the contrary, any amount to which an Indemnitee may be
entitled under this Article XI shall be paid only out of the assets of the
Company and any insurance proceeds available to the Company for such purposes.
No Member shall be personally liable for any amount payable pursuant to this
Article XI, or to make any Capital Contribution, return any distribution made to
it by the Company, or restore any Negative Capital Account balance to enable the
company to make any such payment.
ARTICLE XII
MISCELLANEOUS PROVISIONS
12.1 NOTICES. Except as otherwise set forth herein, any
notice, demand or communication required or permitted to be given under this
Agreement shall be (a) in writing, (b) delivered by hand, nationally recognized
overnight courier service, facsimile or registered or certified mail, postage
prepaid, addressed to a party at its mailing address or facsimile number set
forth in the books and records of the Company, and (c) deemed to have been given
on the date delivered by hand or sent by facsimile, one business day after
deposit with such courier service, and three business days after being deposited
in the United States mail.
12.2 BOOKS OF ACCOUNTS AND RECORDS.
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<PAGE> 30
(a) At the expense of the Company, the Board shall
maintain at the Company's principal place of business, records and accounts
of all operations and expenditures of the Company, including, without
limitation, the following records:
(i) a current list in alphabetical order of the name and
mailing address of each Member, Director, and officer, their respective
facsimile numbers and, with respect to the Members, their respective
shares of Net Income and Net Loss, or information from which such
shares can be derived;
(ii) a copy of the Articles of Organization and all
amendments thereto, together with executed copies of any powers of
attorney pursuant to which any such amendment has been executed;
(iii) copies of the Company's federal, state and local
income tax returns and reports, if any, for the three most recent
Fiscal Years; provided however, that any amounts due under a
Subordinated Note issued to a Member pursuant to Section 9.5(b) within
one (1) year prior to the Bankruptcy of the Company or within one (1)
year prior to any of the events of dissolution of the Company set forth
in Section 10.1 shall be payable pursuant to Section 10.2(b)(iv) below
as if such holder of the Subordinated Note remained a Member and the
aggregate of the amounts due under such Subordinated Note constituted
the positive balance of such Member's Capital Account.
(iv) copies of this Agreement, as in effect from time to
time;
(v) any writings or other information with respect to
each Member's obligation to contribute cash, property or services to
the Company, including, without limitation, the amount of cash so
contributed and a description and statement of the agreed-upon fair
market value of property or services so contributed or to be
contributed;
(vi) any financial statements of the Company for the
three most recent Fiscal Years;
(vii) minutes of every annual, special and court-ordered
meeting of the Members; and
(viii) any written consents obtained from the Members or
Directors for actions taken by Members or Directors without a meeting.
(b) Upon reasonable advance notice, during normal business
hours, any Member or its representatives may, at its expense, inspect and
copy the records described in Section 12.2(a) for any purpose reasonably
related to such person's Interest.
12.3 GOVERNING LAW. This Agreement, and the application or
interpretation hereof, shall be governed by and in accordance with the laws of
the State of New York applicable to agreements made and fully to be performed
therein, and specifically the LLC Act.
30
<PAGE> 31
12.4 AMENDMENT OF ARTICLES OF ORGANIZATION AND AGREEMENT.
(a) Except as otherwise required by this Agreement or the
Act, this Agreement may be amended by the affirmative vote of the Members
holding a majority of the Common Units, provided that Member holding Common
Units which have not vested pursuant to a Buy-Sell Agreement shall not have
the right to vote on any proposed Amendment.
(b) Notwithstanding anything to the contrary contained in
this Section 12.4 or elsewhere in the Agreement (a) any amendment to this
Agreement that would adversely affect (i) the federal income tax treatment
to be afforded a Member or (ii) the liabilities of a Member shall require
the consent of each Member affected, and (b) any amendment to this
Agreement that would adversely affect the consent and approval rights
reserved by the Members or any class or series thereof, or which would
change the method of calculating allocations or distributions under Article
IV and/or Section 10.2, shall require the consent of Members holding
seventy-five percent (75%) of the outstanding Units in the class or series
affected.
12.5 AMENDMENT BY AGREEMENT OF MERGER. Notwithstanding
anything to the contrary contained in this Agreement, in accordance with Section
1004(e) of the LLC Act, an agreement of merger or consolidation approved by the
Members as required by this Agreement may effect (a) amendments to this
Agreement contained in the agreement of merger or consolidation or necessitated
thereby or (b) the adoption of a new operating agreement for the Company if it
is the surviving or resulting entity, in each case without further action by the
Members.
12.6 EXECUTION OF ADDITIONAL INSTRUMENTS. Each Member hereby
agrees to execute such other and further documents and instruments, including,
without limitation, statements of their Interests and powers of attorney, as
necessary to comply with applicable law or otherwise as reasonably requested by
the Board.
12.7 CONSTRUCTION. Whenever the singular number is used in
this Agreement and when required by the context, the same shall include the
plural and vice versa, and the neuter gender shall include the feminine and
masculine genders and vice versa.
12.8 HEADINGS. The headings in this Agreement are for
convenience only and are in no way intended to describe, interpret, define or
limit the scope, extent or intent of this Agreement or any of its provisions.
12.9 WAIVERS; RIGHTS AND REMEDIES CUMULATIVE. The failure of
any party to pursue any remedy for breach, or to insist upon the strict
performance, of any covenant or condition contained in this Agreement shall not
constitute a waiver of any such right with respect to any subsequent breach.
Except as otherwise expressly set forth herein, rights and remedies under this
Agreement are cumulative, and the pursuit of any one right or remedy by any
party shall not preclude, or constitute a waiver of, the right to pursue any or
all other remedies. All rights and remedies provided under this Agreement are in
addition to any other rights the parties may have by law, in equity or
otherwise.
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<PAGE> 32
12.10 SEVERABILITY. If any provision, or portion thereof, of
this Agreement, or its application to any person or circumstance, shall be
invalid, illegal or unenforceable to any extent, the remainder of this
Agreement, such provision and their application shall not be affected thereby,
but shall be interpreted without such unenforceable provision or portion thereof
so as to give effect, insofar as is possible, to the original intent of the
parties, and shall otherwise be enforceable to the fullest extent permitted by
law.
12.11 SUCCESSORS AND ASSIGNS. All of the covenants, terms,
provisions and agreements contained in this Agreement shall be binding upon, and
inure to the benefit of, the parties hereto and, to the extent permitted by this
Agreement, their respective heirs, legal representatives, successors and
assigns.
12.12 COUNTERPARTS. This Agreement may be executed in
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
12.13 NO RIGHT TO PETITION FOR DISSOLUTION. The Members agree
that irreparable harm would be done to the business and goodwill of the Company
if any Member were to bring an action in Court under the LLC Act for the
judicial dissolution of the Company. Accordingly, each Member, in his capacity
as such, hereby irrevocably waives any such right to petition for dissolution of
the Company under the LLC Act, and all similar rights under other applicable
law, except to the extent such relief may be sought by the Company itself as
authorized by the Members in accordance with this Agreement.
12.14 NO THIRD PARTY BENEFICIARIES. The covenants, obligations
and rights set forth in this Agreement are not intended to benefit any creditor
of the Company or of any Member, or any other third person, and except as
permitted by applicable law after the obligation to make an additional Capital
Contribution has been fixed, or in connection with certain wrongful
distributions, no such creditor or other third person shall, under any
circumstances, have any right to compel any actions or payments by the Board
and/or the Members or shall, by reason of any provision contained herein, be
entitled to make any claim in respect of any debt, liability, obligation or
otherwise against the Company or any Member.
12.15 DIRECTORS AS ATTORNEVS-IN-FACT FOR MEMBERS.
(a) Each Member hereby irrevocably constitutes and
appoints, with full power of substitution, each Director, its true and
lawful attorney-in-fact, with full power and authority in its name, place
and stead, to execute, certify, acknowledge, deliver, file and record at
the appropriate public offices:
(i) all certificates and other instruments, and any
amendment thereto, which the Board deems appropriate to form, qualify
or continue the business of the Company as a limited liability company;
(ii) any other instrument or document which may be
required to be filed by the Company under the laws of any state, or
which the Board deems advisable to file; and
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<PAGE> 33
(iii) any instrument or document, including amendments
to this Agreement, which may be required to continue the business of
the Company, admit a Member, or dissolve and liquidate the Company
(provided that such continuation, admission or dissolution are in
accordance with this Agreement), or to reflect any reductions in the
amount of Members' capital.
(b) Each Member's appointment of the Directors as its
attorneys-in-fact shall be deemed to be a power coupled with an interest
and shall survive the incompetency, Bankruptcy or dissolution of the Member
giving such power, except that, in the event of a Member's Transfer of an
Interest in accordance with this Agreement, this power of attorney shall
survive such Transfer only until such time, if any, as the Transferee shall
have been admitted to the Company as a Member and all required documents
and instruments shall have been duly executed, filed and recorded to effect
such substitution.
12.16 ENTIRE AGREEMENT. The Articles of Organization and this
Agreement embody the entire understanding and agreement between the Members
concerning the subject matter hereof and thereof and supersede any and all prior
negotiations, understandings or agreements with respect thereto. To the extent
the LLC Act addresses a matter not otherwise addressed by this Agreement, it is
the intention of the Members that the provisions of the LLC Act shall apply, but
no such application shall otherwise affect any provision of this Agreement.
33
<PAGE> 34
MEMBERS OF ADIRONDACK TRADING PARTNERS LLC
AGREEMENT TO AMEND OPERATING AGREEMENT
AND ACCEPT AMENDED OFFERING MEMORANDUM
1. AMENDED AND RESTATED OPERATING AGREEMENT OF ADIRONDACK TRADING PARTNERS
LLC, dated as of October 1, 1998. The undersigned hereby approves the
Amended and Restated Operating Agreement, which replaces the Operating
Agreement dated June 30, 1998, in its entirety.
2. OFFERING MEMORANDUM OF ADIRONDACK TRADING PARTNERS LLC, dated as of
October 5, 1998 (the "Amended Offering Memorandum"). The undersigned
hereby acknowledges receipt and review of the Amended Offering Memorandum
and acknowledges that the same replaces the offering memorandum dated
April 28, 1998, in its entirely.
Agreed to by: /s/ J. Joe Ricketts
-----------------------------------
(Signature)
J. Joe Ricketts
-----------------------------------
(Print Name)
Entity: Ameritrade Holding Corporation
-----------------------------------
Date: October 12, 1998
-----------------------------------
Phone: 402-597-5654
-----------------------------------
Fax: 402-597-7789
-----------------------------------
Email: [email protected]
-----------------------------------
<PAGE> 1
SELECTED FINANCIAL DATA
in thousands, except per share and operating data
<TABLE>
<CAPTION>
fiscal year ended Sept. 25, 1998 sept. 26, 1997 sept. 27, 1996 sept. 29, 1995 sept. 30, 1994
- ---------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME DATA:
Revenues:
<S> <C> <C> <C> <C> <C>
Commissions and clearing fees $85,644 $51,937 $36,470 $23,977 $20,386
Interest revenue 66,716 36,623 22,518 16,297 9,856
Equity income (loss) from investments 5,083 3,444 3,359 543 (575)
Gain from sale of investments 795 -- -- 584 --
Other 5,956 3,663 3,032 1,481 1,694
- ---------------------------------------------------------------------------------------------------------------------------------
Total revenues 164,194 95,667 65,379 42,882 31,361
Interest expense 29,279 18,429 11,040 7,862 3,912
- ---------------------------------------------------------------------------------------------------------------------------------
Net revenues 134,915 77,238 54,339 35,020 27,449
Expenses excluding interest:
Employee compensation and benefits 36,083 19,291 14,050 8,482 6,538
Commissions and clearance 5,762 3,320 2,531 2,517 1,717
Communications 12,926 5,623 3,686 2,353 1,892
Occupancy and equipment costs 10,622 5,423 2,890 1,627 1,412
Advertising 43,614 13,971 7,537 4,842 5,987
Other 25,377 8,185 5,228 4,369 2,453
- ---------------------------------------------------------------------------------------------------------------------------------
Total expenses excluding interest 134,384 55,813 35,922 24,190 19,999
- ---------------------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes 531 21,425 18,417 10,830 7,450
Provision for income taxes 321 7,603 7,259 3,799 2,619
- ---------------------------------------------------------------------------------------------------------------------------------
Net income $ 210 $13,822 $11,158 $ 7,031 $ 4,831
- ---------------------------------------------------------------------------------------------------------------------------------
Basic and diluted earnings per share $ 0.01 $ 0.50 $ 0.44 $ 0.27 $ 0.19
- ---------------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding - basic 29,031 27,538 25,628 25,628 25,712
Weighted average shares outstanding - diluted 29,077 27,539 25,628 25,628 25,712
<CAPTION>
fiscal year ended sept. 24, 1993
- -------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME DATA:
Revenues:
<S> <C>
Commissions and clearing fees $16,910
Interest revenue 5,838
Equity income (loss) from investments (240)
Gain from sale of investments --
Other 1,031
- -------------------------------------------------------------
Total revenues 23,539
Interest expense 2,258
- -------------------------------------------------------------
Net revenues 21,281
Expenses excluding interest:
Employee compensation and benefits 5,368
Commissions and clearance 1,447
Communications 1,289
Occupancy and equipment costs 970
Advertising 3,928
Other 2,015
- -------------------------------------------------------------
Total expenses excluding interest 15,017
- -------------------------------------------------------------
Income before provision for income taxes 6,264
Provision for income taxes 2,119
- -------------------------------------------------------------
Net income $ 4,145
- -------------------------------------------------------------
Basic and diluted earnings per share $ 0.15
- -------------------------------------------------------------
Weighted average shares outstanding - basic 27,432
Weighted average shares outstanding - diluted 27,432
</TABLE>
60
<PAGE> 2
SELECTED FINANCIAL DATA (CONTINUED)
<TABLE>
<CAPTION>
fiscal year ended sept. 25, 1998 sept. 26, 1997 sept. 27, 1996 sept. 29, 1995
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING DATA:
Average customer trades per day 18,407 6,571 3,670 2,055
Assets in customer accounts (in billions) $ 11.4 $ 7.3 $ 4.0 $ 2.4
Number of core accounts (1) 306,000 98,000 52,000 38,000
Net revenue per trade $ 29.20 $ 46.65 $ 58.76 $ 67.09
Pre-advertising operating expense per trade $ 19.65 $ 25.27 $ 30.69 $ 37.07
Operating margin (2) 0% 28% 34% 31%
Pre-advertising operating margin (3) 33% 46% 48% 45%
Return on average equity (4) 0% 28% 44% 47%
<CAPTION>
fiscal year ended sept. 30, 1994 sept. 24, 1993
- -----------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING DATA:
Average customer trades per day 1,519 1,220
Assets in customer accounts (in billions) $ 1.7 $ 1.2
Number of core accounts (1) 18,000 11,000
Net revenue per trade $ 70.31 $ 69.22
Pre-advertising operating expense per trade $ 35.89 $ 36.07
Operating margin (2) 27% 29%
Pre-advertising operating margin (3) 49% 48%
Return on average equity (4) 49% 69%
</TABLE>
<TABLE>
<CAPTION>
sept. 25, 1998 sept. 26, 1997 sept. 27, 1996 sept. 29, 1995
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEETS DATA:
Cash and segregated investments $ 527,982 $373,286 $191,436 $125,456
Receivable from customers and correspondents, net 647,122 325,407 166,075 130,187
Total assets 1,290,402 757,357 401,679 287,105
Payable to customers and correspondents 1,136,082 666,279 356,943 251,862
Notes payable 11,000 -- 4,853 7,097
Stockholders' equity 84,572 66,989 30,662 19,504
<CAPTION>
sept. 30, 1994 sept. 24, 1993
- -----------------------------------------------------------------------------------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEETS DATA:
Cash and segregated investments $ 101,352 $53,787
Receivable from customers and correspondents, net 99,627 86,281
Total assets 216,991 151,228
Payable to customers and correspondents 198,539 138,958
Notes payable -- --
Stockholders' equity 12,473 7,831
</TABLE>
(1) Core accounts consist of open accounts in the Company's discount brokerage
subsidiaries.
(2) Operating margin is computed by dividing income before provision for income
taxes by net revenues.
(3) Pre-advertising operating margin is computed by dividing income before
provision for income taxes plus advertising expenses by net revenues.
(4) Return on average equity is computed by dividing net income by stockholders'
equity averaged on a quarterly basis. Fiscal 1994 was a 53-week year. All
other periods presented are 52-week years.
61
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion of the financial condition and results of operations of
the Company should be read in conjunction with the Selected Financial Data and
the Consolidated Financial Statements and Notes elsewhere in this annual report.
This discussion contains forward-looking statements that involve risks and
uncertainties that could cause actual results to differ materially from those
anticipated in such forward looking statements. Factors that may cause such
differences include, but are not limited to: the effect of customer trading
patterns on Company revenues and earnings; computer system failures; risks
associated with the Year 2000 computer systems conversions; the effects of
competitors' pricing, product and service decisions and intensified competition;
evolving regulation and changing industry customs and practices adversely
affecting the Company; adverse results of litigation; changes in revenues and
profit margin due to cyclical securities markets and interest rates; and a
significant downturn in the securities markets over a short period of time or a
sustained decline in securities prices and trading volumes.
OVERVIEW
Ameritrade Holding Corporation and its subsidiaries (collectively referred to as
the "Company") provide securities brokerage and clearing execution services to
their customers. The Company's primary subsidiaries include: its discount
brokerage operating units: Ameritrade (Inc.), Accutrade, Inc. ("Accutrade"), and
AmeriVest, Inc. ("AmeriVest"); its securities clearing firm, Advanced Clearing,
Inc. ("Advanced Clearing"), formerly known as AmeriTrade Clearing, Inc.; and its
development-stage on-line financial services company, OnMoney Financial Services
Corporation ("OnMoney").
The Company's primary focus is serving retail customers by providing
products and services at prices that are significantly less than traditional
full-commission securities brokers. Retail brokerage customers are able to trade
securities through a variety of means, including the Internet. The Company
provides its customers with investment news and information as well as
educational services. The Company also provides clearing and execution services
for both its own brokerage operations as well as for unaffiliated
broker-dealers. During fiscal 1998, over 95 percent of the Company's net
revenues were derived from its retail discount brokerage activities and clearing
and execution services.
The Company provides retail discount brokerage services under two separate
operating subsidiaries, Ameritrade (Inc.) and Accutrade. At the end of fiscal
1998, the Company had approximately 306,000 core discount brokerage accounts
which represents an increase of approximately 212 percent from the number of
accounts at the end of fiscal 1997. The Company's average trading volume during
the fourth quarter of fiscal 1998 increased to approximately 24,000 executed
trades per day. This compares to approximately 9,000 and 3,500 trades executed
per day during the fourth quarters of fiscal 1997 and 1996, respectively. The
rapid increase in the number of accounts and trading activity is due in large
part to an extensive national advertising campaign undertaken by the Company
during fiscal 1998. The Company spent over $40 million in a nationwide
advertising and promotion program for the Ameritrade (Inc.) brand during fiscal
1998. This program resulted in 225,000 new accounts and added a net $4 billion
to assets in customer accounts during fiscal 1998, as well as significant brand
awareness and press coverage. The Company plans to continue its extensive
promotional activities and recently signed a two-year contract to have
Ameritrade (Inc.) included as one of four featured brokerages on America Online.
Retail customers have the ability to trade equity securities, options, mutual
funds and bonds through the Internet, PC-based software, personal digital
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
assistant, touchtone telephone and facsimile as well as through a traditional
registered representative. During the quarter ended September 25, 1998,
approximately 80 percent of the trades executed by the Company were made
electronically compared with approximately 50 percent of the trades made during
the quarter ended September 26, 1997. Depending on the medium used by the
customer, trades may be executed for as little as $8 regardless of the number of
shares bought and sold. This represents considerable savings over the trading
fees charged by traditional full-commission brokers. In addition to lower
transaction costs, the Company's retail discount brokerage customers are able to
access a broad range of services designed to meet their individual needs,
including real-time quotes, investment news, research and information. The
Company also strives to provide educational services in an effort to make
investing understandable and interesting to investors of all ability levels.
During fiscal 1998, the Company released "Darwin(TM): Survival of the Fittest,"
the first interactive CD-ROM-based options trading simulator. Darwin includes a
comprehensive options tutorial that is designed to allow investors to learn
basic and advanced option trading strategies, trade fictional equities and
options, formulate investment strategies, track performance and compete against
other players. Darwin is available at no cost through the Darwin web site
(http://darwin.ameritrade.com).
The market for discount brokerage services, particularly electronic brokerage
services, is new, rapidly evolving, intensely competitive, and has few barriers
to entry. The Company has seen a dramatic increase in competition during 1998
and expects competition to continue and intensify in the future. The Company
encounters direct competition from approximately 100 other discount brokerage
firms, many of which provide electronic brokerage services. These competitors
include such discount brokerage firms as Charles Schwab & Co., Inc., Fidelity
Brokerage Services, Inc., National Discount Brokers Group, Inc., Quick & Reilly,
Inc., Waterhouse Securities, Inc., and E*Trade Group, Inc. The Company also
encounters competition from established full-commission brokerage firms as well
as financial institutions, mutual fund sponsors, and other organizations, some
of which provide electronic brokerage services.
The Company believes that the discount brokerage market is currently impacted
by four significant trends that may affect its financial condition and results
of operations. First, commissions charged to customers of discount brokerage
services have steadily decreased over the past several years. Although decreased
commissions have had a negative effect on the Company's commission and clearing
fees revenue per trade, the Company's experience to date indicates that
decreased commissions result in increased account activity and increased
commission and clearing fees revenue in the aggregate. Second, technology has
increased in importance as delivery channels such as the Internet have become
more prevalent. Of the approximately 80 percent of the Company's transactions
which were generated through electronic mediums during the quarter ended
September 25, 1998, approximately 72 percent were placed over the Internet. The
Company expects that increased use of electronic mediums will decrease operating
expenses per trade. Third, the effects of price competition and required
investment in technology have resulted in some consolidation in the market.
Finally, the intense advertising and promotional efforts of the Company and its
major competitors are making it increasingly difficult for new entrants to make
a competitive impact without substantial financial resources to invest in
building a brand.
As a consequence of the rapid growth in customer accounts and trading
volumes during fiscal 1998, the Company experienced certain isolated problems
with its computer system. These problems occurred during periods of
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
unexpectedly high trading activity. The system outages created delays in
processing customer orders and in confirming executed transactions back to the
customer. The Company continues to upgrade and enhance its operating systems in
an attempt to eliminate service disruptions in the future. However, there can be
no assurance that service disruptions will not occur in the future.
RESULTS OF OPERATIONS
NET REVENUES
The Company's largest sources of revenues continue to be commissions earned from
its discount brokerage activities and associated brokerage commissions,
securities transaction clearing fees, and payment for order flow. For the years
ended September 25, 1998, September 26, 1997, and September 27, 1996, 63
percent, 67 percent, and 67 percent, respectively, of the Company's net revenues
were derived from commissions and clearing fees. Clearing services include the
confirmation, receipt, settlement, delivery, and record-keeping functions
involved in the processing of securities transactions. Commissions and clearing
fees totaled $85.6 million in fiscal 1998, compared to $51.9 million in fiscal
1997 and $36.5 million in fiscal 1996. This represents a 135 percent increase
between fiscal 1996 and fiscal 1998. The increase was primarily attributable to
an increase in the number of transactions processed as average trades per day
increased over 400 percent between fiscal 1996 and fiscal 1998 in line with the
growth in the customer base. Offsetting the growth in trades per day is the
decrease in commissions and clearing fees per trade by 53 percent between fiscal
1996 and fiscal 1998 from an average of $39 per trade to an average of $19 per
trade in 1998. The Company expects average commission and clearing fees per
trade to continue to decrease due to competitive pressures and the greater
anticipated number of low-commission Internet trades. However, the Company
believes the rate of decline in average commission rates will be lower than the
rate of decline experienced over the past two years.
The Company has arrangements with several execution agents to receive cash
payments in exchange for routing trade orders to these firms for execution
(payment for order flow). The revenues generated by the Company under these
arrangements totaled $10.9 million, or 8 percent of net revenues for the fiscal
year ended September 25, 1998; $9.1 million, or 12 percent of net revenues for
the fiscal year ended September 26, 1997; and $8.1 million or 15 percent of net
revenues for the fiscal year ended September 27, 1996. As stated above, payment
for order flow is a component of the commission and clearing fees revenue line.
The majority of these revenues were received from execution agents owned by
Knight/Trimark, a market maker in over-the-counter equity securities for those
securities traded in the Nasdaq stock market, the OTC Bulletin Board, and those
listed on the New York and American Stock Exchanges. As of September 25, 1998,
the Company owned approximately 3.95 million shares (approximately 7.7 percent)
of the common stock of Knight/Trimark Group, Inc. ("Knight/Trimark"). Although
this practice of receiving payments for order flow is widespread in the
securities industry, it has come under increased regulatory scrutiny in recent
years. Furthermore, competition between execution agents has narrowed the spread
between bid and ask prices, which has made it less profitable for execution
agents to offer order flow payments to brokers such as the Company's operating
units. The Company expects such payments to decrease as competition increases.
The Company also believes that the narrowing of spreads will create better trade
executions for its customers, and that superior trade execution will tend to
increase the activity in customer accounts. Nevertheless, there can be no
assurance that the loss of any significant portion of these revenues will not
have a material adverse effect
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
on the Company's business, financial condition, and operating results.
The other principal source of revenue is net interest revenue. Net interest
revenue is the difference between interest revenue and interest expense.
Interest revenue is generated by charges to customers on debit balances
maintained in brokerage accounts and the investment of cash from operations and
cash segregated in compliance with federal regulations in short-term marketable
securities. Interest expense consists of amounts paid or payable to customers
based on credit balances maintained in brokerage accounts, as well as costs
related to notes payable, letters of credit, and lines of credit with financial
institutions. Net interest revenue increased to $37.4 million in fiscal 1998
from $18.2 million in fiscal 1997 and from $11.5 million in fiscal 1996. This
increase was due primarily to an increase of 187 percent in cash and investments
segregated in compliance with federal regulations, an increase of 271 percent in
customer and correspondent broker-dealer receivables partially offset by an
increase of 221 percent in amounts payable to customers and correspondent
broker-dealers in fiscal 1998 over fiscal 1996. The Company generally expects
net interest revenue to grow as the account base grows.
Equity income from investments primarily consisted of the Company's
share of income from its partnership interests in Roundtable Partners LLC
("Roundtable," the predecessor to Knight/Trimark) and Comprehensive Software
Systems, Inc. ("CSS"). Equity income from investments increased from $3.4
million in each of fiscal 1996 and fiscal 1997 to $5.1 million in fiscal 1998
primarily due to the greater income generated by Roundtable. In July 1998,
Roundtable was reorganized into Knight/Trimark and conducted a public stock
offering. The Company sold a portion of its interest in CSS during fiscal 1998.
In each case, the Company owns less than 10 percent of the voting equity of
these entities. As a result of these transactions, the Company began accounting
for its investment in Knight/ Trimark as a marketable equity security held
available-for-sale and for its investment in CSS on the cost method rather than
the equity method. The Company no longer has any investments accounted for under
the equity method and, accordingly, no equity income from investments is
currently anticipated for periods after fiscal 1998.
Other revenues increased to $6.0 million in fiscal 1998 from $3.7 million in
fiscal 1997 and $3.0 million in fiscal 1996. The increase is due primarily
to an increase in marketing fees and service fees paid to the Company by mutual
funds as more customer mutual fund assets are held by the Company.
EXPENSES EXCLUDING INTEREST
Employee compensation and benefits expense includes salaries, bonuses, group
insurance, contributions to benefit programs, recruitment, and other related
employee costs. Employee compensation and benefits expense increased to $36.1
million in fiscal 1998 from $19.3 million in fiscal 1997 and $14.0 million in
fiscal 1996, due primarily to an increase in full-time equivalent employees. As
of September 25, 1998, the Company employed 985 full-time equivalent employees
versus 412 on September 26, 1997 and 334 on September 27, 1996. The increase in
employees was necessary to accommodate the dramatic growth in trading volume
following the Company's advertising campaign in early fiscal 1998. The Company
expects employment expenses to increase at a slower rate than net revenues in
fiscal 1999.
Commissions and clearance costs include fees paid to stock and option
exchanges for trade executions, as well as settlement and depository costs
associated with its securities clearing activities. This expense increased to
$5.8 million in fiscal 1998 from $3.3 million in fiscal 1997 and $2.5 million in
fiscal 1996. The 128 percent increase between fiscal 1996 and fiscal 1998 is
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
due primarily to the 400 percent increase in transaction processing volume over
the same period, offset by efforts that the Company has undertaken to reduce
execution, clearance, settlement, and depository costs with outside entities and
the economies of scale associated with these activities.
Communications expense includes telephone, postage, news and quote costs.
Communications expense was $12.9 million in fiscal 1998, compared to $5.6
million in fiscal 1997 and $3.7 million in fiscal 1996. The 251 percent increase
between fiscal 1996 and fiscal 1998 is primarily a result of the 400 percent
increase in transaction processing volume between fiscal 1996 and fiscal 1998.
Communication expenses are expected to continue to increase at a slower rate
than transactions processed as the low cost Internet becomes the Company's
predominant communication channel with its customers.
Occupancy and equipment costs include the costs of leasing and maintaining
the Company's office spaces and the lease expenses on computer equipment and
other fixed assets. Occupancy and equipment expense was $10.6 million in fiscal
1998, $5.4 million in fiscal 1997, and $2.9 million in fiscal 1996. This
increase was due primarily to the lease of equipment and additional office
space. In fiscal 1998, the Company added 132,000 square feet of additional
space; in fiscal 1997, the Company added approximately 50,000 square feet of
additional space.
Advertising costs constituted a larger portion of the Company's operating
costs, increasing from $7.5 million (14 percent of net revenues) in fiscal 1996,
to $14.0 million (18 percent of net revenues) in fiscal 1997 to $43.6 million
(32 percent of net revenues) in fiscal 1998. The increase in advertising
expenditures in fiscal 1998 was principally related to the Company's efforts to
build brand awareness for its Ameritrade (Inc.) brand and was primarily
responsible for the significant increase in the number of customer accounts and
account assets realized by the Company during fiscal 1998.
Other operating expenses include professional service fees, provision for
losses, customer execution price adjustments, amortization of goodwill, travel
expenses and other miscellaneous expenses. In addition, the Company's costs
related to the processing of customer confirmations, statements and other
communications are included in this category. Other expenses increased to $25.4
million in fiscal 1998 from $8.2 million in fiscal 1997 and $5.2 million in
fiscal 1996. The increase is primarily a result of increased confirmation and
statement processing costs associated with the increase in transaction
processing volume and increased consulting services to assist the Company in
operational effectiveness and market research. To a lesser extent, increases in
trade errors related to the growth in transactions processed and to customer
execution price adjustments largely caused by system outages, particularly in
the fourth quarter of fiscal 1998, and increases in the provision for losses
related to market volatility experienced in the fourth quarter of fiscal 1998
also contributed to the growth in other expenses.
Income tax expense was $0.3 million in fiscal 1998, $7.6 million in fiscal
1997, and $7.3 million in fiscal 1996. The effective tax rate dropped from 39
percent in fiscal 1996 to 35 percent in fiscal 1997 as a result of the Company's
participation in economic development tax incentive programs offered by the
State of Nebraska. The effective rate increased to 60 percent in fiscal 1998 due
to the impact of non-deductible goodwill on a relatively small base of pre-tax
income. The Company expects to continue to benefit from the state of Nebraska
tax incentive programs in fiscal 1999.
IMPLEMENTATION OF NEW ACCOUNTING PRONOUNCEMENTS
See Note 1 to the Consolidated Financial Statements for a discussion of recently
issued accounting pronouncements and their effect on the Company.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Company anticipates that its primary needs for capital and liquidity during
fiscal 1999 will be to fund advertising costs, equipment costs, lease
commitments and research and development costs. Advertising costs during fiscal
1999 are anticipated to exceed the advertising expenditures in fiscal 1998.
These costs include the continued national advertising campaign for the
Company's Ameritrade (Inc.) brand, as well as the costs of a marketing agreement
entered into by Ameritrade (Inc.) with America Online. The Company will pay
America Online $12.5 million annually over the two year term of this agreement
to be one of four brokerages featured on America Online. The Company expects to
spend between $6 million and $10 million during fiscal 1999 on hardware and
software upgrades to its computer systems to meet anticipated increases in
trading volumes. In addition, the Company anticipates expenditures between $4
million and $6 million during fiscal 1999 primarily for the purchase of office,
computer and operating equipment. Lease commitments for operating equipment and
facilities during fiscal 1999 are expected to equal approximately $7 million
with an aggregate commitment of approximately $40.5 million through fiscal 2018.
In addition, the Company plans to spend approximately $10 million on continuing
research and development activities during the upcoming fiscal year.
The Company expects to finance its capital and liquidity needs during fiscal
1999 from its operating cash flow and borrowings under a $50 million revolving
credit facility with a bank group described below (see "bank loan agreements").
Dividends from subsidiaries are another source of liquidity. Certain of the
Company's subsidiaries are subject to the requirements of the SEC and the NASD
relating to liquidity, capital standards, and the use of customer funds and
securities, as well as credit agreement provisions, which limit funds available
for the payment of dividends to the parent company.
OPERATING CASH FLOW
Cash used in operating activities was $35.9 million in fiscal 1998, compared to
cash generated from operations of $23.8 million in fiscal 1997 and $20.9 million
in fiscal 1996. The increase in cash used during fiscal 1998 was attributable to
the substantial increase in advertising expenditures during the fiscal year.
Cash used in investing activities was $4.0 million in fiscal 1998, compared
to $3.7 million in fiscal 1997 and $4.7 million in fiscal 1996. Uses of cash in
fiscal 1998 and fiscal 1997 were primarily related to purchases of property and
equipment, offset by cash distributions received from Knight/Trimark and CSS.
Uses of cash in fiscal 1996 related primarily to purchases of property and
equipment and additional investments in Knight/Trimark and CSS, offset by cash
distributions received from Knight/Trimark.
Cash provided by financing activities was $10.8 million in fiscal 1998,
compared to $17.7 million in fiscal 1997 and to cash used in financing
activities of $2.2 million in fiscal 1996. The cash provided by financing
activities in fiscal 1998 consisted of proceeds from the Company's revolving
credit agreement with a bank (see "bank loan agreements"), offset by payments on
the principal on the revolving credit loan. The increase in fiscal 1997 over
fiscal 1996 was attributable to the net proceeds of $22.5 million from the
initial public offering in March 1997, offset by principal payments on notes
payable.
BANK LOAN AGREEMENTS
The Company entered into a revolving credit agreement with a bank group on
January 16, 1998. The revolving credit agreement permits borrowings up to $50
million through June 30, 1999 with permissible borrowings declining $2.5 million
quarterly to $35 million at maturity on December 31, 2000. The revolving credit
agreement is collateralized by the common stock of the
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Company's subsidiaries, as well as all tangible and intangible assets of the
Company. Borrowings under the revolving credit agreement bear interest at prime
rate less 0.75 percent (7.75 percent at September 25, 1998). The Company pays a
maintenance fee of 0.25 percent of the unused borrowings through the maturity
date. The Company had outstanding indebtedness under the revolving credit
agreement of $11.0 million at September 25, 1998. The revolving credit agreement
contains certain restrictions, including restrictions on the payment of cash
dividends and additional borrowings.
A letter of credit in the amount of $44 million as of September 25, 1998, has
been issued by a financial institution on behalf of Advanced Clearing, a
wholly-owned subsidiary of the Company which acts as a securities clearing firm.
The letter of credit has been issued to support margin requirements. Advanced
Clearing pays a maintenance fee of 0.5 percent of the committed amount for the
letter of credit. As of September 25, 1998, no amounts were outstanding under
the credit facility. In addition, the same financial institution may make loans
to Advanced Clearing if requested under a note. Advanced Clearing has pledged
customer securities, the amount of which fluctuates from time to time, to secure
its obligations under the letter of credit and the note.
YEAR 2000
The Company relies heavily on computerized information technology systems ("IT")
for its business operations. In particular, securities trading information moves
to and from the Company's IT system to those operated by stock exchanges,
broker-dealers, clearinghouses and other trading partners on a real-time basis
with little human intervention. The Company's business operations are also
dependent on a variety of non-IT systems that contain embedded circuitry such as
telephone equipment, security and alarm systems, copiers, fax machines, mail
room equipment, heating and air conditioning systems and other infrastructure
systems. In addition, the Company has business relationships with a variety of
third parties whose ability to interface with the Company's IT systems or
otherwise perform their obligations to the Company depends on such systems and
equipment. Some or all of these systems and equipment may be affected by the
so-called "Year 2000 problem" which is the potential inability of certain
computer programs and embedded circuitry to correctly recognize dates occurring
after December 31, 1999. The Company has adopted a plan to deal with this "Year
2000 problem" with respect to its IT and non-IT systems and third party business
relationships.
STATE OF READINESS
The Company has hired a Year 2000 Project Manager who has assembled a working
group that is responsible for the Company's Year 2000 remediation effort. In
general, this effort consists of (i) preparing an inventory of IT and non-IT
systems and assessing the need for remediation of such systems, (ii) determining
the status of Year 2000 remediation of third parties with which the Company has
material business relationships, (iii) remediation of the Company's IT and
non-IT systems and (iv) testing. The Company has completed approximately 66
percent of the inventory and assessment phase of its Year 2000 program. The
Company has been in the process of a planned upgrade of many components of its
IT system and as this process is completed, the Company's IT systems are
expected to become Year 2000 compliant. The Company expects this to occur by
June 30, 1999. The Company is reviewing its non-IT systems along with the
providers that service and maintain these systems, with initial emphasis being
placed on those, such as telephone systems, which have been identified as
necessary to the Company's ability to conduct the operation of
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
its business activities. The Company expects that any necessary modification or
replacement of these non-IT systems will be accomplished by January 1999.
The Company plans to conduct testing of IT and non-IT systems as remediation
work is completed. In particular, the IT systems will undergo an industry-wide
simulation test of the trading cycle, that will test not only the Company's
internal IT system, but also key interfaces with third parties in the securities
industry. While the test is designed to simulate actual trading activity, it
will not be as voluminous as a "normal" cycle, nor will it test the Leap Year
anomaly.
Notwithstanding the Company's efforts to anticipate and remediate Year 2000
problems, there can be no assurance that the inventory and assessment will
discover all potential Year 2000 problems or that testing will reveal
unanticipated material problems with the Company's IT systems and non-IT systems
that will need to be resolved.
The Company has no control over the remediation efforts of third parties with
which it has material business relationships and the failure of certain of these
third parties to successfully remediate their Year 2000 issues could have a
material adverse effect on the Company. Accordingly, the Company has undertaken
the process of contacting each material third party. Such parties include, but
are not limited to, various brokers-dealers, Internet partners, and market
makers. The Company has received initial compliance documentation from certain
of these third parties that their ability to perform their obligations to the
Company are not expected to be materially adversely affected by the Year 2000
problem. The Company will conduct in-house testing of third party systems when
those systems are available. The Company will continue to request updated
information from these material third parties in order to assess their Year 2000
readiness.
COSTS TO ADDRESS YEAR 2000 COMPLIANCE
Costs associated with Year 2000 compliance consist primarily of salaries of the
Year 2000 Project Manager and other staff assigned to the Year 2000 working
group, software used to assess the Company's systems, and consulting fees.
Additional costs will be incurred in connection with replacing non-IT systems as
necessary, polling of third-party readiness and testing. All remediation to the
Company's IT system were made as part of scheduled upgrades and, therefore, have
not been included in the costs of Year 2000 compliance. Costs associated with
the Company's Year 2000 program have been minimal to date and are not expected
to exceed a total of $1 million. Accordingly, the costs associated with
addressing the Company's Year 2000 issues are not expected to have a material
effect on the Company's results of operations, financial position or cash flow.
YEAR 2000 RISKS
Based on currently available information, the Company does not believe that
there will be any protracted systemic failures of the IT or non-IT systems
utilized by it in connection with the operation of its business. The Company
believes that the most reasonably likely worst-case scenario will be that there
will be a temporary interruption or reduction in trading volume capability due
to a combination of interface breakdowns, utilities disruptions or
communications degradations. If such an interruption or reduction occurs, it
will result in loss of revenues and, depending on the extent of such disruption,
may cause the Company to lose accounts. The Company cannot estimate the
magnitude of any such loss of revenue at this time, but it could be material.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
CONTINGENCY PLANS
The Company is currently developing contingency plans as part of an overall
business continuity/disaster recovery project. This plan is expected to be
complete by December 31, 1998.
All forecasts, estimates or other statements in this report relating to the
Year 2000 readiness of the Company are based on information and assumptions
about future events. Such "forward-looking statements" are subject to various
known and unknown risks and uncertainties that may cause actual events to differ
from such statements. Important factors upon which the Company's Year 2000
forward-looking statements are based include, but are not limited to, (a) the
belief of the Company that the upgraded software used in IT systems is already
able to correctly read and interpret dates after December 31, 1999 and will
require little or no remediation; (b) the ability to identify, repair or replace
mission critical non-IT equipment in a timely manner, (c) third parties'
remediation of their internal systems to be Year 2000 ready and their
willingness to test their systems interfaces with those of the Company, (d) no
third party system failures causing material disruption of telecommunications,
data transmission, payment networks, government services, utilities or other
infrastructure, (e) no unexpected failures by third parties with which the
Company has a material business relationship and (f) no material undiscovered
flaws in the Company's Year 2000 inventory and assessment process.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk generally represents the risk of loss that may result from the
potential change in the value of a financial instrument as a result of
fluctuations in interest rates and market prices. The Company has established
policies, procedures and internal processes governing its management of market
risks in the normal course of its business operations.
As a fundamental part of its brokerage business, the Company holds
short-term interest earning assets, mainly funds required to be segregated in
compliance with federal regulations for customers totaling $503,455,354 at
September 25, 1998. The Company invests such funds primarily in short-term
fixed-rate U.S. Treasury Bills and repurchase agreements. The Company's interest
earning assets are financed by short-term interest bearing liabilities totaling
$1,136,082,337 at September 25, 1998 in the form of customer cash balances.
Additionally, at September 25, 1998, the Company had $11,000,000 outstanding in
notes payable under a floating interest rate arrangement. The Company earns a
net interest spread on the difference between amounts earned on customer margin
loans and amounts paid on customer credit balances. Since the Company
establishes the rate paid on customer cash balances, a substantial portion of
its interest rate risk is under the direct management of the Company. The
Company generally moves rates earned on loans in lockstep with rates paid on
credit balances to maintain a consistent net interest spread, and, therefore,
does not anticipate that changes in interest rates will have a material effect
on the Company's earnings and cash flows.
The Company holds a marketable equity security at September 25, 1998, which
is recorded at fair value of $29,454,879 ($17,522,615 net of tax) and has
exposure to market price risk. This risk is estimated as the potential loss in
fair value resulting from a hypothetical 10 percent adverse change in prices
quoted by the stock exchanges and amounts to approximately $3,000,000. Actual
results may differ.
The Company's revenues and financial instruments are denominated in U.S.
dollars and the Company does not invest in or intend to invest in derivative
financial instruments or derivative commodity instruments.
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INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Ameritrade Holding Corporation and Subsidiaries
Omaha, Nebraska
We have audited the accompanying consolidated balance sheets of Ameritrade
Holding Corporation and its subsidiaries (collectively, the "Company") as of
September 25, 1998 and September 26, 1997, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended September 25, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Ameritrade Holding Corporation and
its subsidiaries as of September 25, 1998 and September 26, 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended September 25, 1998, in conformity with generally accepted
accounting principles.
/s/ Deloitte & Touche
Deloitte & Touche LLP
Omaha, Nebraska
October 27, 1998
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CONSOLIDATED BALANCE SHEETS
as of september 25, 1998 and september 26, 1997
<TABLE>
<CAPTION>
1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
assets
Cash and cash equivalents $ 24,526,935 $ 53,522,447
Cash and investments segregated in compliance with federal regulations 503,455,354 319,763,921
Receivable from brokers, dealers, and clearing organizations 25,732,164 17,823,640
Receivable from customers and correspondents - net of allowance for
doubtful accounts: 1998 - $1,039,788; 1997 - $249,949 647,121,854 325,407,147
Furniture, equipment and leasehold improvements - net of accumulated depreciation and
amortization: 1998 - $6,728,212; 1997 - $3,732,790 26,116,333 8,709,923
Goodwill - net of accumulated amortization 5,983,761 6,346,763
Investments 30,760,729 12,597,972
Deferred income taxes -- 39,314
Other assets 26,704,546 13,145,616
- -----------------------------------------------------------------------------------------------------------------------------
Total assets $1,290,401,676 $757,356,743
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
72
<PAGE> 14
CONSOLIDATED BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
liabilities and stockholders' equity
Liabilities:
Payable to brokers, dealers and clearing organizations $ 11,765,785 $ 1,404,999
Payable to customers and correspondents 1,136,082,337 666,279,440
Accounts payable and accrued liabilities 30,716,987 19,252,931
Notes payable to bank 11,000,000 --
Income taxes payable 1,331,170 3,430,279
Deferred income taxes 14,933,313 --
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,205,829,592 690,367,649
- ----------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $1 par value; authorized 3,000,000 shares, none issued -- --
Common stock, $0.01 par value:
Class A - 60,000,000 shares authorized; 26,306,846 shares issued 263,068 263,068
Class B - 6,000,000 shares authorized; 2,728,800 shares issued and outstanding 27,288 27,288
- ----------------------------------------------------------------------------------------------------------------------------
Total common stock 290,356 290,356
Additional paid-in capital 23,135,653 23,152,328
Retained earnings 43,756,848 43,546,410
Treasury stock - Class A shares at cost (9,442 shares at September 25, 1998) (133,388) --
Net unrealized investment gain 17,522,615 --
- ----------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 84,572,084 66,989,094
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $1,290,401,676 $757,356,743
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
73
<PAGE> 15
CONSOLIDATED STATEMENTS OF INCOME
for the years ended september 25, 1998, september 26, 1997 and september 27,
1996
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Commissions and clearing fees $85,644,433 $51,936,902 $36,469,561
Interest revenue 66,716,234 36,622,800 22,517,655
Equity income from investments 5,083,172 3,443,807 3,358,871
Gain from sale of investment 794,634 -- --
Other 5,955,534 3,663,685 3,032,443
- --------------------------------------------------------------------------------------------------------------------------------
Total revenues 164,194,007 95,667,194 65,378,530
Interest expense 29,278,536 18,428,854 11,039,777
- --------------------------------------------------------------------------------------------------------------------------------
Net revenues 134,915,471 77,238,340 54,338,753
Expenses excluding interest:
Employee compensation and benefits 36,082,707 19,290,808 14,049,642
Commissions and clearance 5,762,336 3,320,262 2,530,642
Communications 12,926,154 5,623,468 3,685,535
Occupancy and equipment costs 10,621,551 5,422,839 2,889,654
Advertising 43,613,779 13,970,834 7,537,265
Other 25,377,918 8,185,016 5,228,422
- --------------------------------------------------------------------------------------------------------------------------------
Total expenses excluding interest 134,384,445 55,813,227 35,921,160
- --------------------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes 531,026 21,425,113 18,417,593
Provision for income taxes 320,588 7,602,964 7,259,248
- --------------------------------------------------------------------------------------------------------------------------------
Net Income $ 210,438 $13,822,149 $11,158,345
- --------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share $ 0.01 $ 0.50 $ 0.44
Diluted earnings per share $ 0.01 $ 0.50 $ 0.44
Weighted average shares outstanding - basic 29,031,327 27,537,778 25,627,646
Weighted average shares outstanding - diluted 29,077,455 27,538,907 25,627,646
</TABLE>
See notes to consolidated financial statements.
74
<PAGE> 16
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
for the years ended september 25, 1998, september 26, 1997 and september 27,
1996
<TABLE>
<CAPTION>
Common Stock Additional
--------------------------------------- Paid-In
Total Class A Class B Total Capital
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, September 29, 1995 $19,503,719 $265,968 $49,896 $315,864 $ 785,804
Net income 11,158,345 -- -- -- --
Retirement of treasury stock -- (36,980) (22,608) (59,588) (104,277)
- ------------------------------------------------------------------------------------------------------------------------------
Balance, September 27, 1996 30,662,064 228,988 27,288 256,276 681,527
Net income 13,822,149 -- -- -- --
Issuance of 8,000 shares from
compensation plans 33,750 80 -- 80 33,670
Issuance of 3,400,000 shares from
initial public offering 22,471,131 34,000 -- 34,000 22,437,131
- ------------------------------------------------------------------------------------------------------------------------------
Balance, September 26, 1997 66,989,094 263,068 27,288 290,356 23,152,328
Net income 210,438 -- -- -- --
Purchase of treasury stock (286,375) -- -- -- --
Reissuance of treasury stock 136,312 -- -- -- (16,675)
Net unrealized investment gain 17,522,615 -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Balance, September 25, 1998 $84,572,084 $263,068 $27,288 $290,356 $23,135,653
- ------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Net
Unrealized
Retained Treasury Investment
Earnings Stock Gain
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, September 29, 1995 $19,839,450 $ (1,437,399) $ --
Net income 11,158,345 -- --
Retirement of treasury stock (1,273,534) 1,437,399 --
- ------------------------------------------------------------------------------------------
Balance, September 27, 1996 29,724,261 -- --
Net income 13,822,149 -- --
Issuance of 8,000 shares from
compensation plans -- -- --
Issuance of 3,400,000 shares from
initial public offering -- -- --
- ------------------------------------------------------------------------------------------
Balance, September 26, 1997 43,546,410 -- --
Net income 210,438 -- --
Purchase of treasury stock -- (286,375) --
Reissuance of treasury stock -- 152,987 --
Net unrealized investment gain -- -- 17,522,615
- ------------------------------------------------------------------------------------------
Balance, September 25, 1998 $43,756,848 $ (133,388) $17,522,615
- ------------------------------------------------------------------------------------------
</TABLE>
75
See notes to consolidated financial statements.
<PAGE> 17
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended september 25, 1998, september 26, 1997 and september 27,
1996
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $210,438 $13,822,149 $11,158,345
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization 2,999,017 1,693,487 1,048,692
Provision for losses 815,000 59,000 148,014
Deferred income taxes 3,769,643 405,064 (358,139)
Equity income from investments (5,083,172) (3,443,807) (3,358,871)
Gain from sale of investment (794,634) -- --
Amortization of goodwill 363,002 363,002 363,002
Changes in operating assets and liabilities:
Cash and investments segregated in compliance with federal regulations (183,691,433) (144,095,424) (51,977,699)
Receivable from brokers, dealers and clearing organizations (7,908,524) (2,726,778) (5,080,870)
Receivable from customers and correspondents (322,529,707) (159,391,092) (36,035,750)
Other assets (13,558,930) (7,132,072) (658,027)
Payable to brokers, dealers and clearing organizations 10,360,786 211,520 (1,664,200)
Payable to customers and correspondents 469,802,897 309,336,470 105,080,587
Accounts payable and accrued liabilities 11,464,056 12,031,923 1,999,534
Income taxes payable (2,099,109) 2,623,568 244,342
- --------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (35,880,670) 23,757,010 20,908,960
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
76
<PAGE> 18
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
<S> <C> <C> <C>
Acquisition of subsidiary -- -- (188,953)
Purchase of furniture, equipment and leasehold improvements (20,405,427) (6,657,232) (1,104,124)
Purchase of investments (1,652,740) (659,613) (6,272,361)
Distributions received from investments 12,264,993 3,663,231 2,902,004
Proceeds from sale of investments 5,828,395 -- --
- --------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (3,964,779) (3,653,614) (4,663,434)
- --------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Issuance of Class A common stock -- 33,750 --
Proceeds from initial public offering, net of offering costs -- 22,471,131 --
Proceeds from notes payable 22,500,000 -- --
Principal payments on notes payable (11,500,000) (4,853,000) (2,244,000)
Purchase of treasury stock (286,375) -- --
Reissuance of treasury stock 136,312 -- --
- --------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 10,849,937 17,651,881 (2,244,000)
- --------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (28,995,512) 37,755,277 14,001,527
Cash and cash equivalents at beginning of year 53,522,447 15,767,170 1,765,643
- --------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $24,526,935 $53,522,447 $15,767,170
- --------------------------------------------------------------------------------------------------------------------------------
Supplemental cash flow information:
Interest paid $28,258,819 $17,623,539 $11,025,779
Income taxes paid (refunds received) $(1,418,800) $ 4,525,078 $ 7,342,359
Supplemental investing activities:
Unrealized investment gain, net of deferred taxes of $11,202,984 $17,522,615 $ -- $ --
Noncash financing activities:
Retirement of treasury stock $ -- $ -- $ 1,437,399
</TABLE>
See notes to consolidated financial statements.
77
<PAGE> 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years ended september 25, 1998, september 26, 1997 and september 27,
1996
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - The consolidated financial statements include the
accounts of Ameritrade Holding Corporation and its wholly-owned subsidiaries
(collectively, the "Company"): Advanced Clearing, Inc. ("Advanced Clearing"),
formerly known as AmeriTrade Clearing, Inc.; Accutrade, Inc. ("Accutrade");
Ameritrade (Inc.), formerly known as Ceres Securities, Inc.; AmeriVest, Inc.
("AmeriVest"), formerly known as All American Brokers, Inc.; K. Aufhauser &
Company ("Aufhauser"); and OnMoney Financial Services Corporation ("OnMoney").
All significant intercompany balances and transactions have been eliminated.
On September 27, 1996, the Company's Board of Directors approved a resolution
to reincorporate in the State of Delaware and change its name from TransTerra
Co. to Ameritrade Holding Corporation. The reincorporation was accomplished by
exchanging each share of Class A and Class B common stock of TransTerra Co. for
thirty shares of Class A and Class B common stock of the Company. On January 23,
1997, the Company effected an eight-for-five stock split in the form of a stock
dividend. During 1998, the Company's Board of Directors declared a two-for-one
common stock split, distributed August 1998, and effected in the form of a stock
dividend. All share data and per share amounts have been restated to reflect
these exchanges.
The Company reports on a fifty-two/fifty-three week year. The fiscal years
ended 1998, 1997, and 1996 were each fifty-two week years.
NATURE OF OPERATIONS - The Company provides discount securities brokerage
services through its Ameritrade (Inc.), Accutrade, Aufhauser and AmeriVest
subsidiaries. The Company also provides trading execution and clearing services
for its own broker-dealer operations and for unaffiliated broker-dealers through
Advanced Clearing. OnMoney is a development-stage entity involved in on-line
financial services. The Company's broker-dealer subsidiaries are subject to
regulation by the Securities and Exchange Commission, the National Association
of Securities Dealers, and the Chicago Stock Exchange, Inc.
CAPITAL STOCK - The authorized capital stock of the Company consists of
Class A common stock, Class B common stock and preferred stock. Each share of
Class A and Class B common stock is entitled to one vote on all matters, except
that the Class B common stock is entitled to elect a majority of the directors
of the Company and the Class A common stock is entitled to elect the remainder
of the directors. Each class of common stock is equally entitled to dividends
if, as and when declared by the Board of Directors. Shares of Class A common
stock are not convertible, while each share of Class B common stock is
convertible into one share of Class A common stock at the option of the Class B
holder or upon the occurrence of certain events. Class A and Class B common
stock have equal participation rights in the event of a liquidation of the
Company.
Voting, dividend, conversion and liquidation rights of the preferred stock
would be established by the Board of Directors upon issuance of such preferred
stock.
USE OF ESTIMATES - The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
78
<PAGE> 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SECURITIES TRANSACTIONS - Securities transactions are recorded on a settlement
date basis with such transactions generally settling three business days after
trade date. Revenues and expenses related to securities transactions, including
revenues from execution agents, are also recorded on settlement date, which is
not materially different than trade date.
DEPRECIATION AND AMORTIZATION - Depreciation is provided on a straight-line
basis using estimated useful service lives of three to seven years. Leasehold
improvements are amortized over the lesser of the economic useful life of the
improvement or the term of the lease.
Goodwill is amortized on a straight-line basis generally over a twenty year
period. Accumulated amortization at September 25, 1998 and September 26, 1997
was $1,243,026 and $880,024, respectively. The Company reviews its intangible
assets for impairment at least annually or whenever events or change in
circumstances indicate that the carrying amount of such asset may not be
recoverable.
INCOME TAXES - The Company files a consolidated income tax return with
its subsidiaries on a calendar year basis. Deferred income taxes are provided
for temporary differences between financial statement and taxable income. The
principal temporary differences arise from depreciation, bad debts, prepaid
expenses, and certain accrued liabilities. Deferred tax liabilities and assets
are determined based on the differences between the financial statement carrying
amounts and tax bases of assets and liabilities using enacted tax rates in
effect in the years in which the differences are expected to reverse.
CASH AND CASH EQUIVALENTS - The Company considers temporary, highly
liquid investments with an original maturity of three months or less to be cash
equivalents.
SEGREGATED CASH AND INVESTMENTS - Cash and investments consisting
primarily of US Treasury Bills and repurchase agreements at Advanced Clearing of
$503,455,354 and $319,763,921 as of September 25, 1998 and September 26, 1997,
respectively, have been segregated in a special reserve bank account for the
benefit of customers under Rule 15c3-3 of the Securities and Exchange
Commission.
ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS - The Company considers
the amounts presented for financial instruments on the consolidated balance
sheets to be reasonable estimates of fair value. The estimated fair value
amounts have been determined by the Company using available market information
and appropriate valuation methodologies.
INVESTMENTS - The Company's investments in companies and partnerships are
accounted for under the equity method when the Company has the ability to
exercise significant influence over the investee's operating and financial
policies. The cost method is used for investments that do not meet equity method
requirements. The Company's investments in marketable equity securities are
carried at fair market value and designated as available for sale. Unrealized
gains and losses, net of deferred income taxes, are reflected as a separate
component of stockholders' equity. Realized gains and losses are determined on
the specific identification method and reflected in operations.
79
<PAGE> 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Advertising Expense - The Company generally expenses advertising costs as they
are incurred.
EARNINGS PER SHARE - The Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 128, Earnings Per Share ("SFAS 128")
and accordingly, restated all prior period earnings per share ("EPS") to conform
with SFAS 128. This statement requires dual presentation of basic and diluted
earnings per share on the face of the Statement of Income. Basic EPS excludes
dilution and is computed by dividing income available to common stockholders by
the weighted-average number of all classes of common shares outstanding for the
year. Diluted EPS reflects the potential dilution that could occur if options or
other contracts to issue common stock were exercised or securities were
converted into common stock resulting in the issuance of common stock that then
shared in the earnings of the entity. The adoption of SFAS 128 did not have a
material effect on previously reported EPS.
STOCK BASED COMPENSATION - As permitted by SFAS No. 123, Accounting for Stock
Based Compensation, the Company accounts for its stock-based compensation on the
intrinsic-value method in accordance with Accounting Principles Board ("APB")
Opinion No. 25.
RECLASSIFICATIONS - Certain items in prior years' consolidated financial
statements have been reclassified to conform to the current year presentation.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
SFAS No. 130 - In June 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income. This statement establishes standards for reporting and
display of comprehensive income and its components in a full set of financial
statements. This statement is effective for fiscal years beginning after
December 15, 1997. Companies are also required to report comparative totals for
comprehensive income in interim reports. The Company will report comprehensive
income commencing in fiscal 1999.
SFAS NO. 131 - In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, Disclosures About Segments of an Enterprise and Related
Information ("SFAS No. 131"). This statement requires disclosures for each
segment that are similar to those required under current standards with the
addition of quarterly disclosure requirements and more specific and detailed
geographic disclosures especially by countries as opposed to broad geographic
regions. The provisions of SFAS No. 131 are effective for fiscal years beginning
after December 15, 1997. This statement will have no impact on the Company as
the Company does not have operating segments.
SFAS NO. 133 - In June 1998, the FASB issued Statement of Financial
Accounting Standards No. 133, Accounting for Derivatives and Similar Financial
Instruments and for Hedging Activities. This statement revises the accounting
for the recognition and measurement of derivatives and hedging transactions and
is effective for fiscal years beginning after June 15, 1999. The Company has not
determined the impact this statement will have on the consolidated financial
statements.
80
<PAGE> 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. RECEIVABLE FROM AND PAYABLE TO BROKERS, DEALERS AND CLEARING ORGANIZATIONS
Amounts receivable from and payable to brokers, dealers and clearing
organizations are comprised of the following:
<TABLE>
<CAPTION>
Sept. 25, 1998 Sept. 26, 1997
- ---------------------------------------------------------------------------------
<S> <C> <C>
Receivable:
Securities borrowed $21,638,669 $15,072,400
Securities failed to deliver 4,069,740 2,751,240
Clearing organizations 23,755 --
- ---------------------------------------------------------------------------------
Total $25,732,164 $17,823,640
- ---------------------------------------------------------------------------------
Payable:
Securities loaned $ 5,519,000 $ -
Securities failed to receive 2,227,342 1,005,984
Clearing organizations 4,019,443 399,015
- ---------------------------------------------------------------------------------
Total $11,765,785 $ 1,404,999
- ---------------------------------------------------------------------------------
</TABLE>
3. INVESTMENTS
KNIGHT/TRIMARK GROUP, INC. - Prior to July 8, 1998, the Company owned a
9.2 percent interest in Roundtable Partners LLC ("Roundtable"), a company formed
to hold equity interests in securities trading and market making companies. The
Company had accounted for its investment in Roundtable under the equity method
since its inception. On July 8, 1998, Roundtable was reorganized into a
corporation known as Knight/Trimark Group, Inc. ("Knight/Trimark") coincident
with an initial public offering of Knight/Trimark common stock. As a result of
this reorganization, all of the Company's ownership interest in Roundtable was
converted to 3,953,675 shares of common stock of Knight/Trimark, which
represents 7.7 percent of the issued and outstanding shares of common stock of
Knight/Trimark. The Company also received a cash distribution of $7,817,329 in
connection with the reorganization. This cash distribution was a return of
capital, therefore there was no gain or loss associated with the distribution.
As a result of the reorganization of Knight/Trimark and subsequent initial
public offering in 1998, the Company accounts for its investment in
Knight/Trimark as a marketable equity security held available for sale. The
Company's investment in Knight/ Trimark is subject to a 180-day sale restriction
agreement from the initial public offering date with the underwriters of the
initial public offering. The Company has valued its investment in Knight/Trimark
with a twenty percent discount from the published market value on the Nasdaq
exchange as a result of the sale restriction agreement and potential
registration costs. On September 25, 1998, the Company valued its investment in
Knight/Trimark at a fair value of $29,454,879. The Company's cost basis on
September 25, 1998 was $729,280, therefore the gross unrealized gain is
$28,725,599. The Company executes a portion of its securities transactions
through subsidiaries of Knight/Trimark. Revenues related to such transactions
totaled $9,435,696, $6,843,502, and $7,758,836 in 1998, 1997 and 1996,
respectively. These amounts are included in Commissions and Clearing Fees.
COMPREHENSIVE SOFTWARE SYSTEMS, LTD. ("CSS") - As of September 25, 1998, the
Company owned 7.2 percent of CSS, a partnership formed for the purpose of
developing software for securities broker-dealers, banks and other financial
institutions. On June 3, 1998, the Company earned $794,634 on the sale of a
portion of its limited partnership interest in CSS. As a result of this
transaction, the Company's ownership interest in CSS decreased from 14.3 percent
to 7.2 percent. Accordingly, the Company began accounting for its investment in
CSS under the
81
<PAGE> 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
cost method as of that date, and will, therefore, no longer recognize income or
loss based on the operations of CSS.
ADIRONDACK TRADING PARTNERS, LLC ("ADIRONDACK") - As of September 25, 1998, the
Company owned a minority interest in Adirondack, a development-stage company
formed to trade listed equity and index options. The Company accounts for its
ownership in Adirondack under the cost method.
TELESCAN, INC. ("TELESCAN") - As of September 26, 1997, the Company owned
769,794 shares of common stock of Telescan, a publicly traded software/online
services company. During fiscal 1998, in a series of transactions, the Company
sold its interest in Telescan.
4. NOTES PAYABLE
The Company entered into a revolving credit agreement with a bank group on
January 16, 1998. The revolving credit agreement permits borrowings up to
$50,000,000 through June 30, 1999, with permissible borrowings decreasing
$2,500,000 quarterly to $35,000,000 maturity at December 31, 2000. The revolving
credit agreement is collateralized by the common stock of the Company's
subsidiaries, as well as all assets of the Company. Borrowings under the
revolving credit agreement bear interest at prime rate less 0.75 percent (7.75
percent at September 25, 1998). The Company had outstanding indebtedness under
the revolving credit agreement of $11,000,000 at September 25, 1998. The Company
pays a maintenance fee of 0.25 percent per annum of the unused credit available
under the revolving credit agreement. The revolving credit agreement contains
certain restrictions, including restrictions on the payment of cash dividends
and additional borrowings.
5. INCOME TAXES
Provision for income tax is comprised of the following for fiscal years ended:
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Current expense (benefit):
Federal $(3,051,000) $7,150,775 $7,132,387
State (398,055) 47,125 485,000
- ----------------------------------------------------------------------------------
(3,449,055) 7,197,900 7,617,387
Deferred expense (benefit):
Federal 3,383,013 344,065 (306,777)
State 386,630 60,999 (51,362)
- ----------------------------------------------------------------------------------
3,769,643 405,064 (358,139)
- ----------------------------------------------------------------------------------
Provision for income taxes $ 320,588 $7,602,964 $7,259,248
- ----------------------------------------------------------------------------------
</TABLE>
A reconciliation of the federal statutory tax rate to the effective tax rate
applicable to income before provision for income taxes follows:
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal statutory rate 35.00% 35.00% 35.00%
State taxes, net of federal tax effect 2.78 3.57 4.29
Amortization of goodwill 23.93 0.59 0.75
State credits -- (3.72) (2.87)
Other (1.34) 0.05 2.24
- ----------------------------------------------------------------------------------
60.37% 35.49% 39.41%
- ----------------------------------------------------------------------------------
</TABLE>
82
<PAGE> 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred tax assets (liabilities) are comprised of the following:
<TABLE>
<CAPTION>
1998 1997
- ----------------------------------------------------------------------------------
<S> <C> <C>
Unrealized investment gain $(11,202,984) $ --
Depreciation and amortization, net (575,425) (181,323)
Prepaid expenses (4,279,343) (1,107,460)
- ----------------------------------------------------------------------------------
(16,057,752) (1,288,783)
Accrued liabilities 1,124,439 1,328,097
- ----------------------------------------------------------------------------------
Net deferred tax assets (liabilities) $(14,933,313) $ 39,314
- ----------------------------------------------------------------------------------
</TABLE>
6. NET CAPITAL
The Company's subsidiaries are subject to the Securities and Exchange Commission
Uniform Net Capital Rule (SEC rule 15c3-1), which requires the maintenance of
minimum net capital, as defined. Net capital and the related net capital
requirement may fluctuate on a daily basis.
The Company's broker-dealer subsidiaries had net capital, in the aggregate,
of $40,062,733 and $26,121,959 as of September 25, 1998 and September 26, 1997,
respectively, which exceeded aggregate minimum net capital requirements by
$25,247,775 and $18,058,972, respectively. Subsidiary net capital in the amount
of $14,814,958 and $8,062,987 as of September 25, 1998 and September 26, 1997,
respectively, is not available for transfer to the Company due to net capital
regulations.
7. STOCK OPTION AND INCENTIVE PLANS
The Company has two stock option plans, the Ameritrade Holding Corporation
Long-Term Incentive Plan (the "Long-Term Incentive Plan") and the Directors
Incentive Plan (the "Directors Plan"), both initiated in fiscal 1997.
The Long-Term Incentive Plan authorizes the award of options to purchase
Class A Common Stock, Class A Common Stock appreciation rights, shares of Class
A Common Stock and performance units. The Long-Term Incentive Plan reserves
1,600,000 shares of the Company's Class A Common Stock for issuance to eligible
employees. The Directors Plan authorizes the award of options to purchase Class
A Common Stock and shares of Class A Common Stock. The Directors Plan reserves
160,000 shares of the Company's Class A Common Stock for issuance to
non-employee directors. Options are generally granted at not less than the fair
market value at grant date, vest over a one to three year period, and expire ten
years after the grant date. A summary of the status of the Company's outstanding
stock options as of September 25, 1998 and September 26, 1997 is presented
below:
<TABLE>
<CAPTION>
1998 1997
--------------------- --------------------
Weighted- Weighted-
Average Average
Number of Exercise Number of Exercise
Options Price Options Price
- ---------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at beginning of year 16,000 $ 7.50 -- --
Granted 280,200 $12.84 16,000 $ 7.50
Exercised -- -- -- --
Canceled -- -- -- --
- ---------------------------------------------------------------------------------
Outstanding at end of year 296,200 $12.55 16,000 $ 7.50
Exercisable at end of year 16,000 $ 7.50 -- --
Available for future grant
at end of year 1,463,800 1,744,000
Weighted-average fair value of
options granted during the year $7.38 $6.74
</TABLE>
83
<PAGE> 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about the stock options outstanding
at September 25, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Number of Contractual Exercise Number of Exercise
Range of Exercise Prices Options Life (in years) Price Options Price
- ---------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
$ 5.00 - $10.00 16,000 6.44 $ 7.50 16,000 $7.50
$10.01 - $15.00 275,600 7.14 $12.77 -- --
$15.01 - $20.00 4,600 7.81 $17.13 -- --
- ---------------------------------------------------------------------------------
$ 5.00 - $20.00 296,200 7.11 $12.55 16,000 $7.50
</TABLE>
There are no Stock Appreciation Rights or performance units outstanding as of
September 25, 1998.
As discussed in Note 1, the Company has elected to follow APB 25 and related
Interpretations in accounting for stock-based awards to employees. Under APB 25,
the Company generally recognizes no compensation expense with respect to
such awards.
Pro forma information regarding the net income and earnings per share is
required by SFAS 123. This information is required as if the Company had
accounted for its stock-based awards to employees under the fair value method.
The fair value of options was estimated at the date of the grant using the
Black-Scholes option pricing model with the following weighted average
assumptions for fiscal 1998 and 1997, respectively: risk-free interest rate of
5.95 percent and 6.37 percent; dividend yield of zero for both years; expected
volatility of 49.8 percent for both years; and an expected option life of eight
years for both years. The weighted average fair value of options granted in
fiscal 1998 and 1997 was $7.38 and $6.74, respectively. Pro forma net income and
earnings per share are as follows:
<TABLE>
<CAPTION>
1998 1997
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income As reported $ 210,438 $13,822,149
Pro forma (301,983) 13,787,640
- ---------------------------------------------------------------------------------
Basic earnings per share As reported $ 0.01 $ 0.50
Pro forma (0.01) 0.50
Diluted earnings per share As reported 0.01 0.50
Pro forma (0.01) 0.50
</TABLE>
8. EMPLOYEE BENEFIT PLANS
The Company has a profit-sharing plan under which the annual contribution is
determined at the discretion of the Board of Directors. Profit sharing expense
was $779,657, $595,222 and $388,800 for the fiscal years ended 1998, 1997 and
1996, respectively.
The Company has a 401(k) plan covering all eligible employees. The plan
provides for matching contributions at the discretion of the Board of Directors.
Contribution expense under this plan was $-0-, $-0- and $9,093 for the fiscal
years ended 1998, 1997 and 1996, respectively.
The Company has an executive bonus plan that was designed to allow designated
executive participants the opportunity to earn bonus awards with current and
deferred components. The value of each component is based on the annual increase
(if any) in the book value per share of the common stock. Executive bonus plan
expense was $960,000, $2,170,000 and $1,710,000 for the fiscal years ended 1998,
1997 and 1996, respectively.
84
<PAGE> 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. EARNINGS PER SHARE
Reconciliation between the weighted average shares outstanding used in the basic
and diluted earnings per share computation is presented below.
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $210,438 $13,822,149 $11,158,345
Weighted average shares
outstanding - basic 29,031,327 27,537,778 25,627,646
Effect of dilutive securities:
Assumed exercise of stock options 46,128 1,129 --
Weighted average shares
outstanding - diluted 29,077,455 27,538,907 25,627,646
Earnings per share - basic $ 0.01 $ 0.50 $ 0.44
Earnings per share - diluted $ 0.01 $ 0.50 $ 0.44
- ----------------------------------------------------------------------------------
</TABLE>
10. COMMITMENTS AND CONTINGENCIES
Lease Commitments - The Company and its subsidiaries have various non-
cancelable operating leases on facilities and certain computer and office
equipment requiring annual payments as follows:
<TABLE>
<CAPTION>
Fiscal Year Ending Amount
- ------------------------------------------------------------------------------
<C> <C>
1999 $ 6,970,754
2000 6,028,228
2001 3,075,012
2002 1,776,036
2003 1,790,677
Thereafter (to December 31, 2017) 20,904,751
- ------------------------------------------------------------------------------
Total $40,545,458
- ------------------------------------------------------------------------------
</TABLE>
The Company and certain of its subsidiaries lease one of their office facilities
from the Chief Executive Officer of the Company. The lease expires on December
31, 2017, and provides for annual rentals of $1,288,000. Additionally, the
Company and its subsidiaries lease certain computer equipment, office equipment,
and office facilities under various operating leases. Rental expense was
$6,225,232, $3,155,550 and $1,581,171 for fiscal years ended 1998, 1997 and
1996, respectively.
ADVERTISING COMMITMENT - The Company has entered into a two-year agreement with
America Online, Inc. ("AOL") that will feature Ameritrade (Inc.) as one of four
brokerages on AOL's Personal Finance Channel. The pact calls for the Company to
pay AOL $12.5 million annually over a two-year term.
LETTER OF CREDIT - A letter of credit in the amount of $44,000,000 as of
September 25, 1998, has been issued by a financial institution on behalf of
Advanced Clearing, a wholly-owned subsidiary of the Company which acts as a
securities clearing firm. The letter of credit has been issued to support margin
requirements. Advanced Clearing pays a maintenance fee of 0.5 percent of the
committed amount for the letter of credit. As of September 25, 1998 and
September 26, 1997, no amounts were outstanding under the credit facility. In
addition, the same financial institution may make loans to Advanced Clearing if
requested under a note. Advanced Clearing has pledged customer securities, the
amount of which fluctuates from time to time, to secure its obligations under
the letter of credit and the note.
LEGAL - On September 16, 1998, a putative class action complaint was filed
in the District Court, Douglas County, Nebraska, seeking injunctive and
equitable relief due to the Company's alleged breach of contract, violation of
the
85
<PAGE> 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Consumer Protection Act, fraudulent inducement, negligent misrepresentation,
negligence, and unjust enrichment regarding the Company's alleged inability to
handle the volume of subscribers to its Internet brokerage services. The
complaint seeks injunctive relief enjoining alleged deceptive, fraudulent, and
misleading practices and unspecified compensatory damages. The Company believes
that it has viable defenses to the allegations raised in the complaint. However,
because this proceeding is at a preliminary phase and the amount of damages
sought has not been quantified, the Company is not presently able to predict the
ultimate outcome of this matter.
The Company and its subsidiaries are parties to a number of other legal
matters arising in the ordinary course of business. In management's opinion, the
Company has adequate legal defenses respecting each of these actions and does
not believe that they will materially affect the Company's results of operations
or its financial position.
GENERAL CONTINGENCIES - In the general course of business, there are various
contingencies which are not reflected in the consolidated financial statements.
These include Advanced Clearing's customer activities involving the execution,
settlement and financing of various customer securities transactions. These
activities may expose the Company to off-balance-sheet credit risk in the event
the customers are unable to fulfill their contracted obligations.
Advanced Clearing's customer securities activities are transacted on either a
cash or margin basis. In margin transactions, Advanced Clearing extends credit
to the customer, subject to various regulatory and internal margin requirements,
collateralized by cash and securities in the customer's account. In connection
with these activities, Advanced Clearing executes and clears customer
transactions involving the sale of securities not yet purchased (short sales),
substantially all of which are transacted on a margin basis subject to
individual exchange regulations. Such transactions may expose the Company to
off-balance-sheet risk in the event margin requirements are not sufficient to
fully cover losses which customers may incur. In the event the customer fails to
satisfy its obligations, Advanced Clearing may be required to purchase or sell
financial instruments at prevailing market prices in order to fulfill the
customer's obligations.
Advanced Clearing seeks to control the risks associated with its customer
activities by requiring customers to maintain margin collateral in compliance
with various regulatory and internal guidelines. Advanced Clearing monitors
required margin levels daily and, pursuant to such guidelines, requires
customers to deposit additional collateral, or to reduce positions, when
necessary.
Advanced Clearing borrows securities both to cover short sales and to
complete customer transactions in the event that a customer fails to deliver
securities by the required date. Such borrowings are collateralized by
depositing cash or pledging securities with lending institutions and are "marked
to market" on a daily basis. Failure to maintain levels of cash deposits or
pledged securities at all times at least equal to the value of the related
securities can subject Advanced Clearing to risk of loss. Advanced Clearing
seeks to control the risk of loss by monitoring the market value of securities
pledged and requiring adjustments of collateral levels where necessary.
86
<PAGE> 28
QUARTERLY FINANCIAL DATA (UNAUDITED)
in thousands, except per share and stock price data
<TABLE>
<CAPTION>
for the fiscal year ended sept. 25, 1998
---------------------------------------------------------------------------
first quarter second quarter third quarter fourth quarter
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 31,365 $36,762 $47,926 $48,141
Interest expense 5,689 6,684 8,320 8,586
- ------------------------------------------------------------------------------------------------------------------------------------
Net revenues 25,676 30,078 39,606 39,555
Total expenses excluding interest 43,171 30,394 30,346 30,473
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) before provision for income taxes (17,495) (316) 9,260 9,082
Net income (loss) $ (11,249) $ (271) $5,940 $ 5,790
- ------------------------------------------------------------------------------------------------------------------------------------
Basic earnings (loss) per share $ (0.39) $ (0.01) $ 0.20 $ 0.20
Diluted earnings (loss) per share $ (0.39) $ (0.01) $ 0.20 $ 0.20
Stock price data ($)
High 18.88 15.03 16.38 22.88
Low 10.81 11.38 12.34 13.50
</TABLE>
<TABLE>
<CAPTION>
for the fiscal year ended sept. 26, 1997
---------------------------------------------------------------------------
first quarter second quarter third quarter fourth quarter
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 19,042 $22,641 $24,904 $29,080
Interest expense 3,690 4,197 4,959 5,583
- ------------------------------------------------------------------------------------------------------------------------------------
Net revenues 15,352 18,444 19,945 23,497
Total expenses excluding interest 15,416 13,036 12,805 14,556
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) before provision for income taxes (64) 5,408 7,140 8,941
Net income (loss) $ (75) $ 3,469 $ 4,587 $ 5,841
- ------------------------------------------------------------------------------------------------------------------------------------
Basic earnings (loss) per share $ (0.00) $ 0.13 $ 0.16 $ 0.20
Diluted earnings (loss) per share $ (0.00) $ 0.13 $ 0.16 $ 0.20
Stock price data ($)
High n/a 10.63* 8.88 13.16
Low n/a 8.38* 6.06 7.53
</TABLE>
*Commencing March 4, 1997.
All information is adjusted for the two-for-one stock split effective August
18, 1998.
The stock prices listed do not include retail markups, markdowns, or
commissions, and may not represent actual transactions.
<PAGE> 1
EXHIBIT 24.1
POWER OF ATTORNEY
The undersigned hereby appoints Robert T. Slezak as his agent and
attorney-in-fact for the purpose of executing and filing all reports on Form
10-K relating to the year ending September 25, 1998, and any amendments
thereto, required to be filed with the Securities and Exchange Commission by
Ameritrade Holding Corporation.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
as of the 24th day of November, 1998.
/s/ Gene L. Finn
- ----------------
Gene L. Finn, Director
<PAGE> 1
EXHIBIT 24.2
POWER OF ATTORNEY
The undersigned hereby appoints Robert T. Slezak as his agent and
attorney-in-fact for the purpose of executing and filing all reports on Form
10-K relating to the year ending September 25, 1998, and any amendments
thereto, required to be filed with the Securities and Exchange Commission by
Ameritrade Holding Corporation.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
as of the 24th day of November, 1998.
/s/ Thomas Y. Hartley
- ---------------------
Thomas Y. Hartley, Director
<PAGE> 1
EXHIBIT 24.3
POWER OF ATTORNEY
The undersigned hereby appoints Robert T. Slezak as his agent and
attorney-in-fact for the purpose of executing and filing all reports on Form
10-K relating to the year ending September 25, 1998, and any amendments
thereto, required to be filed with the Securities and Exchange Commission by
Ameritrade Holding Corporation.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
as of the 24th day of November, 1998.
/s/ Charles L. Marinaccio
- -------------------------
Charles L. Marinaccio, Director
<PAGE> 1
EXHIBIT 24.4
POWER OF ATTORNEY
The undersigned hereby appoints Robert T. Slezak as his agent and
attorney-in-fact for the purpose of executing and filing all reports on Form
10-K relating to the year ending September 25, 1998, and any amendments
thereto, required to be filed with the Securities and Exchange Commission by
Ameritrade Holding Corporation.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
as of the 24th day of November, 1998.
/s/ Mark L. Mitchell
- --------------------
Mark L. Mitchell, Director
<PAGE> 1
EXHIBIT 24.5
POWER OF ATTORNEY
The undersigned hereby appoints Robert T. Slezak as his agent and
attorney-in-fact for the purpose of executing and filing all reports on Form
10-K relating to the year ending September 25, 1998, and any amendments
thereto, required to be filed with the Securities and Exchange Commission by
Ameritrade Holding Corporation.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
as of the 24th day of November, 1998.
/s/ John W. Ward
- ----------------
John W. Ward, Director
<PAGE> 1
EXHIBIT 24.6
POWER OF ATTORNEY
The undersigned hereby appoints Robert T. Slezak as his agent and
attorney-in-fact for the purpose of executing and filing all reports on Form
10-K relating to the year ending September 25, 1998, and any amendments
thereto, required to be filed with the Securities and Exchange Commission by
Ameritrade Holding Corporation.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
as of the 24th day of November, 1998.
/s/ David W. Garrison
- ---------------------
David W. Garrison, Director
<PAGE> 1
EXHIBIT 24.7
POWER OF ATTORNEY
The undersigned hereby appoints Robert T. Slezak as his agent and
attorney-in-fact for the purpose of executing and filing all reports on Form
10-K relating to the year ending September 25, 1998, and any amendments
thereto, required to be filed with the Securities and Exchange Commission by
Ameritrade Holding Corporation.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
as of the 18th day of December, 1998.
/s/ Joseph A. Konen
- -------------------
Joseph A. Konen, Director
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS INCLUDED IN THE FORM 10K AS OF SEP. 25, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-25-1998
<PERIOD-START> SEP-27-1997
<PERIOD-END> SEP-25-1998
<CASH> 527,982,289
<RECEIVABLES> 672,854,018
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 21,638,669
<INSTRUMENTS-OWNED> 0
<PP&E> 26,116,333
<TOTAL-ASSETS> 1,290,401,676
<SHORT-TERM> 0
<PAYABLES> 1,147,848,122
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 0
<LONG-TERM> 0
0
0
<COMMON> 290,356
<OTHER-SE> 84,281,728
<TOTAL-LIABILITY-AND-EQUITY> 1,290,401,676
<TRADING-REVENUE> 0
<INTEREST-DIVIDENDS> 66,716,234
<COMMISSIONS> 85,644,433
<INVESTMENT-BANKING-REVENUES> 0
<FEE-REVENUE> 5,955,534
<INTEREST-EXPENSE> 29,278,536
<COMPENSATION> 36,082,707
<INCOME-PRETAX> 531,026
<INCOME-PRE-EXTRAORDINARY> 531,026
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 210,438
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
