eTrade 2002 Annual Report Download - page 135

Table of Contents
Index to Financial Statements
shares of Wit common stock expired unexercised in February 2001 and the Company did not exercise any of the warrants to purchase
approximately 1.8 million shares. Concurrently with this agreement, the Company and Wit entered into a Strategic Alliance Agreement
(“Strategic Alliance Agreement”). Pursuant to the terms of the Strategic Alliance Agreement, the Company acquired Wit’ s retail brokerage
business, received approximately 4.0 million shares of Wit common stock and a warrant to purchase up to 2.0 million shares of Wit common
stock for $10.25 per share as consideration for naming Wit to be the exclusive source of initial public offerings and entering into certain
arrangements concerning follow-on offerings, investment banking products and secondary market-making services. The Strategic Alliance
Agreement had a total term of five years. The fair value of the consideration for the Strategic Alliance Agreement was recorded as deferred
revenue and amortized to other revenue over the term of the Strategic Alliance Agreement. In a related transaction, the Company also
purchased 2.0 million shares of Wit common stock for $20.5 million in cash. The Company subsequently purchased 300,000 shares of Wit
common stock for approximately $1.9 million on the open market. As a result of these transactions, the Company held an approximate 10%
ownership interest in Wit, and accounted for its investment under the equity method.
Effective August 20, 2001, the Company entered into a Termination Agreement and General Release with Wit (“Termination Agreement”).
Pursuant to the terms of the Termination Agreement, the Company and Wit terminated the Strategic Alliance Agreement in its entirety and
entered into a new business relationship. In consideration of the Termination Agreement, the Company transferred to Wit 9.3 million shares of
Wit common stock, warrants to purchase 1.8 million shares of Wit common stock at a price of $0.60 per share, and warrants to purchase 2.0
million shares of Wit common stock at $10.25 per share. The fair value of the shares and warrants transferred to Wit was $16.5 million, which
has been recorded as a reduction to other revenues, offsetting the recognition of $17.8 million in remaining deferred revenues relating to the
termination of the Company’ s Strategic Alliance Agreement. Subsequent to entering into the Termination Agreement, the Company sold its
remaining investment in Wit, comprised of 2.3 million shares of Wit common stock, to a related party at fair market value for cash of $3.8
million. The Company recognized a $19.8 million loss on its investment in Wit, reflecting the difference between the fair value and the carrying
value of the securities as of the date of these transactions.
Venture Capital Funds
E*TRADE eCommerce Fund I — The Company made a $25.2 million contribution of certain equity securities to the E*TRADE eCommerce
Fund, L.P. (“Fund I”) on October 1, 1999. Fund I raised an additional $75.0million from third-party investors (including $25 million from
entities associated with SOFTBANK and $4.5 million from certain executive officers and directors). Fund I invests in early to mid-stage
companies that are focused on enterprise technologies, particularly in the networking, storage, infrastructure, tools and applications markets.
In October 2001, the Company amended its agreement in Fund I, whereby it increased the Company’ s capital commitment by $7.5 million and
modified the order in which Fund I distributions are to occur. The change provides for cash contributing partners to receive priority in
distribution until they reach a 15% annual rate of return on their initial investment; the Company as the sole securities contributing partner,
would then receive any excess distributions until they reach a 15% rate of return on the cost basis of contributed securities. Additional
distributions, if any, are then allocated proportionately to all limited partners regardless of the nature of their respective contributed capital. As
a result of this amendment, the Company recorded an additional equity loss of $11.1 million in fiscal 2001.
During fiscal 2002, the Company contributed approximately $6.8 million to Fund I. In October 2002, the Company received a cash distribution
from Fund I of $0.9 million associated with the cash proceeds on the sale of Fund I’ s equity interest in certain companies. At December 31,
2002, the Company’ s remaining capital commitment to Fund I was $0.7 million. The total funded and unfunded capital for Fund I is $107.7
million.
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2003. EDGAR Online, Inc.