Sample Business Plan PhatGroup

| a U B B | | B B B B | B B g B B ' | BusiNess PLaN CONFIDENTIAL | | g TABLE OF CONTENTS m • t H B EXECUTIVE SUMMARY THE MARKET .................................... ........................... 1 6 8 ........................................... FORMATION OF PHATGROUP.COM o MISSION B • STRATEGY COMPETITION ........................................... PHATPARTNERsPRODUCTS AND SERVICES..................................... ............................... . OPERATIONS AND ENGINEERING ........................... 9 i i .13.10 15 18 .22 FOUNDERS AND MANAGEMENT TEAM ....................... FINANCIALS .......................................... APPENDIX • ANGEL INVESTORS AND ADVISORS o PHATAFFILIATES ................................ .......................... ......................... LETTER • WEBSITE DEVELOPMENT .................. B 28 29 30 H • AOL NO-ACTION 33 n I | I II I I n | 3 3 I'll I r | I i J r J | | | i J | J | | EXECUTIVE SUMMARY | M Some months ago, more than a million Sunday Boston Globe subscribers received copies of the paper in a brightly-colored blue and yellow plastic bag that pictured the Warner Brothers cartoon character "The Roadrunner" with this message from MediaOne: "We're going to transform the way you experience the Internet. (Go ahead and read the newspaper first, if you'd like)." PhatGroup.com is an Internet gateway that will transform the way financial services are provided to customers. It is a customer gateway where virtually all of a customer's financial needs, from mortgage and banking Internet destination. investments, will be met easily and securely to insurance and at one In the following PhatGroup.com, pages, we will share with you details about its partners, its audience, how it will deliver best-of- M M M PhatGroup.comr. is an M M internet that will the way breed financial services and products, how it will generate revenue, and mostitsimportantly, how it will successfully meet the high expectations of customers. gateway transform financial services Changing U M Landscape are provided to customers. But first things first - a word about the changing landscape of the financial services industry and how the emerging online economy is changing the way consumer needs are being met. There is no turning back. The combination of de-regulation, the impact of new Internet technologies, and the emergence of a global economy have thrown financial services into disarray. Three recent developments have presented the industry with some formidable challenges. • First, in business relationships, there has been a power shift from enterprises to consumers. A new generation of well-informed consumers - Generation X, baby boomers, and a growing number of older Americans - now interact directly with enterprises for a wide variety of services from on-line shopping to banking and investing. Increasingly, intermediaries are being eliminated. And with the introduction of new technology applications via the Internet, consumer expectations are continuously being raised. The challenge to financial services is when provide what consumers how they want it...and how to they wantconsumers simply, they want... it. Put want easy and secure access to many financial services from one gateway. • The second development is the commoditization of financial services. As institutions introduce new financial products and services, competitors quickly develop similar offerings. The result is commoditization and ever-shrinking profits and fees. Enterprises have tried to meet this challenge by consolidations, mergers, and m W W M M M n W f_US/N_SS PMN • CONFIL)EN'nAX 1. | l EXECUTIVE SUMMARY I alliances I - but with mixed results. In a study of 168 mergers between 1979 and 1990 by New York University professor of fhlance Mark Sirower, 67 percent of the merged companies lost significant shareholder value. • The third development involves the absence of loyalty among consumers. With an increasing number of choices for services, consumers know what services are the best-of-breed in the marketplace. Consequently, they move from one service provider to another at the speed of a click. The challenge to financial services is how to develop loyal consumers who will stay at one Internet destination to satisfy their financial service needs. As blurred, new and and developments, traditional old tried-andbeena result of these rules other players have emerged, and boundaries have true paradigms for doing business no longer work. I I I Best-of-breed I services from the nation's most Time-Gateway ....................................................................................................................................................................... successful financial In E-Commerce, its 1.999 report on financial services, Ernst & Young emphasized that among emerging organizations and operating models, I the most critical factor for future success in financial services is the role of the gateway to customers. The report noted that a few firms will control the gateways and that these will not necessarily be in the financial services industry. And it concluded, "Those firms that control the gateway will hold positions of considerable customer interactions with the firm and with other service providers." PhatGroup.com is positioned to be "the" definitive gateway for consumers, offering the best-of-breed services from the nation's most successful financial service providers, on a platform that will create exclusive partnerships in a coherent financial network - and beyond. service providers. I I i Market Needs I By providing consumers with a one-stop solution for all of their financial service needs through a web-based "vortal", a portal that vertically integrates exclusive financial service companies, PhatGroup.com will meet the most pressing marketplace financial service providers. needs of both consumers and I I o that first is time consumer's need for simplicity website) anddestination a The saves the (no jumping from website to - a single provides variety of easy-to-use financial services. How many consumers are projected to be online and in needStephens estimates that by the year of financial services via the Internet? BancBoston Robertson 2003, there will be 25 million online brokerage accounts. Credit BUSINESS PI,AN • CONFIDENTIAL 2. I i | II EXECUTIVE SUMMARY . | I Suisse First Boston projects as many as 30 million online banking accounts by 2003. IDC estimates that electronic commerce will explode - from $50 billion dollars last year to more than $1.3 trillion by 2003. Armual online mortgage originations will reach between $180 and $200 billion by 2004, according to Goldman Sachs. And by 2003, the number of households conducting online financial transactions will grow from 3.3 million households to as many as 20.9 million households, reports Forrester Research. • The second need PhatGroup.com will meet is the need financial services enterprises have to quickly and easily offer best-of-breed products and services through the most sophisticated and easy-touse cham_els available. Using architecture that makes available diverse services from one gateway, PhatGroup.com will enable each partner to offer products and services through one unique chalmel that attracts millions of clients through the collective draw of all partners, I I I A PhatAccountrM allow members will to pay trade funds, I bills and taxes, stocks, I transfer and apply for loans Opening I Doors with a PhatAccountTM and mortgages... I When a consumer becomes a PhatGroup member, a single online PhatAccount is established for him or her to access all PhatGroup services - loans, investments, banking, etc. - from PhatGroup partner providers. All subsequent financial transactions through partners make up one integrated account. The PhatAccount is both a unique creation and the distinctive highlighted feature of PhatGroup.com, bridging the services of varied providers through an easy-to-read quick-summary statement. The PhatGroup.com website will do more than housing and presenting a member's financial information. It will be fully transactional, giving each PhatGroup member easy access to PhatGroup partners. Members will engage in transactions without leaving PhatGroup.com's web site. PhatGroup.com, in a word, will be a one-stop solution for any and all of its members' online transactions. A PhatAccount will allow members to pay bills and taxes, trade stocks, transfer funds, and apply for loans and mortgages using the varied partners provided by PhatGroup.com. I I I I I i I Freedom PhatMembers and Access for PhatMembersTM will have the freedom to use some or all of the PhatPartner best-of-breed services offered to them. Their personal data will be stored and shared, where applicable, between PhatPartners at the time of account activation. PhatGroup.com will ultimately refine the process of managing BUSINESS PlAN • CONFIDENTIAL 3. i i , XC.OVFSOMM .... ... online i financial services by providing a credible, efficient, personalized and simplified program for controlling will always and maintaining featured one's financial attraction, or health. The PhatAccount B "product," which draw consumers. will grow B service be the constant will set PhatGroup.com The PhatAccount allows apart unlimited competitors for from its opportunity, and it as the consumer's industries. total online needs - in virtually all to encompass and information-related i B PhatPartners PhatGroup.com's Equals Best-of-Breed vision is straightforward: provide the best-of-breed Revenue for is the services by the best-of-breed partners. To do this, PhatGroup.com is conducting a selection process for PhatPartners that involves an exhaustive examination of the best and most forward-thinking enterprises in the country. In this process, its experienced management team has benefited PhatPartnersr,,I generated R through greatly from its extensive network Equally important, PhatGroup.com B of relationships within the industry, has selected Ernst & Young, a premiere to conduct an RFP aggregation of assets. consulting firm with significant e-commerce experience and help screen and qualify prospective partners, B PhatGroup.com will not rely exclusively on an RFP to determine its partners. It will leverage both methods to allow for a process that will reach the best contenders, and ultimately, allow for a discriminating and thoughtful selection. will have exclusive rights in its individual service sector. from and to their n Each PhatPartner i They will bePhatMortgage, the sole provider PhatBank, PhatTrade, etc. and owner of the trademark PhatPartners will automatically benefit increased visibility, an ever-increasing consumer database, cross-selling internal these benefits, While internal marketing promotion. the PhatGroup.com team will works to ensure model work naturally create the success. PhatGroup.com will take the appropriate measures PhatPartners, so that those companies who provide not, in essence, PhatGroup.comwith website. the featured partner on the competing service B i in contracting its multiple services are of another signed B i The PhatPartner process will be conducted and completed in a series of phases. This will ensure efficient integration, as well as provide the platform by which successive phases can be implemented. Phase 1: PhatBank TM, PhatTrade TM, PhatMortgage PhatInsu rance TM, PhatCard TM, PhatBillpay PhatFunds TM (mutual funds), PhatAdvice PhatJobs TM, PhatTravel TM, PhatAnnuities TM, PhatLoan TM . TM, i B Phase 2: TM, TM, PhatBond TM, PhatAuction TM . B BUSINESS PLAN • CONFII)ENFIAI_ 4. | 1M I PhatGroup.com will also feature varied content partners to add to the marketability, efficiency, accuracy and creditability of the website. Those content partners include Links2Go (as both the internal site and Web search engine), NewsAlert for market headlines and research, E-dentification for site security, and CommTouch for PhatMember e-mail and calendaring services. I | Revenue I Generation PhatGroup.com will generate revenue in three ways: through a branding fee, a direct transaction flow fee, and advertising fees. Each PhatPartuer will pay an annual fee for its service space and trademark. Initially, this revenue will be used, in large part, to support the national branding effort that will identify and create the PhatGroup.com personality that will attract the consuming public. The flow fee will be based on the unique transactional factors and efforts behind each partner's service. Advertising space on the site, consisting in the form of promotional offers, links and banners, will provide a consistent and substantial source revenue. PhatGroup.com of will not allow for advertising that would, in any way, create a conflict of interest or compete directly with the featured PhatPartners. AS new and better • products COllie on and services the market, can PhatPartners make them available | i Asset Aggregation and Sticking Power to immediately to As a result of the commodization of financial services, enterprises are unable make money from transactions. Their revenue is generated through the aggregation of assets. What distinguishes PhatGrou.p.com from any of its would-be competitors is its unique customer gateway model. This enables PhatPartners to build assets through PhatMembers. As PhatMembers grow their PhatAccounts, PhatPartners benefit from asset aggregation. Equally important, the freedom and variety provided to PhatMembers translates to sticking power or customer loyalty. As new and better products and services come on the market, PhatGroup can PhatMembers. I I make them available immediately to PhatMembers. PhatMembers to jump from website to website. i There is no need for PhatGroup also will be featured on the website of eachof PhatPartner. immediately expand the company's reach to millions consumers visit PhatGroup.com through a simple click. This will who can I I Finally, one of the crowning strengths of PhatGroup.com is its credibility. It is an "honest broker" and not a financial services provider. Its raison d'etre is to serve PhatMembers with the best-of-breed products and services available in the marketplace. B BUSINESS PLAN • CONFIDENTIAL 5. II "o II I ¸ I ° 'i ¢ m j 'o II ii J I | THE MARKET I There is a strong and growing market for providing consumers a simple, convenient and secure way to meet their financial services needs via the Internet. A growingwebsites for these needs. are turning tradingwide number of consumers range of They are to a online, applying for mortgages, tracking portfolios, doing their 160 180 t 1404 y / r8 i 80_ _ 90% 70% i = =_ 120! j _ _10o t " _ a01 _ 2; 60_ s0_ 40_'_ I banking, and paying bills. executives at financial services Industrv. analysts, I I ! a01 40! 20 20_ 0 1998E 1999E 2000E 2001E :__* :;,_'30,_, _ _; 2002E companies, chorus withand media punditsnew technologies investors make up a consistent one theme - as take hold, a staggering number of consumers are participating in the emerging online economy. In impressively increasing numbers, these Internet-savvy consumers are turning to banks, brokerage firms, mortgage companies, insurance compmxies, and other enterprises to provide them convenient ways of simplifying their financial services needs. 25-; i!20_ _0_ 2003E 0_ y,, _ + ..m_,o,r,_,_,,, _ Percent of FinancialUsers I ONLINE ROKERAGE B ACCOUNT 1997-2003E (inmillions) I...................................................................................... | 20_ _s _i __ _; _ I Current statistics and forecasts by the nation's leading I I analysts are impressive: • Electronic commerce will grow from $50 billion _ next four years. (IDC) • There will be between 25 and 30 million online dollars last accounts morethe year$1.3 trillion in the year to by than brokerage 2003. (BancBoston Robertson o I Stephens and Credit Suisse First Boston) 10+_ ii ____ _ .................... 1996 1997 1998 1999E 2000E 2001E 2002E2003E TRANSACTIONS I The number of online banking accounts today (estimated at 13.9 million) will increase to 96 million by 2003. (BancBostonRobertson Stephens) 40,00o 35,00o 25.00o 20.000 30/)00 ,o,ooo' s,000_,ooo_ 0 1Q:97" PER QUARTER AverageTraderdQ TR (in thousands) I ° The number of households conducting online financial transactions will grow from 3.3 million households to as many as 20.9 million households by 2003. (Forrester ° Annual online mortgage originations will reach between $180 and $200 billion by 2004. (Goldman Research) Sachs) ° Insurance over the Internet should grow 100% annually resulting in 3-5% market penetration. (Goldman Sachs) _ .......... _ _N __ _ i 2Q:97""3Q:97""iQ:98""iQ:9d"';Q:98-'4Q:98 _._ _;:_ 1Q:99 2Q:99 ...... i I I i so Co_._._,e_,,,.._ ..... _._o_,o,, Ro_.,.o. ......,,,,_,0.. S,o_,, BUSINESS PlAN " CONI-'IDENTIAI_ 6. I I THE MARKET ...................... . I I As many banks and other providers of financial services scramble to do business on the World Wide Web, they are confronting shrinking profits, high Internet costs, and consumers whose loyalty is to convenience. While the market for financial services via the Internet is strong, there is an additional need for new more profitable model for delivering these services. Many leading industry analysts believe this new model will be a vertical portal. Morgan Stanley Dean Witter (The Internet and Financial Services) defines a vertical portal as "a destination for cybersurfers to buy and/or get information on a variety of different breadth, that share the products user friendliness,site's focus. and customization A vertical portal's a loyal generate product customer who visits the site frequently and stays for some time." "Vertical portals, taking the strategic high ground," it continued, "will become the ultimate distributors." And in its 1999 E-Commerce report on financial & Young emphasized the most critical factor for in financial services is the role of the gateway to noted that a few firms will control the gateways will not necessarily reported concluded, services, Ernst future success customers. It and that these 37.8 ONLINEANKINGACCOUNTS U.S. B INTHE (in millions) 96.39 I I 64& ,;_ _ _ _ ] _'_ _ _I I I I _;,7i6 _3__ ..... _i 1998E 1909E 2000E 200_E 2002E 2003E INTHE U,S. ONLINE MORTGAGE ORIGINATIONS (in billions) I I I I 120/ i 100 V _0_ 60V ,o_ 269 17,9 _ 2000E 109, 64.5 _3 _ 2001E ............ :_!".'_i 2003E be in the financial services industry. The "Those firms that control the gateway will interactions with the _ _ _s_ _ _'_:' 2002E firm and with other service providers." hold positions of considerable customer 20_ 0i_ 1999E m_" ONLINE SALES INTHE U.S. (in millions) ,4 5782 I "L /I 2,570 I = 1999E 2000E 2001 E 2002E 2003E Soorce: Company reports and BancBoston Rot,'ertson Stephens estimates i BUSINESS PLAN • CONI-'IDENTIAL 7. o 3 __. 0 '='I li = . | i | i | | | f | FORMATION OF PHATGROUP.COM ]] I The founders, management team, and others associated with PhatGroup.com identified an immediate need for a new financial services bushless model that would serve consumers' needs efficiently and profitably. Based on their experience in financial services, they also recognized that the tens of millions of technology savvy consumers want the conveniences represented by the best the Internet has to offer. Responding to fill these needs, Founder Sean Brennan, a former bank executive, and Co-Founder William Stewart, a venture capitalist and CEO of Asia Pacific Ventures Technology Partners (APVTP), founded PhatGroup.com. Billed as the financial industry's first vertical market portal or "vortal", PhatGroup.com will link major financial institutions on the PhatGroup.com website and enable consumers and vendors to leverage the benefits of a wide variety of separate services, activities and alliances available through a single customer gateway, I I PhatGroup.com committed providing products is to best-of-breed and services ]] Mission The mission of PhatGroup.com is to be "the" gateway for consumers, offering best-of-breed products and services from the nation's most successful financial service providers, and allowing consumers to transact and maintain their records in one summarized PhatAccount. These exclusive providers will be leaders in the brokerage, banking, investment, tax, lending, insurance, mutual fund and credit card industries. With time, PhatGroup.com will grow to provide consumers a comprehensive, one-stop solution for all of their online needs. through one convenient, customer easy-to-use I gateway website. | ]] I I i Strategy PhatGroup.com is committed to providing best-of-breed products and services through one convenient, easy-to-use website. Through one all-inclusive PhatAccount, each PhatMember will be provided products and services by PhatPartners. PhatGroup.com will enlist exclusive partners who adhere to the highest industry standards m_d who reach out to broad demographic groups that include Generation X, baby boomers, and older online consumers. Each prospective PhatPartner will be required to engageand a strict qualifying process products and Ernst in delivery of best-of-breed directed by and Young. The quality services by PhatMembers will be assured through PhatGroup.com's rigid and ongoing review process. I i BUSINESS PLAN • CONFIDENTIAL 8. II II II II II II II II i J o o I I 3 0 J | | | | | | | J J I I i I i | | I | | COMPETITION I At this time, no other enterprise is focused on the comprehensive solution envisioned by PhatGroup.com. But there are many enterprises that offer partial solutions. Two are under development and plan to provide consumers only with a one-stop financial accounts, banking investments, travel rewards and bills. summary of their basic credit cards, communications, I I I The two enterprises - Yodlee.com and VerticalOne.com - will offer accounting-type services and fall short of what consumers are demanding. To make any related transactions on those accounts, consumers will need to go to the host account site. Vertical One, which was acquired recently by Security First, has no revenue and does not intend to have revenue until 2001. We believe the revenue models of Yodlee.com and VerticalOne.com are PhatGroup.corn tinguished would-be from is dis- competitors it is a I distinctly limited. Yodlee.com, for example, plans to generate revenue solely through advertising, data mining, co-branding, equipment fees and referral fees. PhatGroup.com is distinguished from would-be competitors because it is a single source transactional site. In addition to generating revenue from transactions, it does so through branding and from each other's client advertising. What's more, PhatGroup.com and all PhatPartners benefit base. The result is a solid and ongoing cross-pollination. The convenience and ease-of-use afforded PhatMembers through one website location ensures consumer loyalty that translates into more revenue. As industry analysts and others report, millions of consumers already transact business via the Internet, and when it becomes even more convenient, easy and secure, millions more will join them. No other enterprise - no bank, no mortgage company, no dot.com company has a comprehensive model today that offers consumers a way to meet all their financial service needs, (and eventually, all of their online needs), through one, fully transactional customer gateway. PhatGroup.com has a comprehensive model today - and it works. because single I I source site. transactional E i I I I I BUSINESS PLAN • CONFII)ENTIAL 9. | I I i | I i i I i I I I I Ul @ c I I I I P RODUCTSANDSERVICES I PhatMembers will have a single PhatAccount that enables them to receive a wide range of best-of-breed financial products and services provided by PhatPartners through the PhatGroup.com customer gateway. PhatMembers investments, will be able to do online trading and banking, manage their access the most comprehensive financial information and news I I about companies and stock market developments, seek financial advice, send and receive e-mail, and much, much more. Most important, they will be able to conduct transactions, get hfformation, and, put simply, receive the products and services want them. As PhatGroup PhatAccount, they wmlt.., how they want them .... and when they I PhatMembers the products services how receive I grows to additional service product binding industries, the will remain encompass the constant distinguishing and I together PhatGroup's varied partners, PhatGroup.com will also offer several diversified products and services to consumers and PhatMembers. While each of these products and/or services revenue willthe form of ad to the consumer,among other also work they will forms, in be a benefit impressions, to generate they want... they want and when they I them.., I The introduction of services through PhatGroup.com will take place in phases. This will ensure efficient integration, as well as provide the platform by which successive phases can be implemented. Some of the products and services provided at one convenient destination will include: to each PhatGroup member want them. I I Phase 1: • PhatBank I • PhatTrade o PhatMortgage I ° PhatLoan ° PhatInsurance ° PhatCard I ° PhatBillpay Phase 2: ° PhatAdvice o PhatBonds • PhatFunds • PhatAuction I i I ° PhatJobs • PhatTravel • PhatAnnuities BUSINESS PlAN • CONFIDENTIAL 10. I I PRODUCTS AND SERVICESPHAT_ P AH S.ELm,__._. , I I o _ ," "" .,'" ,. _atfumiture _l_at tickets _ . ..... o _'_ _atcard _bat adv,ce ' phattravel @hatschoo/ _at mobile 1 1 " _phatpr ." _atrealty @phatlaw I BUSINESS PLAN * CONFIDENTIAL 11. | il PR OD UCTS AND SER VICES | H As PhatGroup grows to encompass additional service industries, the PhatAccount, will remain the constant distinguishing product binding together PhatGroup's varied partners. PhatGroup.com will also offer several diversified products and services to consumers and PhatMembers. While each of these products and/or services will be a benefit to the consumer, they will also work to generate revenue in the form of ad impressions, among other forms. Here are some examples of the supportive services PhatGroup.com will offer: • Free E-mail & Calendaring Services - All PhatMembers receive a free e-mail account, accessible from any computer with Internet access. In addition to giving our PhatMembers a reason to return everyday, these e-mail addresses will serve as an excellent source of cross-selling for our PhatPartners and an ideal way for us to introduce new products o E-mail Newsletter N and services to our PhatMembers. - Newsletter to all PhatMembers detailing H B H H PhatGroup.com to plans quickly grow from N its Financial Industry roots to include all industries, travel menL PhatPartners, special rates and promotions, investing, banking, etc. as well as tips about such as N H o Quotes, News and Research - Free to all, this information will be provided by a third party such as NewsAlert. This information will include financial news, stock quotes and charts, market updates, etc. ° Mutual Funds - A listing of all major mutual funds including comparative research studies and information such as performance and price history. • PhatShops - A shopping directory affiliate program with links to hundreds of major web retailers for everything from flowers to computers to office equipment. Easily navigated by category, these links will provide revenue in the form of commissions earned on all purchases generated by links from PhatGroup.com. PhatGroup.com plans to quickly grow from its financial industry roots to include all industries, such as travel and entertainment. We will continue to partner with best-of-breed companies in each category to bring to our PhatMembers an exhaustive list of PhatPartners, each integrated into the PhatAccount. This integration will allow a member, for example, to purchase an airline ticket or a DVD with one click at one of our PhatPartners, with the charge billed to his or her PhatCard, held by our PhatPartner. PhatGroup.com intends to grow its featured products (PhatPartners) so that it will move from a "one-stop financial solution" to the consumer's all-encompassing, "one-stop solution." and entertain- H H B N H H N H BUSINESS PLAN • CONEIDENTIAL 12. "o II I! !1 I! 'o II | PHATPARTNERS °. I As part of its commitment to provide best-of-breed products and services to PhatMembers, PhatGroup will enlist PhatPartners who adhere to the highest industry standards and PhatGroup.com who reach out to broad demographic groups online consumers. that include Generation X, baby boomers, and older I I Each prospective PhatPartner will be qualified through a rigorous RFP evaluation process to be conducted by Ernst and Young, one of the nation's most distinguished consulting firms with an extensive e-commerce practice. Additionally, the quality and delivery of best-ofbreed products and services by PhatMembers will be assured through PhatGroup.com's own rigid and ongoing review process. Each PhatPartner will have exclusive rights in its individual service sector. They will be the sole provider and owner of the title PhatBank, PhatTrade, PhatMortgage, etc. PhatPartners will benefit from increased visibility, an increased consumer database, and cross-selling and internal promotion that both the PhatGroup.com model and the internal marketing PhatGroup.com team will work to ensure, measures in contracting its will take the appropriate ! PhatMembers, will I I enlist PhatPartners who adhere to the highest industry standards. Ill i PhatPartners, that those companies who service of another signed not, in essence, socompeting with the featured provide multiple services are partner on the PhatGroup.com website. As noted, the PhatPartner process will be conducted and completed in a series of phases. This will ensure efficient integration, as well as provide the platform by which successive phases can be implemented. At this writing, PhatGroup.com is in various stages of the process of reviewing, evaluating and negotiating with leading partners. Below is a list of some of the PhatPartners that have been accepted to date. They include both revenue producing partners, partners who are providing important additional services to PhatMembers, and partners who are providing PhatGroup.com's infrastructure. o Quick & Reilly, Inc., the nation's largest and most successful discount brokerage firm and recently, an affiliate of the Fleet Financial Group, will be PhatGroup.com's PhatTrade partner. Quick & Reilly has 170 locations and over 250,000 accounts. • Rebls.com, an oniine mortgage PhatMortgage partner. provider, will be PhatGroup.com's I I I I I | ° FlyCast, a leading provider of Internet direct-response advertising, will provide and service the ad banner space on PhatGroup.com's i website. PhatGroup.com's initial agreement one million ad impressions. with FlyCast guarantees i BUSINESS PLAN • CONFIDENTIAL 13. | PHATPARTNERS | I • LinkShare, one will provide the PhatGroup.com a per impression of the largest Internet affiliate marke_g companies, connections to what will be a roster of PhatShops. will be paid for link-throughs to various shop sites on basis. I I ° CheckFree.com, the nation's first end-to-end electronic bill payment solution, will be PhatGroup.com's PhatBillpay partner. CheckFree.com serves close to 3 million customers, has more than 1,100 connections with merchants, financial institutions. and services over 350 major I I I • E-denfification will be PhatGroup.com's security provider for the PhatAccount. E-dentification will provide a fraud protection/identity system that will keep information and transactions secure and private. i ° services to corporations, will be PhatGroup.com's of e-mail provider. CommTouch, the largest international provider web-based e-mail CommTouch will host, manage and support PhatMember e-mail accounts. * DirectWeb, the first and only service to offer both a computer and Internet connection to subscribers at a low monthly cost, will be the PhatGroup.com's PhatlSP. I I I ° NewsAlert, a leader in electronic financial information and research, will be providing a broad range of content for PhatGroup.com including market news and commentary, stock quotes, charts and graphs, mutual fund information, IPO calendars and company research. o Trustee.corn, a leading organization serving as guardian Internet standards will soon be designating PhatGroup.com as a site that adheres to the highest standards of quality in the operation of its website. I | I ° Links2Go asprovide will serve as PhatGroup.com's PhatLinks - a unique financial search component, as well information search service. I • Continuum outsourcing functioning Software will be PhatGroup.com's engineering partner and the chief architects behind the fully PhatAccount. BUSINESS PlAN ° CONFIDENTIAL 1,J. I II I i II l i i I "l II l i I J | | | i i |. .| | | I m _ ........ II OPERATIONS AND ENGINEERING | Website The PhatGroup.com I website, the centralized contact point for consumers, will be hosted at Exodus Communications, Inc., a leading provider of systems and network management solutions for companies with mission-critical Internet operations. This will provide PhatGroup.com with a secure, high-bandwidth location capable of scaling with the company's growing needs. Our production servers will include firewall, web server and database servers. Using load-balancing, clustering and data mirroring, we will ensure that the website is available 24x7x365. All data, both public and private, will be fully encrypted, ensuring that consumer information is secure. The engineering staff will maintain these systems, as well as internal systems ensuring a virtual 100% uptime. PhatGroup.com will track and analyze consumer information such as banner ad click-through, click-through, account information and usage statistics. affiliate I I I I I The website adesigninteractive ad agency will be handled jointly by and development Circle.corn, top under the Snyder Communications Group, and Continuum Software. Since the unique feature of PhatGroup.com allows consumers to remain at the website while conducting transactions, we will incorporate and/or mirror the identical functions and procedure that is used at each individual PhatPart-ner's site. I Architecture The PhatA¢count I - Custom Software The PhatAccount This "Virtual core of PhatGroup.com's a back-end database lies at the Account" consists of engineering and software effort. of PhatMember account information and an associated "User Agent" or "Spider" for interfacing with PhatPartner websites. The back-end database contains records for each PhatMember that describe that PhatMember's active PhatPartner accounts, including user names, passwords, PhatPartner and balances as appropriate accounts. to the corresponding I I I The Spider contains software (code) in the form of C-language executables, runtime libraries, scripts and/or templates that allow the Spider to log into PhatParhler web sites, create new PhatPartner accounts, retrieve PhatMember balances required for integrating the PhatPartner's PhatMember's Virtual Account. from these accounts, etc. as service offerings into the I | I BUSINESS PLAN • CONFIDENTIAI_ 15. | | OPERATIONS AND ENGINEERING | H I I I EXAMPLE: Given a particular PhatPartner such as Quick & Reilly, and a particular PhatMember such as John Doe, the back-end database will include, among other information, that John Doe's Quick & Reilly username is "johndoe" with a specific associated password. The Spider will use this information, as well as such templates/scripts/other data sources as may be needed to log into John Doe's Quick & Reilly account and fetch John Doe's current balance and portfolio. Similarly, for a new PhatMember without an existing Quick & Reilly account, the Spider will | PHATGROUP I ,_emberWebB'o_ ACCOUNT OBs _Pha',Me,'nber % _FiATGnOUP : Acceunttnfo. pI'LATPAETN_ PHATPARTNER C'_ii_i ..... H PccountConteni _B_S_ER <-'-'_ __ I :,;, : _ .... PhatG,'...',up f_for,_ation Reques*,s ('-"'-_ PhatPart_'_er PHATGROUP AccountContent USER AGENT w._' .... ....... 4--'-> PhatPert, ner Customer Account nfo. t Acc0umDs, I be able to create a new Quick & Reilly account for that PhatMember and to retrieve all relevant password/user name information during the account creation process, for storage into the PhatGroup back-end database. Continuum (please refer to graphic) Software will develop, for PhatGroup, a proof-of-concept H I Spider that isJohn Doe's existing Wingspan Doe's existing Quick & Reilly account and capable of logging into John Bank account, fetching balance and portfolio information from both accounts, and displaying this information in the form of an HTML page. Continuum will also provide documentation and guidance on how this proof-of-concept Spider can be extended into a general tool for accessing multiple PhatMember accounts across multiple PhatPart-ners. PhatGroup will be responsible for implementing these extensions. Towards this end, Continuum will provide PhatGroup required for extending the Spider. with a list of technical skills H i I | H BUSINESS PLAN • CONFIDENTIAL 76. II OPERATIONS I AND ENGINEERING ' " I PhatPartners What does it take, technically, to be a PhatPartner? PhatGroup.com's "virtual account" software is designed to place a minimum burden on PhatPartners. Most account information/retrieval is based on whatever web interface the PhatPartner currently uses. Therefore, if the PhatPartner were to change this interface, or the conversation required between a browser and the interface, the Spider would become "lost" and would be unable to retrieve the desired information. To avoid this problem, PhatGroup requires advance notice of any changes to the PhatPartner web site and access to a beta version of the new web site no later than five business days before such PhatPartner changes take effect (go live). PhatLinks (provided by Links2Go and Continuum Software) will consist of a directory of financial topics, along with financial links, and an integrated keyword search. PhatLinks allows the interested user to "drill down" through financial topics, to retrieve links and topics of interest related to a keyword search, and to see financial links and topics related to particular links of interest. PhatLinks will also provide integrated discussion groups on finm_cial topics and real-time Java chat (in partnership with myESP) on those topics. PhatGroup will provide to Continuum a 500Mhz Pentium III server based on the Intel BX chipset with 10/100 ethernet card, a minimum of 9Gb of hard disk, and 2Gb of RAM. Continuum will configure this server to include the Links2Go software, including all links and topics related to financial interests, keyword search for financial links, an integrated web server customized with the PhatGroup look-and-feel, configured as phatlinks.links2go.com running Linux. Continuum will aid PhatGroup in integrating this web server with their PhatGroup web servers, and with co-locating this web server along with the PhatGroup web servers at Exodus. Continuum will also provide periodic software and database updates. I I I I I I I I I I I I PhatGroup.com, PhatMortgage, I PhatFunds, PhatTickets, PhatPartner, Phatlnsurance, PhatAnnuities, PhatSchool, PhatMember, PhatBillpay, PhatAccount, PhatCard, PhatBank, PhatAdvice, PhatLoan, PhatTravel, are PhatAuction, PhatBonds, PhatJobs, PhatFurniture, PhatMobile, PhatPR, PhatRealty, PhatLaw and PhatL.inks i registered Trademarks of PhatGroup, Inc., copyright 1999. All rights reserved. DISCLAIMER:Warner Brothers, RoadRunner and other names used herein are tradeI marks of other companies, and no claim of ownership expressed or implied is made herein. BUSINESS PLAN • CONF'IDENFIAI, 17. I I I I I J I I I J | J l I I 0 C • I I ° _ I FOUNDERS AND MANAGEMENT TEAM I Sean Patrick Brennan: Founder and CEO In August 1999, Mr. Brelman founded PhatGroup.com, with the intent to create the financial industry's first vertical market portal - or, "vortal," by linking major financial institutions on the PhatGroup.com website. Both the consumer and the vendor are able to leverage the PhatBenefits of isolated services, activities and alliances on one site. Before dreaming I and building PhatGroup, Mr. Brennan joined Investors Development and I I Bank & Trust as Managing Director of New Product Director of Strategic Planning. I During his three years at IBT, Mr. Brelman built, from start to finish, a family of institutional money market mutual funds for the bank, and was appointed President of The Merrimac Fund. As President of the funds, he organized, marketed, funded and raised the capital for what would become one of IBT's most successful products. After operations, negotiating plan for the fund family, developing the budget for writing the business the contract for the sub-advisor, setting the fee structure for its team of employees and assisting in the election of its Board of Trustees, The Merrimac Cash Fund commenced operations on November 21, 1996. At year's end, the net assets of the Fund were over $1 billion. In 1997, an additional $600 million in assets were added and two new funds were opened. Bank & Trust, Mr. Brennan was Director of I I I I Prior to joining Investors I International Mutual Funds of C.S. First Boston. As Director, he supervised directly the entire sales and marketing staff of all of the international funds, and within the first six months, raised money market fund assets from $100 million to $7 billion. As Vice President of Sales for the Concord Financial Corporation, Sean raised assets in excess of $12 billion, selling funds for Bank of America, Barnet Bank, Paine Webber, mid Chase. He developed the Institutional Sales Group and managed their initial contracts. Concord was sold to Bysis for $120 million in 1993. The youngest Vice President of Private Banking at age 25, Mr. Brelman was assigned to all high specializing in American Express International domestic investments, trust services, mortgages for the Boston Company net worth client groups Edge Bank. He sold and private placements, I I I I i I and ultimately, built revenue in excess of $2 million annually. After graduating from St. Anselm's College with a degree positioning him for law school, Mr. Brennan pursued an opportunity at American Express International Bank as assistant to the Chairman. Mr. Brennan lives with his wife and three children in Massachusetts. BUSINESS PLAN • CONEI[)ENTIAL 78. i | FOUNDERS AND MANAGEMENT TEAM Will Stewart: Co-Founder & President of Asia Pacific Ventures I Will Stewart has worked with nearly 100 high technology companies including fortune 500 firms such as AST, Lexmark, and MicroAge and Silicon Valley start-ups such as eshop, Intuit, Knowledge Adventure, RSA and Verisign. He has played a central role in creating and in implementing business plans for these businesses in Japan and Asia. In addition, Mr. Stewart I has raised more than $100 million in both equity and non-equity funds for U.S. high technology companies in Japan and Asia. Mr. Stewart has led APV's expansion in recent years into mergers and acquisitions activity, initiating the $392 million AST merger with Samsung and the recent acquisition of Radius assets by UMAX of Taiwan. Mr. Stewart founded APV in 1990. Between 1.985 and 1990, Mr. Stewart worked at NEC in Japan as the first U.S. executive to be transferred to NEC headquarters in Tokyo. He was involved in the global Computers & Communications (C&C) market and system planning group, coordinating the efforts of various product groups, research and development laboratories and manufacturing plants worldwide. Mr. Stewart joined NEC America in 1984 as marketing manager where he was responsible for researching and developing the C&C market and business plans for NEC in the U.S. .., -............................................. I I I I I David C. Nunheimer: Chief Operating Officer B Prior to joining PhatGroup.com, Mr. Nunheimer formed Bologna, Harris & Nunheimer, P.C., a trial litigation firm in Boston, Massachusetts. The firm represented the interests of insurers and large corporations, including The Stanley Works, Toys "R" Us, Stop & Shop, Budget Rental, John Hancock, The Fireman's Fund, Empire Insurance Group and Bradlees. David oversaw all aspects of running law firm, and continued to handle all clients. Operating within an extremely doubled in size within four years and business. and marketing a medium-sized Boston litigation matters, including advising competitive environment, the firm saw a commensurate growth in its I I I I Before forming Bologna, Harris & Nunheimer, other notable litigation firms. P.C., he worked at several I Madan liability P.C. concentrated & construction, commercial the product & Madan, litigation. Orlando in Associates concentrated inand area of admiralty in Federal Court. David graduated summa cum laude from Suffolk University Law School and is a graduate of St. Ansehn College, where he received a degree in Business Economics. IJUSINESS LAN• P CONFIDENTIAL I 19. | Marc Goodman, Ph.D.: Operations Continuum Software I Engineer & VP of I A veteran programmer, software author, systems analyst and consultant, Marc is currently Vice President and Chief Technical Officer at Continuum Software, Inc. and the creator of the web search engine, Links2Go. Prior to joining Continuum Software, Marc was Vice President of Research and Development at Cognitive Systems, Inc. where he led the medium and long-range strategic plaxming of the company's technology. He consulted directly for an extensive list of diverse organizations including American Express, Citibank, the Central Intelligence Agency, Apple Computer and Lockheed. I Over the last twenty years, Marc has consistently published several award-winning retail software and computer game products. Marc graduated Magna Cum Laude with a B.S. in Information and Computer Science from the Georgia Institute of Technology. He earned both his M.S. and Ph.D. in Computer Science from Brandeis University. B I Michael A. Clisham: I Assistant VP of Business Development with an extensive background in Mr. Clisham came to PhatGroup.com I sales, marketing, account management, investment services and business development consulting. He has worked with several major international companies including Westinghouse Electric Corporation, A.G. Edwards & Sons, Inc. and Thomson Financial. While at Westinghouse, Mike excelled in sales and marketing, and I I I moved on to work for two of the company's subsidiaries. After working for A.G. Edwards & Sons as an investment broker, he joined Thomson Financial where he advised corporate business development professionals in assessing their markets and competitors through web-based research services. Mike earned his B.A. in Economics, with a Concentration in Finance from Framingham State College, and completed post-graduate studies Information Technology at Harvard University. in I i BUSINESS PlAN • CONF'IDENTIAL 20. | | FOUNDERS AND MANAGEMENT TEAM 1M | Elizabeth E. Meinert: Assistant VP of Marketing and marketing Before joining PhatGroup.com, i Beth was lead copywriter manager for the nation's third largest developed and lecture management company. As department head, she international directed all marketing projects including the redesign and production of the website, direct ail campaigns to both college and corporate markets, company and literature, and recruiting/business proposals. catalogs I t Prior toand public relations marketing,company's roster the event planning, she managed media her promotion to for the of celebrities, authors and politicians including President Mikhail Gorbachev, Archbishop Desmond Tutu and President Lech Walesa. Beth holds a B.A. in English Literature and Art History, and is a graduate of the University of Puget Sound and the University of Durham (Durham, England). Immediately after graduation, she spent a year teaching English in Usti nad Labem, Czech Republic. I | Christopher Elam: Operations Manager Chris came to PhatGroup.com with extensive experience in Internet technologies, including web support, designl, and programming, for companies including the Massachusetts Corporation Educational Telecommunications and Arnold Communications. While at Arnold, Chris supported the intranet's 1000+ users in multiple capacities. As part of the implementation and support team behind the intranet, he researched, designed, updated, and serviced the company's site and communications systems. Chris studied at Suffolk University Professional. and is a Microsoft Certified I B | | | I Beth San Antonio: Executive Assistant Previously, Beth was part of the team that created and managed a multi-cinema theatre complex, where she hired and trained employees, executed internal operations and helped develop a marketing strategy. Beth also has a background in Child Development and Education. For I six years, she directed the Merrimac Playground Recreational Camp in Massachusetts, which provided children ages K-6 an enjoyable educational experience throughout the summer months. She studied at Boston University. I i BUSINESS PlAN o CONFIDENTIAL 21. ,11 II II m. "11 il = , Ii r m ¢0 _" (,0 _(_ (,.O I.O • . :. o . .... 0 ,..6 "T _"T, co co m o o_.,-.o o_ (,0 (.0 "_r o oo_ "_ og _o '* o oo_._ _ o_'o _ _'_0_ :._ _) o ' ° o > _ ,- " --t_ I _I off::, _ _ -_- o_ _o (o co o_ 0,4 0 0') - "6 _, _ > ,::; "_ _ _ (,o _ '+- O) ° o, _,) l Z ,_ ...... ,.o_- 0", o o.(.6 l oo o ' ' tOC,4 • _ 0 0 r.. o o X m _ (o _0 o i,,. (0 (,o . • m. _, o _(0(_ _ o _o_ o ,_ I _ oo_ _o _ o -_i _ _ o o_ ,_- .0_ _=° :P--_"6 -o E _,.- o_ _, o "8_o = '_ _ = = r •am _ _§ o o _.. .£: -o o" -o -_o _, _ ,_ _ o ,_ _oo_ o','q _" ,< _ ,__,'- _ _ o o o ° _ _- _ "_ _o • m oo - - " " oo ._._ ._ _ _,o_-_ (_ o o,_,_ o o_ _.a_ I o§ - o , o. _-_ , )). _ _ _ I/_ _i _ _o,--o _Z _ _o. o,o,o_" _[ . .. 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O_ i_ I',,_ tO o _ _ " ¢-0 _)o _ 0 _) _) "_" _ • I _ _,_ o§ _ _ - . _" , _ _ o _". co _ _ _0 _ . _ co_ o_ _ = _,_ _ _ _ _o F- _ :_ = o_o8 I _:_ co _ _° _ ' r--_ o° o ' _ _ r--'_" _ c_ ,_o'_ "_ _ _g "_ r,_ o § _ _ _ _ o _o o o _ g WoO ._, __-_ i _ _ _ o _o o co.__ _ c_ o _ t._ o , ' o ,o _o _ _ r-- _ o_ ._ _o _ _ _-_ o_ _ _0 g I _ ' ' " " _-__ o © , _ 8 _ g o , o o o 0 _ _ _ _ CO o _._._ i _ ._-'_c_._E I a° o _ o_ _ m o_ _0 o o _ _ o _ _o _ 00 _ o , _ o _ _ o _ ,_ o ,-,- o co _'_'> "®_, _ _'_',_8_" ,,'_ I >_ o _ I i o -_ _ ._ ¢-- c C o C ,z r7 _ _ _ '_ 0 _ u_ w _ 0 _ m w BUSINESS PLAN • CONFIDENTIAl.. 27. I I ,I I I I JR I _, = Q. i| X i i I I 'i I i I "i I i "i J i, II II I AlVCEL INVE.STORSAD . ....ADVISORS ........ • Bill Schmermund - The Sawtooth Group • John Healy - Yahoo! I ° John Kim - Aetna, Inc. ° Tom Price - Bank of New York I • m • Peter Quick ° Peter Thompson - Woodbridge Capital ° Dick Loos - HSBC Mutual Funds • Grover Daniels - Something.com ° J. Jotm Brennan - Phat VC - Venture Capital I ° Ed Najjar - Najjar Motors ° Gerry Buckley I • • Peter Bassett - Atlantic Investments, o Dan Massiello - 3 Com LLC • Lary Mannix - Bank of Boston ° Mike Morian - Chase ° Ronald Nutter - Advance I ° Arnold Kraft - E-Wood - Foley, Hoag & Eliot Tech ° Dave Feinberg I i • Will Stewart - APVTP ° Arnold Haynes - Haynes Real Estate • Steve Smith - ABN.AMRO Bank • Sean McConnon - Founder of Raptor Software o "Links2Go"/Continuum Software I | I BUSINESS I-_LAN • CONI-'IDENTIAL 28. 1 I I . C,eck.eo.com The nation's bill payment first end-to-end solution, I www.checkfree.com electronic . -Wood A dynamic, Internet based auction for wood and related products, supported by a news and information www.e-wood.com rich web site. • Q.,ck ,ei,y ering PhatTrade) www.quick-reilly.com The nation's largest and most successful discount brokerage firm. (will be pow- I I • CommTouch The largest international provider of webbased e-mail services to corporations. www.commtouch.com _ EXODUS • Exodus Commications A leading provider of lnternet systems and network management solutions, www.exodus.com • REBLS.com _ A growing leader in online mortgage origination and management. (will be powering PhatMortgage) www.rebls.com * Continuum Software The leader in the rapidly $ AW ,, TOOTI'_ Accelerators. growing field www.continuumsi.com of Enterprise Application • The leading provider Flycast response advertising www.flycast.com of lnternet solutions, direct- " The advertising Group An Sawtooth agency _:=_::::_4 ...... specializing in web design, print, television, radio, public relations and branding. (PhatGroup.com's advertising agency partner). www.sawtoothgroup.com. lead l l i '..._d_r_;_ • DirectWeb _ ....... ,_ The first and currently, the only company to provide consumers with both a computer and an internet connection for one low monthly cost. www.directweb.com Gresh & Coml_any Gresh & Company _6gigi_FiET_i A full service public relations company i_6g with a specialty in corporate communications. • www.greshandcompany.com Circle.corn Top, international, interactive ad agency under the Snyder Communications c0m Group. ® E-dentification A leader in customized fraud protection/identity systems for the Internet. www.e-dentification.com • LinkShare l,inkShal_ One of the largest Internet affiliate marwww.linkshare.com keting companies, (Designing the website and developing an online marketing strate_' for PhatGroup.com). www.circle.com 1 E-Profile A complete end-to-end _'_ jr0_/18 outsourcing ° Links2Go __ t solution for institutions looking to create awww.e-profile.com "turnkey" Internet banking operation, An innovative new way to _ search the web. www.links2go.corn 1 Ernst & Young An international F,o._, r,o,,c,, ,or,_,,,, ° NewsAlert A comprehensive Internet source for ° • INDICATES RE_.;ENUE A GENEK_TING PARTNER INDICATES ANINFRtKSTRUCFURE CONTENT PARTNER leader, their financial services consulting practice focuses on process improvement, innovation, information technology design, and development and implementation. (Conducting PhatGroup.com's RFP Process) www.ey.com real-time financial and business news, stock quotes and charts, portfolios and investment research. www.newsalert.com BUSINESS PLAN • CONEIDENTIAL 29. I APPENDIXWEBSITE DEVELOPMENT I {_ _s .... _ _ .................. I I l I " I BUSINESS PLAN • CONF'IDENTIAL 30. i I I I I " | | u BuyA New Home! I | | PhatBarik I Welcometo PhatGroup.com,a uniquefamily of financial service FI'CC Ph_tl laL_ _oLL_e fi_. _,_c,_,_.-. n_._,-.,, D,,._ A p_ve_ed yA¢N-,t_,_Jt_ companies,all dedicatedto deliveringthe highestquality of product, b organizationand accessibilityto the world of personalfinance on the web. We've done the hard part for you - we've partneredthe indusPhatTrade _.v,'etedby_tek try leaders on one site, allowing you to leverage the best-of-the-best when it comes to securing the financial backbone of your life. I PhatLoan . _o,,.,-_,=,, t,,z,,_ ,,,=,,_ Lo_,c._t ln[c.re._l ]"'--"_"--"' |. ..... I _ii;_l t | | I m m APPENDIXWEBSITE DEVELOPMENT .... _ i II m I I NetscapeiPh atGrouP.c° m I BUSINESS m [ LAN * CONFIDENTIAL ) 32. II . APP No,xAOLNo II n SECURITIES AND EXCHANGE D.C. 20549 COMMISSION ASHINGTON, Scott W. Campbell Vice President and Associate The Schwab Building 101 Montgomery Street San Francisco, CA 94104 General Counsel Charles Schwab & Co., Inc. I Re: Online Services Dear Mr. Campbell: I which relief from the This letter responds to your letter dated November 25, 1996, in you request broker-dealer registration requirements under Section 15(a) of the Securities Exchange Act of 1934 ("Exchange Act") on behalf of America Online, Compuserve, and Microsoft ("online services") if they agree to connect their subscribers to Charles Schwab & Co., Inc. ("Schwab") for a nominal, flat, per order fee. As you noted I in your letter, online access to broker-dealers should help investors gain U greater and more convenient access to the securities markets and their broker-dealers. We understand that Schwab intends to enter into separate agreements with the online under which the o_lline services will allow Schwab to make its brokerage services services to the available I subscribers of the online services. For instance, a Compuserve subscriber could log on to that service and locate Schwab's icon through [*2] an online menu provided by Compuserve. By clicking on to Schwab's icon, the subscriber could access various brokerage services provided by Schwab. If it wished to do so, the subscriber could open an account with Schwab by accessing, completing, and returning account opening forms via the computer. After a subscriber has opened an account with Schwab, he or she will be able to send orders to purchase or sell securities electronically to Schwab, I I which will execute those orders and relate the relevant and required information about those orders to its customer. Schwab will take responsibility for orders once they have been received. Schwab has developed as atutorials) of that lead the verification through acknowledgement D' process and make clear when series order-entry, and screens (which customers can preview customer the order-ent an order has been received by Schwab. With respect to Microsoft, in addition to enabling potential investors site, access Schwab through to Microsoft will provide Internet all of their brokerage information the subscribers Investorsoftware that area enable them to download service, an will within Microsoft's its Microsoft with via the Internet and to consolidate [*3] and view that information i I I on their desktop computers. that the agreements Schwab intends to enter into with the online services will We also understand set forth the responsibilities of will be and each In sales under the agreements, Schwab Schwab responsible online the accuracy of the advertising for service under all agreement. and particular, materials relative to Schwab's financial services that are published by the online services; the online services and other than by distributing be allowed to describe allSchwab's brokerage services to their employees will not these materials; and subscribers advertising or sales material will clearly indicate I that the subscriber or user of any of the online services will be a brokerage customer of Schwab and not of any of the online services. In addition, we understand that the online services and their employees will not recommend or endorse specific securities. Neither the online services i BUSINESS PLAN • CONFIL)ENTIAL 33. II II II II APPENDIX- AOL No-ACTION LETTER rM ..... nor their employees (except with respect to their own accounts) will take part (other than by routing messages) in the financial services offered by Schwab, including the opening, maintenance, administration, or closing of Schwab accounts, or the solicitation [*4] of trades, nor will they provide specialized assistance in resolving accounts or related securities transactions. engage in negotiations involving brokerage problems, discrepancies or disputes involving brokerage The online services also will not answer questions or accounts or related securities transactions; all such inquiries will not directed orders, select among broker-dealers customer orders forpersom_el. The markets will be accept by the online service to Schwab's or route support services customers to online for execution; all decisions concerning broker-dealer or market selection will be made by customers or Schwab. The online Schwab or effect clearance customer funds or securities related to securities orders transmitted to services will not handle and settlement of customer trades. The online services will not extend credit to any customer I for the purpose of purchasing securities through, or carrying securities with, Schwab. Moreover, under the agreements, Schwab will compensate an online service by paying it a nominal fiat fee for each order transmitted to Schwab. The amount of this fee will not vary depending on the number of shares or the value of the underlying securities [*5] comprising a customer order transmitted to Schwab, nor will the amount of this fee vary depending upon whether the order results in an executed trade. I I Based on these facts and representations, Commission ofunder Division of Market the Exchange will not the staff the Section 15(a) of Regulation recommend enforcement action to the Act if Schwab enters into agreements with the online services as discussed in your letter without the I online services registering as brokers or dealers under Section 15(b) of the Exchange Act. This letter represents the views of the staff of the Division based on our understanding of the proposed arrangements between Schwab and the online services as discussed in your letter. This staff position this I concerns enforcement action only and does not represent a legal conclusion regarding the applicability of the statutory or regulatory provisions of the federal securities laws. Moreover, position is based solely on the representations might require a different response. a broker-dealer conducting business over the Internet that you have made, and any different facts or I conditions Although not the subject of this request, I should consider the extent to which it may be responsible for content provided by a third party. See. e.g., Securities Exchange Act Release No. 21383 (October 9, 1984), in which the Commission noted that a suitability" "issue is raised to the extent that a broker-dealer or related entity provides investors research and analysis amounting to recommendations of individual securities through computer brokerage system or accompanying data bases." See also "Ask the Analysts about Electronic Communications," NASD Regulator), & Compliance Alert (April 1996), in which the the I National Association of Securities Dealers, Inc. noted that a melnber must not link to a WEB site that the member knows contains misleading information about the member's products or services. | Sincerely, I Richard R. Lindsey, Director | BUSINESS PLAN • CONFIDENTIAL 34. | ~