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Delaware (State or other jurisdiction of incorporation or organization)

6211 (Primary Standard Industrial Classification Code Number)

94-2844166 (I.R.S. Employer Identification Number)

4500 Bohannon Drive

Menlo Park, CA 94025

(650) 331-6000

Christos M. Cotsakos

Chairman of the Board and Chief Executive Officer

E*TRADE Group, Inc.

4500 Bohannon Drive

Menlo Park, CA 94025

(650) 331-6000

Copies to:

Daniel G. Kelly, Jr., Esq. Davis Polk & Wardwell 1600 El Camino Real Menlo Park, CA 94025 (650) 752-2001

Joseph J. Fox Co-Chairman of the Board of Directors and Co-Chief Executive Officer Web Street, Inc. 510 Lake Cook Road Deerfield, IL 60015 (847) 444-4700

Jeffrey R. Patt, Esq. Katten Muchin Zavis 525 West Monroe Street Suite 1600 Chicago, IL 60661-3693 (312) 902-5200

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		Page
QUESTIONS AND ANSWERS ABOUT       THE PROPOSED COMBINATION		1
WHERE YOU CAN FIND MORE       INFORMATION ABOUT E*TRADE AND       WEB STREET		3
SUMMARY		5
The Offer and the Merger		5
The Companies		5
Reasons for the Offer		6
Web Street’s Recommendation		6
The Offer		6
SELECTED HISTORICAL FINANCIAL       DATA		12
Selected Historical Financial Data of            E*TRADE		12
Selected Historical Financial Data of Web            Street		14
Comparative Per Share Data		15
Comparative Market Price Information		16
RISK FACTORS		17
Risks Relating to the Proposed Offer and            Merger		17
Risks Relating to the Nature of the Online            Financial Services Business		20
Risks Relating to the Regulation of our            Business		27
Risks Relating to Owning Our Stock		32
INFORMATION REGARDING E*TRADE		35
Business		35
Recent Developments		36
INFORMATION REGARDING WEB       STREET		36
Business		36
Management’s Discussion and Analysis of            Financial Condition and Results of            Operations		44
Quantitative and Qualitative Disclosures            About Market Risk		55
THE OFFER		56
The Offer		56
Timing of Our Offer		56
Extension, Termination and Amendment		56
Exchange of Web Street Shares; Delivery            of E*TRADE Common Stock		57
Cash Instead of Fractional Shares of            E*TRADE Common Stock		58
Withdrawal Rights		58
Procedure for Tendering		59
Guaranteed Delivery		60

		Page
Background of the Offer		61
E*TRADE’s Reasons for the Offer and            Merger		63
Recommendation of the Web Street Board;            Factors Considered		64
Material Federal Income Tax            Consequences		66
Purpose of the Offer; The Merger;            Appraisal Rights		67
Conditions of the Offer		68
Regulatory Clearances		70
Possible Effects of Our Offer		70
Relationships with Web Street		71
Accounting Treatment		72
Fees and Expenses		72
New York Stock Exchange and E*TRADE            and Web Street Common Stock		73
COMPARATIVE PER SHARE MARKET       PRICE AND DIVIDEND       INFORMATION		74
OPINION OF WEB STREET FINANCIAL       ADVISOR		75
INTERESTS OF WEB STREET OFFICERS       AND DIRECTORS IN THE MERGER		80
THE MERGER AGREEMENT AND THE       STOCKHOLDER AGREEMENT		82
The Offer		82
The Merger		82
Web Street Board of Directors		83
Treatment of Web Street Warrants and            Stock Options		83
Covenants and Representations and            Warranties		83
Escrow Agreement		85
Conditions of the Offer		85
Conditions of the Merger		85
Termination of the Merger Agreement		85
Termination Fees		86
Amendments		87
The Stockholder Agreement		87
DESCRIPTION OF E*TRADE CAPITAL       STOCK		88
COMPARISON OF E*TRADE AND WEB       STREET STOCKHOLDER RIGHTS		91
SECURITY OWNERSHIP OF CERTAIN       BENEFICIAL OWNERS AND       MANAGEMENT		94
LEGAL MATTERS		95
EXPERTS		95
INDEX TO WEB STREET, INC.       FINANCIAL STATEMENTS		F-1

LIST OF ANNEXES
Annex A    Agreement and Plan of                              Merger		A-1

Annex B    Stockholder Agreement		B-1
Annex C    Opinion of Houlihan Smith &                              Company		C-1

Q:	What are E*TRADE and Web Street proposing?

A:

E*TRADE proposes to acquire all outstanding shares of Web Street common stock. E*TRADE has entered into a Merger Agreement with Web Street pursuant to which we are offering, through Opus Acquisition Corp., our wholly-owned subsidiary, to exchange shares of E*TRADE common stock for each outstanding share of Web Street common stock. After the offer is completed, subject to approval by the stockholders of Web Street if necessary, Opus Acquisition Corp. will merge with Web Street. As a result of the offer and the merger, Web Street will become a wholly-owned subsidiary of E*TRADE.

Q:	What would I receive in exchange for my Web Street shares?

A:	We are offering to exchange 0.1864 share of E*TRADE common stock for each outstanding share of common stock of Web Street that is validly tendered and not properly withdrawn.

Q:	How long will it take to complete the offer and merger?

A:

We hope to complete the offer at the end of the second quarter of 2001, or soon thereafter. We expect to complete the merger shortly after we complete the offer, or if stockholder approval for the merger is required, shortly after the special meeting of the stockholders to approve the merger, if we obtain the required stockholder approvals at that meeting. We must also obtain regulatory clearance prior to completion of the merger.

Q:	Do I have to pay any fees or commissions?

A:

If you are the record owner of your shares and you tender your shares in the offer, you will not incur any brokerage fees. If you own your shares through a broker or other nominee who tenders the shares on your behalf, your broker may charge you a fee for doing so. You should consult your broker or nominee to determine whether any charges will apply.

Q:	Does Web Street support the offer and the merger?

A:

Yes. The members of the Web Street board of directors determined by unanimous vote that the offer is fair to, and in the best interests of, Web Street and its stockholders, and recommend that Web Street stockholders accept the offer and tender their shares pursuant to the offer. Web Street’s board of directors has approved by unanimous vote of the directors the merger agreement, the offer and the merger. Information about the recommendation of Web Street’s board of directors is more fully set forth in Web Street’s Solicitation/Recommendation Statement on Schedule 14D-9, which is being mailed to Web Street stockholders together with this prospectus.

Q:	Has Web Street received a fairness opinion in connection with the offer and the merger?

A:

Yes. Web Street has received an opinion from Houlihan Smith & Company dated May 20, 2001, to the effect that, as of that date, the consideration to be received by Web Street stockholders pursuant to the merger agreement is fair, from a financial point of view, to the stockholders of Web Street. The opinion is included as Annex C to this prospectus.

Q:	Have any Web Street stockholders agreed to tender their shares?

A:	Yes. Joseph J. Fox and Avi Fox, the Co-Chairmen and Co-Chief Executive Officers of Web Street have agreed to tender into the offer outstanding shares representing approximately 40.7% of the outstanding common stock of Web Street as of May 20, 2001.

Q:	What percentage of E*TRADE common stock will Web Street stockholders own after the offer and the merger?

A:

If we obtain all of the shares of Web Street pursuant to the offer and the merger, former stockholders of Web Street would own approximately 1.5% of the shares of common stock of E*TRADE, based upon the number of shares of E*TRADE common stock and of Web Street common stock outstanding on May 31, 2001.

Q:	What are the conditions to the acceptance of Web Street shares in the offer?

A:	The acceptance of Web Street shares in the offer is subject to several conditions, including:

Ÿ

a majority of the outstanding Web Street shares, on a fully-diluted basis, having been validly tendered and not properly withdrawn, which we refer to as the minimum tender condition,

Ÿ

approval of the National Association of Securities Dealers in accordance with the NASD’s registration rule 1017 having been obtained,

Ÿ

the registration statement of which this prospectus is a part having been declared effective by the SEC, and

Ÿ

Web Street having not breached any covenant, representation or warranty in a material manner.

These and other conditions to the offer are discussed in this prospectus under “The Offer —Conditions of the Offer” beginning on page 68.

Q:	How do I participate in the offer?

A:	To tender your shares, you should do the following:

Ÿ

If you hold your shares in your own name, complete and sign the enclosed letter of transmittal and return it with your share certificates to American Stock Transfer & Trust Company, the exchange agent for the offer, at its address on the back cover of this prospectus.

Ÿ

If you hold your shares in “street name” through a broker, ask your broker to tender your shares.

For more information about the timing of the offer, extensions of the offer period and your rights to withdraw your shares from the offer before the expiration date, please refer to “The Offer” beginning on page 56.

Q:	Will I be taxed on the E*TRADE shares I receive?

A:

A Web Street stockholder’s receipt of E*TRADE common shares in the offer or the merger will be tax-free for United States federal income tax purposes (except for taxes resulting from the receipt of cash instead of any fraction of an E*TRADE common share). You are urged to carefully read the discussion under “The Offer—Material Federal Income Tax Consequences” beginning on page 66, and to consult your tax advisor on the consequences of participation in the offer or the merger.

Q:	Do the statements on the cover page regarding this prospectus being subject to change and the registration statement filed with the SEC not yet being effective mean that the offer has not commenced?

A:

No. The offer has commenced and change of this prospectus and effectiveness of the registration statement are not necessary for you to tender Web Street shares. The SEC rules permit exchange offers to begin before the related registration statement has become effective, and we are relying on these rules, with the goal of quickly combining E*TRADE and Web Street, subject to the SEC declaring the registration statement effective.

Q:	Is E*TRADE’s financial condition relevant to my decision to tender my shares in the offer?

A:

Yes. Shares of Web Street accepted in the offer will be exchanged for shares of E*TRADE and so you should consider our financial condition before you decide to become one of our shareowners through the offer. In considering E*TRADE’s financial condition, you should review the documents incorporated by reference in this prospectus, because they contain detailed business, financial and other information about us.

Public Reference Room 450 Fifth Street, N.W. Suite 1024 Washington, D.C. 20549

North East Regional Office 7 World Trade Center Room 1300 New York, New York 10048

Midwest Regional Office 500 West Madison Street Suite 1400 Chicago, Illinois 60661-2511

		Period
Annual Report on Form 10-K, as amended		Year ended September 30, 2000, as filed on November 9, 2000, as amended on November 22, 2000
Quarterly Report on Form 10-Q Transition Report		Transition Period from October 1, 2000 to December 31, 2000, as filed on February 14, 2001
Quarterly Report on Form 10-Q		Quarter ended March 31, 2001, as filed on May 15, 2001
The description of E*TRADE common stock set      forth in E*TRADE’s registration statement on      Form 8-A filed by E*TRADE pursuant to Section      12 of the Securities Exchange Act of 1934,      including any amendment or report filed for      purposes of updating the description		Filed on July 12, 1996 Amended on February 12, 2001
Current Reports on Form 8-K and amendments to      those Reports		Filed on:    January 19, 2001  January 23, 2001  January 25, 2001  February 12, 2001  May 21, 2001  May 22, 2001  June 15, 2001

Ÿ

help us to continue growing our customer base,

Ÿ

contribute to our profitability,

Ÿ

further expand our physical presence strategy, and

Ÿ

better position us as a provider of online financial services.

Example:

Ÿ

If you currently own 500 Web Street common shares, after the offer and the merger you will receive 93 E*TRADE common shares and a check for the value of 20% of an E*TRADE common share, rounded to the nearest one cent. The value of the E*TRADE common shares that you receive will fluctuate as the price of an E*TRADE common share changes.

Ÿ

On May 31, 2001, the most recent practicable date prior to the filing of this document, the last sale price of E*TRADE common stock on the New York Stock Exchange was $7.50. Applying the 0.1864 exchange ratio to the E*TRADE closing price on that date, each holder of Web Street common shares would be entitled to receive E*TRADE common shares with a market value of approximately $1.40 for each Web Street share. The actual value of the E*TRADE common shares to be issued in the merger, however, will depend on the market price at that time, and may be more or less than the value given in this example. We urge you to obtain current price quotations for Web Street and E*TRADE common shares.

Ÿ

a properly completed and duly executed letter of transmittal (or manually executed facsimile of that document), along with any required signature guarantees, or an agent’s message in connection with a book-entry transfer, and any other required documents, must be transmitted to and received by the exchange agent at one of its addresses set forth on the back cover of this prospectus. In addition, certificates for tendered Web Street shares must be received by the exchange agent at one of those addresses, or those Web Street shares must be tendered pursuant to the procedures for book-entry tender, in each case before the expiration date. See the procedures for tendering shares on page 59 under “The Offer—Procedure for Tendering” for more details; or

Ÿ

you must comply with the guaranteed delivery procedures set forth in “The Offer—Guaranteed Delivery.”

Ÿ

a majority of the outstanding Web Street shares, on a fully-diluted basis, having been tendered and not properly withdrawn;

Ÿ

absence of any law, court order or regulatory action seeking to delay or prohibit the offer or the merger;

Ÿ

the registration statement of which this prospectus is a part having been declared effective by the SEC;

Ÿ

the shares of E*TRADE common stock to be issued in the offer and the merger having been approved for inclusion on the NYSE, subject to official notice of issuance;

Ÿ

Web Street having not breached any covenant, representation or warranty in a material manner;

Ÿ

approval of the acquisition of Web Street by the NASD;

Ÿ

all Web Street options having been exercised, cancelled or repurchased;

Ÿ

each of seven senior executives of Web Street having executed an Escrow Agreement and each of Joseph J. Fox and Avi Fox having executed a Non-Competition Agreement;

Ÿ

the waiver of any registration rights previously granted by Web Street (other than registration rights pursuant to warrants of Web Street to be assumed by E*TRADE); and

Ÿ

the merger agreement not having been terminated in accordance with its terms.

Ÿ

we do not consummate the offer by September 30, 2001 (a party in material breach of its obligations under the merger agreement cannot terminate it for this reason);

Ÿ

a law or court order prohibits the merger;

Ÿ

the offer has expired or been terminated in accordance with the merger agreement without our having accepted any shares of Web Street common stock pursuant to the offer (a party in material breach of its obligations under the merger agreement cannot terminate it for this reason); or

Ÿ

any representation or warranty of the other party having become inaccurate in a material manner, or the other party failing to perform a covenant.

Ÿ

Web Street’s board of directors approves or recommends an acquisition proposal, as defined in the merger agreement;

Ÿ

Web Street’s board of directors withdraws, or amends or modifies in any way adverse to E*TRADE its recommendation to the Web Street stockholders that they accept the offer and approve and adopt the merger agreement and the merger;

Ÿ

Web Street fails to include its board’s recommendation in certain documents related to the offer; or

Ÿ

Web Street does not recommend rejection of a competing tender or exchange offer for 40% or more of Web Street’s shares.

Ÿ

the merger agreement is terminated by E*TRADE, for any of the reasons described in the immediately preceding four bullet points, where Web Street’s board of directors has adversely changed its recommendation of the merger agreement proposal or has recommended an alternative transaction; or

Ÿ

the merger agreement is terminated in circumstances where the offer is not completed and Web Street enters into an agreement to be acquired by another party within 12 months of the termination of the merger agreement.

		Three Months Ended December 31, 2000		Years Ended September 30,
				2000			1999			1998			1997		1996
		(in thousands, except per share amounts)
Consolidated Statement Of Operations      Data:
Gross revenues		$569,032		$1,973,183			$  889,683			$482,244			$316,132		$198,824
Net revenues		$333,766		$1,368,318			$  671,448			$361,005			$254,022		$160,369
Operating income (loss)		$    6,909		$    (80,326	)		$(149,193	)		$  (7,661	)		$  28,979		$    6,312
Gain on sale of investments		$    3,582		$    211,149			$    54,093			$      —			$      —		$      —
Income (loss) before cumulative effect of      accounting change and extraordinary      loss(1)(2)		$    1,436		$      19,152			$  (54,315	)		$      (402	)		$  18,311		$    4,700
Net income (loss)		$    1,353		$      19,152			$  (56,769	)		$      (402	)		$  18,311		$    4,700
Income (loss) per share before cumulative      effect of accounting change and      extraordinary loss(1)(2):
Basic		$      0.00		$          0.06			$      (0.20	)		$      0.00			$      0.12		$      0.05
Diluted		$      0.00		$          0.06			$      (0.20	)		$      0.00			$      0.11		$      0.03
Income (loss) per share:
Basic		$      0.00		$          0.06			$      (0.21	)		$    (0.01	)		$      0.12		$      0.05
Diluted		$      0.00		$          0.06			$      (0.21	)		$    (0.01	)		$      0.11		$      0.03
Shares used in computation of per share      data:
Basic		311,413		301,926			272,832			195,051			147,168		92,797
Diluted		321,430		319,336			272,832			195,051			167,818		134,781
Ratio of Earnings to Fixed Charges(3)		1.01x		1.18x			—			—			1.46x		1.14x
Deficiency of earnings to fixed charges		—		—			$    80,651			$    4,528			—		—

(1)

The cumulative effect of change in accounting principle resulted from the implementation by ETFC of Statement of Position 98-5, Reporting on the Cost of Start-up Activities, which requires that the cost of start-up activities be expensed as incurred rather than capitalized, with the initial application reported as the cumulative effect of a change in accounting principle. In June 1999, ETFC redeemed all of its outstanding debt. ETFC wrote off both the related premium and the remaining discount as an extraordinary loss on the early extinguishment of debt, totaling approximately $2.0 million, net of tax.

(2)

The cumulative effect of accounting change resulted from the adoption of Statement of Financial Accounting Standard (“SFAS”) No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, on October 1, 2000. The adoption of SFAS No. 133 resulted in an $82,500 charge, net of tax, from a cumulative effect of a change in accounting principle and a $6.2 million decrease, net of tax, in shareowner’s equity in the quarter ending December 31, 2000.

(3)

The ratio of earnings to fixed charges is computed by dividing fixed charges into income (loss) before income taxes, minority interest, extraordinary items and the cumulative effect of accounting change less equity in the income (losses) of investments plus fixed charges. Fixed charges include, as applicable, interest expense, amortization of debt issuance costs and the estimated interest component of rent expense.

		December 31, 2000		September 30,
				2000		1999		1998		1997		1996
		(in thousands)
Consolidated Balance      Sheet Data:
Cash and equivalents		$      212,430		$      175,443		$    157,705		$      76,409		$    144,752		$      46,237
Brokerage receivables— net		$  4,639,078		$  6,542,508		$2,982,076		$1,451,468		$    877,004		$    279,388
Mortgage-backed      securities		$  5,058,919		$  4,188,553		$1,426,053		$1,012,163		$    319,203		$    184,743
Loans receivable—net		$  5,039,602		$  4,172,754		$2,154,509		$    904,854		$    540,704		$    351,821
Total assets		$17,741,110		$17,317,437		$8,032,174		$4,448,140		$2,295,804		$1,076,194
Convertible subordinated      notes and capital lease      liability		$      673,842		$      676,903		$          —		$          —		$          —		$          —
Mandatorily redeemable      preferred securities		$        30,747		$        31,531		$      30,584		$      38,385		$      42,186		$      19,586
Shareowners’ equity		$  1,746,048		$  1,856,833		$1,451,795		$    853,059		$    354,550		$    117,979

		Three Months Ended March 31, 2001			Three Months Ended March 31, 2000
		(in thousands, except per share amounts)
Consolidated Statement of Operations Data:
Gross revenues		$550,125			$564,565
Net revenues		$329,581			$416,700
Operating income (loss)		$    2,926			$(25,266	)
Gain (loss) on sale of investments		$  (2,531	)		$  10,915
Income (loss) before extraordinary loss(1)		$  (7,166	)		$(25,466	)
Net income (loss)		$  (9,203	)		$(25,466	)
Income (loss) per share before extraordinary loss(1)
Basic		$    (0.02	)		$    (0.09	)
Diluted		$    (0.02	)		$    (0.09	)
Net Income (loss) per share:
Basic		$    (0.03	)		$    (0.09	)
Diluted		$    (0.03	)		$    (0.09	)
Shares used in computation of income (loss) per share before extraordinary      loss and net income (loss) per share:
Basic		317,242			298,026
Diluted		317,242			298,026
Deficiency of Earnings to Fixed Charges		$  17,031			$  33,240

		March 31, 2001
		(in thousands)
Consolidated Balance Sheet Data:
Cash and equivalents		$      156,094
Brokerage receivables—net		$  4,562,003
Mortgage-backed securities		$  3,970,223
Loans receivable—net		$  6,345,377
Total assets		$18,415,535
Convertible subordinated notes and capital lease liability		$      672,082
Mandatorily redeemable preferred securities		$        30,763
Shareowners’ equity		$  1,723,092

(1)	Extraordinary loss on the early extinguishment of debt was $2.0 million, net of tax, for the three months ended March 31, 2001, and was recorded as a result of the early redemption of $400 million of adjustable and fixed rate advances with the Federal Home Loan Bank of Atlanta.

		Year Ended December 31,												Period from September 3, 1996 (Date of Inception) to December 31, 1996			Three Months Ended March 31,
		2000			1999			1998			1997						2001			2000
		(in thousands, except per share data)															(unaudited)
Consolidated Statement of Operations Data:
Gross Revenues		$  33,916			$25,476			$    7,891			$    329			$    —			$    5,614			$13,057
Net revenues		$  32,269			$25,472			$    7,891			$    329			$    —			$    5,249			$13,055
Loss from operations		$(19,190	)		$(6,763	)		$(11,818	)		$(3,267	)		$    (116	)		$ (3,948	)		$(3,792	)
Gain from settlement of litigation		$      925			$    —			$      —			$    —			$    —			$      —			$    —
Net loss		$(18,265	)		$(6,763	)		$(11,818	)		$(3,267	)		$    (116	)		$  (3,948	)		$(3,792	)
Basic and diluted net loss per common share		$    (0.71	)		$  (0.32	)		$    (0.71	)		$  (0.25	)		$  (0.01	)		$    (0.15	)		$  (0.15	)
Shares used in computation of basic and diluted     net loss per common share (thousands of     shares)		25,755			21,203			16,741			12,872			12,309			25,866			25,674

		As of December 31,										As of March 31, 2001
		2000		1999		1998		1997		1996
		(in thousands)										(unaudited)
Consolidated Balance Sheet Data:
Cash and cash equivalents		$  25,502		$39,189		$1,580		$1,272		$      3		$13,883
Total assets		$100,961		$47,791		$4,496		$1,514		$   3		$81,453
Total liabilities		$  75,618		$  4,828		$3,345		$  412		$    —		$60,036
Redeemable common stock		$      —		$    —		$  624		$  278		$    —		$    —
Total stockholders’ equity		$  25,344		$42,963		$  527		$  824		$      3		$21,418

		Three Months Ended March 31, 2001			Three Months Ended December 31, 2000			Year Ended September 30, 2000
E*TRADE Historical:
Income (loss) per share before extraordinary loss—basic		$(0.02	)		$  0.00			$  0.06
Income (loss) per share before extraordinary loss—diluted		$(0.02	)		$  0.00			$  0.06
Income (loss) per share—basic		$(0.03	)		$  0.00			$  0.06
Income (loss) per share—diluted		$(0.03	)		$  0.00			$  0.06
Book value per share		$  5.35			$  5.59			$  5.99
		Three Months Ended March 31, 2001			Three Months Ended December 31, 2000			Year Ended December 31, 2000
Web Street Historical:
Net loss per share—basic		$(0.15	)		$(0.15	)		$(0.71	)
Net loss per share—diluted		$(0.15	)		$(0.15	)		$(0.71	)
Book value per share		$  0.83			$  0.98			$  0.98
		Three Months Ended March 31, 2001			Three Months Ended December 31, 2000			Fiscal Year 2000
Pro Forma Combined Income (Loss) Per Share Before      Extraordinary Loss (1):
Per E*TRADE share—basic		$(0.04	)		$(0.02)			$(0.04)
Per E*TRADE share—diluted		$(0.04	)		$(0.02)			$(0.04)
Per equivalent Web Street share—basic (2)		$(0.01	)		$(0.00)			$(0.01)
Per equivalent Web Street share—diluted (2)		$(0.01	)		$(0.00)			$(0.01)
Pro Forma Combined Income (Loss) Per Share (1):
Per E*TRADE share—basic		$(0.05	)		$(0.02)			$(0.04)
Per E*TRADE share—diluted		$(0.05	)		$(0.02)			$(0.04)
Per equivalent Web Street share—basic (2)		$(0.01	)		$(0.00)			$(0.01)
Per equivalent Web Street share—diluted (2)		$(0.01	)		$(0.00)			$(0.01)
Pro Forma Combined Book Value Per Share (3):
Per E*TRADE share		$  5.33			$  5.59			$  5.98
Per equivalent Web Street share		$  0.99			$  1.04			$  1.11

(1)

The unaudited pro forma combined per share information combines financial information of E*TRADE for the fiscal year ended September 30, 2000 with the financial information of Web Street for the year ended December 31, 2000 and assumes the $325 million of our 6 3 /4% Convertible Subordinated Notes had been issued at the beginning of fiscal year 2000, and gives effect to interest that would have accrued on the 6 3 /4% Convertible Subordinated Notes during the periods presented. On January 22, 2001, E*TRADE changed its fiscal year end from September 30 to December 31.

(2)	The unaudited equivalent Web Street pro forma per share amounts are calculated by multiplying the E*TRADE combined pro forma per share amounts by the share exchange ratio of 0.1864 E*TRADE share for each outstanding share of Web Street Common Stock.

(3)

Historical book value per share is computed by dividing shareowners’ equity by the number of shares of common stock and the exchangeable shares outstanding at the end of each period. Pro forma book value per share is computed by dividing pro forma shareowners’ equity by the pro forma number of shares of common stock and the exchangeable shares outstanding at the end of the period less amounts attributable to preferred shareowners.

		Last Sale Price of E*TRADE Common Stock		Last Sale Price of Web Street Common Stock		Value of E*TRADE Common Stock Received
May 18, 2001		$9.20		$  .80		$1.71
May 31, 2001		$7.50		$1.33		$1.40

The E*TRADE common shares to be received by Web Street stockholders in the merger will fluctuate in value

We may face challenges in integrating E*TRADE and Web Street and, as a result, may not realize the expected benefits of the anticipated merger

Officers and directors of Web Street have potential conflicts of interest in the merger

Forward-looking statements may prove inaccurate

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synergies

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efficiencies

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cost savings

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revenue enhancements

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product integration

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capital productivity

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capital spending

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the timetable for completing the merger

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allocation of intangibles

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integration of operations

Economic and Industry Conditions   Ÿ  materially adverse changes in economic or industry conditions generally or in the markets served by our companies   Ÿ  product and labor prices, fluctuations in exchange rates and currency values   Ÿ  capital expenditure requirements   Ÿ  volatility in the stock market       Transaction or Commercial Factors   Ÿ  our ability to integrate the business of E*TRADE and Web Street successfully after the merger   Ÿ our ability to retain Web Street’s active customer accounts   Ÿ  the challenges inherent in diverting management’s focus and resources from other strategic opportunities and from operational matters during the integration process

Operating Factors   Ÿ  changes in operating conditions and costs   Ÿ  interest rates   Ÿ  access to capital markets   Political/Governmental Factors   Ÿ  political developments and law and regulations   Ÿ  political stability in relevant areas of the world   Competitive Factors and Technology Advances   Ÿ  the actions of competitors   Ÿ  the development and use of new technology

We will incur large depreciation and amortization expenses

Need for regulatory approvals may affect consummation of the merger

Partners or customers may react unfavorably to the proposed combination

Failure to complete the merger could negatively impact Web Street stock price and future business and operations

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Web Street may be required under limited circumstances to pay us a termination fee of up to $1,350,000;

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the price of Web Street common stock may decline to the extent that the current market price of Web Street common stock reflects a market assumption that the merger will be completed; and

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costs incurred by Web Street related to the merger, such as legal and accounting fees as well as a portion of the financial advisor fees that would be payable upon completion of the merger, must be paid by Web Street even if the merger is not completed.

The market price of our common stock may decline as a result of the merger

We face competition from competitors, some of whom have significantly greater financial, technical, marketing and other resources, which could cause us to lower our prices or to lose a significant portion of our market share

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American Express Company

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AOL Time Warner Inc.

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Ameritrade, Inc.

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Bank of America Corporation

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Charles Schwab & Co., Inc.

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CSFBdirect (formerly DLJ direct)

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J.P. Morgan Chase & Co.

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Citigroup Inc.

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Datek Online Holdings Corporation

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Fidelity Investments

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FleetBoston Financial Corporation

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Intuit Inc.

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Merrill Lynch, Pierce, Fenner & Smith Incorporated

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Microsoft MoneyCentral

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Morgan Stanley Dean Witter & Co.

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National Discount Brokers Corporation (which is owned by Deutsche Bank)

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NetBank, Inc.

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PaineWebber Group, Inc. (which is owned by UBS AG)

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Salomon Smith Barney, Inc. (which is owned by Citigroup)

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TD Waterhouse Group, Inc.

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Wells Fargo & Company

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WingspanBank.com (a division of First USA Bank, N.A.)

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Yahoo! Inc.

The security of our computers or confidential customer information transmitted over public networks could be breached, which could deter customers from using our services and significantly damage our reputation

As a significant portion of our revenues come from online investing services, downturns in the securities industry have harmed and could further significantly harm our business, including by reducing transaction volumes and margin borrowing and increasing our dependence on our more active customers who receive lower prices

Downturns in the securities markets increase the risk that parties to margin lending transactions with us will fail to honor their commitments and that the value of the collateral we hold in connection with those transactions will not be adequate, increasing our risk of losses from our margin lending activities

Our inability to retain and hire skilled personnel and senior management could seriously harm our ability to maintain and grow our business

If our ability to correctly process customer transactions is slowed or interrupted, we could be subject to customer litigation and our reputation could be harmed

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undetected errors in software programs or computer systems,

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our inability to effectively resolve any errors in our internal software programs or computer systems once they are detected, or

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heavy stress placed on systems in the transaction process during certain peak trading times.

Increases in prevailing and anticipated interest rates would reduce the value of E*TRADE Bank’s fixed rate investments and may decrease E*TRADE Bank’s profitability by increasing the expense of variable rate interest-bearing liabilities without a corresponding increase in income from assets bearing a fixed rate of interest

E*TRADE Bank’s asset diversification to include higher yielding investments which carry a higher inherent risk of default in its portfolio may increase the risk of charge-offs which could reduce our profitability

We rely on a number of third parties to process our transactions, and their inability to expand their technology to meet our needs, or our inability to expand our own technology in the event of a significant increase in demand, could impair our ability to acquire new customers and otherwise grow our business

If we are unable to quickly introduce new products and services that satisfy changing customer needs, we could lose customers and have difficulty attracting new customers

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effectively using new technologies,

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adapting our services and products to meet emerging industry standards,

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developing, introducing and marketing service and product enhancements, or

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developing, introducing and marketing new services and products to meet customer demand.

If our Business Solutions Group products fail or produce inaccurate results we could be subject to litigation and our reputation may be harmed

The size of our market and our results of operations depend heavily upon the growing acceptance of the Internet as a commercial marketplace for financial services

If our international efforts are not successful, our business growth will be harmed and our resources will not have been used efficiently

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unexpected changes in regulatory requirements and trade barriers,

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difficulties in staffing and managing foreign operations,

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the level of investor interest in cross-border trading,

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authentication of online customers,

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political instability,

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fluctuations in currency exchange rates,

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reduced protection for intellectual property rights in some countries,

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seasonal reductions in business activity during the summer months in Europe and certain other parts of the world,

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the level of adoption of the Internet in international markets, and

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potentially adverse tax consequences.

Our failure to successfully integrate the companies that we acquire into our existing operations could harm our business

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difficulties in the assimilation and integration of acquired operations and products,

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diversion of management’s attention from other business concerns,

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failure to achieve anticipated cost savings,

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amortization of acquired intangible assets, with the effect of reducing our reported earnings, and

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potential loss of key associates of acquired companies.

Any failure to maintain our relationships with strategic partners or loss in value of the investments we make could harm our business

If we fail to protect our intellectual property rights or face a claim of intellectual property infringement by a third party, we could lose our intellectual property rights, be liable for significant damages, or incur significant costs and expenses regardless of the merits of the claims against us

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enforce our intellectual property rights,

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protect our trade secrets,

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determine the validity and scope of the proprietary rights of others, or

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defend against claims of infringement or invalidity.

Anti-Takeover provisions in our charter documents and Delaware law could prevent or delay a change in control

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authorizing the issuance of “blank check” preferred stock,

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providing for a classified board of directors with staggered, three-year terms,

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prohibiting cumulative voting in the election of directors,

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requiring super-majority voting to effect business combinations or certain amendments to our certificate of incorporation and bylaws,

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limiting the persons who may call special meetings of shareowners,

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prohibiting shareowner action by written consent, and

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establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted on by shareowners at shareowner meetings.

If changes in government regulation favor our competition or restrict our business practices, our ability to attract customers and our profitability may suffer

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sales methods,

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recommendations of securities,

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trading practices among broker-dealers,

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execution of customers’ orders,

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use and safekeeping of customers’ funds and securities,

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capital structure,

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record keeping,

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advertising,

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conduct of directors, officers and employees, and

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supervision.

If we fail to comply with applicable securities and banking regulations, we could be subject to disciplinary actions, damages, penalties or restrictions that could significantly harm our business

If we do not maintain the capital levels required by regulators, we may be fined or forced out of business

		Required Net Capital		Net Capital		Excess Net Capital
E*TRADE Securities Incorporated		$48,123		$414,103		$365,980
E*TRADE Institutional Securities, Inc.		$    250		$    2,779		$    2,529
E*TRADE Investor Select, Inc.		$        5		$      230		$      225
Marquette Securities, Inc.		$    250		$      795		$      545
E*TRADE Capital Markets, Inc.		$    174		$  14,126		$  13,952
E*TRADE Canada Securities Corporation		$      56		$      192		$      136

		Actual				To Be Well Capitalized Under Prompt Corrective Action Provision
		Amount		Ratio		Amount		Ratio
Core Capital (to adjusted tangible assets)		$682,943		5.66%		>$603,741		> 5.0%
Tier 1 Capital (to risk weighted assets)		$682,943		11.57%		>$354,124		> 6.0%
Total Capital (to risk weighted assets)		$696,595		11.80%		>$590,206		>10.0%

Restrictions on the ability of or decreased willingness of third parties to make payments for order flow could reduce our profitability

Regulatory review of our advertising practices could hinder our ability to operate our business and result in fines and other penalties

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censures or fines,

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suspension of all advertising,

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the issuance of cease-and-desist orders, or

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the suspension or expulsion of a broker-dealer or any of its officers or employees.

If we were to solicit orders from our customers or make investment recommendations, we would become subject to additional regulations that could be burdensome and subject us to fines and other penalties

Due to the increasing popularity of the Internet, laws and regulations may be passed dealing with issues such as user privacy, pricing, content and quality of products and services and those regulations could adversely affect the growth of the online financial services industry

Due to our acquisition of ETFC, we are subject to regulations that could restrict our ability to take advantage of good business opportunities and that may be burdensome to comply with

We may incur costs to avoid investment company status and our business would suffer significant harm if we were deemed to be an investment company

Our historical quarterly results have fluctuated and do not reliably indicate future operating results

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fluctuations in the fair market value of our equity investments in other companies, including through existing or future private investment funds managed by us,

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existing or future private investment funds managed by us,

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fluctuations in interest rates, which will impact our investment and loan portfolios,

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changes in trading volume in securities markets,

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the success of, or costs associated with, acquisitions, joint ventures or other strategic relationships,

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changes in key personnel,

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seasonal trends,

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purchases and sales of securities and other assets as part of E*TRADE Bank’s portfolio restructuring efforts,

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customer acquisition costs, which may be affected by competitive conditions in the marketplace,

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the timing of introductions or enhancements to online financial services and products by us or our competitors,

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market acceptance of online financial services and products,

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domestic and international regulation of the brokerage, banking and Internet industries,

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accounting for derivative instruments and hedging activities,

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changes in domestic or international tax rates,

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changes in pricing policies by us or our competitors,

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fluctuation in foreign exchange rates, and

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changes in the level of operating expenses to support projected growth.

We have incurred losses in the past and we cannot assure you that we will be profitable

The market price of our common stock may continue to be volatile which could cause litigation against us and the inability of shareowners to resell their shares at or above the prices at which they acquire them

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quarterly variations in operating results,

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volatility in the stock market,

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volatility in the general economy,

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changes in interest rates,

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announcements of acquisitions, technological innovations or new software, services or products by us or our competitors, and

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changes in financial estimates and recommendations by securities analysts.

We may need additional funds in the future which may not be available and which may result in dilution of the value of our common stock

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Domestic retail brokerage—our domestic retail brokerage products and services include fully-automated stock, option, fixed income and mutual fund order processing, online investment portfolio tracking and access to financial market news and information. As of March 31, 2001, we had 3.2 million active domestic brokerage accounts, with assets held in domestic brokerage customer accounts of $40.0 billion. Revenues from these products and services were 71% of our net revenues in the fiscal year ended September 30, 2000 and 60% of our net revenues in the quarter ended March 31, 2001.

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Banking—through our banking operations, we provide a wide range of FDIC-insured and other banking products and services through the Internet, telephones and ATMs. As of March 31, 2001, we had 405,000 active banking accounts, with deposits in banking accounts of $6.8 billion. Revenues from these products and services were 10% of our net revenues in the fiscal year ended September 30, 2000 and 22% of our net revenues in the quarter ended March 31, 2001.

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Global and institutional brokerage—our global brokerage products and services are similar to those of our domestic retail brokerage operations except that they are provided to foreign investors through our international subsidiaries. Our institutional brokerage products and services are provided to institutional investors as opposed to retail investors. As of March 31, 2001, we had 97,000 active global and institutional accounts, with assets held in global and institutional customer accounts of $1.1 billion. Revenues from these products and services were 13% of our net revenues in the fiscal year ended September 30, 2000 and 12% of our net revenues in the quarter ended March 31, 2001.

Overview

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track stock quotes that automatically update in real time as the market moves;

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view up-to-date news and financial market headlines from multiple sources;

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buy and sell securities, including stocks and options;

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buy, sell or exchange over 6,000 load and no-load mutual funds, obtain fund information, view fund performance reports from Morningstar and read complete fund prospectuses through Web Street’s online Mutual Fund SuperSite;

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receive quick confirmation of executed trades; and

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check securities positions and account balances that are updated in real time to reflect just-completed trades.

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Our system enables customers worldwide to trade in U.S. securities through our web site. We have established partnerships with foreign brokerage firms to offer our Unified Global Brokerage Accounts. These accounts currently enable customers of these firms to trade in U.S. securities markets through translated versions of our web site, using funds that customers deposit in local currencies and convert to U.S. dollars for immediate trading. Our foreign partners market our online services and provide local customer support in our customers’ own languages.

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Our web site provides automatically updated market data, including stock quotes, market-maker information and financial news, in real time. Investors can track the movement of stock prices, as well as relevant corporate and market news, on individually designed watch lists. Our web site also provides account information that is updated in real time, rather than periodically or overnight, to allow our customers to better track their positions.

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We have automated the online investment process, significantly reducing the need for human intervention to review or execute trades for our customers. As a result, over 90% of our customer orders are currently entered, processed and confirmed electronically. This allows our customers to avoid the longer trade execution time, personnel requirements, possibilities for human error and costs associated with less automated order entry and processing systems.

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Our web site has user-friendly graphical interfaces that makes online investing easy and fast, even for investors unaccustomed to conducting transactions over the Internet. Customers have access to a variety of investment tools, including portfolio tracking, market-maker information, historic and intra-day stock charting, market and company news and investment research, all on the same page. Investors can customize user interfaces on our web site to select the market and securities watch lists, news, charts and market analyses that are most valuable to them based on their individual investment objectives.

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We offer customers the ability to place orders with us 24 hours a day, seven days a week. We submit orders placed after market hours for execution at the next day’s market opening. Customers can trade securities through the Internet or with licensed brokers over the telephone. We also have a growing network of financial services centers that provide a physical location where clients can open new accounts, enter trades and receive personalized, face-to-face customer service.

Stock and Options Trading

Mutual Funds

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search the mutual funds Web Street offers by name and criteria, such as fund category, fees, performance, risk and rankings;

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view fund performance reports from Morningstar that provide comprehensive fund information, including returns, investment objectives, fees, holdings and analysis;

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read the prospectuses for mutual funds in which they are interested and enter orders to purchase or sell an existing position; and

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automatically re-invest dividends and capital gains from particular mutual funds.

Cash Management Services

Margin Accounts

Market Data and Financial Information

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research and industry graphical reports of fundamental investment information for approximately 7,000 companies and 100 industries, including company overviews, market trends, earnings estimates, price-to-earnings ranges, stock price charts and industry comparisons from Morningstar;

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real-time static stock quotes and expanded quotes that provide more detailed information about a security, including trading volume, 52-week highs and lows, earnings per share and time and size of last sale;

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up to 10 customized watch lists of 10 securities each and real-time world financial news relating to these securities from Reuters News Service, PRNewswire and Business Wire;

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summaries of composite indices, including those for the major U.S. exchanges, Nasdaq and S&P 500 and market look tables;

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initial public offering filing and pricing data from IPO.com, provided by Reuters Reality Online;

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indices and key news items for over 20 major global financial markets; and

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information about mutual funds, searchable by specific desired criteria.

Specialized Products for Active Traders

Portfolio Tracking and Records Management

Private Client Group

Web Street University

Other Financial Services

Order Processing

Clearing

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American Express Company

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AOL Time Warner Inc.

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E*TRADE Group, Inc.

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Ameritrade, Inc.

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Bank of America Corporation

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Charles Schwab & Co., Inc.

Ÿ

CSFBdirect (formerly DLJ direct)

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J.P. Morgan Chase & Co.

Ÿ

Citigroup Inc.

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Datek Online Holdings Corporation

Ÿ

Fidelity Investments

Ÿ

FleetBoston Financial Corporation

Ÿ

Intuit Inc.

Ÿ

Merrill Lynch, Pierce, Fenner & Smith Incorporated

Ÿ

Microsoft MoneyCentral

Ÿ

Morgan Stanley Dean Witter & Co.

Ÿ

National Discount Brokers Corporation (which is owned by Deutsche Bank)

Ÿ

NetBank, Inc.

Ÿ

PaineWebber Group, Inc. (which is owned by UBS AG)

Ÿ

Salomon Smith Barney, Inc. (which is owned by Citigroup)

Ÿ

TD Waterhouse Group, Inc.

Ÿ

Wells Fargo & Company

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WingspanBank.com (a division of First USA Bank, N.A.)

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Yahoo! Inc.

Location		Amount of Property Owned and Occupied or Leased by Us		Principal Usage
Deerfield, Illinois		17,300 sq. ft.†		Principal executive offices and data center
Chicago, Illinois		33,000†		Principal brokerage and clearing offices
Northbrook, Illinois		6,000†		Software development office
Arizona		30,000*		Data center (under construction)
9454 Wilshire Boulevard		2,600†		Financial Services Center
Beverly Hills, California
60 State Street		2,970†		Financial Services Center
Boston, Massachusetts
1675 Broadway		4,300†		Financial Services Center
Denver, Colorado
532 Market Street		6,700†		Financial Services Center
San Francisco, California

*	Represents property we own.

†	Represents property we lease.

Cautionary Note Regarding Forward-Looking Statements

Overview

Results of Operations

		Percentage of Net Revenues
		Year Ended December 31,									Three months ended March 31,
		1998			1999			2000			2000			2001
Revenues:
Transaction revenue		93	%		92	%		85	%		93	%		79	%
Interest income		2			3			18			6			26
Other revenue		5			5			2			1			2
		100			100			105			100			107
Interest expense		—			—			(5	)		—			(7	)
Net revenues		100			100			100			100			100

		Percentage of Net Revenues
		Year Ended December 31,									Three months ended March 31,
		1998			1999			2000			2000			2001
Cost of Services:
Clearance and execution		35			41			46			41			41
Employee compensation and benefits		17			11			15			7			26
Communication and data processing		12			7			9			5			14
Total cost of services		64			59			70			53			81
Operating expenses:
Marketing and advertising		103			33			32			43			11
Technology development		20			8			13			6			32
General and administrative		62			27			44			27			51
Total operating expenses		185			68			89			76			94
Net loss from operations		(149	)%		(27	)%		(59	)%		(29	)%		(75	)%

Quarterly Results of Operations

		Quarter Ended
		June 30, 1999			Sept. 30, 1999			Dec. 31, 1999			March 31, 2000			June 30, 2000			Sept. 30, 2000			Dec. 31, 2000			March 31, 2001
		(in thousands)
Revenues:
Transaction revenue		$        5,609			$        6,061			$        7,530			$      12,078			$        6,281			$        4,185			$        4,750			$        4,148
Interest income		168			163			402			736			675			2,304			2,138			1,365
Other revenue		260			268			378			243			371			117			37			101
		6,037			6,492			8,310			13,057			7,327			6,606			6,925			5,614
Interest expense		(1	)		(1	)		(2	)		(2	)		(2	)		(990	)		(652	)		(365	)
Net revenues		6,036			6,491			8,308			13,055			7,325			5,616			6,273			5,249
Cost of services:
Clearance and execution		2,659			2,802			3,385			5,354			4,553			2,758			2,283			2,150
Employee compensation and         benefits		708			640			828			967			1,048			1,437			1,284			1,375
Communication and data         processing		331			418			691			657			792			823			818			739
Total cost of services		3,698			3,860			4,904			6,978			6,393			5,018			4,385			4,264
Operating expenses:
Marketing and advertising		1,611			3,290			2,924			5,592			2,881			971			760			588
Technology development		599			489			603			709			683			1,195			1,594			1,693
General and administrative		1,370			1,618			2,648			3,568			4,256			3,143			3,333			2,652
Total operating expenses		3,580			5,397			6,175			9,869			7,820			5,309			5,687			4,933
Loss from operations		(1,242	)		(2,766	)		(2,771	)		(3,792	)		(6,888	)		(4,711	)		(3,799	)		(3,948)
Gain from settlement of litigation		—			—			—			—			—			925			—			—
Net loss		$      (1,242	)		$      (2,766	)		$      (2,771	)		$      (3,792	)		$      (6,888	)		$      (3,786	)		$(3,799	)		(3,948	)
Basic and diluted net loss per     common share		$        (0.06	)		$        (0.13	)		$        (0.12	)		$        (0.15	)		$        (0.27	)		$        (0.15	)		$        (0.15	)		$        (0.15	)
Shares used in computing basic and     diluted net loss per share		20,404,466			20,841,324			25,173,156			25,674,219			25,727,076			25,783,938			23,827,869			25,866,120

Revenues

Transaction Revenue

Interest Income and Interest Expense

Other Revenue

Cost of Services

Clearance and Execution Costs

Employee Compensation and Benefits

Communication and Data Processing

Operating Expenses

Marketing and Advertising

Technology Development

General and Administrative

Revenues

Cost of Services

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You make your tender by or through an eligible institution;

Ÿ

The enclosed notice of guaranteed delivery, properly completed and duly executed, substantially in the form enclosed with this prospectus, is received by the exchange agent as provided below on or prior to the expiration date; and

Ÿ

The certificates for all tendered Web Street shares (or a confirmation of a book-entry transfer of tendered securities into the exchange agent’s account at DTC as described above), in proper form for transfer, together with a properly completed and duly executed letter of transmittal (or a manually signed facsimile thereof), with any required signature guarantees (or, in the case of a book-entry transfer, an agent’s message) and all other documents required by the letter of transmittal are received by the exchange agent within three Nasdaq trading days after the date of execution of the notice of guaranteed delivery.

Help us to Continue Growing Our Customer Base

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We and Web Street believe that economies of scale and size are significant contributors to the financial success of online financial services companies generally and online brokerage businesses in particular. In the acquisition, we will acquire Web Street Securities’ 34,000 active accounts, including 6,300 accounts held by German residents. During the month preceding execution of the merger agreement, Web Street’s customers executed approximately 4,900 transactions per day. The Web Street accounts have a similar pricing schedule as that used by us, so we expect that they will integrate well into our base of nearly 4 million accounts.

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We believe that the consideration to be paid in the offer and the merger allows us to purchase Web Street’s accounts and other assets at an attractive valuation. Although the per share trading price of Web Street common stock on May 18, 2001, the last trading day before execution of the merger agreement was $0.80, the weighted average per share trading price for the one year period ended May 14, 2001, was $1.70.

Contribute to Our Profitability

Ÿ

The transaction is expected to be accretive to our revenues and earnings immediately after the closing. Through the transaction, we expect to gain an annual revenue stream of $20-25 million. In addition, once the Web Street customers are integrated into our scalable architecture, we expect to achieve significant efficiencies that will be reflected in gross margin and operating margin results for those accounts.

Further Expand Our Physical Presence Strategy

Ÿ

The transaction will further our physical presence strategy by adding four physical centers in highly desirable locations—Boston, Denver, San Francisco and Beverly Hills. These new centers will allow us to leverage our existing physical presence strategy, including our flagship E*TRADE Center location in New York, 20 new E*TRADE Zone locations, service centers located in Target stores, to be rolled out in the coming year and our network of over 10,000 E*TRADE Bank ATMs, giving consumers value added financial services and educational content in a high-tech, high-touch experience.

Better Position Us as a Provider of Online Financial Services

Ÿ

The addition to E*TRADE of Web Street’s customer accounts and four physical centers, and the additional revenues and earnings that we expect to result from the acquisition, will better position us in the expected consolidation of the online brokerage business. We have long been pursuing a strategy of broadening our products and services and building a top-tier service quality organization. The acquisition will increase our size and stability, furthering our ability to offer a broad array of products and services.

Ÿ

a stockholder who is not a citizen or resident of the United States,

Ÿ

a financial institution or insurance company,

Ÿ

a tax-exempt organization,

Ÿ

a dealer or broker in securities,

Ÿ

a stockholder that holds its Web Street common stock as part of a hedge, appreciated financial position, straddle or conversion transaction, or

Ÿ

a stockholder who acquired his Web Street common stock pursuant to the exercise of options or otherwise as compensation.

Ÿ

A holder of Web Street common stock will not recognize any gain or loss upon its exchange of its shares of Web Street common stock for shares of E*TRADE common stock.

Ÿ

If a holder of Web Street common stock receives cash instead of a fractional share of E*TRADE common stock, the holder will be required to recognize gain or loss, measured by the difference between the amount of cash received instead of that fractional share and the portion of the tax basis of that holder’s shares of Web Street common stock allocable to that fractional share. This gain or loss will be capital gain or loss, and will be long-term capital gain or loss if the share of Web Street common stock exchanged for that fractional share of E*TRADE common stock was held for more than one year at the effective time of the merger.

Ÿ

A holder of Web Street common stock will have a tax basis in the E*TRADE common stock received in the offer and merger equal to (1) the tax basis of the Web Street common stock surrendered by that holder pursuant to the offer or in the merger, less (2) any tax basis of the Web Street common stock surrendered that is allocable to any fractional share of E*TRADE common stock for which cash is received.

Ÿ

The holding period for shares of E*TRADE common stock received in exchange for shares of Web Street common stock in the offer and merger will include the holding period for the shares of Web Street common stock surrendered in the offer and merger.

Minimum Tender Condition

Regulatory Clearance Condition

Registration Statement Effectiveness Condition

NYSE Listing Condition

Other Conditions of the Offer

(1)

There shall not have been instituted or pending any action or proceeding by any government or governmental authority or agency, domestic, foreign or supranational, before any court or governmental authority or agency, domestic, foreign or supranational challenging or seeking to make illegal, to delay materially or otherwise directly or indirectly to restrain or prohibit the making of the offer, the acceptance for payment of or payment for some or all of the Web Street shares by E*TRADE or Opus Acquisition Corp. or the consummation of the merger;

(2)

There shall not have been entered, enacted, promulgated, enforced or issued by any court, government or governmental authority or agency, domestic, foreign or supranational a judgment, order, decree, statute, law, ordinance, rule or regulation, or any other legal restraint or prohibition preventing the consummation of the offer or making the offer illegal;

(3)

Web Street shall not have failed to perform in any material respect any of its covenants, obligations or agreements under the merger agreement so that, overall, the failures would reasonably be expected to have a material adverse effect on Web Street;

(4)

The representations and warranties of Web Street contained in the merger agreement, disregarding all qualifications and exceptions contained in the merger agreement relating to materiality or material adverse effect or any similar standard or qualification, shall be true at and as of the expiration of the offer as if made at and as of that time, other than representations or warranties that address matters only as of a certain date, which shall be true and correct as of that date, except as would not reasonably be expected to have, individually or in the aggregate, a material adverse effect on Web Street;

(5)

The merger agreement shall not have been terminated;

(6)

All options issued under Web Street’s option plans and the ESPP shall have been exercised, cancelled or repurchased;

(7)

Each of seven senior executives of Web Street shall have executed and delivered to E*TRADE an escrow agreement and each of Joseph and Avi Fox shall have executed and delivered a Non-Competition Agreement; and

(8)

No shares of E*TRADE common stock to be issued in the offer or the merger (excluding shares to be issued upon exercise of Web Street warrants assumed in the merger) shall be subject to registration rights granted by Web Street that have not been fully waived by the holder.

Ÿ

At least 750,000 publicly held shares, held by at least 400 stockholders of round lots, with a market value of at least $5 million and net tangible assets of at least $4 million and at least two registered and active market makers for the shares or

Ÿ

At least 1,100,000 publicly held shares, held by at least 400 stockholders of round lots, with a market value of at least $15 million and at least four registered and active market markers, and either

Ÿ

A market capitalization of at least $50 million; or

Ÿ

Total assets and total revenue of at least $50 million each for the most recently completed fiscal year or two of the last three most recently completed fiscal years.

		Web Street Common Shares
		Market Price
		High		Low
Fiscal 2000
First Quarter		$13.38		$5.75
Second Quarter		$  9.06		$2.25
Third Quarter		$  3.75		$1.94
Fourth Quarter		$  2.13		$0.69
Fiscal 2001
First Quarter		$  1.63		$0.52
Second Quarter (through May 31, 2001)		$  1.52		$0.45

		E*TRADE Common Shares
		Market Price
		High		Low
Fiscal 2000
First Quarter		$ 40.00		$ 21.63
Second Quarter		$  34.25		$  19.19
Third Quarter		$  31.19		$  13.13
Fourth Quarter		$  20.19		$  13.19
Transition Period—Quarter ended December 31, 2000		$  16.50		$    6.66
Fiscal 2001
First Quarter		$  15.38		$    6.35
Second Quarter (through May 31, 2001)		$  10.20		$    5.32

						Online Brokerage Peers
		Exchange Offer		Web Street Current Price		Median		Low		High
Equity Value to:
TTM Revenue		1.81x		0.73x		2.47x		0.29x		5.17x
Book Value		2.10x		0.85x		2.58x		0.74x		9.46x

Note:

“TTM” means the trailing twelve months ended March 31, 2001, and “Book Value” was determined as of March 31, 2001.

		Enterprise Value/ Core Accounts			Enterprise Value/ Client Assets
Ameritrade		$1,236			6.0	%
CSFB Direct		948			2.2	%
E*TRADE		1,043			8.4	%
Charles Schwab		3,798			3.3	%
TD Waterhouse		1,721			3.3	%
Median		$1,236			3.3	%
Web Street/E*TRADE
Merger Consideration		$1,304			9.6	%
Premium over median		5.5	%		187.0	%

Acquiror		Target
MONY Group, Inc.		Advest Group, Inc.
Royal Bank of Canada		Dain Rauscher Corp.
Deutsche Bank AG		National Discount Brokers
E*TRADE Group, Inc.		TIR Limited
Gilman & Ciocia, Inc.		North Shore Capital Management
GlobalNet Financial.com, Inc.		Dalton Kent Securities Group, Inc.
Lotus Pacific, Inc.		U.S. Securities & Futures Group, Inc.
Omega Research, Inc.		Online Tradinginc.com Corp.
Pinnacle Global Group, Inc.		Blackford Securities Corp.
vFinance.com, Inc.		Colonial Direct Financial Group
Waddell & Reed Financial, Inc.		The Legend Group of Companies

						Guideline Transactions
		Exchange Offer		Web Street Current Price		Median		Low		High
Equity Value to:
TTM Revenue		1.81x		0.73x		0.95x		0.43x		25.64x
Book Value		2.10x		0.85x		2.58x		0.74x		9.46x

Acquiror		Target
Deutsche Bank AG		National Discount Brokers
E*TRADE Group Inc.		VERSUS Technologies, Inc.
First Union Corp.		JW Genesis Financial Corp.
Franklin Resources Inc.		Fiduciary Trust Co. International
Franklin Resources Inc.		Bissett & Associates Investment Mgt.
Legg Mason Inc.		Perigee Inc.
Metropolitan Life Insurance Co.		Conning Corp.
MONY Group Inc.		Advest Group Inc.
Old Mutual PLC		United Asset Management Corp.
PA Consulting Group		Hagler Bailly Inc.
Regions Financial Corp.		Morgan Keegan Inc.
ReliaStar Financial Corp.		Lexington Global Asset Managers Inc.
Royal Bank of Canada		Dain Rauscher Corp.

		Median		Low		High
Premium to One Day Share Price		41.1%		1.6%		94.1%

Ÿ

the anticipated future 2005 terminal value. The terminal value was determined by calculating multiples of projected 2005 net free cash flow ranging from 6.0x to 8.0x.

		E*TRADE		Web Street
30 Day Average		$9.04		$0.58
30 Day Weighted Average		$9.01		$0.62
90 Day Average		$8.58		$0.72
90 Day Weighted Average		$8.47		$0.73
1 Year Average		$13.06		$1.63
1 Year Weighted Average		$13.47		$1.70
2 Year Average		$20.90		N/A
2 Year Weighted Average		$23.35		N/A

		Return Since 11/19/99		Return from 52-week high
Web Street/E*TRADE Merger Consideration		(84.4)%		(54.3)%
JB Oxford		(82.1)%		(70.2)%
Stockwalk.com		(81.3)%		(92.8)%
Ameritrade		(70.6)%		(61.6)%
E*TRADE		(75.5)%		(60.0)%
Siebert Financial		(71.8)%		(49.7)%
TD Waterhouse Group		(39.7)%		(46.7)%
Charles Schwab		(35.3)%		(51.5)%
AB Watley		(20.6)%		(61.0)%

Certain Executive Agreements

Executive		Threshold Test #1 Amount		Threshold Test #2 Amount		Threshold Test #3 Amount		Threshold Test #4 Amount		Total
Joseph J. Fox		$201,629		$201,629		$    500,000		$    545,585		$1,448,843
Avi Fox		201,629		201,629		500,000		545,585		1,448,843
Joseph Barr		125,175		125,175		—		338,710		589,060
Stuart Cohn		102,806		102,806		—		278,128		483,794
William Mania		86,788		86,788		—		234,839		408,415
D. J. Rosenberg		87,318		87,318		—		236,273		410,910
Harleigh Mandel		44,654		44,654		—		120,828		210,135
Total		$850,000		$850,000		$1,000,000		$2,300,000		$5,000,000

Certain Loan Agreements

Ÿ

amend or terminate the agreement on behalf of Web Street;

Ÿ

waive any rights, benefits or remedies of Web Street or holders of Web Street common stock under the merger agreement;

Ÿ

extend the time for performance of E*TRADE’s or Opus Acquisition Corp.’s obligations under the merger agreement; or

Ÿ

approve any other action of Web Street which adversely affects the holders of Web Street common stock.

Ÿ

the aggregate exercise price for the Web Street shares otherwise purchasable pursuant to the warrant, divided by

Ÿ

the aggregate number of shares of E*TRADE common stock purchasable pursuant to the warrant.

Ÿ

directly or indirectly solicit, initiate or take any action to facilitate or encourage the submission or announcement of, any Acquisition Proposal (as defined below),

Ÿ

enter into or participate in any discussions or negotiations with, furnish any information relating to it or its subsidiaries or afford access to the business, properties, assets, books or records of Web Street or its subsidiaries to, otherwise cooperate in any way with, or assist, participate in, facilitate or encourage any effort by any third party that is seeking to make or has made an Acquisition Proposal,

Ÿ

approve, endorse or recommend any Acquisition Proposal, or

Ÿ

enter into any letter of intent or similar document or any contract, agreement or commitment contemplating or otherwise relating to any Acquisition Proposal.

Ÿ

engage in discussions or negotiations with or furnish information (pursuant to a confidentiality agreement) to any third party which makes a bona fide Acquisition Proposal,

Ÿ

approve or recommend to its stockholders that Acquisition Proposal pursuant to the Exchange Act, or

Ÿ

withdraw, modify in a manner adverse to E*TRADE or fail to make a recommendation to its stockholders of the offer and the merger, if, in each case, the Web Street board of directors reasonably determines (after consultation with Web Street’s financial advisor) that the Acquisition Proposal is or is likely to result in a Superior Proposal (as defined below) and determines in good faith (after consultation with its outside legal counsel) that it is necessary to take such action(s) in order to satisfy its fiduciary duties under applicable law.

Ÿ

any acquisition or purchase from Web Street by any person or group of more than 40% of the outstanding voting securities of Web Street or any of its subsidiaries or any tender offer or exchange offer that if consummated would result in any person or group beneficially owning 40% or more of the outstanding voting securities of Web Street or any of its subsidiaries or any merger, consolidation, business combination or similar transaction involving Web Street pursuant to which the stockholders of Web Street immediately preceding that transaction would hold less than 60% of the equity interests in the surviving or resulting entity of that transaction,

Ÿ

any sale, lease (other than in the ordinary course of business), exchange, transfer, license (other than in the ordinary course of business), acquisition, or disposition of more than 40% of the consolidated assets of Web Street, or

Ÿ

any liquidation or dissolution of Web Street.

Ÿ

to the extent required by applicable law, the merger agreement shall have been approved and adopted by the Web Street stockholders;

Ÿ

no provision of any applicable law or regulation and no judgment, injunction, order or decree shall prohibit the consummation of the merger;

Ÿ

the shares of E*TRADE common stock to be issued in the merger shall have been authorized for inclusion on the New York Stock Exchange, subject to official notice of issuance;

Ÿ

the registration statement on Form S-4 relating to the merger shall have become effective under the Securities Act and not be the subject of any stop order or proceedings seeking a stop order; and

Ÿ

Opus Acquisition Corp. shall have purchased shares of Web Street common stock in the offer.

(1)

the offer has not been consummated on or before September 30, 2001 (the “Termination Date”), unless the failure to consummate the offer is the result of a material breach or failure to fulfill a material obligation of the merger agreement by the party seeking termination;

(2)

the offer expires or terminates in accordance with the terms of the merger agreement without E*TRADE or Opus Acquisition Corp. having accepted for exchange any Web Street shares, except that a party will not be permitted to terminate the merger agreement for this reason if the expiration or termination is a result of a breach of the merger agreement by that party;

(3)

there shall be any applicable law or regulation that makes consummation of the merger illegal or otherwise prohibited or any judgment, injunction, or order which is final and nonappealable prohibiting the closing of the merger; or

(4)

any representation or warranty of the non-terminating party contained in the merger agreement is or becomes inaccurate so that, overall, the inaccuracies would reasonably be expected to have a material adverse effect on the non-terminating party, or the non-terminating party fails to perform any material covenant contained in the merger agreement, if that inaccuracy or failure to perform has not been or is incapable of being cured by the non-terminating party within 30 days following receipt by the non-terminating party of notice from the terminating party of the inaccuracy or failure to perform.

(1)

the Web Street board of directors, or any of its committees, approves or recommends to the Web Street stockholders any Acquisition Proposal;

(2)

the Web Street board of directors, or any of its committees, withdraws or amends or modifies in any way adverse to E*TRADE its recommendation to the Web Street stockholders that they accept the offer and approve and adopt the merger agreement and the merger;

(3)

Web Street fails to include in various documents relating to the offer the recommendation of the Web Street board of directors that the Web Street stockholders accept the offer and approve and adopt the merger agreement and the merger; or

(4)

a tender or exchange offer relating to 40% or more of the Web Street shares is commenced by a third party and Web Street does not send to its stockholders pursuant to rules under the Exchange Act, within 10 business days of the day that the offer is published, sent or given, a statement that Web Street recommends rejection of that tender or exchange offer.

Ÿ

a sale or other disposition by Web Street of a business or assets representing 40% or more of the consolidated net revenues, net income or assets of Web Street immediately prior to that sale,

Ÿ

the acquisition by any person or group (including by way of a tender offer or an exchange offer or issuance by Web Street), directly or indirectly, of beneficial ownership or a right to acquire beneficial ownership of shares representing 40% or more of any class of equity securities of Web Street, or

Ÿ

a merger, consolidation, business combination, recapitalization, liquidation, dissolution or similar transaction involving Web Street.

Parties

Agreement to Tender

Proxy

Ÿ

in favor of the adoption and approval of the merger agreement, the offer and the merger and the other transactions contemplated by the merger agreement, and

Ÿ

against the approval of any

Ÿ

Acquisition Proposal,

Ÿ

reorganization, recapitalization, liquidation or winding up of Web Street or any other extraordinary transaction involving Web Street,

Ÿ

corporate action that would prevent or delay consummation of the offer, the merger or any other transaction contemplated by the merger agreement, or

Ÿ

other matters relating to the foregoing.

Ÿ

a merger or consolidation of us or any of our subsidiaries with an interested shareowner or with a corporation that is or would become an affiliate or associate, with these terms defined for purposes of this provision of our certificate of incorporation as they are defined in the Exchange Act of 1934, of an interested shareowner,

Ÿ

any sale, lease, exchange, mortgage, pledge, transfer or other disposition to or with, or proposed by or on behalf of, an interested shareowner or any affiliate or associate of an interested shareowner involving any assets of ours or our subsidiaries that constitute 5% or more of our total assets,

Ÿ

the issuance or transfer by us or by any of our subsidiaries of any of our or their securities to, or proposed by or on behalf of, an interested shareowner or any affiliate or associate of an interested shareowner in exchange for cash, securities or other property that constitute 5% or more of our total assets,

Ÿ

the adoption of any plan or proposal for our liquidation or dissolution or any spin-off or split-up of any kind of us or any of our subsidiaries, proposed by or on behalf of an interested shareowner or an affiliate or associate of an interested shareowner, or

Ÿ

any reclassification, recapitalization, or merger or consolidation of us with any of our subsidiaries or any other transaction that has the effect, directly or indirectly, of increasing the proportionate share of any class or series of our capital stock or that of any of our subsidiaries that is beneficially owned by an interested shareowner or an affiliate or associate of an interested shareowner.

Ÿ

is, or was at any time within the prior two-year period, the beneficial owner of 10% or more of our outstanding voting securities,

Ÿ

is one of our associates or affiliates and at any time in the prior two-year period was the beneficial owner of 10% or more of our outstanding voting securities, or

Ÿ

under circumstances described in more detail in our certificate of incorporation, an assignee of any of the persons described above.

Ÿ

that person or any of its affiliates or associates, beneficially owns, directly or indirectly,

Ÿ

that person or any of its affiliates or associates has, directly or indirectly, the right to acquire (whether such right is exercisable immediately or subject only to the passage of time), pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise, or the right to vote pursuant to any agreement, arrangement or understanding, or

Ÿ

are beneficially owned, directly or indirectly, by any other person with which the person in question or any of its affiliates or associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any shares of our capital stock.

E*TRADE

Web Street

Ÿ  The rights of E*TRADE shareowners are governed by E*TRADE’s certificate of incorporation and bylaws, in addition to Delaware law.   Ÿ  Upon completion of the merger, the E*TRADE certificate of incorporation and bylaws will be the same in all respects as the present documents.

Ÿ  The rights of Web Street stockholders are governed by Web Street’s certificate of incorporation and bylaws, in addition to Delaware law.   Ÿ  Upon completion of the merger, Web Street stockholders will become E*TRADE stockholders.

Ÿ  The authorized capital stock of E*TRADE consists of:   Ÿ  600,000,000 E*TRADE common shares, with a par value of $0.01 per share; there were 319,412,174 shares of common stock outstanding as of May 31, 2001.   Ÿ  1,000,000 shares of preferred stock, with a par value of $0.01 per share, one share of Series A Preferred Stock outstanding as of May 31, 2001.   Ÿ  10,644,223 shares exchangeable into common stock, with a par value of $.01 per share; there were 2,742,174 Exchangeable Shares outstanding as of May 31, 2001.

Ÿ  The authorized capital stock of Web Street consists of:   Ÿ  100,000,000 Web Street common shares, with a par value of $0.01 per share; there were 26,346,281 shares of common stock outstanding as of May 31, 2001.   Ÿ  2,000,000 shares of preferred stock, with a par value of $0.01 per share, none outstanding.

AMENDMENT OF GOVERNING DOCUMENTS   Charter

Ÿ  Except for the matters specified in the following section, an authorization of the E*TRADE board, followed by the vote of a majority of the outstanding E*TRADE common shares is required for an amendment to the E*TRADE certificate of incorporation.   Ÿ  An amendment to the E*TRADE certificate of incorporation providing for the following required an authorization by the E*TRADE board followed by the approval of at least sixty-six and two-thirds percent (66 2 /3%) of the combined voting power of all E*TRADE shares entitled to vote generally in the election of directors:

Ÿ  Except for the matters specified in the following section, an authorization of the Web Street board, followed by the vote of a majority of the outstanding Web Street common shares is required for an amendment to the Web Street certification of incorporation.   Ÿ  An amendment to the Web Street certificate of incorporation providing for the following requires an authorization by the Web Street board followed by the approval of at least sixty-six and two-thirds percent (66 2 /3%) of the voting power of shares entitled to vote generally in the election of directors:

E*TRADE

Web Street

Ÿ  limiting the power of shareowners to remove directors, altering the classified board structure, limiting the authority of the board of directors to amend or repeal the bylaws, requiring that all actions by shareowners take place at an annual or special meeting and not by written consent, calling special meetings, or changing the vote required in a business combination.   Ÿ  E*TRADE’s bylaws may be adopted, amended or repealed by:   Ÿ  a majority vote of the board of directors except that the vote of two-thirds of the total number of directors is required to increase or reduce the authorized number of directors; or   Ÿ  holders of at least 66 2 /3% of E*TRADE’s combined voting power of all of E*TRADE’s outstanding common stock.

Ÿ  altering the classified board structure, limiting the authority of the board of directors to amend or repeal the bylaws of the corporation, calling special meetings, requiring that all actions by stockholders take place at an annual or special meeting and not by written consent or changing the number of directors or provisions regarding their removal.   Ÿ  Web Street’s bylaws may be adopted, amended or repealed by:   Ÿ  a majority vote of the board of directors.   Ÿ  holders of at least 66 2 /3% of the voting power of the shares entitled to vote generally in the election of directors.

Ÿ  E*TRADE’s bylaws provide that the board of directors shall consist of 9 directors. This number may be changed by an amendment to the bylaws and two-thirds of the board of directors.   Ÿ  The current number of directors is 9.

Ÿ  The Web Street certificate of incorporation provides that the board of directors shall consist of not less than 3 nor more than 9 directors with the actual number determined from time to time by resolution adopted by the majority of directors.   Ÿ  The current number of directors is 7.

Ÿ  The board of directors is divided into three classes, each as nearly equal in number as possible, with one class being elected annually to a three-year term. There are three Class I directors, whose term will expire at the annual meeting to be held in 2002; three Class III directors, whose terms will expire at the annual meeting to be held in 2003; and three Class II directors, whose terms will expire at the annual meeting to be held in 2004.

Ÿ  The board of directors is divided into three classes, each as nearly equal in number as possible, with one class being elected annually to a three-year term. There are two Class III directors, whose terms will expire at the annual meeting to be held in 2002; two Class I directors, whose term will expire at the annual meeting to be held in 2003; and three Class II directors, whose terms will expire at the annual meeting to be held in 2004.

E*TRADE

Web Street

Ÿ  A shareowner must make any nomination for a director in writing to the secretary of E*TRADE at least 120 days but not more than 150 days before the first anniversary of the proxy statement relating to the preceding year’s annual meeting.

Ÿ  A stockholder must make any nomination for a director in writing to the secretary of Web Street not less than 45 days nor more than 75 days before the first anniversary of the mailing of the preceding year’s proxy statement with respect to Web Street’s annual meeting of stockholders.

Ÿ  E*TRADE directors or the entire board may be removed, with or without cause, by vote of at least 66 2 /3% of the combined voting power of all shares of E*TRADE entitled to vote generally in the election of directors.

Ÿ  Any director may be removed with cause by the holders of 66 2 /3% of the voting power of the shares then entitled to vote generally in the election of directors.

Ÿ  The annual meeting of shareowners must be held on a date and at a place within or without Delaware as fixed by the E*TRADE board of directors or the president.

Ÿ  The annual meeting of stockholders for the election of directors shall be held on a date and at a place within or without Delaware fixed by the Web Street board of directors.

Ÿ  Special meetings of the shareowners, for any purposes, may be called at anytime, by the chairman of the board, the president, the chairman or the secretary upon request from a majority of the board of directors or holders of 10% of the votes at such special meeting.

Ÿ  Web Street’s certificate of incorporation authorizes the board of directors, the chairman of the board, the chief executive officer or the president to call a special meeting of stockholders. Therefore, stockholders of Web Street are not authorized to call special meetings of stockholders.

Ÿ  An E*TRADE shareowner wishing to bring business before the annual shareowners’ meeting must provide written notice to the secretary of E*TRADE. The notice must be received between 120 and 150 days prior to first anniversary of the proxy statement relating to the preceding annual meeting.

Ÿ  A Web Street stockholder wishing to bring business before the annual stockholders’ meeting must provide written notice not less than 45 days nor more than 75 days before the first anniversary of the mailing of the preceding year’s proxy statement for Web Street’s annual meeting of stockholders.

Ÿ

the corporation has elected not to be governed by these restrictions,

Ÿ

prior to the time that the stockholder became an interested stockholder, the board of directors of the corporation approved either the business combination or the transaction resulting in the stockholder’s becoming an interested stockholder,

Ÿ

upon consummation of the transaction resulting in the stockholder’s becoming an interested stockholder, the stockholder owns at least 85% of the outstanding voting stock of the corporation, excluding voting stock owned by directors who are also officers and certain employee stock plans, or

Ÿ

at or subsequent to the time that the stockholder became an interested stockholder, the business combination is approved by the board and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least two-thirds of the outstanding voting stock that the interested stockholder does not own.

Beneficial Owner		Number of Shares Beneficially Owned		Percent of Shares Beneficially Owned			Number of Options Included in Number of Shares Beneficially Owned
Avi Fox(1)		5,543,427		20.9	%		125,000
Joseph J. Fox(1)		5,445,827		20.6			125,000
D. Jonathan Rosenberg		608,635		2.3			112,500
Stuart A. Cohn		440,689		1.7			168,750
Joseph A. Barr		331,453		1.2			293,750
William J. Mania		279,081		1.1			202,500
Frederic J. Graber		7,500		*			27,500
Jeffrey S. Stein		17,500		*			5,000
All Directors and Executive      Officers as a Group      (8 persons)		12,701,612		46.3	%		1,060,000

*	Less than 1%

(1)	The address for Mr. Joseph J. Fox and Mr. Avi Fox is 510 Lake Cook Rd., Deerfield, IL 60015.

		Page
Report of Independent Public Accountants		F-2
Consolidated Balance Sheets as of December 31, 1999 and 2000		F-3
Consolidated Statements of Operations for the years ended December 31, 1998, 1999 and 2000		F-4
Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1999 and 2000		F-5
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 1998,      1999 and 2000		F-6
Notes to Consolidated Financial Statements		F-7
Schedule I—Web Street, Inc. (Parent Company Only) Condensed Financial Statements as of      December 31, 2000 and for the three years then ended		F-19
Unaudited Interim Condensed Consolidated Balance Sheets as of December 31, 2000 and      March 31, 2001		F-23
Unaudited Interim Condensed Consolidated Statements of Operations for the three months ended      March 31, 2000 and 2001		F-24
Unaudited Interim Condensed Consolidated Statements of Cash Flows for the three months ended      March 31, 2000 and 2001		F-25
Unaudited Interim Condensed Consolidated Statement of Changes in Stockholder’s Equity for the three      months ended March 31, 2001		F-26
Notes to Unaudited Interim Condensed Consolidated Financial Statements		F-27

/s/    ARTHUR ANDERSEN LLP

		December 31, 2000			December 31, 1999
ASSETS
Cash and cash equivalents		$  25,501,668			$39,189,362
Cash segregated under federal and other regulatory requirements		900,000			—
Brokerage receivables, net		62,846,057			2,395,679
Property, equipment and software, net		8,644,617			3,994,411
Deposits with clearing organizations		1,306,998			105,999
Prepaid expenses and other		1,761,858			2,105,452
Total assets		$100,961,198			$47,790,903
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Brokerage payables		$  69,427,677			$      350,376
Accounts payable		3,582,414			2,354,852
Accrued expenses		2,370,242			1,976,633
Deferred rent		237,362			146,082
Total liabilities		75,617,695			4,827,943
Commitments and contingencies
Stockholders’ equity:
Preferred stock ($.01 par value; 2,000,000 shares authorized; no shares                issued and outstanding)		—			—
Common stock ($.01 par value, 100,000,000 shares authorized; 25,854,399                shares issued and outstanding at December 31, 2000 and 25,660,402                shares issued and outstanding at December 31, 1999)		258,544			256,604
Additional paid-in capital		65,961,151			65,317,651
Accumulated deficit		(40,876,192	)		(22,611,295	)
Total stockholders’ equity		25,343,503			42,962,960
Total liabilities and stockholders’ equity		$100,961,198			$47,790,903

		Years ended December 31,
		2000			1999			1998
Revenues:
Transaction revenue		$27,293,991			$23,471,194			$  7,350,246
Interest income		5,852,813			880,897			162,959
Other revenue		768,747			1,123,453			377,775
		33,915,551			25,475,544			7,890,980
Interest expense		(1,646,554	)		(3,959	)		(47	)
Net revenues		32,268,997			25,471,585			7,890,933
Cost of services:
Clearance and execution		14,947,677			10,564,306			2,794,584
Employee compensation and benefits		4,736,032			2,725,779			1,375,203
Communication and data processing		3,090,206			1,727,605			946,150
Total cost of services		22,773,915			15,017,690			5,115,937
Operating expenses:
Marketing and advertising		10,203,996			8,457,773			8,151,578
Technology development		4,181,198			2,005,093			1,559,306
General and administrative		14,300,048			6,754,526			4,882,562
Total operating expenses		28,685,242			17,217,392			14,593,446
Loss from operations		(19,190,160	)		(6,763,497	)		(11,818,450	)
Gain from settlement of litigation		925,263			—			—
Net loss		$(18,264,897	)		$  (6,763,497	)		$(11,818,450	)
Basic and diluted net loss per common share		$          (0.71	)		$          (0.32	)		$          (0.71	)
Weighted-average common shares used in computation of basic      and diluted net loss per common share		25,755,433			21,202,941			16,740,600

		Years ended December 31,
		2000			1999			1998
Cash flows from operating activities:
Net loss		$(18,264,897	)		$  (6,763,497	)		$(11,818,450	)
Adjustments to reconcile net loss to net cash used in operating           activities:
Depreciation and amortization		2,181,602			885,350			347,647
Compensation and other expenses incurred through issuance                of stock options and warrants		583,677			527,114			1,273,082
Provision for uncollectible accounts		601,216			415,625			275,886
Net deferred rent accretion (amortization)		91,280			(4,296	)		150,378
Changes in operating assets and liabilities:
Cash segregated under federal and other regulatory                     requirements		(900,000	)		—			—
Brokerage receivables		14,774,179			(2,007,341	)		(1,284,602	)
Deposits with clearing organizations		(1,200,999	)		(11,423	)		(44,576	)
Prepaid expenses and other assets		329,649			(974,229	)		(929,803	)
Brokerage payables		(6,747,527	)		329,122			17,980
Accounts payable		1,227,562			552,706			1,503,854
Accrued expenses		393,609			1,045,188			820,645
Net cash used in operating activities		(6,930,649	)		(6,005,681	)		(9,687,959	)
Cash flows used in investing activities:
Purchases of property, equipment and software		(6,818,808	)		(3,993,538	)		(1,038,909	)
Cash flows from financing activities:
Proceeds from issuance of common stock, net of issuance           costs		—			48,065,937			11,224,466
Redemption of preferred stock		—			(650,000	)		—
Payment from (to) related party		—			190,000			(190,000	)
Common stock issued from employee stock purchase plan		52,116			—			—
Proceeds from the exercise of stock options		9,647			3,005			—
Net cash provided by financing activities		61,763			47,608,942			11,034,466
Increase (decrease) in cash and cash equivalents		(13,687,694	)		37,609,723			307,598
Cash and cash equivalents at beginning of year		39,189,362			1,579,639			1,272,041
Cash and cash equivalents at end of year		$25,501,668			$39,189,362			$  1,579,639
Supplemental cash flow disclosure
Interest paid		$  1,590,554			$          4,745			$            338
Significant non-cash transactions
Balances transferred from clearing broker upon conversion of      operations:
Brokerage receivables, net		$75,824,898			$            —			$            —
Brokerage payables		75,824,898			—			—
Gain on settlement of litigation		500,263			—			—
Elimination of common stock put rights		—			624,375			—

		Common Stock		Series A Preferred Stock			Series C Preferred Stock			Additional Paid-in Capital			Accumulated Deficit			Receivable from Related Party			Total Stockholders’ Equity
Balance at January 1, 1998		$151,527		$1,125			$30,000			$  4,323,624			$  (3,682,473	)		$      —			$      823,803
Issuance of 14,850 shares of         common stock as         compensation		149		—			—			48,751			—			—			48,900
Issuance of 3,785,325 shares of         common stock		37,853		—			—			10,747,098			—			—			10,784,951
Exercise of options on 3,375         shares of common stock		34		—			—			191			—			—			225
Receivable from related party		—		—			—			—			—			(190,000	)		(190,000	)
Accretion of redeemable common         stock		—		—			—			—			(346,875	)		—			(346,875	)
Compensation and other expenses         incurred through issuance of         stock options and warrants		—		—			—			1,224,182			—			—			1,224,182
Net loss and comprehensive         loss		—		—			—			—			(11,818,450	)		—			(11,818,450	)
Balance at December 31, 1998		189,563		1,125			30,000			16,343,846			(15,847,798	)		(190,000	)		526,736
Repurchase and retirement of         3,000,000 shares of Series C         preferred stock		—		—			(30,000	)		(620,000	)		—			190,000			(460,000	)
Issuance of 5,989,960 shares of         common stock, net of issuance         costs		59,900		—			—			48,445,327			—			—			48,505,227
Issuance of 450,000 shares of         common stock in exchange for         112,500 shares of Series A         preferred stock		4,500		(1,125	)		—			(3,375	)		—			—			—
Elimination of common stock put         rights		2,081		—			—			622,294			—			—			624,375
Compensation and other expenses         incurred through issuance of         stock options and warrants		—		—			—			527,114			—			—			527,114
Exercise of options on 56,031         shares of common stock		560		—			—			2,445			—			—			3,005
Net loss and comprehensive         loss		—		—			—			—			(6,763,497	)		—			(6,763,497	)
Balance at December 31, 1999		256,604		—			—			65,317,651			(22,611,295	)		—			42,962,960
Compensation and other expenses         incurred through issuance of         stock options and warrants		—		—			—			583,677			—			—			583,677
Issuance of 31,497 shares of         common stock through         employee stock purchase         plan		315		—			—			51,801			—			—			52,116
Exercise of options on 162,500         shares of common stock		1,625		—			—			8,022			—			—			9,647
Net loss and comprehensive         loss		—		—			—			—			(18,264,897	)		—			(18,264,897	)
Balance at December 31, 2000		$258,544		$  —			$    —			$65,961,151			$(40,876,192	)		$      —			$25,343,503

Transaction Revenue

Interest Income

Other Revenue

Interest Expense

Clearance and Execution Costs

Depreciation and Amortization

Advertising Costs

Employee Costs

Stock-Based Compensation

Income Taxes

Earnings Per Share

Cash and Cash Equivalents

Securities-Lending Activities

Reclassifications

Risk and Uncertainties

Use of Estimates

		2000			1999
Brokerage Receivables
Receivables from customers		$59,409,054			$          —
Fees and commissions receivable		1,236,229			2,536,673
Receivable from clearing organizations		779,359			—
Deposits for securities borrowed		2,261,800			—
Other		174,642			—
Allowance for uncollectible accounts		(1,015,027	)		(140,994	)
		$62,846,057			$2,395,679
Brokerage Payables
Customer payables		$58,313,672			$          —
Payable to broker-dealers		605,283			37,711
Fees, commissions and margin-sharing payments payable		354,712			312,665
Deposits for securities loaned		10,154,010			—
		$69,427,677			$    350,376

		2000			1999
Hardware and equipment		$  5,288,069			$2,813,417
Furniture and fixtures		666,327			438,576
Software		3,040,721			872,458
Buildings and leasehold improvements		3,067,518			1,151,101
Land and improvements		48,149			25,000
Total cost		12,110,784			5,300,552
Accumulated depreciation		(3,466,167	)		(1,306,141	)
		$  8,644,617			$3,994,411

2001		$  3,287,443
2002		3,074,176
2003		1,958,895
2004		1,523,907
2005		1,553,586
Thereafter		4,701,615
		$16,099,622

		2000			1999
Deferred tax assets:
Net operating loss carry forwards		$15,313,921			$7,853,775
Accumulated compensation and other expenses incurred through                issuance of stock options and warrants		561,416			529,929
Allowance for doubtful accounts		393,830			—
Other		182,789			346,766
Total deferred tax assets		16,451,956			8,730,470
Deferred tax liabilities—property, equipment and software, net		(608,261	)		(220,558	)
		15,843,695			8,509,912
Valuation allowance		(15,843,695	)		(8,509,912	)
Net deferred tax asset		$            —			$          —

		Years ended December 31,
		2000			1999			1998
Tax benefit at federal statutory rate		(34.0	)%		(34.0	)%		(34.0	)%
State income taxes, net of federal tax benefit		(5.0	)		(4.8	)		(4.8	)
Increase in valuation allowance		40.1			38.7			38.7
Other		(1.1	)		0.1			0.1
Effective tax rate		—	%		—	%		—	%

Preferred Stock

Series A

Series C

Common Stock

Common Stock Warrants

Year Issued		Shares Issuable under Warrants		Exercise Period		Exercise Price (per share)
1996		26,625		From November 16, 2000 to November 16, 2001		$ 3.20
1997		41,250		From November 16, 2000 to November 16, 2001		$ 3.20
1997		225,000		From November 16, 2000 to November 16, 2001		$11.00
1998		428,367		From February 16, 2001 to November 16, 2004		$ 3.00
1998		476,259		From February 16, 2001 to November 16, 2004		$ 4.00
1998		375,000		From February 6, 1998 to November 16, 2001		$ 4.00
1999		47,000		From November 17, 2000 to August 24, 2004		$ 8.50
1999		625,000		From May 15, 2000 to various dates through 2005, contingent on performance milestones		$19.00 to $30.00

Common Stock Options

Employee Stock Purchase Plan

		Years ended December 31,
		2000					1999					1998
		Wtd Ave Ex Price		Shares			Wtd Ave Ex Price		Shares			Wtd Ave Ex Price		Shares
Options outstanding at beginning of year		$5.07		2,081,626			$2.51		1,458,622			$0.05		97,970
Options granted with exercise prices:
Less than market		—		—			—		—			0.05		569,776
Equal to market		3.85		945,390			10.14		680,875			4.57		794,251
Greater than market		8.86		1,750,000			—		—			—		—
Options exercised		0.05		(350,000	)		0.06		(56,031	)		0.05		(3,375	)
Options forfeited		8.12		(318,385	)		6.00		(1,840	)		—		—
Options outstanding at end of year		$6.59		4,108,631			$5.07		2,081,626			$2.51		1,458,622
Options exercisable at end of year		$4.13		931,852			$1.37		641,126			$0.34		385,995
Weighted-average fair value of options granted      with exercise prices:
Less than market		$—					$—					$2.70
Equal to market		1.28					3.88					0.66
Greater than market		0.73					—					—

		Options outstanding						Exercisable Options
Range of Exercise Prices		Shares		Weighted- average Remaining Contractual Life		Weighted- average Exercise Price		Shares		Weighted- average Exercise Price
Up to $2.00		376,625		4.1 years		$0.41		276,125		$0.07
Greater than $2.00 up to $4.00		1,170,111		7.9		3.48		459,626		4.00
Greater than $4.00 up to $8.00		1,090,945		9.1		6.04		21,101		5.50
Greater than $8.00		1,470,950		8.3		11.07		175,000		10.71
		4,108,631		8.0 years		$6.59		931,852		$4.13

		2000			1999			1998
Net loss:
As reported		$(18,264,897	)		$(6,763,497	)		$(11,818,450	)
As adjusted		(19,897,221	)		(8,857,851	)		(11,868,321	)
Basic and diluted net loss per common share:
As reported		$          (0.71	)		$        (0.32	)		$          (0.71	)
As adjusted		(0.77	)		(0.42	)		(0.71	)

		First			Second			Third			Fourth			Year
2000 Quarters
Total net revenue		$13,055			$  7,325			$  5,616			$  6,273			$  32,269
Total costs of services		6,978			6,393			5,018			4,385			22,774
Total operating expenses		9,869			7,820			5,309			5,687			28,685
Operating loss		(3,792	)		(6,888	)		(4,711	)		(3,799	)		(19,190	)
Net loss		(3,792	)		(6,888	)		(3,786	)		(3,799	)		(18,265	)
Basic and diluted net loss per common share		$  (0.15	)		$  (0.27	)		$  (0.15	)		$  (0.15	)		$    (0.71	)
1999 Quarters
Total net revenue		$  4,637			$  6,036			$  6,491			$  8,308			$  25,472
Total costs of services		2,556			3,698			3,860			4,904			15,018
Total operating expenses		2,066			3,580			5,397			6,175			17,217
Operating income (loss)		15			(1,242	)		(2,766	)		(2,771	)		(6,763	)
Net income (loss)		15			(1,242	)		(2,766	)		(2,771	)		(6,763	)
Basic and diluted net income (loss) per common share		$    0.00			$  (0.06	)		$  (0.13	)		$  (0.12	)		$    (0.32	)

		December 31, 2000			December 31, 1999
ASSETS
Cash and cash equivalents		$12,690,160			$36,153,921
Investment in subsidiary		8,624,274			5,458,866
Property, equipment and software, net		8,377,135			3,771,078
Prepaid expenses and other		1,310,762			1,755,410
Total assets		$31,002,331			$47,139,275
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Accounts payables		$  3,904,282			$  2,948,554
Accrued expenses		1,517,184			1,081,679
Deferred rent		237,362			146,082
Total liabilities		5,658,828			4,176,315
Commitments and contingencies
Stockholders’ equity:
Preferred stock ($.01 par value; 2,000,000 shares authorized; no shares                issued and outstanding)		—			—
Common stock ($.01 par value, 100,000,000 shares authorized; 25,854,399                shares issued and outstanding at December 31, 2000 and 25,660,402                shares issued and outstanding at December 31, 1999)		258,544			256,604
Additional paid-in capital		65,961,151			65,317,651
Accumulated deficit		(40,876,192	)		(22,611,295	)
Total stockholders’ equity		25,343,503			42,962,960
Total liabilities and stockholders’ equity		$31,002,331			$47,139,275

		Years ended December 31,
		2000			1999			1998
Revenues:
Interest income		$  1,310,223			$    255,737			$            —
Other revenue		566			—			—
		1,310,789			255,737			—
Interest expense		(2,791	)		—			—
Net revenues		1,307,998			255,737			—
Cost of services:
Clearance and execution		48,679			56,231			200
Employee compensation and benefits		123,394			82,266			9,900
Communication and data processing		431,017			170,592			37,898
Total cost of services		603,090			309,089			47,998
Operating expenses:
Marketing and advertising		5,112,582			4,293,657			15,808
Technology development		2,216,311			1,096,594			801,560
General and administrative		5,806,320			2,700,258			1,669,638
Total operating expenses		13,135,213			8,090,509			2,487,006
Equity in pretax income (loss) from operations of subsidiary		(6,759,855	)		1,380,364			(9,283,446	)
Equity in gain from settlement of litigation of subsidiary		925,263			—			—
Net loss		$(18,264,897	)		$(6,763,497	)		$(11,818,450	)

		Years ended December 31,
		2000			1999			1998
Cash flows from operating activities:
Net loss		$(18,264,897	)		$  (6,763,497	)		$(11,818,450	)
Adjustments to reconcile net loss to net cash used in operating           activities:
Undistributed loss (earnings) of subsidiary		5,834,592			(1,380,364	)		9,283,446
Depreciation and amortization		1,935,648			656,672			100,316
Compensation and other expenses incurred through issuance                of stock options and warrants		583,677			527,114			1,273,082
Provision for uncollectible accounts		945			—			—
Net deferred rent accretion (amortization)		91,280			(4,296	)		150,378
Changes in operating assets and liabilities:
Prepaid expenses and other assets		430,703			(1,021,669	)		(753,157	)
Accounts payable		955,728			2,873,708			74,846
Accrued expenses		435,505			294,239			787,440
Net cash used in operating activities		(7,996,819	)		(4,818,093	)		(902,099	)
Cash flows used in investing activities:
Purchases of property, equipment and software		(6,528,705	)		(4,044,122	)		(464,528	)
Capital contributed to subsidiary		(9,000,000	)		(2,593,006	)		(9,667,639	)
Cash used in investing activities		(15,528,705	)		(6,637,128	)		(10,132,167	)
Cash flows from financing activities:
Proceeds from issuance of common stock, net of issuance           costs		—			48,065,937			11,224,466
Redemption of preferred stock		—			(650,000	)		—
Payment from (to) related party		—			190,000			(190,000	)
Common stock issued from employee stock purchase plan		52,116			—			—
Proceeds from the exercise of stock options		9,647			3,005			—
Net cash provided by financing activities		61,763			47,608,942			11,034,466
Increase (decrease) in cash and cash equivalents		(23,463,761	)		36,153,721			200
Cash and cash equivalents at beginning of year		36,153,921			200			—
Cash and cash equivalents at end of year		$12,690,160			$36,153,921			$            200
Supplemental cash flow disclosure
Interest paid		$          2,791			$            —			$            —
Significant non-cash transaction
Elimination of common stock put rights		$            —			$      624,375			$            —

		March 31, 2001			December 31, 2000
		(Unaudited)
ASSETS
Cash and cash equivalents		$13,882,855			$  25,501,668
Cash segregated under federal and other regulatory requirements		9,225,000			900,000
Brokerage receivables, net		46,237,350			62,846,057
Property, equipment and software, net		8,845,325			8,644,617
Deposits with clearing organizations		815,276			1,306,998
Prepaid expenses and other		2,447,539			1,761,858
Total assets.		$81,453,345			$100,961,198
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Brokerage payables		$55,559,300			$  69,427,677
Accounts payable		2,956,982			3,582,414
Accrued expenses		1,246,060			2,370,242
Deferred rent		273,237			237,362
Total liabilities		60,035,579			75,617,695
Commitments and contingencies
Stockholders’ equity:
Preferred stock ($.01 par value; 2,000,000 shares authorized; no shares                issued and outstanding)		—			—
Common stock ($.01 par value, 100,000,000 shares authorized; 25,872,278                shares issued and outstanding at March 31, 2001 and 25,854,399 shares                issued and outstanding at December 31, 2000)		258,723			258,544
Additional paid-in capital		65,982,818			65,961,151
Accumulated deficit		(44,823,775	)		(40,876,192	)
Total stockholders’ equity		21,417,766			25,343,503
Total liabilities and stockholders’ equity		$81,453,345			$100,961,198

		Three months ended March 31,
		2001			2000
		(Unaudited)
Revenues:
Transaction revenue		$4,147,718			$12,077,940
Interest income		1,364,473			736,767
Other revenue		101,335			242,727
		5,613,526			13,057,434
Interest expense		(364,877	)		(2,218	)
Net revenues		5,248,649			13,055,216
Cost of services:
Clearance and execution		2,150,328			5,353,579
Employee compensation and benefits		1,374,666			966,935
Communication and data processing		738,609			657,712
Total cost of services		4,263,603			6,978,226
Operating expenses:
Marketing and advertising		588,128			5,591,869
Technology development		1,693,064			709,240
General and administrative		2,651,437			3,567,845
Total operating expenses		4,932,629			9,868,954
Net loss		$(3,947,583	)		$  (3,791,964	)
Basic and diluted net loss per common share		$        (0.15	)		$          (0.15	)
Weighted-average common shares used in computation of basic and diluted net      loss per common share		25,866,120			25,674,219

		Three months ended March 31,
		2001			2000
		(Unaudited)
Cash flows from operating activities:
Net loss		$  (3,947,583	)		$  (3,791,964	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		667,629			411,080
Compensation and other expenses incurred through issuance of stock                options and warrants		—			233,174
Provision (recovery) for uncollectible accounts, net		(13,745	)		112,228
Net deferred rent accretion (amortization)		35,875			(1,074	)
Changes in operating assets and liabilities:
Cash segregated under federal and other regulatory requirements		(8,325,000	)		—
Brokerage receivables		16,622,452			(1,732,665	)
Deposits with clearing organizations		491,722			(1,139	)
Prepaid expenses and other assets		(263,920	)		(713,457	)
Brokerage payables		(13,868,377	)		169,947
Accounts payable		(625,432	)		1,042,617
Accrued expenses		(1,124,182	)		(908,342	)
Net cash used in operating activities		(10,350,561	)		(5,179,595	)
Cash flows from investing activities:
Purchases of property, equipment and software		(865,088	)		(2,003,707	)
Loans originated		(425,010	)		—
Net cash used in investing activities		(1,290,098	)		(2,003,707	)
Cash flows from financing activities:
Common stock issued from employee stock purchase plan		21,846			—
Proceeds from the exercise of stock options		—			2,352
Net cash provided by financing activities		21,846			2,352
Decrease in cash and cash equivalents		(11,618,813	)		(7,180,950	)
Cash and cash equivalents at beginning of period		25,501,668			39,189,362
Cash and cash equivalents at end of period		$13,882,855			$32,008,412
Supplemental cash flow disclosure:
Interest paid.		$      399,277			$          2,218

		Common Stock		Series A Preferred Stock		Series C Preferred Stock		Additional Paid-in Capital		Accumulated Deficit			Receivable from Related Party		Total Stockholders’ Equity
Balance at December 31, 2000		$258,544		$—		$—		$65,961,151		$(40,876,192	)		$—		$25,343,503
Exercise of options on 17,879         shares of common stock		179		—		—		21,667		—			—		$        21,846
Net loss and comprehensive         loss		—		—		—		—		(3,947,583	)		—		(3,947,583	)
Balance at March 31, 2001		258,723		—		—		$65,982,818		$(44,823,775	)		—		$21,417,766

		March 31, 2001			December 31, 2000
Brokerage Receivables
Receivables from customers		$40,898,169			$59,409,054
Fees and commissions receivable		866,464			1,236,229
Receivable from clearing organizations		606,950			779,359
Deposits for securities borrowed		4,766,100			2,261,800
Other		114,694			174,642
Allowance for uncollectible accounts		(1,015,027	)		(1,015,027	)
		$46,237,350			$62,846,057
Brokerage Payables
Customer payables		$53,521,291			$58,313,672
Payable to broker-dealers		439,968			605,283
Fees, commissions and margin-sharing payments payable		140,141			354,712
Deposits for securities loaned		1,457,900			10,154,010
		$55,559,300			$69,427,677

		March 31, 2001			December 31, 2000
Hardware and equipment		$  5,249,848			$  5,288,069
Furniture and fixtures		687,612			666,327
Software		3,394,876			3,040,721
Buildings and leasehold improvements		3,587,694			3,067,518
Land and improvements		51,573			48,149
Total cost		12,971,603			12,110,784
Accumulated depreciation		(4,126,278	)		(3,466,167	)
		$  8,845,325			$  8,644,617

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				Page
ARTICLE 1		The Offer		A-1
Section 1.01.		The Offer		A-1
Section 1.02.		Company Action		A-2
Section 1.03.		Directors		A-3
ARTICLE 2		The Merger		A-4
Section 2.01.		The Merger		A-4
Section 2.02.		Effective Time; Closing		A-4
Section 2.03.		Effect Of The Merger		A-4
Section 2.04.		Certificate Of Incorporation; Bylaws		A-4
Section 2.05.		Directors And Officers		A-4
Section 2.06.		Effect On Capital Stock		A-4
Section 2.07.		Exchange Of Certificates		A-5
Section 2.08.		No Further Ownership Rights In Company Common Stock		A-7
Section 2.09.		Taking Of Necessary Action; Further Action		A-8
Section 2.10.		Dissenting Shares		A-8
ARTICLE 3		Representations And Warranties Of Company		A-8
Section 3.01.		Organization; Subsidiaries		A-8
Section 3.02.		Company Capitalization		A-9
Section 3.03.		Obligations With Respect To Capital Stock		A-9
Section 3.04.		Authority; Non-Contravention		A-10
Section 3.05.		SEC Filings; Company Financial Statements		A-11
Section 3.06.		Absence Of Certain Changes Or Events		A-12
Section 3.07.		Taxes		A-12
Section 3.08.		Title To Properties		A-13
Section 3.09.		Intellectual Property		A-14
Section 3.10.		Compliance With Laws		A-15
Section 3.11.		Litigation		A-16
Section 3.12.		Employee Benefit Plans		A-17
Section 3.13.		Certain Agreements		A-19
Section 3.14.		Brokers’ And Finders’ Fees		A-21
Section 3.15.		Insurance		A-21
Section 3.16.		Disclosure		A-21
Section 3.17.		Fairness Opinion		A-21
Section 3.18.		Affiliates		A-21
Section 3.19.		Environmental Matters		A-21
Section 3.20.		Investment Company Act		A-22
Section 3.21.		Related Party Transactions		A-22
Section 3.22.		Broker-Dealer Compliance		A-22
Section 3.23.		Financial Services		A-22
Section 3.24.		Customer Accounts		A-22
Section 3.25.		Risk Management Instruments		A-23
Section 3.26.		Investment Securities		A-23
Section 3.27.		Repurchase Agreements		A-23
Section 3.28.		Books And Records		A-23
Section 3.29.		Commission Rates		A-23
Section 3.30.		Net Capital		A-23
ARTICLE 4		Representations And Warranties Of Parent And Merger Sub		A-23
Section 4.01.		Organization Of Parent And Merger Sub		A-23

				Page
Section 4.02.		Parent And Merger Sub Capitalization		A-24
Section 4.03.		Authority; Non-contravention		A-24
Section 4.04.		Sec Filings; Parent Financial Statements		A-25
Section 4.05.		Absence Of Certain Changes Or Events		A-26
Section 4.06.		Disclosure Documents		A-26
Section 4.07.		Litigation		A-26
Section 4.08.		Compliance With Laws		A-26
ARTICLE 5		Conduct Prior To The Effective Time		A-26
Section 5.01.		Conduct Of Business By Company		A-26
Section 5.02.		Tax Matters		A-28
ARTICLE 6		Additional Agreements		A-29
Section 6.01.		Stockholder Approval; Preparation Of Registration Statement And Proxy Statement/Prospectus		A-29
Section 6.02.		Regulatory Filings		A-30
Section 6.03.		No Solicitation		A-31
Section 6.04.		Obligations Of Merger Sub		A-32
Section 6.05.		Voting Of Shares		A-32
Section 6.06.		Registration Statement		A-32
Section 6.07.		Confidentiality; Access To Information		A-32
Section 6.08.		Public Disclosure		A-33
Section 6.09.		Reasonable Efforts; Notification		A-33
Section 6.10.		Warrants, Stock Options And ESPP		A-34
Section 6.11.		Accounts Maintenance And Transition Period		A-34
Section 6.12.		Company Trademarks		A-35
Section 6.13.		Indemnification		A-35
Section 6.14.		NYSE Listing		A-35
Section 6.15.		Letters Of Accountants		A-35
Section 6.16.		Takeover Statutes		A-35
Section 6.17.		Tax Matters		A-36
Section 6.18.		Escrow		A-36
ARTICLE 7		Conditions To The Merger		A-37
Section 7.01.		Conditions To Obligations Of Each Party To Effect The Merger		A-37
ARTICLE 8		Termination, Amendment And Waiver		A-37
Section 8.01.		Termination		A-37
Section 8.02.		Notice Of Termination; Effect Of Termination		A-38
Section 8.03.		Fees And Expenses		A-38
Section 8.04.		Amendment		A-39
Section 8.05.		Extension; Waiver		A-39
ARTICLE 9		General Provisions		A-39
Section 9.01.		Non-survival Of Representations And Warranties		A-39
Section 9.02.		Notices		A-39
Section 9.03.		Interpretation; Certain Defined Terms		A-40
Section 9.04.		Counterparts		A-41
Section 9.05.		Entire Agreement; Third Party Beneficiaries		A-41
Section 9.06.		Severability		A-41
Section 9.07.		Other Remedies; Specific Performance		A-41

				Page
Section 9.08.		Governing Law		A-41
Section 9.09.		Rules Of Construction		A-41
Section 9.10.		Assignment		A-41
Section 9.11.		Waiver Of Jury Trial		A-42
Exhibit A		Form of Stockholders Agreement
Exhibit B		Form of Affiliate Letter
Exhibit C		Form of Escrow Agreement
Exhibit D		Escrow Threshold Schedule
Exhibit E		Schedule of Net Termination Payments/Receipts and Net Cash Position
Exhibit F		Schedule of Escrow Executives’ Contributions to Escrow
Exhibit G		Form of Non-Competition Agreement

(ii)  The sale of the Excess Shares by the Exchange Agent shall be executed on the NYSE and shall be executed in round lots to the extent practicable. The Exchange Agent shall use all commercially reasonable efforts to complete the sale of the Excess Shares as promptly following the Effective Time as, in the Exchange Agent’s reasonable judgment, is practicable consistent with obtaining the best execution of such sales in light of prevailing market conditions. Until the net proceeds of such sales have been distributed to the holders of Company Common Stock, the Exchange Agent will hold such proceeds in trust for the holders of Company Common Stock. The Exchange Agent will determine the portion of such net proceeds to which each holder of Company Common Stock shall be entitled, if any, by multiplying the amount of the aggregate net proceeds by a fraction the numerator of which is the amount of the fractional share interest to which such holder of Company Common Stock is entitled (after taking into account all shares of Parent Common Stock to be issued to such holder) and the denominator of which is the aggregate amount of fractional share interests to which all holders of Company Common Stock are entitled. As soon as practicable after the determination of the amount of cash, if any, to be paid to holders of Company Common Stock with respect to fractional share interests, the Exchange Agent shall promptly pay such amounts to such holders of Company Common Stock in accordance with the terms of Section 2.07(c).

(iii)  Notwithstanding the provisions of paragraphs (i) and (ii) of this Section 2.07(e), Parent may decide, at its option, exercised prior to the Effective Time, in lieu of the issuance and sale of Excess Shares and the making of the payments contemplated in such paragraphs, that Parent shall pay to the Exchange Agent an amount sufficient for the Exchange Agent to pay each holder of Company Common Stock the amount such holder would have received pursuant to Section 2.07(e)(ii) assuming that the sales of Parent Common Stock were made at a price equal to the average of the closing prices of the Parent Common Stock on the NYSE for the ten consecutive trading days immediately following the Effective Time and, in such case, all references herein to the cash proceeds of the sale of the Excess Shares and similar references shall be deemed to mean and refer to the payments calculated as set forth in this paragraph (iii). In such event, Excess Shares shall not be issued or otherwise transferred to the Exchange Agent pursuant to Sections 2.07(b) or (e).

(i)  “Company Employee Plan” shall mean any plan, program, policy, practice, contract, agreement or other arrangement providing for compensation, severance, termination pay, performance awards, stock or stock-related awards, fringe benefits or other employee benefits or remuneration of any kind, whether written or unwritten or otherwise, funded or unfunded, including without limitation, each “employee benefit plan,” within the meaning of Section 3(3) of ERISA which is or has been maintained, contributed to, or required to be contributed to, by Company or any ERISA Affiliate for the benefit of any Employee;

(ii)  “COBRA” shall mean the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended;

(iii)  “DOL” shall mean the Department of Labor;

(iv)  “Employee” shall mean any current, former, or retired employee, officer, or director of Company or any subsidiary of Company;

(v)  “Employee Agreement” shall mean each management, employment, severance, consulting, relocation, repatriation, expatriation, visas, work permit or similar agreement or contract between Company or any subsidiary of Company, on the one hand, and any Employee or consultant of Company or any subsidiary of Company, on the other hand;

(vi)  “ERISA” shall mean the Employee Retirement Income Security Act of 1974, as amended;

(vii)  “ERISA Affiliate” shall mean any other person or entity under common control with Company within the meaning of Section 414(b), (c), (m) or (o) of the Code and the regulations issued thereunder;

(viii)  “FMLA” shall mean the Family Medical Leave Act of 1993, as amended;

(ix)  “International Employee Plan” shall mean each Company Employee Plan that has been adopted or maintained by Company, whether informally or formally, for the benefit of Employees outside the United States;

(x)  “IRS” shall mean the Internal Revenue Service;

(xi)  “Multiemployer Plan” shall mean any “Pension Plan” (as defined below) which is a “multiemployer plan,” as defined in Section 3(37) of ERISA;

(xii)  “PBGC” shall mean the Pension Benefit Guaranty Corporation; and

(xiii)  “Pension Plan” shall mean each Company Employee Plan which is an “employee pension benefit plan,” within the meaning of Section 3(2) of ERISA.

(i)  no notice, notification, demand, request for information, citation, summons or order has been received, no complaint has been filed, no penalty has been assessed, and no investigation, action, claim, suit, proceeding or review (or any basis therefor) is pending or, to the knowledge of Company, is threatened by any Governmental Entity or other Person relating to or arising out of any environmental law, regulation or permit;

(ii)  Company and its subsidiaries are and have been in compliance with all environmental laws, regulations and permits; and

(iii)  there are no liabilities of or relating to Company or any of its subsidiaries of any kind whatsoever, whether accrued, contingent, absolute, determined, determinable or otherwise arising under or relating to any environmental law, regulation or permit and there are no facts, conditions, situations or set of circumstances that could reasonably be expected to result in or be the basis for any such liability.

 

          Section 4.02.    Parent And Merger Sub Capitalization.     (a)  The authorized capital stock of Parent consists solely of 600,000,000 shares of Parent Common Stock, par value $.01 per share, of which there were 319,365,275 shares issued and outstanding as of the close of business on May 17, 2001, 1,000,000 shares of Preferred Stock, par value $.01 per share, of which one share is issued and outstanding as of the close of business on May 17, 2001 (for the purpose of effecting voting rights for the exchangeable shares of EGI Canada Corporation identified immediately hereafter), and 10,644,223 shares of EGI Canada Corporation, exchangeable on a one-for-one basis into shares of Parent Common Stock at any time, of which there were 2,757,463 shares issued and outstanding as of the close of business on May 17, 2001. As of May 17, 2001, there were outstanding employee stock options to purchase an aggregate of 43,304,770 shares of Parent Common Stock (of which options to purchase an aggregate of 21,016,931 shares of Parent Common Stock were exercisable). All outstanding shares of Parent Common Stock are duly authorized, validly issued, fully paid and nonassessable and are not subject to preemptive rights created by statute, the Certificate of Incorporation or Bylaws of Parent or any agreement or document to which Parent is a party or by which it is bound.

 

          (b)  The authorized capital stock of Merger Sub consists of 1,000 shares of common stock, $0.01 par value, all of which, as of the date hereof, are issued and outstanding and are held by Parent. All of the outstanding shares of Merger Sub’s common stock have been duly authorized and validly issued, and are fully paid and nonassessable. Merger Sub was formed for the purpose of consummating the Merger and has no material assets or liabilities except as necessary for such purpose.

 

          (c)  All outstanding shares of Parent Common Stock, all outstanding Parent options, and all outstanding shares of capital stock of each subsidiary of Parent have been issued and granted in compliance with (i) all applicable securities laws and other applicable material Legal Requirements and (ii) all material requirements set forth in applicable agreements or instruments.

 

          (d)  The Parent Common Stock to be issued in the Offer and the Merger when issued in accordance with the provisions of this Agreement and, assuming that Company warrants to be assumed by Parent in the Merger are legally valid, binding and enforceable at the date of this Agreement, the Parent Common Stock to be issued upon the exercise of such warrants in accordance with the terms thereof, will be validly issued, fully paid and nonassessable.

 

          Section 4.03.    Authority; Non-contravention.    (a)   Each of Parent and Merger Sub has all requisite corporate power and authority to enter into this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of Parent and Merger Sub, subject only to the filing of the Certificate of Merger pursuant to Delaware Law. No approval of any holder of any securities of Parent is required in connection with the consummation of the transactions contemplated hereby. This Agreement has been duly executed and delivered by each of Parent and Merger Sub and, assuming the due authorization, execution and delivery by Company, constitutes the valid and binding obligation of Parent and Merger Sub, respectively, enforceable against Parent and Merger Sub in accordance with its terms, except as enforceability may be limited by bankruptcy and other similar laws affecting the rights of creditors generally and general principles of equity.

 

          (b)  The execution and delivery of this Agreement by each of Parent and Merger Sub does not, and the performance of this Agreement by Parent and Merger Sub will not, (i) conflict with or violate the Certificate of Incorporation or Bylaws of Parent or Merger Sub, (ii) subject to compliance with the requirements set forth in Section 4.03(c), conflict with or violate any law, rule, regulation, order, judgment or decree applicable to Parent or Merger Sub or by which any of their respective properties is bound or affected, or (iii) result in any breach of or constitute a default (or an event that with notice or lapse of time or both would become a default) under, or impair Parent’s rights or alter the rights or obligations of any third party under, or give to others any rights of termination, amendment, acceleration or cancellation of, or result in the creation of an Encumbrance on any of the properties or assets of Parent or Merger Sub pursuant to, any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise, concession or other instrument or obligation to which Parent or Merger Sub is a party or by which Parent or Merger Sub or any of their respective properties are bound or affected, except, in the case of clauses (ii) and (iii), for such conflicts, violations, breaches, defaults, impairments, or rights which, individually or in the aggregate, would not have a Material Adverse Effect on Parent. Part 4.03(b) of the Parent Disclosure Letter list all consents, waivers and approvals under any of Parent’s or any of its subsidiaries’ agreements, contracts, licenses or leases required to be obtained in connection with the consummation of the transactions contemplated hereby, which, if individually or in the aggregate not obtained, would result in a material loss of benefits to Parent or the Surviving Corporation as a result of the Merger.

 

          (c)  No consent, approval, order or authorization of, or registration, declaration or filing with any Governmental Entity or other person is required to be obtained or made by Parent or Merger Sub in connection with the execution and delivery of this Agreement or the consummation of the Offer or Merger, except for (i) the filing of the Certificate of Merger with the Secretary of State of the State of Delaware, (ii) compliance with any applicable requirements of the Securities Act, the Exchange Act, and any other applicable securities law, whether state or foreign, (iii) compliance with the applicable provisions of laws relating to the regulation of broker-dealers and banks and the rules and requirements of any self-regulatory organization, and (v) such other consents, authorizations, filings, approvals and registrations which if not obtained or made would not be material to Parent or the Surviving Corporation or have a material adverse effect on the ability of the parties hereto to consummate the transactions contemplated hereby.

 

          Section 4.04.    SEC Filings; Parent Financial Statements.     (a)  Parent has filed all forms, reports and documents required to be filed by Parent with the SEC since the effective date of the registration statement for Parent’s initial public offering, and has made available to Company such forms, reports and documents in the form filed with the SEC. All such required forms, reports and documents (including those that Parent may file subsequent to the date hereof) are referred to herein as the “Parent SEC Reports.” As of their respective dates, the Parent SEC Reports (i) were prepared in all material respects in accordance with the requirements of the Securities Act or the Exchange Act, as the case may be, and the rules and regulations of the SEC thereunder applicable to such Parent SEC Reports, and (ii) did not at the time they were filed (or if amended or superseded by a filing prior to the date of this Agreement, then on the date of such filing) contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, except to the extent corrected prior to the date of this Agreement by a subsequently filed Parent SEC Report. None of Parent’s subsidiaries is required to file any forms, reports or other documents with the SEC.

 

          (b)  Each of the consolidated financial statements of Parent (including, in each case, any related notes thereto) contained in the Parent SEC Reports (the “Parent Financials”), including any Parent SEC Reports filed after the date hereof until the Closing, (i) comply as to form in all material respects with the published rules and regulations of the SEC with respect thereto, (ii) are prepared in accordance with GAAP applied on a consistent basis throughout the periods involved (except as may be indicated in the notes thereto or, in the case of unaudited interim financial statements, as may be permitted by the SEC under Form 1O-Q, 8-K or any successor form under the Exchange Act) and (iii) fairly present the consolidated financial position of Parent and its subsidiaries as at the respective dates thereof and the consolidated results of Parent’s operations and cash flows for the periods indicated, except that the unaudited interim financial statements may not contain footnotes and were or are subject to normal and recurring year-end adjustments. The balance sheet of Parent contained in Parent SEC Reports as of December 31, 2000 is hereinafter referred to as the “Parent Balance Sheet.” Except as disclosed in the Parent Financials or in the Parent SEC Documents filed, in each case, prior to the date hereof, neither Parent nor any of its subsidiaries has any material liabilities or obligations (absolute, accrued, contingent or otherwise) which are, individually or in the aggregate, material to the business, results of operations or financial condition of Parent and its subsidiaries taken as a whole, except for liabilities incurred since the date of the Parent Balance Sheet in the ordinary course of business consistent with past practices and liabilities incurred in connection with this Agreement.

 

          (c)  Parent has heretofore furnished to Company a complete and correct copy of any amendments or modifications, which have not yet been filed with the SEC but which are required to be filed, to agreements, documents or other instruments which previously had been filed by Parent with the SEC pursuant to the Securities Act or the Exchange Act.

 

          Section 4.05.    Absence Of Certain Changes Or Events.     Since the date of the Parent Balance Sheet there has not been (i) through the date of this Agreement, any event, occurrence, development or state of circumstances or facts that has had or would reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect on Parent, (ii) any declaration, setting aside or payment of any dividend on, or other distribution (whether in cash, stock or property) in respect of, any of Parent’s or any of its subsidiaries’ capital stock, or any purchase, redemption or other acquisition by Parent of any of Parent’s capital stock or any other securities of Parent or its subsidiaries or any options, warrants, calls or rights to acquire any such shares or other securities except for repurchases which are not, individually or in the aggregate, material in amount from employees following their termination pursuant to the terms of their pre-existing stock option or purchase agreements, (iii) any material change by Parent in its accounting methods, principles or practices, except as required by concurrent changes in GAAP or (iv) any revaluation by Parent of any of its material assets, other than in the ordinary course of business.

 

          Section 4.06.    Disclosure Documents.    Neither the Offer Documents or the Registration Statement or the Post-Effective Amendment, nor any of the information supplied or to be supplied by Parent or its subsidiaries or representatives for inclusion or incorporation by reference in the Schedule 14D-9 or the Company Proxy Statement (as defined below) will, at the respective times any such documents or any amendments or supplements thereto are filed with the SEC, are first published, sent or given to stockholders or become effective under the Securities Act or, in the case of the Company Proxy Statement, at the time of the Company Stockholders Meeting, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading. The Offer Documents and the Registration Statement and the Post-Effective Amendment will comply as to form in all material respects with the requirements of all applicable laws, including the Securities Act and the Exchange Act, as applicable, and the rules and regulations thereunder. No representation or warranty is made by Parent or Merger Sub with respect to statements made or incorporated by reference therein based on information supplied by Company for inclusion or incorporation by reference therein.

 

          Section 4.07.    Litigation.    There is no judgment, decree or order against Parent or any of its subsidiaries or, to the knowledge of Parent, any of their respective directors or officers (in their capacities as such) that seeks to restrain or enjoin the consummation of the transactions contemplated by this Agreement.

 

          Section 4.08.    Compliance With Laws.    Neither Parent nor any of its subsidiaries is in conflict with, or has violated or is in violation of (i) any law, rule, regulation, order, judgment or decree, including any rule promulgated by an SRO, applicable to Parent or any of its subsidiaries or by which Parent or any of its subsidiaries or any of their respective properties is bound or affected, or (ii) its respective certificate or articles of incorporation or bylaws or other charter or organizational documents, except for conflicts and violations that, individually or in the aggregate, would not have a Material Adverse Effect on Parent.

 

ARTICLE 5

 

CONDUCT PRIOR TO THE EFFECTIVE TIME

 

          Section 5.01.    Conduct Of Business By Company.    During the period from the date of this Agreement and continuing until the earlier of the termination of this Agreement pursuant to its terms or the Appointment Time, Company and each of its subsidiaries shall, except to the extent that Parent shall otherwise consent in writing and except as provided in Part 5.01 of Parent Disclosure Letter, carry on its business in the ordinary course in substantially the same manner as heretofore conducted and in compliance in all material respects with all applicable laws and regulations, pay its debts and Taxes when due subject to good faith disputes over such debts or Taxes, pay or perform other material obligations when due, and use its commercially reasonable efforts consistent with past practices and policies to (i) preserve intact its present business organization, (ii) keep available the services of its present officers and employees and (iii) preserve its relationships with customers, suppliers, licensors, licensees and others with which it has business dealings. In addition, during that period Company will promptly notify Parent of any material event involving its business or operations consistent with the agreements contained herein.

 

          In addition, except as permitted by the terms of this Agreement, and except as contemplated by this Agreement or provided in Part 5.01 of the Company Disclosure Letter, without the prior written consent of Parent during the period from the date of this Agreement and continuing until the earlier of the termination of this Agreement pursuant to its terms or the Appointment Time, Company shall not do any of the following and shall not permit its subsidiaries to do any of the following:

 

          (a)  Waive any stock repurchase rights, accelerate, amend or change the period of exercisability of options or restricted stock, reprice options granted under any employee, consultant, director or other stock plans or authorize cash payments in exchange for any options granted under any of such plans;

 

          (b)  Grant any severance or termination pay to any officer or employee except pursuant to written agreements in effect, or policies existing, on the date hereof (or as required by applicable law) and as previously disclosed in writing to Parent or adopt any new severance plan;

 

          (c)  Transfer or license to any person or entity or otherwise extend, amend or modify in any material respect any rights to any material Company Intellectual Property;

 

          (d)  Declare, set aside or pay any dividends on or make any other distributions (whether in cash, stock, equity securities or property) in respect of any capital stock of Company or split, combine or reclassify any capital stock of Company or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for any capital stock of Company;

 

          (e)  Purchase, redeem or otherwise acquire, directly or indirectly, any shares of capital stock of Company or its subsidiaries, except repurchases of unvested shares at cost in connection with the termination of the employment relationship with any employee pursuant to stock option or purchase agreements in effect on the date hereof;

 

          (f)  Issue, deliver, sell, authorize, pledge or otherwise encumber any shares of capital stock or any securities convertible into shares of capital stock, or subscriptions, rights, warrants or options to acquire any shares of capital stock or any securities convertible into shares of capital stock, or enter into other agreements or commitments of any character obligating it to issue any such shares or convertible securities, other than the issuance, delivery and/or sale of (i) shares of Company Common Stock pursuant to the exercise of Company Options, (ii) shares of Company Common Stock pursuant to the exercise of Company warrants, (iii) shares of Company Common Stock issuable to participants in the Company ESPP, and (iv) shares of Company Common Stock issuable to participants in Company’s 401(k) Plan, in each case, consistent with the terms thereof;

 

          (g)  Cause, permit or propose any amendments to its Certificate of Incorporation, Bylaws or other charter documents (or similar governing instruments of any of its subsidiaries);

 

          (h)  Acquire or agree to acquire by merging or consolidating with, or by purchasing any equity interest in or a portion of the assets of, or by any other manner, any business or any corporation, partnership, association or other business organization or division thereof; or otherwise acquire or agree to acquire any assets which are material, individually or in the aggregate, to the business of Company or enter into any material joint ventures, strategic relationships or alliances;

 

          (i)  Sell, lease, license, encumber or otherwise dispose of any properties or assets which are material, individually or in the aggregate, to the business of Company;

 

          (j)  Incur any indebtedness for borrowed money or guarantee any such indebtedness of another person, issue or sell any debt securities or options, warrants, calls or other rights to acquire any debt securities of Company, enter into any “keep well” or other agreement to maintain any financial statement condition or enter into any arrangement having the economic effect of any of the foregoing, other than in the ordinary course of business, consistent with past practice;

 

          (k)  Except as required to comply with any Legal Requirement, adopt or amend any employee benefit plan or employee stock purchase or employee stock option plan, or enter into any employment contract or collective bargaining agreement, pay any special bonus or special remuneration to any director or employee, or increase the salaries or wage rates or fringe benefits (including rights to severance or indemnification) of its directors, officers, employees or consultants other than with respect to employees and consultants (other than officers) in the ordinary course of business, consistent with past practice, or change in any material respect any management policies or procedures that are material to the business of Company;

 

          (l)  Make any material capital expenditures, except in accordance with the current Company annual budget and plan, as previously disclosed to Parent;

 

          (m)  Modify, amend or terminate any Company Contract to which Company or any subsidiary thereof is a party or waive, release or assign any material rights or claims thereunder;

 

          (n)  Enter into any licensing or other agreement with regard to the acquisition, distribution or licensing of any material Intellectual Property other than licenses, distribution or other similar agreements entered into in the ordinary course of business consistent with past practice;

 

          (o)  Revalue any of its assets or, except as required by GAAP, make any change in accounting methods, principles or practices;

 

          (p)  Materially change the trading fees Company charges its customers;

 

          (q)  Take any action that would materially delay the consummation of the transactions contemplated hereby;

 

          (r)  Engage in an Impermissible Activity, as specified in Section 3.23; or

 

          (s)  Agree in writing or otherwise to take any of the actions described in Section 5.01 (a) through (r) above.

 

          Section 5.02.    Tax Matters.    (a)  Neither Company nor any of its subsidiaries shall make or change any material Tax election, change any annual tax accounting period, adopt or change any method of tax accounting, file any material amended Tax Returns or claims for material Tax refunds, enter into any material closing agreement, surrender any material Tax claim, audit or assessment, surrender any right to claim a material Tax refund, offset or other reduction in Tax liability surrendered, consent to any extension or waiver of the limitations period applicable to any Tax claim or assessment or take or omit to take any other action, if any such action or omission would have the effect of increasing the Tax liability or reducing any Tax asset of Company or any of its subsidiaries.

 

          (b)  Company and each of its subsidiaries will establish or cause to be established in accordance with GAAP on or before the Appointment Time an adequate accrual for all material Taxes due with respect to any period ending prior to or as of the Appointment Time.

 

           (c)  All transfer, documentary, sales, use, stamp, registration, value added and other such Taxes and fees (including any penalties and interest) incurred in connection with the Merger (including any real property transfer tax and any similar Tax) shall be paid by Company when due, and Company will, at its own expense, file all necessary Tax returns and other documentation with respect to all such Taxes and fees, and, if required by applicable law, Company will, and will cause its affiliates to, join in the execution of any such Tax returns and other documentation.

 

ARTICLE 6

 

ADDITIONAL AGREEMENTS

 

          Section 6.01.    Stockholder Approval; Preparation Of Registration Statement And Proxy Statement/Prospectus.    (a)  If approval of Company’s stockholders is required by applicable law in order to consummate the Merger other than pursuant to Section 253 of Delaware Law, Parent and Company shall, as soon as practicable following the acceptance of Shares pursuant to the Offer, prepare and Company shall file with the SEC a proxy statement (the “Company Proxy Statement”) and Parent and Company shall prepare and Parent shall file with the SEC a post-effective amendment to the Registration Statement (the “Post-Effective Amendment”) for the offer and sale of the Parent Stock pursuant to the Merger and in which the Company Proxy Statement will be included as a prospectus. Each of Company and Parent shall use all reasonable efforts to have the Post-Effective Amendment declared effective under the Securities Act as promptly as practicable after such filing. Company will use all reasonable efforts to cause the Company Proxy Statement to be mailed to Company’s stockholders as promptly as practicable after the Post-Effective Amendment is declared effective under the Securities Act. Parent shall also take any action (other than qualifying to do business in any jurisdiction in which it is not now so qualified or to file a general consent to service of process) required to be taken under any applicable state securities laws in connection with the issuance of Parent Common Stock in the Offer and the Merger and Company shall furnish all information concerning Company and the holders of capital stock of Company as may be reasonably requested in connection with any such action and the preparation, filing and distribution of the Company Proxy Statement. No filing of, or amendment or supplement to, or correspondence to the SEC or its staff with respect to, the Post-Effective Amendment will be made by Parent, or the Company Proxy Statement will be made by Company, without providing the other party a reasonable opportunity to review and comment thereon. Parent will advise Company, promptly after it receives notice thereof, of the time when the Post-Effective Amendment has become effective or any supplement or amendment has been filed, the issuance of any stop order, the suspension of the qualification of the Parent Common Stock issuable in connection with the Merger for offering or sale in any jurisdiction, or any request by the SEC for amendment of the Post-Effective Amendment or comments thereon and responses thereto or requests by the SEC for additional information. Company will advise Parent, promptly after it receives notice thereof, of any request by the SEC for the amendment of the Company Proxy Statement or comments thereon and responses thereto or requests by the SEC for additional information. If at any time prior to the Effective Time any information relating to Company or Parent, or any of their respective affiliates, officers or directors, should be discovered by Company or Parent which should be set forth in an amendment or supplement to either of the Post-Effective Amendment or the Company Proxy Statement, so that any of such documents would not include any misstatement of a material fact or omit to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, the party which discovers such information shall promptly notify the other parties hereto and an appropriate amendment or supplement describing such information shall be promptly filed with the SEC and, to the extent required by law, disseminated to the stockholders of Company.

 

          (b)  If approval of the Company’s stockholders is required by applicable law in order to consummate the Merger, Company shall establish, prior to or as soon as practicable following the date upon which the Post-Effective Amendment becomes effective, a record date (which shall be prior to or as soon as practicable following the date upon which the Post-Effective Amendment becomes effective) for, duly call, give notice of, convene and hold a meeting of its stockholders (the “Company Stockholders Meeting”) for the purpose of considering and taking action upon this Agreement and the Merger and (with the consent of Parent) such other matters as may in the reasonable judgment of Company be appropriate for consideration at the Company Stockholders Meeting. Once the Company Stockholders Meeting has been called and noticed, Company shall not postpone or adjourn the Company Stockholders Meeting (other than for the absence of a quorum) without the consent of Parent. Subject to Company’s right, pursuant to Section 6.03(b) hereof, to withdraw or modify the Recommendations, the Board of Directors of Company shall include in the Post-Effective Amendment and the Company Proxy Statement a copy of the Recommendations as such Recommendations pertain to the Merger and this Agreement. Notwithstanding the foregoing, if approval of the Company’s stockholders is required by applicable law in order to consummate the Merger, the Board of Directors of Company shall submit this Agreement and the Merger for approval to the Company’s stockholders whether or not the Board of Directors of Company determines in accordance with Section 6.03(b) after the date hereof that this Agreement and the Merger are no longer advisable and recommends that the stockholders of Company reject it. Unless the Board of Directors of Company has withdrawn its recommendation of this Agreement and the Merger in compliance with Section 6.03(b), Company shall use its reasonable best efforts to solicit from stockholders of Company proxies in favor of this Agreement and the Merger and shall take all other actions necessary or advisable to secure the vote or consent of stockholders required by Delaware Law to effect the Merger.

 

          (c)  Notwithstanding the foregoing clauses (a) and (b) above, if Merger Sub shall acquire at least 90% of the outstanding Shares in the Offer, the parties hereto shall take all necessary actions (including actions referred to in clause (a) above, as applicable) to cause the Merger to become effective, as soon as practicable after the expiration of the Offer, without a meeting of stockholders of Company, in accordance with Section 253 of Delaware Law.

 

          Section 6.02.    Regulatory Filings.    (a)   Promptly after the date of this Agreement, each of Company and Parent will prepare and file any filings required to be filed by it, take, or cause to be taken, and do, or cause to be done, all things necessary, proper or advisable to consummate and make effective the Merger and the transactions contemplated by this Agreement under the Exchange Act, the Securities Act or any other federal, state or foreign laws relating to the Merger and the transactions contemplated by this Agreement including, without limitation, laws relating to the regulation of broker-dealers and banks, the rules and requirements of any self-regulatory organization, the NYSE, the NASD and the Municipal Securities Rulemaking Board (the “Regulatory Filings”). Company and Parent each shall promptly supply the other with any information which may be required in order to effectuate any filings pursuant to this Section 6.02.

 

          (b)  Without limiting the generality of the foregoing Section 6.02(a), if the closing price for Parent Common Stock shall be at least $10.00 for any continuous five trading days prior to the Closing Date, either Company or Parent may determine, by written notice to the other party, that notification and report forms are required to be filed by each of Company and Parent with regard to the Offer pursuant to the Hart-Scott-Rodino Antitrust Improvement Act of 1976, as amended (the “HSR Act”), in which case, both Company and Parent shall file a notification and report form, and comply with all obligations under the HSR Act within five business days of such notice, and Company and Parent shall respond as promptly as practicable to any inquiries or requests received from the Federal Trade Commission, the Department of Justice, any state attorney general or other governmental or regulatory body for additional information or documentation in connection with antitrust or related matters. Except as may be prohibited by law, Company and Parent will consult and cooperate with one another, and will consider in good faith the views of one another, in connection with such determination that notification and report forms are required to be filed and any analysis, appearance, presentation, memorandum, brief, argument, opinion or proposal made or submitted in connection with or relating to the HSR Act or any other federal or state antitrust or fair trade law.

 

          (c)  Each of Company and Parent will notify the other promptly upon the receipt of any comments from the SEC or its staff or any other government officials in connection with any filing made pursuant hereto and of any request by the SEC or its staff or any other government officials for amendments or supplements to the Registration Statement, the Post-Effective Amendment, the Company Proxy Statement or any Regulatory Filing or for additional information and will supply the other with copies of all correspondence between such party or any of its representatives, on the one hand, and the SEC, or its staff or any other government officials, on the other hand, with respect to the Registration Statement, the Post-Effective Amendment, the Company Proxy Statement, the Merger or any Regulatory Filing. Each of Company and Parent will cause all documents that it is responsible for filing with the SEC or other regulatory authorities under Section 6.01 and this Section 6.02 to comply in all material respects with all applicable requirements of law and the rules and regulations promulgated thereunder. Whenever any event occurs which is required to be set forth in an amendment or supplement the Registration Statement, the Post-Effective Amendment, the Company Proxy Statement or any Regulatory Filing, Company or Parent, as the case may be, will promptly inform the other of such occurrence and cooperate in filing with the SEC or its staff or any other government officials, and/or mailing to stockholders of Company and/or Parent, such amendment or supplement.

 

          Section 6.03.    No Solicitation.    (a)  From the date hereof until the Appointment Date or termination of the Agreement in accordance with Article 8 hereof, whichever is earlier, neither Company nor any of its subsidiaries shall, nor shall Company or any of its subsidiaries authorize or permit any of its or their officers, directors, employees, investment bankers, attorneys, accountants, consultants or other agents or advisors to, directly or indirectly, (i) solicit, initiate or take any action to facilitate or encourage the submission or announcement of any Acquisition Proposal (as defined below), (ii) enter into or participate in any discussions or negotiations with, furnish any information relating to Company or any of its subsidiaries or afford access to the business, properties, assets, books or records of Company or any of its subsidiaries to, otherwise cooperate in any way with, or assist, participate in, facilitate or encourage any effort by any third party that is seeking to make or has made an Acquisition Proposal, (iii) approve, endorse or recommend any Acquisition Proposal or (iv) enter into any letter of intent or similar document or any contract, agreement or commitment contemplating or otherwise relating to any Acquisition Proposal.

 

          (b)  Notwithstanding anything in this Agreement to the contrary, the Board of Directors of Company, directly or indirectly through advisors, agents or other intermediaries, may (i) engage in negotiations and discussions with any third party that, subject to Company’s compliance with Section 6.03(a), has made a bona fide Acquisition Proposal that the Board of Directors of Company reasonably determines (after consultation with Company’s financial advisor) is or is reasonably likely to result in a Superior Proposal, (ii) furnish to such third party nonpublic information relating to Company or any of its subsidiaries pursuant to a confidentiality agreement with terms no less favorable to Company than those contained in the Confidentiality Agreement, (iii) take and disclose to its stockholders a position contemplated by Rule 14e-2(a) under the Exchange Act or otherwise make disclosure to them, (iv) following receipt of such an Acquisition Proposal, withdraw, modify in a manner adverse to Parent, or fail to make its Recommendations, and/or (v) take any action ordered to be taken by Company by any court of competent jurisdiction if, in each case (1) neither Company nor any representative of Company and its subsidiaries shall have violated any of the restrictions set forth in this Section 6.03, (2) the Board of Directors of Company determines in good faith, after consultation with its outside legal counsel, that it is necessary for the Board of Directors to take such action in order to satisfy its fiduciary obligations to Company’s stockholders under applicable law, (3) prior to furnishing any such nonpublic information to, or entering into any such discussions with, such person or group, Company gives Parent written notice (which notice shall in no event be given less than one business day prior to furnishing such information or entering into such discussions) of the identity of such person or group and all of the material terms and conditions of such Acquisition Proposal and of Company’s intention to furnish nonpublic information to, or enter into discussions with, such person or group, and Company receives from such person or group an executed confidentiality agreement containing terms at least as restrictive with regard to Company’s confidential information as the Confidentiality Agreement, and (4) contemporaneously with furnishing any such nonpublic information to such person or group, Company furnishes such nonpublic information to Parent (to the extent such nonpublic information has not been previously furnished by the Company to Parent). Company and its subsidiaries will immediately cease any and all existing activities, discussions or negotiations with any parties conducted heretofore with respect to any Acquisition Proposal. Without limiting the foregoing, it is understood that any violation of the restrictions set forth in the preceding two sentences by any officer, director or employee of Company or any of its subsidiaries or any investment banker, attorney or other advisor or representative of Company or any of its subsidiaries shall be deemed to be a breach of this Section 6.03 by Company.

 

          (c)  In addition to the obligations of Company set forth in paragraph (a) of this Section 6.03, Company as promptly as reasonably practicable shall advise Parent orally and in writing of any Acquisition Proposal, or any inquiry with respect to or which Company reasonably should believe would lead to any Acquisition Proposal, the material terms and conditions of such Acquisition Proposal or inquiry, and the identity of the person or group making any such Acquisition Proposal or inquiry. Company will keep Parent informed as promptly as reasonably practicable in all material respects of material amendments of any such Acquisition Proposal or inquiry.

 

          “Superior Proposal” means any bona fide, unsolicited written Acquisition Proposal for at least a majority of the outstanding shares of Company Common Stock on terms that the Board of Directors of Company determines in good faith by a majority vote, after consultation with Houlihan, Smith & Company, Inc. or such other nationally recognized reputation and taking into account all the terms and conditions of the Acquisition Proposal, are more favorable and provide greater value to all the Company’s stockholders than as provided hereunder.

 

          For purposes of this Agreement, “Acquisition Proposal” shall mean any offer or proposal by a third party, other than Parent, Merger Sub or any affiliate thereof, relating to: (A) any acquisition or purchase from Company by any person or “group” (as defined under Section 13(d) of the Exchange Act and the rules and regulations thereunder) of more than a 40% interest in the outstanding voting securities of Company or any of its subsidiaries or any tender offer or exchange offer that if consummated would result in any person or “group” (as defined under Section 13(d) of the Exchange Act and the rules and regulations thereunder) beneficially owning 40% or more of the outstanding voting securities of Company or any of its subsidiaries or any merger, consolidation, business combination or similar transaction involving Company pursuant to which the stockholders of Company immediately preceding such transaction would hold less than 60% of the equity interests in the surviving or resulting entity of such transaction; (B) any sale, lease (other than in the ordinary course of business), exchange, transfer, license (other than in the ordinary course of business), acquisition, or disposition of more than 40% of the consolidated assets of Company; or (C) any liquidation or dissolution of Company.

 

          Section 6.04.    Obligations Of Merger Sub.    Parent will take all action necessary to cause Merger Sub to perform its obligations under this Agreement and to consummate the Offer and the Merger on the terms and subject to the conditions set forth in this Agreement.

 

          Section 6.05.    Voting Of Shares.    Parent and Merger Sub agree to vote all Shares acquired in the Offer or otherwise beneficially owned by them or any of their subsidiaries in favor of approval and adoption of this Agreement and the Merger at the Company Stockholder Meeting or pursuant to Section 253 of the DGCL, on the terms and subject to the conditions set forth in this Agreement.

 

          Section 6.06.    Registration Statement.    Parent shall promptly prepare and file with the SEC under the Securities Act the Registration Statement and shall use all reasonable efforts to cause the Registration Statement to be declared effective by the SEC as promptly as practicable. Parent shall promptly take any action required to be taken under foreign or state securities laws in connection with the issuance of Parent Common Stock in the Merger. Company and its counsel shall be given a reasonable opportunity to review and comment on the Registration Statement and the Offer Documents and any amendments thereto prior to their being filed with the SEC. Parent shall promptly provide to Company copies of any SEC comment letters or details of oral SEC comments relating to the Registration Statement.

 

          Section 6.07.    Confidentiality; Access To Information.     (a)  The parties acknowledge that Company and Parent have previously executed the Confidentiality Agreement which Confidentiality Agreement will continue in full force and effect in accordance with its terms.

 

           (b)  Company will afford Parent and its accountants, counsel and other representatives reasonable access during normal business hours to the properties, books, records and personnel of Company during the period prior to the Effective Time to obtain all information concerning the business, including the status of product development efforts, properties, results of operations and personnel of Company, as Parent may reasonably request, including without limitation copies of working papers of accountants, contracts, and other corporate documents, and access to other parties with whom it has business dealings. Parent will afford Company and its accountants, counsel and other representatives reasonable access during normal business hours to the properties, books, records and personnel of Parent during the period prior to the Effective Time to obtain all information concerning the business, properties and results of operations of Parent, as Company may reasonably request. No information or knowledge obtained in any investigation pursuant to this Section will affect or be deemed to modify any representation or warranty contained herein or the conditions to the obligations of the parties to consummate the Offer and the Merger.

 

          Section 6.08.    Public Disclosure.    Parent and Company will consult with each other, and to the extent practicable, agree, before issuing any press release or otherwise making any public statement with respect to the Offer, Merger, this Agreement or an Acquisition Proposal and will not issue any such press release or make any such public statement prior to such consultation, except as may be required by law or any listing agreement with a national securities exchange; provided, however, that this Section 6.08 shall terminate in the event the Board of Directors of Company shall withdraw its Recommendations. The parties have agreed to the text of the joint press release announcing the signing of this Agreement.

 

          Section 6.09.    Reasonable Efforts; Notification.     (a)  Upon the terms and subject to the conditions set forth in this Agreement, each of the parties agrees to use all reasonable efforts to take, or cause to be taken, all actions, and to do, or cause to be done, and to assist and cooperate with the other parties in doing, all things necessary, proper or advisable to consummate and make effective, in the most expeditious manner practicable, the Merger and the other transactions contemplated by this Agreement, including using reasonable efforts to accomplish the following: (i) the taking of all reasonable acts necessary to cause the conditions precedent set forth in Annex I and Article 7 to be satisfied, (ii) the obtaining of all necessary actions or nonactions, waivers, consents, approvals, orders and authorizations from Governmental Entities and the making of all necessary registrations, declarations and filings (including registrations, declarations and filings with Governmental Entities, if any) and the taking of all reasonable steps as may be necessary to avoid any suit, claim, action, investigation or proceeding by any Governmental Entity, (iii) the obtaining of all necessary consents, approvals or waivers from third parties, (iv) the defending of any suits, claims, actions, investigations or proceedings, whether judicial or administrative, challenging this Agreement or the consummation of the transactions contemplated hereby, including seeking to have any stay or temporary restraining order entered by any court or other Governmental Entity vacated or reversed and (v) the execution or delivery of any additional instruments necessary to consummate the transactions contemplated by, and to carry out fully the purposes of, this Agreement. Notwithstanding anything in this Agreement to the contrary, neither Parent nor any of its affiliates shall be under any obligation to make proposals, execute or carry out agreements or submit to orders providing for the sale or other disposition or holding separate (through the establishment of a trust or otherwise) of any assets or categories of assets of Parent, any of its affiliates or Company or its subsidiaries or the holding separate of the shares of Company Common Stock (or shares of stock of the Surviving Corporation) or imposing or seeking to impose any limitation on the ability of Parent or any of its subsidiaries or affiliates to conduct their business or own such assets or to acquire, hold or exercise full rights of ownership of the shares of Company Common Stock (or shares of stock of the Surviving Corporation).

 

          (b)  Each of Company and Parent will give prompt notice to the other of (i) any notice or other communication from any person alleging that the consent of such person is or may be required in connection with the transactions contemplated hereby, (ii) any notice or other communication from any Governmental Entity in connection with the transactions contemplated hereby, (iii) any litigation relating to, involving or otherwise affecting Company, Parent or their respective subsidiaries that relates to the consummation of the transactions contemplated hereby. Company shall give prompt notice to Parent of any representation or warranty made by it contained in this Agreement becoming untrue or inaccurate, or any failure of Company to comply with or satisfy in any material respect any covenant, condition or agreement to be complied with or satisfied by it under this Agreement, in each case, such that the conditions set forth in Annex I or Article 7 would not be satisfied, provided, however, that no such notification shall affect the representations, warranties, covenants or agreements of the parties or the conditions to the obligations of the parties under this Agreement. Parent shall give prompt notice to Company of any representation or warranty made by it or Merger Sub contained in this Agreement becoming untrue or inaccurate, or any failure of Parent or Merger Sub to comply with or satisfy in any material respect any covenant, condition or agreement to be complied with or satisfied by it under this Agreement, in each case, such that the conditions set forth in Annex I or Article 7 would not be satisfied, provided, however, that no such notification shall affect the representations, warranties, covenants or agreements of the parties or the conditions to the obligations of the parties under this Agreement.

 

          Section 6.10.    Warrants, Stock Options And ESPP.     (a)  At the Effective Time, each outstanding warrant to purchase Company Common Stock, whether or not then exercisable, will be assumed by Parent. The terms of each outstanding warrant to purchase Company Common Stock, whether or not exercisable or vested, shall be adjusted as necessary to provide that, at the Effective Time, each such warrant outstanding immediately prior to the Effective Time shall be deemed to constitute a warrant to acquire, on the same terms and conditions as were applicable under such warrant, (i) that number of shares of Parent Common Stock as the holder of such warrant would have been entitled to receive pursuant to the Merger had such holder exercised such warrant in full immediately prior to the Effective Time, and (ii) at an exercise price per share of Parent Common Stock equal to (A) the aggregate exercise price for the shares of Company Common Stock otherwise purchasable pursuant to such warrant divided by (B) the aggregate number of shares of Parent Common Stock deemed purchasable pursuant to such warrant, provided that any fractional share of Parent Common Stock resulting from an aggregation of all the shares of a holder subject to a warrant shall be rounded down to the nearest whole share. At the Effective Time, each outstanding Company Option to purchase Company Common Stock, if any, whether or not then exercisable, will be cancelled without the payment, except as provided below, of any cash or other consideration.

 

          (b)  With respect to each Company Option issued under the 1998 Option Plan, Company agrees that within five business days of the date of this Agreement it shall cause the administrator of the 1998 Option Plan to give notice pursuant to Section 14(c) of such Plan that each such Option shall terminate 15 days from the date of such notice.

 

          (c)  With respect to each Company Option issued under the 1999 Option Plan, Company agrees pursuant to Section 7(a)(iv)(d) of such Plan to, as of the Appointment Time, settle each Company Option issued under such Plan for an amount equal to the positive difference between the Change of Control Price (as defined in such Plan), and the applicable per share exercise price.

 

          (d)  With respect to each Company Option issued under the 2000 Option Plan, Company agrees pursuant to Section 7(a)(iv)(d) of such Plan to, as of the Appointment Time, settle each Company Option issued under such Plan for an amount equal to the positive difference between the Change of Control Price (as defined in such Plan) and the applicable per share exercise price.

 

          (e)  With respect to each Company Option issued under any Non-Plan Option Agreement, Company agrees to cause each such Option, as of the Appointment Time, to have been exercised or cancelled without the payment of cash or other consideration by Company.

 

          (f)  Pursuant to the terms of the Company ESPP, Company agrees, as of the Appointment Time, to repurchase each outstanding option under the Company ESPP as provided in Section 6.3(b)(2) thereof and that no new offering period shall commence under the Company ESPP subsequent to the date of this Agreement.

 

          Section 6.11.    Accounts Maintenance And Transition Period.     Prior to the Appointment Time, Company agrees to use all reasonable efforts to take, or cause to be taken, all actions, and to do, or cause to be done, and to assist and cooperate with Parent in doing, all things necessary, proper or advisable to retain all customer accounts, and the assets therein (the “Accounts”). Prior to the Appointment Time, the parties agree to use all reasonable efforts to take, or cause to be taken, all actions, and to do, or cause to be done, and to assist and cooperate with the other party in doing, all things necessary, proper or advisable to facilitate the transition of the control and operations of the business of Company and its subsidiaries at the Effective Time.

 

          Section 6.12.    Company Trademarks.    Following the Closing and for a period of four years, Parent agrees not to, and to cause its subsidiaries not to, sell or otherwise transfer the “Web Street,” “Web Street Securities,” the Web St. in box logo, or the stylized “W” trademarks.

 

          Section 6.13.    Indemnification.    (a)  From and after the Effective Time, Parent shall, and shall cause the Surviving Corporation to, fulfill and honor in all respects the obligations of Company pursuant to any indemnification agreements between Company and its directors and officers as of the Effective Time (the “Indemnified Parties”) and any indemnification provisions under Company’s or the Surviving Corporation’s Certificate of Incorporation or Bylaws as in effect on the date hereof. The Certificate of Incorporation and Bylaws of the Surviving Corporation will contain provisions with respect to exculpation and indemnification that are at least as favorable to the Indemnified Parties as those contained in the Certificate of Incorporation and Bylaws of Company as in effect on the date hereof, which provisions will not be amended, repealed or otherwise modified for a period of six years from the Effective Time in any manner that would adversely affect the rights thereunder of individuals who, immediately prior to the Effective Time, were directors, officers, employees or agents of Company, unless such modification is required by law.

 

          (b)  For a period of six years after the Effective Time, Parent will either (i) cause the Surviving Corporation to maintain in effect, if available, directors’ and officers’ liability insurance covering those persons who are currently covered by Company’s directors’ and officers’ liability insurance policy on terms comparable to those applicable to the current directors and officers of Company; provided, however, that in no event will Parent or the Surviving Corporation be required to expend in excess of 150% of the annual premium currently paid by Company for such coverage (or such coverage as is available for such 150% of such annual premium), or (ii) if mutually agreed between Company and Parent, purchase a directors’ and officers’ liability insurance on terms comparable to those applicable to the current directors and officers of Company covering all periods prior to the Effective Time.

 

          (c)  This Section 6.13 shall survive the consummation of the Merger, is intended to benefit Company, the Surviving Corporation and each Indemnified Party, shall be binding on all successors and assigns of the Surviving Corporation and Parent, and shall be enforceable by the Indemnified Parties.

 

          Section 6.14.    NYSE Listing.    Parent agrees to authorize for listing on the NYSE the shares of Parent Common Stock issuable, and those required to be reserved for issuance, in connection with the Offer and the Merger, effective upon official notice of issuance.

 

          Section 6.15.    Letters Of Accountants.    Company and Parent shall use their respective reasonable efforts to cause to be delivered to Parent letters of Company’s and Parent’s independent accountants, respectively, dated no more than two business days before the date on which the Registration Statement becomes effective (and satisfactory in form and substance to Parent), that is customary in scope and substance for letters delivered by independent public accountants in connection with registration statements similar to the Registration Statement.

 

          Section 6.16.    Takeover Statutes.    If any Takeover Statute is or may become applicable to the Merger or the other transactions contemplated by this Agreement, each of Parent and Company and their respective Boards of Directors shall grant such approvals and take such lawful actions as are necessary to ensure that such transactions may be consummated as promptly as practicable on the terms contemplated by this Agreement and otherwise act to eliminate or minimize the effects of such statute and any regulations promulgated thereunder on such transactions. Company agrees that on and after the date hereof, it will not adopt any “poison pill” rights plan or any similar antitakeover plan or take any other action that would impede or prevent completion of the Offer, the Merger or this Agreement.

 

          Section 6.17.    Tax Matters.    Each of Parent, Merger Sub and Company agrees that it will not take any action, or fail to take any action, which action or failure to act would cause or be reasonably likely to cause the Transaction to fail to qualify as a “reorganization” within the meaning of Section 368(a) of the Code and the Treasury regulations promulgated thereunder.

 

          Section 6.18.    Escrow.    (a)  Each of Joseph J. Fox, Avi Fox, Joseph Barr, Stuart Cohn, William Mania, D. J. Rosenberg and Harleigh Mandel (each an “Escrow Executive”) hereby agrees as a condition and inducement to Parent’s willingness to enter into this Agreement to enter into, prior to the Appointment Time, an Escrow Agreement (the “Escrow Agreement”) with Parent substantially in the form of Exhibit C. The amount set forth under the column entitled “Total” next to each Escrow Executive’s name on Exhibit F hereto, shall, with respect to each executive be referred to as the “Executive Escrow Total.” Each Escrow Executive, the Company and Parent agree that the payments that would otherwise be owed to such executive pursuant to the terms of his employment agreement with Company upon consummation of the Offer shall be reduced by the amount of the Executive Escrow Total and that Parent shall, within two business days of the Appointment Time, deposit cash in such amount with American Stock Transfer and Trust Co. (or another institution selected by Parent with the reasonable consent of the Founders), as escrow agent (the “Escrow Agent”). All such deposits pursuant to this Section 6.18 shall total $5,000,000 and (together with any interest earned thereon) shall constitute the Escrow Fund and be governed by the terms set forth in this Section 6.18 and the Escrow Agreement (such arrangement, the “Escrow”). Parent shall be solely responsible for all expenses and fees payable to Escrow Agent in connection with the Escrow.

 

          (b)  With respect to each date (each, a “Determination Date”) set forth on Exhibit D (the “Escrow Threshold Schedule”), Parent shall certify in writing to each Escrow Executive as soon as reasonably practical following such date (and in no event more than 30 days thereafter) whether the applicable threshold test (each, a “Threshold Test”) corresponding to such date on the Escrow Threshold Schedule has been satisfied. No earlier than such delivery to the Escrow Executives, Parent shall deliver to the Escrow Agent a certificate signed by Parent directing the Escrow Agent to deliver the applicable threshold amount (each, a “Threshold Amount”) corresponding to such date on the Escrow Threshold Schedule, together with any interest earned thereon, to either (i) the Escrow Executives (to each Escrow Executive pro rata based on contributions to the Escrow Fund with respect to such executive for such Threshold Test as set forth on Exhibit F) if the applicable Threshold Test has been satisfied or (ii) Parent if the applicable Threshold Test has not been satisfied. The Escrow shall terminate when all disputes regarding any distributions from the Escrow Fund have been settled and all distributions under the Escrow have been made.

 

          (c)  Each of Joseph J. Fox, Avi Fox, Joseph Barr, Stuart Cohn, William Mania, D. J. Rosenberg and Harleigh Mandel agrees, notwithstanding any agreement between such executive and Company (including each agreement set forth on Part 3.04 of the Company Disclosure Letter), that effective as of the Appointment Time, the maximum amount that Company will be obligated to pay such executives in order to reimburse such executives for any federal, state, or local income tax or excise tax (including any interest or penalties imposed with respect to such taxes) by reason of any payment being made by or on behalf of Company to such executives that is subject to a “golden parachute” excise tax under Section 4999 of the Code, shall be a total amount for all such executives collectively of $140,668.00 (the “Aggregate Excise Tax Gross-up Cap”). Notwithstanding the foregoing sentence, each Escrow Executive and Parent agrees that to the extent that Net Cash Available After Termination Related Payments (as defined on Exhibit F) exceeds $750,000 on the Determination Date on which Net Cash Available After Termination Related Payments is calculated, Parent shall pay, on behalf of Company, to the Escrow Executives, collectively, such excess as if the Escrow Executives had not agreed to the Aggregate Excise Tax Gross-up Cap, but only to the extent that the Escrow Executives have been required by a Taxing Authority within six months of the Appointment Time to pay a “golden parachute” excise tax referred to above.

 

ARTICLE 7

 

CONDITIONS TO THE MERGER

 

          Section 7.01.    Conditions To Obligations Of Each Party To Effect The Merger.     The obligations of Company, Parent and Merger Sub to consummate the Merger are subject to the satisfaction of the following conditions:

 

          (a)  if required by Delaware law, this Agreement shall have been approved and adopted by the stockholders of Company;

 

          (b)  Merger Sub shall have accepted for exchange and exchanged all of the Shares validly tendered pursuant to the Offer;

 

          (c)  no provision of any applicable law or regulation and no judgment, injunction, order or decree shall prohibit the consummation of the Merger;

 

          (d)  the Registration Statement or the Post-Effective Amendment, as the case may be, shall have been declared effective and no stop order suspending effectiveness shall be in effect and no proceedings for such purpose shall be pending before or threatened by the SEC; and

 

          (e)  the shares of Parent Common Stock to be issued in the Merger shall have been approved for listing on the NYSE, subject to official notice of issuance.

 

ARTICLE 8

 

TERMINATION, AMENDMENT AND WAIVER

 

          Section 8.01.    Termination.    This Agreement may be terminated and the Merger may be abandoned at any time prior to the Appointment Time (notwithstanding any approval of this Agreement by the stockholders of Company):

 

          (a)  by mutual written agreement of Company and Parent; or

 

          (b)  by either Company or Parent, if:

 

(i)  the Offer shall have expired or been terminated in accordance with the terms of this Agreement without Parent or Merger Sub having accepted for exchange any Shares pursuant to the Offer; provided, however, that the right to terminate this Agreement under this Section 8.01(b)(i) shall not be available to any party whose failure to fulfill any obligation under this Agreement has been the principal cause of or resulted in the failure of the Offer to have been consummated on or before such date and such action or failure to act constitutes a material breach of this Agreement; or

 

(ii)  the Offer has not been consummated on or before September 30, 2001 (the “End Date”); provided, however, that the right to terminate this Agreement under this Section 8.01(b)(ii) shall not be available to any party whose failure to fulfill any obligation under this Agreement has been the principal cause of or resulted in the failure of the Offer to have been consummated on or before such date and such action or failure to act constitutes a material breach of this Agreement; or

 

(iii)  there shall be any applicable law or regulation that makes consummation of the Merger illegal or otherwise prohibited or any judgment, injunction, order or decree of any court or governmental body having competent jurisdiction enjoining Company or Parent from consummating the Merger is entered and such judgment, injunction, judgment or order shall have become final and nonappealable; or

 

(iv)  (A) any representation or warranty of the other party contained in this Agreement shall be or have become inaccurate such that, in the aggregate, such inaccuracies would reasonably be expected to have a Material Adverse Effect on such other party, or (B) the other party fails to perform any material covenant contained in this Agreement; provided, however, that such inaccuracy or failure to perform has not been or is incapable of being cured by such other party within 30 days following receipt by the terminating party of notice of such inaccuracy or failure to perform; or

 

          (c)  by Parent if a Triggering Event shall have occurred.

 

          For purposes of this Agreement, a “Triggering Event” shall be deemed to have occurred if, prior to the Appointment Time: (i) the Board of Directors of Company or any committee thereof shall have approved or recommended to Company stockholders any Acquisition Proposal, (ii) the Board of Directors of Company or any committee thereof shall for any reason have withdrawn or shall have amended or modified in a manner adverse to Parent its Recommendations (except as required by any applicable Legal Requirement and in a manner that is not materially adverse to Parent); (iii) Company shall have failed to include the Recommendations in the Offer Documents, the Schedule 14D-9 or the Post-Effective Amendment; or (iv) a tender or exchange offer relating to 40% or more of the Shares shall have been commenced by a person unaffiliated with Parent, and Company shall not have sent to its securityholders pursuant to Rule 14e-2 promulgated under the Exchange Act, within 10 business days after such tender or exchange offer is first published, sent or given, a statement disclosing that Company recommends rejection of such tender or exchange offer.

 

          The party desiring to terminate this Agreement pursuant to this Section 8.01 (other than pursuant to Section 8.01(a)) shall give written notice of such termination to the other party.

 

          Section 8.02.    Notice Of Termination; Effect Of Termination.     Any proper termination of this Agreement under Section 8.01 above will be effective immediately upon the delivery of written notice of the terminating party to the other parties hereto. In the event of the termination of this Agreement under Section 8.01, this Agreement shall be of no further force or effect without liability of any party (or any stockholder, director, officer, employee, agent, consultant or representative of such party) to the other parties hereto, except (i) as set forth in this Section 8.02, Section 8.03 and Article 9, each of which shall survive the termination of this Agreement, and (ii) that nothing herein shall relieve any party from liability for any willful breach of this Agreement. No termination of this Agreement shall affect the obligations of the parties contained in the Confidentiality Agreement, all of which obligations shall survive termination of this Agreement in accordance with their terms.

 

          Section 8.03.    Fees And Expenses.    (a)   General.    Except as set forth in this Section 8.03, all fees and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such expenses whether or not the Merger is consummated; provided, however, that Parent shall pay all fees and expenses, other than attorneys’ and accountants fees and expenses, incurred in relation to the printing and filing with the SEC of the Registration Statement (including financial statements and exhibits) and any amendments or supplements thereto.

 

          (b)  Company Payments.    If this Agreement is terminated by Parent or Company, as applicable, pursuant to Sections 8.01(b)(i) or (ii) or Section 8.01(c), Company shall promptly, but in any event no later than two days after the date of such termination, pay Parent a fee equal to $1.35 million in immediately available funds (the “Termination Fee”); provided, that in the case of a termination under Section 8.01(b)(i) or (ii) prior to which no Triggering Event has occurred, (i) such payment shall be made only if (A) following the date of this Agreement and prior to the termination of this Agreement, any Acquisition Proposal shall have been publicly announced or shall have become publicly known, and (B) within 12 months following the termination of this Agreement, either a Company Acquisition (as defined below) is consummated, or Company enters into an agreement providing for a Company Acquisition and such Company Acquisition is later consummated, and (ii) such payment shall be made promptly, but in any event no later than two days after the consummation of such Company Acquisition. Company acknowledges that the agreements contained in this Section 8.03(b) are an integral part of the transactions contemplated by this Agreement, and that, without these agreements, Parent would not enter into this Agreement. Accordingly, if Company fails to pay in a timely manner the amounts due pursuant to this Section 8.03(b), and, in order to obtain such payment, Parent makes a claim that results in a judgment against Company, Company shall pay to Parent its reasonable costs and expenses (including reasonable attorneys’ fees and expenses) in connection with such suit, together with interest on the amounts set forth in this Section 8.03(b) at the prime rate of J.P. Morgan Chase & Co. in effect on the date such payment was required to be made. Payment of the fees described in this Section 8.03(b) shall not be in lieu of damages incurred in the event of breach of this Agreement.

 

          For the purposes of this Agreement, “Company Acquisition” shall mean any of the following transactions (other than the transactions contemplated by this Agreement): (i) a sale or other disposition by Company of a business or assets representing 40% or more of the net revenues, net income or assets of Company immediately prior to such sale; (ii) the acquisition by any person or group (including by way of a tender offer or an exchange offer or issuance by Company), directly or indirectly, of beneficial ownership or a right to acquire beneficial ownership of shares representing 40% or more of any class of equity securities of Company; or (iii) a merger, consolidation, business combination, recapitalization, liquidation, dissolution or similar transaction involving Company.

 

          Section 8.04.    Amendment.    Subject to applicable law, this Agreement may be amended by the parties hereto at any time by execution of an instrument in writing signed on behalf of each of Parent and Company.

 

          Section 8.05.    Extension; Waiver.    At any time prior to the Effective Time any party hereto may, to the extent legally allowed, (i) extend the time for the performance of any of the obligations or other acts of the other parties hereto, (ii) waive any inaccuracies in the representations and warranties made to such party contained herein or in any document delivered pursuant hereto and (iii) waive compliance with any of the agreements or conditions for the benefit of such party contained herein. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such party. Delay in exercising any right under this Agreement shall not constitute a waiver of such right.

 

ARTICLE 9

 

GENERAL PROVISIONS

 

          Section 9.01.    Non-survival Of Representations And Warranties.     The representations and warranties of Company, Parent and Merger Sub contained in this Agreement shall terminate at the Effective Time, and only the covenants that by their terms survive the Effective Time shall survive the Effective Time.

 

          Section 9.02.    Notices.    All notices and other communications hereunder shall be in writing and shall be deemed given upon delivery either personally or by commercial delivery service, or sent via facsimile (receipt confirmed) to the parties at the following addresses or facsimile numbers (or at such other address or facsimile numbers for a party as shall be specified by like notice):

 

          (a)  if to Parent or Merger Sub, to:

 

E*Trade Group, Inc.

4500 Bohannon Drive

Menlo Park, CA 94025

Attention: Russell Elmer

Facsimile No.: 650-331-6835

 

with a copy to:

 

Davis Polk & Wardwell

1600 El Camino Real

Menlo Park, California 94025

Attention: Daniel G. Kelly, Jr.

Facsimile No.: 650-752-2113

 

(b)  if to Company, to:

 

Web Street, Inc.

510 Lake Cook Road

Deerfield, IL 60015

Attention: Joseph Fox

Facsimile No.: 847-267-9926

 

with a copy to:

 

Katten Muchin Zavis

525 West Monroe Street, Suite 1600

Chicago, IL 60661-3693

Attention: Jeffrey Patt

Facsimile No.:

 

          Section 9.03.    Interpretation; Certain Defined Terms.     (a)  When a reference is made in this Agreement to Exhibits, such reference shall be to an Exhibit to this Agreement unless otherwise indicated. When a reference is made in this Agreement to Sections, such reference shall be to a Section of this Agreement unless otherwise indicated. The words “include,” “includes” and “including” when used herein shall be deemed in each case to be followed by the words “without limitation.” The table of contents and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. When reference is made herein to “the business of” an entity, such reference shall be deemed to include the business of all direct and indirect subsidiaries of such entity. Reference to the subsidiaries of an entity shall be deemed to include all direct and indirect subsidiaries of such entity.

 

          (b)  For purposes of this Agreement, the term “knowledge” means with respect to a party hereto, with respect to any matter in question, that any of the executive officers of such party has actual knowledge of such matter, after reasonable inquiry of such matter. For purposes of this definition, the “executive officers” of Company shall be those person listed on Part 9.03(b) of the Company Disclosure Letter.

 

          (c)  For purposes of this Agreement, the term “Material Adverse Effect” when used in connection with an entity means any change, event, circumstance or effect that is or would be materially adverse to the business, assets (including intangible assets), financial condition, operations or results of operations of such entity taken as a whole with its subsidiaries, except to the extent that any such change, event, circumstance or effect results from (i) changes in general economic conditions, (ii) changes affecting the industry generally in which such entity operates (provided that such changes do not affect such entity in a substantially disproportionate manner), (iii) changes in the trading prices for such entity’s capital stock or (iv) the announcement or pendency of this Agreement (including a reduction in customer revenues, a disruption in or termination of any vendor or strategic relationship or a loss of employees).

 

          (d)  For purposes of this Agreement, the term “person” shall mean any individual, corporation (including any non-profit corporation), general partnership, limited partnership, limited liability partnership, joint venture, estate, trust, company (including any limited liability company or joint stock company), firm or other enterprise, association, organization, entity or Governmental Entity.

 

           (e)  For purposes of this Agreement, “subsidiary” of a specified entity will be any corporation, partnership, limited liability company, joint venture or other legal entity of which the specified entity (either alone or through or together with any other subsidiary) owns, directly or indirectly, 50% or more of the stock or other equity or partnership interests the holders of which are generally entitled to vote for the election of the Board of Directors or other governing body of such corporation or other legal entity; provided, however that for purposes of Section 3.23 and Section 5.01(r), “subsidiary” shall mean any legal entity of which Company has direct or indirect, rebuttable or conclusive “control” as such term is defined in Part 574 of Title 12 of the U.S. Code of Federal Regulations.

 

          Section 9.04.    Counterparts.    This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other party, it being understood that all parties need not sign the same counterpart.

 

          Section 9.05.    Entire Agreement; Third Party Beneficiaries.     This Agreement, its Exhibits and the documents and instruments and other agreements among the parties hereto as contemplated by or referred to herein, including the Company Disclosure Letter and the Parent Disclosure Letter (a) constitute the entire agreement among the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof, it being understood that the Confidentiality Agreement shall continue in full force and effect until the Closing and shall survive any termination of this Agreement; and (b) are not intended to confer upon any other person any rights or remedies hereunder, other than the Continuing Directors, except as specifically provided in Section 6.13.

 

          Section 9.06.    Severability.    In the event that any provision of this Agreement or the application thereof, becomes or is declared by a court of competent jurisdiction to be illegal, void or unenforceable, the remainder of this Agreement will continue in full force and effect and the application of such provision to other persons or circumstances will be interpreted so as reasonably to effect the intent of the parties hereto. The parties further agree to replace such void or unenforceable provision of this Agreement with a valid and enforceable provision that will achieve, to the extent possible, the economic, business and other purposes of such void or unenforceable provision.

 

          Section 9.07.    Other Remedies; Specific Performance.     Except as otherwise provided herein, any and all remedies herein expressly conferred upon a party will be deemed cumulative with and not exclusive of any other remedy conferred hereby, or by law or equity upon such party, and the exercise by a party of any one remedy will not preclude the exercise of any other remedy. The parties hereto agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to seek an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions hereof in any court of the United States or any state having jurisdiction, this being in addition to any other remedy to which they are entitled at law or in equity.

 

          Section 9.08.    Governing Law.    This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, regardless of the laws that might otherwise govern under applicable principles of conflicts of law thereof.

 

          Section 9.09.    Rules Of Construction.    The parties hereto agree that they have been represented by counsel during the negotiation and execution of this Agreement and, therefore, waive the application of any law, regulation, holding or rule of construction providing that ambiguities in an agreement or other document will be construed against the party drafting such agreement or document.

 

          Section 9.10.    Assignment.    No party may assign either this Agreement or any of its rights, interests, or obligations hereunder without the prior written consent of the other parties hereto. Subject to the preceding sentence, this Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and permitted assigns. Any purported assignment in violation of this Section shall be void.

 

          Section 9.11.    Waiver Of Jury Trial.    EACH OF PARENT, COMPANY AND MERGER SUB HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE ACTIONS OF PARENT, COMPANY OR MERGER SUB IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE AND ENFORCEMENT HEREOF.

 

* * * * *

 

           IN WITNESS WHEREOF, the parties hereto have caused this Agreement and Plan of Merger to be executed by their duly authorized respective officers as of the date first written above.

 

E*TRADE GROUP, INC.

 

/s/    Christos M. Costakos

By:

Name: Christos M. Costakos

Title: Chairman & CEO

 

OPUS ACQUISITION CORP.

 

/s/    Leonard C. Purkis

By:

Name: Leonard C. Purkis

Title: President, CFO and Secretary

 

WEB STREET, INC.

 

/s/    Avi Fox

By:

Name: Avi Fox

Title: Co-CEO

 

Each Escrow Executive hereby agrees to comply with all obligations under Section 6.18.

 

JOSEPH J. FOX

 

/s/    Joseph Fox

---

 

AVI FOX

 

/s/    Avi Fox

---

 

JOSEPH BARR

 

/s/    Joseph Barr

---

 

STUART COHN

 

/s/    Stuart Cohn

---

 

WILLIAM MANIA

 

/s/    William Mania

---

 

D. J. ROSENBERG

 

/s/    D.J. Rosenberg

---

 

HARLEIGH MANDEL

 

/s/    Harleigh Mandel

---

 

ANNEX I

 

CONDITIONS TO THE OFFER

 

          Notwithstanding any other provision of the Offer, subject to the terms of this Agreement, Merger Sub shall not be required to accept for exchange or exchange or deliver any shares of Parent Common Stock for (subject to any applicable rules and regulations of the SEC, including Rule 14e-1(c) under the Exchange Act (relating to Merger Sub’s obligation to pay for or return tendered Shares after the termination or withdrawal of the Offer)) any Shares tendered, if by the expiration of the Offer (as it may be extended by a Mandatory Extension), (1) the Minimum Condition shall not have been satisfied, (2) any broker-dealer or bank regulatory approvals required to consummate the Offer shall not have been obtained, (3) the Registration Statement shall not have become effective under the Securities Act or shall be the subject of any stop order or proceedings seeking a stop order, (4) the shares of Parent Common Stock to be issued in the Offer and the Merger shall not have been approved for listing on the NYSE, subject to official notice of issuance, (5) if any Company Option or option under the Company ESPP shall be outstanding immediately following acceptance of shares in the Offer, (6) any Escrow Executive shall not have executed and delivered to Parent an Escrow Agreement, (7) any of Joseph J. Fox or Avi Fox shall not have executed and delivered to Parent a Non-Competition Agreement with Parent substantially in the form of Exhibit G, (8) any shares of Parent Common Stock to be issued in the Offer or the Merger (excluding shares of Parent Common Stock to be issued upon exercise of any Company warrants assumed in the Merger) would be subject to any registration rights granted by Company that have not been fully waived by the holder thereof, or (9) at any time on or after the date of this Agreement and prior to the acceptance for exchange of Shares pursuant to the Offer, any of the following conditions exist and are continuing:

 

          (a)  there shall be instituted or pending any action or proceeding by any government or governmental authority or agency, domestic, foreign or supranational, before any court or governmental authority or agency, domestic, foreign or supranational challenging or seeking to make illegal, to delay materially or otherwise directly or indirectly to restrain or prohibit the making of the Offer, the acceptance for payment of or payment for some or all of the Shares by Parent or Merger Sub or the consummation of the Merger; or

 

          (b)  a judgment, order, decree, statute, law, ordinance, rule or regulation, entered, enacted, promulgated, enforced or issued by any court, government or governmental authority or agency, domestic, foreign or supranational or any other legal restraint or prohibition preventing the consummation of the Offer or making the Offer illegal shall be in effect; or

 

          (c)  Company shall have failed to perform in any material respect any of its covenants, obligations or agreements under this Agreement such that the aggregate of all such breaches would have a Material Adverse Effect on Company; or

 

          (d)  the representations and warranties of Company contained in this Agreement, disregarding all qualifications and exceptions contained therein relating to materiality or Material Adverse Effect or any similar standard or qualification, shall be true at and as of the expiration of the Offer (as it may be extended by a Mandatory Extension) as if made at and as of such time (other than representations or warranties that address matters only as of a certain date, which shall be true and correct as of such date), with such exceptions as would not have, individually or in the aggregate, a Material Adverse Effect on Company; or

 

          (e)  the NASD shall not have approved the Offer in accordance with NASD registration rule 1017; or

 

          (f)  the Merger Agreement shall have been terminated in accordance with its terms.

 

          The foregoing conditions are for the sole benefit of Parent and Merger Sub and may, subject to the terms of the Merger Agreement, be waived by Parent and Merger Sub in their reasonable discretion in whole at any time or in part from time to time.

 

          The foregoing conditions shall not be conditions to any Optional Extension following the Appointment Time.

 

ANNEX B

 

STOCKHOLDER AGREEMENT

 

          AGREEMENT, dated as of May 20, 2001 among E*TRADE Group, Inc., a Delaware corporation (“Parent”), and Joseph J. Fox and Avi Fox, holders of shares of common stock (each a “Stockholder”), par value $.01 per share (“Company Common Stock”), of Web Street, Inc., a Delaware corporation (“Company”).

 

          WHEREAS, in order to induce Parent and Opus Acquisition Corp., a Delaware corporation, to enter into an Agreement and Plan of Merger, dated as of the date hereof (the “Merger Agreement”), with Company, Parent has requested each Stockholder, and each Stockholder has agreed, to enter into this Agreement with respect to all shares of Company Common Stock now or hereafter beneficially owned by such Stockholder (with respect to each Stockholder, the “Shares”).

 

          NOW, THEREFORE, the parties hereto agree as follows:

 

ARTICLE 1

 

GRANT OF PROXY; VOTING AGREEMENT; AGREEMENT TO TENDER

 

          Section 1.01    Voting Agreement.    Each Stockholder hereby agrees to vote all Shares that such Stockholder is entitled to vote at the time of any vote to approve and adopt the Merger Agreement, the Offer, the Merger and all agreements related to the Offer and the Merger and any actions related thereto at any meeting of the stockholders of Company, and at any adjournment thereof, at which such Merger Agreement and other related agreements (or any amended version thereof), or such other actions, are submitted for the consideration and vote of the stockholders of Company. Each Stockholder hereby agrees that it will not vote any Shares in favor of the approval of any (i) Acquisition Proposal, (ii) reorganization, recapitalization, liquidation or winding up of Company or any other extraordinary transaction involving Company, (iii) corporate action the consummation of which would frustrate the purposes, or prevent or delay the consummation, of the Offer, the Merger or any other transactions contemplated by the Merger Agreement or (iv) other matter relating to, or in connection with, any of the foregoing matters.

 

          Section 1.02    Irrevocable Proxy.    Each Stockholder hereby revokes any and all previous proxies granted with respect to the Shares. By entering into this Agreement, each Stockholder hereby grants a proxy appointing Parent as such Stockholder’s attorney-in-fact and proxy, with full power of substitution, for and in such Stockholder’s name, to vote, express, consent or dissent, or otherwise to utilize such voting power as Parent or its proxy or substitute shall, in Parent’s sole discretion, deem proper with respect to the Shares to effect any action contemplated by Section 1.01 above (including the right to sign its name (as stockholder) to any consent, certificate or other document relating to Company that the law of the State of Delaware may permit or require.) The proxy granted by each Stockholder pursuant to this Article 1 is irrevocable and is granted in consideration of Parent entering into this Agreement and the Merger Agreement and incurring certain related fees and expenses. The proxy granted by each Stockholder shall be revoked only upon termination of this Agreement in accordance with its terms.

 

          Section 1.03    Agreement to Tender.    Each Stockholder hereby agrees to tender, upon the request of Parent (and agrees that it will not withdraw), pursuant to and in accordance with the terms of the Offer, the Shares. Within five business days after the commencement of the Offer, each Stockholder shall (x) deliver to the depositary designated in the Offer: (i) a letter of transmittal with respect to the Shares complying with the terms of the Offer, (ii) certificates representing of the Shares and (iii) all other documents or instruments required to be delivered pursuant to the terms of the Offer, and/or (y) instruct its broker or such other person who is the holder of record of any Shares beneficially owned by such Stockholder to tender such shares for exchange in the Offer pursuant to the terms and conditions of the Offer.

 

ARTICLE 2

 

REPRESENTATIONS AND WARRANTIES OF STOCKHOLDER

 

          Each Stockholder, severally and not jointly, represents and warrants to Parent that:

 

          Section 2.01    Authorization.    This Agreement has been duly executed and delivered by such Stockholder and the consummation of the transactions contemplated hereby are within the powers of such Stockholder. If this Agreement is being executed in a representative or fiduciary capacity, the person signing this Agreement has full power and authority to enter into and perform this Agreement. The obligations under this Agreement constitute the legal valid and binding obligations of such Stockholder.

 

          Section 2.02    Non-Contravention.    The execution, delivery and, subject to compliance with the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (“HSR Act”), and securities laws, as applicable, performance by such Stockholder of this Agreement, do not and will not (i) violate any applicable law, rule, regulation, judgment, injunction, order or decree, (ii) require any consent or other action by any person under, constitute a default under, or give rise to any right of termination, cancellation or acceleration under any provision of any agreement or other instrument binding on such Stockholder or (iii) result in the imposition of any Encumbrance on such Shares.

 

          Section 2.03    Ownership of Shares.    Such Stockholder is the record and beneficial owner of the Shares, free and clear of any Encumbrance and any other limitation or restriction (including any restriction on the right to vote or otherwise dispose of the Shares) other than restrictions under the Securities Act of 1933, as amended. None of the Shares is subject to any voting trust or other agreement or arrangement with respect to the voting of such Shares.

 

          Section 2.04.    Total Shares.    Except for the Shares set forth on the signature page hereto next to such Stockholder’s name, Stockholder does not beneficially own any (i) shares of capital stock or voting securities of Company, (ii) securities of Company convertible into or exchangeable for shares of capital stock or voting securities of the Company or (iii) options or other rights to acquire from Company any capital stock, voting securities or securities convertible into or exchangeable for capital stock or voting securities of Company.

 

ARTICLE 3

 

REPRESENTATIONS AND WARRANTIES OF PARENT

 

          Parent represents and warrants to each Stockholder:

 

          Section 3.01    Corporate Authorization.    The execution, delivery and performance by Parent of this Agreement and the consummation by Parent of the transactions contemplated hereby are within the corporate powers of Parent and have been duly authorized by all necessary corporate action. This Agreement constitutes a valid and binding agreement of Parent.

 

ARTICLE 4

 

COVENANTS OF STOCKHOLDER

 

          Each Stockholder hereby covenants and agrees that:

 

          Section 4.01    No Proxies for or Encumbrances on Shares.     Except pursuant to the terms of this Agreement, such Stockholder shall not, without the prior written consent of Parent, directly or indirectly, (i) grant any proxies or enter into any voting trust or other agreement or arrangement with respect to the voting of any Shares with respect to any matter contemplated by this Agreement or in a manner inconsistent with this Agreement or (ii) acquire, sell, assign, transfer, encumber or otherwise dispose of, or enter into any contract, option or other arrangement or understanding with respect to the direct or indirect acquisition or sale, assignment, transfer, encumbrance or other disposition of, any Shares during the term of this Agreement other than pursuant to the Offer. Stockholder shall not seek or solicit any such acquisition or sale, assignment, transfer, encumbrance or other disposition or any such contract, option or other arrangement or understanding and agrees to notify Parent promptly, and to provide all details requested by Parent, if Stockholder shall be approached or solicited, directly or indirectly, by any Person with respect to any of the foregoing.

 

          Section 4.02    Appraisal Rights.    Such Stockholder agrees not to exercise any rights (including, without limitation, under Section 262 of the General Corporation Law of the State of Delaware) to demand appraisal of any Shares which may arise with respect to the Merger.

 

ARTICLE 5

 

MISCELLANEOUS

 

          Section 5.01    Further Assurances.    Parent and each Stockholder will each execute and deliver, or cause to be executed and delivered, all further documents and instruments and use all reasonable efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations, to consummate and make effective the transactions contemplated by this Agreement.

 

          Section 5.02    Amendments; Termination.    Any provision of this Agreement may be amended or waived if, but only if, such amendment or waiver is in writing and is signed, in the case of an amendment, by each party to this Agreement or in the case of a waiver, by the party against whom the waiver is to be effective. This Agreement shall terminate upon the termination of the Merger Agreement in accordance with its terms.

 

          Section 5.03    Expenses.    All costs and expenses incurred in connection with this Agreement shall be paid by the party incurring such cost or expense.

 

          Section 5.04    Successors and Assigns.    The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns; provided that no party may assign, delegate or otherwise transfer any of its rights or obligations under this Agreement without the consent of the other parties hereto, except that Parent may transfer or assign its rights and obligations to any affiliate of Parent.

 

          Section 5.05    Governing Law.    This Agreement shall construed in accordance with and governed by the laws of the State of Delaware.

 

          Section 5.06    Counterparts; Effectiveness.    This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement shall become effective when each party hereto shall have received counterparts hereof signed by all of the other parties hereto.

 

          Section 5.07    Severability.    If any term, provision or covenant of this Agreement is held by a court of competent jurisdiction or other authority to be invalid, void or unenforceable, the remainder of the terms, provisions and covenants of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated.

 

          Section 5.08    Specific Performance.    The parties hereto agree that irreparable damage would occur in the event any provision of this Agreement is not performed in accordance with the terms hereof and that the parties shall be entitled to specific performance of the terms hereof in addition to any other remedy to which they are entitled at law or in equity.

 

          Section 5.09    Capitalized Terms.    Capitalized terms used but not defined herein shall have the respective meanings set forth in the Merger Agreement.

 

           IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written.

 

E*TRADE GROUP, INC.

 

/s/    Christos M. Costakos

By:

Name: Christos M. Costakos

Title: Chairman & CEO

 

 

Class of Stock		Shares Owned
Common Stock		5,320,827
Class of Stock		Shares Owned
Common Stock		5,418,427

Stockholders

JOSEPH J. FOX
/s/    JOSEPH J. FOX
By:
AVI FOX
/s/    AVI FOX
By:

 

ANNEX C

 

May 20, 2001

 

Members of the Board of Directors

Web Street, Inc.

510 Lake Cook Road

Deerfield, IL 60015

 

Gentlemen:

 

          You have informed us that Web Street, Inc. (“WEBS”), E*TRADE Group, Inc. (“E*TRADE”) and Opus Acquisition Corp., a wholly-owned subsidiary of E*TRADE (“Merger Sub”), propose to enter into an Agreement and Plan of Merger (the “Agreement”) pursuant to which (i) E*TRADE will offer to exchange (the “Exchange”) a fraction of a share of common stock, $0.01 par value, of E*TRADE (“E*TRADE Common Stock”) equal to the “Exchange Ratio” (as hereinafter defined) for each share of common stock, par value $0.01 of WEBS (“WEBS Common Stock”), and (ii) following the completion of the Exchange Offer, at the Effective Time (as defined in the Agreement), Merger Sub will be merged with and into WEBS (the “Merger”) and each share of WEBS Common Stock (other than shares owned by E*TRADE or WEBS) will be converted into a fraction of a share of E*TRADE Common Stock equal to the Exchange Ratio.

 

          The Exchange Ratio shall mean and be calculated as follows: approximately $45 million divided by the total number of WEBS shares deemed outstanding divided by the average closing price for E*TRADE Common Stock for the 20 trading day period immediately prior to signing of the Agreement. We estimate this calculation to be: approximately $45 million divided by 26,443,214 (26,346,281 current shares outstanding plus approximately 49,875 shares expected to be issued prior to the merger upon exercise of certain outstanding options plus 47,058 additional shares deemed to be outstanding) divided by $9.13, estimated to be the trailing 20 day average price of E*TRADE Common Stock. The result of this calculation is estimated at .1864 shares of E*TRADE Common Stock for each share of WEBS Common Stock.

 

          The terms and conditions of the Exchange Offer and the Merger are set forth in more detail in the Agreement. You have requested our opinion as investment bankers as to whether the Exchange Ratio is fair, from a financial point of view, to the stockholders of WEBS as of the date hereof (the “Opinion”). In conducting our investigation and analysis and in arriving at our Opinion, we have reviewed such information and taken into account such financial and economic factors as we have deemed relevant under the circumstances. In that connection, we have, among other things:

 

a.

Reviewed certain publicly available financial and other data with respect to WEBS and E*TRADE, including but not limited to WEBS’ and E*TRADE’s recent filings with the Securities and Exchange Commission, including the consolidated financial statements for recent years and for the most recent fiscal quarters for which published results are available and certain other relevant financial and operating data relating to WEBS and E*TRADE made available to us from published sources and from the internal records of WEBS;

 

b.

Reviewed the financial terms and conditions of the Agreement in the form presented to us from WEBS senior management;

 

c.

Reviewed the financial projections of WEBS including certain assumptions and conditions prepared and furnished to us by WEBS senior management;

 

d.

Reviewed historical market prices and trading volume for WEBS Common Stock and E*TRADE Common Stock;

 

Board of Directors

Web Street, Inc.

Fairness Opinion

May 20, 2001

Page 2

 

e.

Held discussions with members of senior management of WEBS with respect to the historical and current financial condition and operating results as well as the business and future prospects of WEBS as a stand alone entity;

 

f.

Compared WEBS from a financial point of view with certain other publicly traded companies in the online brokerage industry that we deemed to be relevant;

 

g.

Compared the proposed financial terms of the Exchange Offer and Merger with the financial terms of certain other business combinations we deemed relevant; and

 

h.

Conducted such other studies, analyses, inquiries and investigations as we deemed appropriate.

 

          During our review, we relied upon and assumed, without independent verification, the accuracy, completeness and reasonableness of the financial and other information provided, and have further relied upon the assurances of WEBS senior management that they are unaware of any facts that would make the information provided to us to be incomplete or misleading for the purposes of this Opinion. We have further relied upon the accuracy of publicly available financial data. We have not assumed responsibility for any independent verification of this information nor have we assumed any obligation to verify this information. We have assumed that the financial projections provided to us by WEBS senior management in connection with the rendering of this Opinion were reasonably prepared on bases reflecting the best currently available estimates and good faith judgments of WEBS senior management, at the date of this Opinion, as to the future financial performance of the Company, on a stand-alone basis. We assume no responsibility for and express no view as to such financial projections or the assumptions on which they were based. We did not perform an independent evaluation or appraisal of the assets of the Company.

 

          Our Opinion is necessarily based upon information made available to us, and on economic, market, financial and other conditions as they exist on the date of this letter. We disclaim any obligation to advise the Board of Directors of WEBS or any person of any change in any fact or matter affecting our Opinion, which may come or be brought to our attention after the date of this Opinion.

 

          It is understood that this letter is for the information of the Board of Directors of WEBS in connection with its evaluation of the Exchange Offer and the Merger and it does not constitute a recommendation to any stockholder as to whether such stockholder should accept the Exchange Offer or as to how such stockholder should vote with respect to the Merger. Further, we express no opinion regarding the structure, terms or effect of any aspect of the Exchange Offer or the Merger other than their fairness to the stockholders of WEBS, from a financial point of view, including, without limitation, any effects resulting from the application of any bankruptcy proceeding, fraudulent conveyance, or other international, federal or state insolvency law, or of any pending or threatened litigation affecting WEBS or E*TRADE. We are also expressing no opinion as to the tax consequences of the Exchange Offer or Merger.

 

          It is understood that this Opinion may be included in its entirety in the disclosure materials to be provided to WEBS’ stockholders in connection with the Exchange Offer, as well as in any Proxy or Information Statement to be provided to WEBS’ stockholders in connection with the Merger, provided that no summary of or excerpt from, and no published reference to this Opinion may be made without our prior express written approval, which approval shall not be unreasonably withheld or delayed.

 

          Houlihan, a National Association of Securities Dealers member, as part of its investment banking services, is regularly engaged in the valuation of businesses and securities in connection with mergers, acquisitions, Board of Directors

Web Street, Inc.

Fairness Opinion

May 20, 2001

Page 3

 

underwritings, sales and distributions of listed and unlisted securities, private placements, and valuations for corporate and other purposes. Houlihan will receive a fee from WEBS relating to its services in providing this Opinion which is not contingent on the consummation of the Exchange Offer or the Merger. In an engagement letter dated May 3, 2001 WEBS has agreed to indemnify Houlihan with respect to Houlihan’s services as follows:

 

If Houlihan or any person or entity associated with Houlihan becomes involved in any way in any legal or administrative proceeding related to the services performed hereunder or the report, Web Street, Inc. will indemnify, defend and hold Houlihan and any such person and/or entity harmless from all damage and expenses (including reasonable attorney’s fees and expenses and court costs) incurred in connection therewith, except to the extent that a court having jurisdiction shall have determined in a final judgment that such loss, claim, damage or liability resulted primarily from the gross negligence, bad faith, willful misfeasance, or reckless disregard of the obligations or duties of Houlihan hereunder.

 

          Based on the foregoing, it is our opinion that the Exchange Ratio is fair to the stockholders of WEBS, from a financial point of view, as of the date hereof.

 

Very truly yours,

 

 

/s/    Houlihan Smith & Co., Inc.

 

Houlihan Smith & Company, Inc.

 

 

 

The Exchange Agent for the Offer is:

 

American Stock Transfer & Trust Company

59 Maiden Lane New York, NY 10038

Telephone: (800) 937-5449

Facsimile: (718) 259-1144

 

[LOGO OF INNISFREE]

 

 

PART II

 

INFORMATION NOT REQUIRED IN PROSPECTUS

 

Item 20.    Indemnification of Directors and Officers.

 

          Article Tenth of the Registrant’s Certificate of Incorporation, as amended, provides that, to the fullest extent permitted by the Delaware General Corporation Law (the “DGCL”), as the same exists or as it may hereafter be amended, as described below, no director of the Registrant shall be personally liable to the Registrant or its stockholders for monetary damages for breach of fiduciary duty as a director.

 

          Article 5 of the Registrant’s Bylaws further provides that the Registrant shall, to the maximum extent and in the manner permitted by the DGCL, as described below, indemnify each of its directors and officers against expenses (including attorneys’ fees), judgments, fines, settlements and other amounts actually and reasonably incurred in connection with any proceeding, arising by reason of the fact that such person is or was an agent of the Registrant.

 

          In addition, the Registrant has entered into indemnification agreements with each of its directors and executive officers, and maintains officers’ and directors’ liability insurance.

 

          Subsection (a) of Section 145 of the DGCL empowers a corporation to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful.

 

          Subsection (b) of Section 145 of the DGCL empowers a corporation to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by right of the corporation to procure a judgment in its favor by reason of the fact that such person acted in any of the capacities set forth above, against expenses (including attorneys’ fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, except that no indemnification may be made in respect to any claim issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper.

 

          Section 145 of the DGCL further provides that to the extent a director or officer of a corporation has been successful on the merits or otherwise in the defense of any such action, suit or proceeding referred to in subsections (a) and (b) of Section 145 or in the defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys’ fees) actually and reasonably incurred by him in connection therewith; that the indemnification provided for by Section 145 shall not be deemed exclusive of any other rights which the indemnified party may be entitled; that indemnification provided by Section 145 shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of such person’s heirs, executors and administrators; and empowers the corporation to purchase and maintain insurance on behalf of a director or officer of the corporation against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liabilities under Section 145.

 

           Section 102(b)(7) of the DGCL provides that a certificate of incorporation may contain a provision eliminating or limiting the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided that such provision shall not eliminate or limit the liability of the director (i) for any breach of the director’s duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL or (iv) for any transaction from which the director derived an improper personal benefit.

 

          Merger Agreement Provisions Relating to Web Street Directors and Officers. The merger agreement provides that, for six years after the effective time of the merger, E*TRADE will honor the obligations of Web Street pursuant to indemnification agreements between Web Street and its directors and officers and to indemnify and hold harmless each person who was a director or officer of Web Street at or prior to the date of the merger agreement from their acts or omissions in those capacities to the extent provided under the Web Street’s certificate of incorporation and bylaws in effect at such time.

 

          The merger agreement also provides that, for six years from the effective time of the merger, E*TRADE shall provide directors’ and officers’ liability insurance for each person currently covered by Web Street’s directors’ and officers’ liability insurance policy either by maintaining Web Street’s current insurance policy or by purchasing comparable insurance. The terms of this insurance policy must be no less favorable that those of the Web Street policy in effect at the effective time, except that E*TRADE will be obligated to pay premiums for such insurance only up to 150% of the annual premiums that Web Street paid for such insurance as of May 20, 2001.

 

Item 21.    Exhibits and Financial Statement Schedules.

 

          (a)  List of Exhibits

 

Exhibit Number Page		Description
2(a)		Agreement and Plan of Merger dated as of May 20, 2001 among E*TRADE, Web Street and Opus Acquisition Corp. (included as Annex A to the Prospectus contained in this Registration Statement).
2(b)		Stockholder Agreement dated as of May 20, 2001 between E*TRADE and Joseph J. Fox and Avi Fox (included as Annex B to the Prospectus contained in this Registration Statement).
3(a)*		Fourth Amended and Restated Certificate of Incorporation of E*TRADE, as amended to date (incorporated by reference to E*TRADE’s Annual Report on Form 10-K for the fiscal year ended September 30, 2000).
3(b)*		Restated Bylaws of E*TRADE (incorporated by reference to E*TRADE’s Annual Report on Form 10-K for the fiscal year ended September 30, 2000).
4*		Specimen Common Stock Certificate (incorporated by reference to E*TRADE’s Registration Statement on Form S-1 as amended, file no. 333-05525).
5†		Opinion of Davis Polk & Wardwell regarding the validity of the securities being registered.
8(a)†		Opinion of Davis Polk & Wardwell regarding material federal income tax consequences of the offer and the merger.
8(b)†		Opinion of Katten Muchin Zavis regarding material federal income tax consequences of the offer and the merger.
21*		Subsidiaries of the Registrant (incorporated by reference to E*TRADE’s Annual Report on 10-K for the fiscal year ended September, 2000).
23(a)		Consent of Deloitte & Touche LLP, independent auditors.
23(b)		Consent of Arthur Andersen LLP, independent public accountants.
23(c)		Consent of Arthur Andersen LLP, independent public accountants.
23(d)†		Consent of Davis Polk & Wardwell (included in the opinion filed as Exhibit 5 to this Registration Statement).
23(e)†		Consent of Davis Polk & Wardwell (included in the opinion filed as Exhibit 8(a) to this Registration Statement).
23(f)†		Consent of Katten Muchin Zavis (included in the opinion filed as Exhibit 8(b) to the Registration Statement).
23(g)†		Consent of Houlihan Smith & Company, Inc.
24†		Power of Attorney (included on the signature page of this Registration Statement).
99(a)†		Form of Letter of Transmittal
99(b)†		Form of Notice of Guaranteed Delivery
99(c)†		Form of Letter to Brokers, Dealers, etc.
99(d)†		Form of Letter to Clients
99(e)†		Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9.

---

(b)	Not applicable.

(c)	The opinion of Houlihan Smith & Company, Inc. is included as Annex C to the Prospectus contained in this Registration Statement.

†	Previously filed

*	Incorporated by reference

 

Item 22.    Undertakings.

 

          (a)  The undersigned Registrant hereby undertakes:

 

(1)  That prior to any public reoffering of the securities registered hereunder through use of a prospectus which is a part of this registration statement, by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c), such reoffering prospectus will contain the information called for by the applicable registration form with respect to reofferings by persons who may be deemed underwriters, in addition to the information called for by the other items of the applicable form.

 

(2)  That every prospectus (i) that is filed pursuant to paragraph (1) immediately preceding, or (ii) that purports to meet the requirements of Section 10(a)(3) of the Securities Act of 1933 and is used in connection with an offering of securities subject to Rule 415, will be filed as a part of an amendment to the registration statement and will not be used until such amendment is effective, and that, for purposes of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

 

(3)  That, for purposes of determining any liability under the Securities Act of 1933, each filing of the Registrant’s annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan’s annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

 

(4)  To respond to requests for information that is incorporated by reference into the Prospectus pursuant to Item 4, 10(b), 11 or 13 of this form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means.

 

This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request.

 

(5)  To supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective.

 

(6)  To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:

 

(i)  To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933;

 

(ii)  To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement;

 

(iii)  To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement.

 

(7)  That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

 

(8)  To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.

 

          (b)  Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.

 

SIGNATURES

 

          Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Menlo Park, State of California, on June 29, 2001.

 

E*TRADE GROUP , INC .

 

/s/    LEONARD C. PURKIS

By:

Leonard C. Purkis

Chief Financial Officer

(Principal Financial and Accounting Officer)

 

          Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.

 

Signature		Title		Date
*                                                                                                      Christos M. Cotsakos		Chairman of the Board and Chief Executive Officer (Principal Executive Officer)		June 29, 2001
/s/    LEONARD C. PURKIS                                                                                                       Leonard C. Purkis		Chief Financial Officer (Principal Financial and Accounting Officer)		June 29, 2001
William A. Porter		Chairman Emeritus
Peter Chernin		Director
*                                                                                                      Ronald D. Fisher		Director		June 29, 2001
William E. Ford		Director
*                                                                                                      David C. Hayden		Director		June 29, 2001
*                                                                                                      George Hayter		Director		June 29, 2001
*                                                                                                      Lewis E. Randall		Director		June 29, 2001
*                                                                                                      Lester C. Thurow		Director		June 29, 2001
/s/    LEONARD C. PURKIS          *By:                                                                                              Leonard C. Purkis Attorney-in-Fact

 

EXHIBIT INDEX

 

Exhibit Number Page		Description
2(a)		Agreement and Plan of Merger dated as of May 20, 2001 among E*TRADE, Web Street and Opus Acquisition Corp. (included as Annex A to the Prospectus contained in this Registration Statement).
2(b)		Stockholder Agreement dated as of May 20, 2001 between E*TRADE and Joseph J. Fox and Avi Fox (included as Annex B to the Prospectus contained in this Registration Statement).
3(a)*		Fourth Amended and Restated Certificate of Incorporation of E*TRADE, as amended to date (incorporated by reference to E*TRADE’s Annual Report on Form 10-K for the fiscal year ended September 30, 2000).
3(b)*		Restated Bylaws of E*TRADE (incorporated by reference to E*TRADE’s Annual Report on Form 10-K for the fiscal year ended September 30, 2000).
4*		Specimen Common Stock Certificate (incorporated by reference to E*TRADE’s Registration Statement on Form S-1 as amended, file no. 333-05525).
5†		Opinion of Davis Polk & Wardwell regarding the validity of the securities being registered.
8(a)†		Opinion of Davis Polk & Wardwell regarding material federal income tax consequences of the offer and the merger.
8(b)†		Opinion of Katten Muchin Zavis regarding material federal income tax consequences of the offer and the merger.
21*		Subsidiaries of the Registrant (incorporated by reference to E*TRADE’s Annual Report on Form 10- K for the fiscal year ended September, 2000).
23(a)		Consent of Deloitte & Touche LLP, independent auditors.
23(b)		Consent of Arthur Andersen LLP, independent public accountants.
23(c)		Consent of Arthur Andersen LLP, independent public accountants.
23(d)†		Consent of Davis Polk & Wardwell (included in the opinion filed as Exhibit 5 to this Registration Statement).
23(e)†		Consent of Davis Polk & Wardwell (included in the opinion filed as Exhibit 8(a) to this Registration Statement).
23(f)†		Consent of Katten Muchin Zavis (included in the opinion filed as Exhibit 8(b) to this Registration Statement).
23(g)†		Consent of Houlihan Smith & Company, Inc.
24†		Power of Attorney (included on the signature page of this Registration Statement).
99(a)†		Form of Letter of Transmittal
99(b)†		Form of Notice of Guaranteed Delivery
99(c)†		Form of Letter to Brokers, Dealers, etc.
99(d)†		Form of Letter to Clients
99(e)†		Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9.

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(b)	Not applicable.

(c)	The opinion of Houlihan Smith & Company, Inc. is included as Annex C to the Prospectus contained in this Registration Statement.

†	Previously filed

*	Incorporated by reference