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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
Commission File Number 0-27705
WEB STREET, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-4212401
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
510 Lake Cook Road, Deerfield, Illinois 60015
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (847) 444-4700
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the registrant's voting stock held by non-
affiliates of the registrant (assuming, for the purposes hereof, that
directors, executive officers and 10% or greater stockholders of the registrant
are affiliates of the registrant), based upon the closing sale price of the
registrant's Common Stock on March 27, 2000, was $163,450,177.
The number of shares of the registrant's Common Stock outstanding as of
March 27, 2000, was 25,684,777.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrant's Definitive Proxy Statement relating to the
registrant's 2000 Annual Meeting of Stockholders to be filed hereafter are
incorporated by reference into Part III of this Report on Form 10-K.
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TABLE OF CONTENTS
PART I
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Item 1. Business ...................................................... 1
Overview....................................................... 1
Industry Background............................................ 2
The Web Street Solution........................................ 3
Our Services................................................... 5
International and Content Relationships........................ 8
Technology and Systems......................................... 9
Marketing...................................................... 10
Operations..................................................... 12
Competition.................................................... 13
Intellectual Property and Other Proprietary Rights............. 14
Regulation and Supervision..................................... 14
Employees...................................................... 17
Risk Factors................................................... 18
Cautionary Note Regarding Forward-Looking Statements........... 31
Item 2. Our Properties................................................. 32
Item 3. Legal Proceedings.............................................. 32
Item 4. Submission of Matters to a Vote of Our Security Holders........ 32
PART II
Item 5. Market for Our Common Equity and Related Stockholder Matters... 32
Price Range of Common Stock.................................... 32
Dividends...................................................... 33
Sales of Unregistered Securities............................... 33
Use of Initial Public Offering Proceeds........................ 34
Item 6. Selected Financial Data........................................ 35
Management's Discussion and Analysis of Financial Condition and
Item 7. Results of Operations.......................................... 36
Overview....................................................... 36
Results of Operations.......................................... 38
Years Ended December 31, 1999, 1998 and 1997................... 38
Quarterly Results of Operations................................ 42
Income Taxes................................................... 43
Liquidity and Capital Resources................................ 43
Year 2000 Readiness............................................ 45
Recent Accounting Pronouncements............................... 45
Item 7A. Quantitative and Qualitative Disclosures About Market Risk..... 46
Item 8. Financial Statements and Supplementary Data.................... 46
Changes in and Disagreements with Accountants on Accounting and
Item 9. Financial Disclosure........................................... 46
PART III
Item 10. Directors and Executive Officers of the Registrant............. 47
Item 11. Executive Compensation......................................... 47
Item 12. Security Ownership of Certain Beneficial Owners and Management. 47
Item 13. Certain Relationships and Related Transactions................. 47
PART IV
Exhibits, Financial Statement Schedules and Reports on Form 8-
Item 14. K.............................................................. 47
Index to Consolidated Financial Statements............................... F-1
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PART I
Item 1. Business
Overview
We provide online brokerage services to individual investors, primarily in
the United States, Europe, Asia and Latin America. Through our web site,
located at www.webstreet.com, our customers can quickly execute equity, option
and mutual fund trades at a low cost and conveniently access real-time trading
information, financial market data and account information.
We have built and continue to invest in a proprietary online trading system
that is cost efficient, secure and highly scalable. In our virtual trading
pit, our customers can do all the following with just a few clicks of a mouse
and without changing screens:
. track stock quotes that automatically update in real time as the market
moves;
. view up-to-date news and financial market headlines from multiple
sources;
. buy and sell securities, including stocks, and options;
. buy, sell or exchange over 4,000 load and no-load mutual funds, obtain
fund information, view fund performance reports from Morningstar and read
complete fund prospectuses through our online Mutual Fund SuperSite;
. receive quick confirmation of executed trades; and
. check securities positions and account balances that are updated in real
time to reflect just-completed trades.
Our customers have access to personalized investment tools, including
portfolio tracking; historical and intra-day stock charting; market-maker
information; financial market and company news; and third-party investment
research from IPO.com, BASELINE Financial Services, Inc., Morningstar Equity
Research and others. We provide these services 24 hours a day, seven days a
week through the Internet. During the year ended December 31, 1999, online
transactions constituted over 90% of our transaction volume. We also offer
toll-free telephone access for customers who want to enter orders through a
licensed broker or our automated touch-tone telephone trading service.
Further, we provide high-quality customer service 24 hours a day, seven days a
week through a toll-free telephone number, 1-800-WEBTRADE, and online help
desk.
We are partnering 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 which customers deposit in local currencies and may convert
to U.S. dollars for immediate trading. Our foreign partners market our online
services and provide local customer support in their customers' own languages.
We have a mutually exclusive agreement with ConSors Discount-Broker, a leading
European online discount brokerage firm. Under this agreement, through January
2003, ConSors is required to direct to us all its customers in Germany,
France, Spain, Switzerland, Italy, Austria and Luxembourg who want to trade
stocks or options in U.S. markets. We also have a similar agreement with
Landsbref, Ltd., the securities house of The Bank of Iceland, under which
Landsbref is required to direct to us, and we currently provide our services
to, all its customers in Iceland who want to trade stocks or options in U.S.
markets. In October 1999, we established an alliance with a subsidiary of Sun
Hung Kai & Co. Securities Ltd., a leading brokerage firm in Hong Kong, to
provide our online brokerage services to its customers in Hong Kong and to
help us form alliances or joint ventures in China, Japan and Australia and
possibly other Asian markets. We also established an alliance with a
subsidiary of C.B. Capitales, a leading online brokerage firm in Chile, to
provide our online brokerage services to its customers in Chile. Through our
Unified Global Brokerage Accounts, we plan to enable online investors
worldwide to trade in major global financial markets.
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We conduct all our brokerage activities through a wholly-owned subsidiary,
Web Street Securities, Inc., an Illinois corporation and registered broker-
dealer, which was incorporated in Illinois on September 3, 1996. We
incorporated in Delaware on December 31, 1997 under the name Web Street
Financial Group, Inc., which we changed to WebStreet.com, Inc. on February 9,
1999 and to Web Street, Inc. on August 11, 1999.
Industry Background
Increase In Investment Activity
In recent years, the U.S. market for equity securities has grown
dramatically and there has been a large increase in the average daily trading
volume. In addition to the strong U.S. market, the increased use of IRAs,
401(k)s, employee stock ownership plans, stock options and mutual funds has
created greater interest and participation of individuals in the market.
Emergence of the Internet and Online Commerce
The Internet is revolutionizing the way that organizations and consumers
interact and conduct business. The explosive growth in business on the
Internet has been driven by the Internet's ability to offer businesses and
consumers a compelling and cost-effective medium for communications and
commerce through its accessibility and convenience, use of open standards and
ability to enable real-time interactions. One driver of this growth is the
fact that consumers in the United States and internationally are becoming more
comfortable conducting transactions on the Internet. The increasing prevalence
of online commerce options, such as purchases and sales, funds transfers and
online banking, bill presentment and payment, has also contributed to this
growth by simplifying and automating financial transactions for consumers and,
in many cases, significantly reducing costs for consumers by eliminating the
need for intermediaries that traditionally charge fees to provide products,
services or information.
Development of the Online Brokerage Industry
The emergence of the Internet is changing the financial services industry,
particularly the securities brokerage sector. In fact, online brokerage firms
have grown significantly faster than the brokerage industry as a whole. Over
the past five years online trading has grown from only a handful of trades a
day to now accounting for nearly 50% of all retail equity trades. We believe
the rapid development of the online brokerage industry has been driven
principally by the following factors:
. Individual investors are increasingly taking direct control over their
personal financial affairs because they find it more convenient than
relying on traditional financial intermediaries. Individual investors
want the flexibility to transact business at times and places that are
convenient for them. Online brokerage firms enable investors to place
trades 24 hours a day from their homes, offices and other locations,
without the need to contact a broker;
. Individual investors are increasingly taking direct control over their
personal financial affairs because they find it less expensive than
relying on traditional financial intermediaries. Online brokerage firms
provide investors with lower per-trade commissions due to the cost
savings associated with delivering brokerage services over the Internet.
Online brokerage firms are also able to provide investors with access to
information at little or no charge because of the low cost of exchanging
information over the Internet; and
. Individual investors have become increasingly sophisticated and
knowledgeable about investment strategies and alternatives. In response,
online brokerage firms have developed a range of tools and services not
currently offered by traditional brokerage firms that meet the needs of
these investors, including access to real-time stock quotes and market-
maker information, as well as the ability to manage their investment
portfolios online.
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We believe that, as online brokerage firms continue to take advantage of
the speed and other capabilities of the Internet, this rapid development of
the online brokerage industry will continue. Forrester Research, Inc., a
leading information technology data research firm, estimates that:
. the number of U.S. online brokerage accounts will grow to over 20.4
million by the end of 2003; and
. the value of assets held by customers in accounts with online brokerage
firms will grow to over $3 trillion by the end of 2003.
International markets also present significant opportunities for online
brokers. While current web usage in Europe and Asia trails U.S. rates,
Computer Industry Almanac, Inc. predicts that web penetration will grow faster
outside North America in the next several years. In a January 2000 report,
Forrester Research forecasted that European Internet brokerage accounts will
rise from 1.26 million at the end of 1999 to 14.0 million by the end of 2004.
Our Opportunity
We believe that these trends have contributed to a growing opportunity for
all providers of online financial services. However, as U.S. and international
investors continue to desire greater control over their own financial
decisions, they are becoming more demanding of these financial services
providers. Investors are increasingly looking for:
. quick and secure transaction execution;
. immediate access to current financial information and investment tools;
. convenience, simplicity and ease of access;
. certainty that trades will be completed reliably;
. the ability to trade worldwide; and
. low transaction fees.
The Web Street Solution
We have designed our web site and proprietary trading systems from the
ground up specifically to meet investor demands. This contrasts the approach
of many of our competitors who have adapted existing systems designed for
traditional brokerage services. We provide easy-to-use and cost-effective
online brokerage services that satisfy our customers' specific investing
needs. We enable individuals to take greater control of their investment
decisions and financial transactions through the following features:
. Cost-Effective, Global Online Services. We have capitalized on the global
reach of the Internet by enabling customers worldwide to trade in U.S.
securities on our web site. By leveraging the low-cost infrastructure and
efficiencies of the Internet, we are able to provide cost-effective
online brokerage services to a broad range of customers around the world.
We are partnering 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 which customers deposit in local
currencies and may convert to U.S. dollars for immediate trading. Our
foreign partners market our online services and provide local customer
support in their customers' own languages. In December 1998, we
established a mutually exclusive arrangement with ConSors Discount-
Broker, a leading online discount brokerage firm in Europe. We currently
provide our services to ConSors customers with accounts in Germany and
expect to begin serving ConSors customers with accounts in France and
Switzerland in the second quarter of 2000 and ConSors customers with
accounts in Spain, Italy, Austria and Luxembourg in the second half of
2000. Investors in these European countries who trade U.S. securities
through our ConSors relationship pay the same low transaction fees as
investors who
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trade directly through us in the United States. In addition, a limited
number of investors in approximately 90 other countries use our brokerage
services by directly accessing our web site.
. Real-Time Data. Our web site provides automatically updated market data,
including stock quotes, market-maker information and financial news, in
real time. Investors can track the rapid 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. We notify customers as to the
status of their placed orders, usually within seconds of their order
entry, and update their account balances, usually within seconds of
filling the orders. Our technology gives customers real-time buying power
information and enables investors to make informed investment decisions
in a more timely and convenient manner in constantly changing markets.
. Fast, Reliable and Efficient Trading System. We specifically designed our
systems and operations to exploit the operating benefits of the Internet,
rather than simply to link customers electronically to an existing
traditional brokerage operation. 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, currently, over 90% of
all our customer orders are entered, processed and confirmed
electronically. This allows us to avoid the longer trade execution time,
personnel requirements, possibility of human error and costs associated
with less automated order entry and processing. In addition, we designed
our system with excess capacity to allow uninterrupted access and rapid
trade entry during periods of heavy trading volume. Our system is fully
redundant. If any component affecting the ability of our customers to
enter orders fails, a back-up will automatically take over in a manner
that is transparent to our customers. However, approximately five minutes
will be required to completely remedy a database or network connection
failure. Additionally, we have begun to develop a second data center so
that we can (1) continue to serve our customers in the event of a
catastrophic systems failure at one of our facilities, (2) increase our
overall system capacity and (3) operate more efficiently by splitting the
demands on our system between two facilities. Our system also allows for
application programs to be quickly modified in response to changing
customer requirements, for processing power to be quickly and easily
added without service interruption and for advanced and complementary
financial services and products to be easily added. In addition, we offer
highly secure services through our use of encryption and authentication
technology, allowing investors to conduct transactions privately and with
confidence that their funds and securities are protected.
. User-Friendly Web Site. Our web site has user-friendly graphical
interfaces that make online investing easy and fast, even for investors
unaccustomed to conducting transactions over the Internet. Through our
virtual trading pit, our customers have quick and convenient access to a
variety of investment tools, including portfolio tracking, market-maker
information, historical and intra-day stock charting, market and company
news and investment research. Investors can even 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. With these tools,
investors can conveniently and quickly trade securities and access a wide
variety of financial and account information with just a few clicks of
their mouse and without changing screens on our web site. In addition,
our web site contains an online help desk that provides basic information
on how to use our services, answers to frequently asked questions about
our web site and services and a glossary of frequently used financial
terms.
. Continuous Access and Support. 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 upon the next day's market opening.
Customers can trade securities through the Internet, with licensed
brokers over the telephone or through our automated touch-tone telephone
trading service. Customers have the ultimate control over when and where
they enter trade orders. In addition, we believe that offering quality
customer service and support is critical to building and maintaining high
levels of customer satisfaction, retention and loyalty. Our online help
desk provides quick and efficient answers to customers' questions. In
addition,
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although we do not provide investment advice, we provide toll-free
telephone access to service representatives 24 hours a day, seven days a
week for customers requiring additional information.
Our Services
We have designed our online brokerage services to serve the needs of all
types of self-directed investors, regardless of their investing style, trade
frequency or level of sophistication. Our user-friendly web site enables
customers to trade securities easily and quickly online and, with its advanced
features, also provides customers with customized direct access to a wide
variety of investment tools and real-time financial information. We provide
customers 24-hour access to their accounts, financial market news and trading
information through the Internet and over the telephone. Our proprietary
transaction and order routing system provides quick execution on most orders,
timely on-screen trade confirmations and access to up-to-the-minute account
information.
Stock and Options Trading
Stock and options trading constituted essentially all of our transaction
volume during the year ended December 31, 1999. Customers can place orders
directly to buy and sell Nasdaq and U.S. exchange-listed securities, as well
as equity and index options, through our automated order processing system. We
support a range of order types, including market orders, good-till-canceled or
day orders, stop orders, limit orders and short sales. We electronically
review the parameters of an order, together with the customer's buying power
and positions held, prior to executing an order. All listed market orders,
subject to certain size limitations, are executed at the National Best
Bid/Offer (NBBO) or better as soon as possible after they are routed to the
market-maker or exchange. The NBBO is a dynamically updated representation of
the combined highest bid and lowest offer quoted across all U.S. stock
exchanges and market-makers registered in a specific security. Eligible orders
are exposed to the marketplace for possible price improvement, subject to the
NBBO. Limit orders are executed based on an indicated price and time priority.
All Nasdaq market orders, subject to certain size limitations, are executed at
the Best Bid/Offer (Inside Market) or better as soon as possible after they
are routed to the market-maker in a given security. The Best Bid/Offer (Inside
Market) is equivalent to NBBO, but only relates to Nasdaq stocks. All
transaction and portfolio records are electronically updated within seconds to
reflect trading activity. Buy and sell orders placed when the markets are
closed are automatically submitted prior to the next day's market opening .
Account holders generally receive almost immediate electronic notification of
order executions, which are later followed by printed trade confirmations and
detailed monthly statements.
We are currently developing various advanced trading features, including
the ability to program investments, to help our customers effectively
implement their investment strategies. For example, we plan to enable
customers to set profit and loss parameters under which trades will be placed,
with our systems monitoring the market to automatically place the trade to
satisfy the parameters. We also plan to enable customers to create baskets of
stock that can be traded in a single order. In addition, we are developing
advanced options trading features that will enable investors to place spread
and straddle orders.
We offer low commissions on trades of listed and Nasdaq securities, as well
as equity and index options. Our commissions on equities are currently $14.95
per Internet trade, $17.95 per automated touch-tone telephone trade and $24.95
per trade executed by telephone through a registered representative. On equity
and index option trades, we also charge $14.95, $17.95 and $24.95 per trade,
plus $1.75 per contract. We currently offer commission-free trades on over-
the-counter orders of 1,000 or more shares for stocks priced at over $2.00 per
share. We can offer these commission-free trades because, through our
arrangement with U.S. Clearing Corporation, a subsidiary of Fleet Financial
Group, Inc., we currently receive payment related to order flow of $0.025 per
share for over-the-counter trades priced at more than $2.00 per share. When
our current agreement with U.S. Clearing expires on April 30, 2000, we may no
longer be able to offer these commission-free trades. See "--Operations--
Clearing" and "--Risk Factors--Our business may be adversely affected by the
expiration of our clearing agreement in April 2000."
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Mutual Funds
Our online Mutual Fund SuperSite enables our customers to analyze, compare
and trade online over 4,000 load and no-load mutual funds in over 300 fund
families. On our web site, customers can:
. search the mutual funds we offer by name and criteria, such as fund
category, fees, performance, risk and rankings;
. view fund performance reports from Morningstar which provide
comprehensive fund information, including returns, investment objectives,
fees, holdings and analysis;
. read the prospectuses for mutual funds they are interested in and enter
orders to purchase or sell an existing position; and
. automatically re-invest dividends and capital gains from particular
mutual funds.
Our customers can also obtain information regarding, and execute trades of,
these mutual funds by contacting one of our licensed brokers on the telephone.
We do not currently charge our customers commissions on the purchase, sale or
exchange of mutual funds in transactions of $500 or more on our SuperSite.
Margin Accounts
Through our clearing agreement with U.S. Clearing, our customers are able
to maintain margin accounts with U.S. Clearing. In an account authorized for
margin trading, U.S. Clearing can lend our customers a portion of the market
value of certain securities maintained in the customers' accounts up to the
limit imposed by the Federal Reserve Board of Governors under Regulation T,
which for most equity securities is initially 50%. U.S. Clearing, at its
discretion, may establish higher margin requirements for volatile stocks.
These loans are collateralized by the securities in the customers' accounts.
Our customers can use these margin loans to purchase additional securities
using our online brokerage services. Customers may also sell securities short,
without owning them, in their margin account, subject to minimum equity and
applicable margin requirements and the availability of the securities to be
borrowed and delivered. We indemnify U.S. Clearing for losses it suffers on
loans to our customers secured by securities in their accounts with us.
Together with U.S. Clearing, we proactively seek to control the risks
associated with these activities. We approve new margin accounts only after
reviewing the customer's credit history and relevant financial data. We
require customers to maintain margin collateral in compliance with various
regulatory and internal guidelines. Pursuant to these guidelines, we monitor
required levels daily, and where necessary on an intra-daily basis, and
require customers to deposit additional collateral or reduce securities
positions when necessary. To date, we have experienced only modest losses on
these accounts, and we believe we have established adequate credit assessment
procedures. We expect to become self-clearing after our agreement with U.S.
Clearing expires on April 30, 2000. As a self-clearing firm, our customers
will be able to maintain margin accounts directly with us, and we plan to
continue using our current credit assessment procedures. See "--Risk Factors--
We may suffer losses if we fail to manage effectively our customer credit
risks."
Market Data and Financial Information
We continually receive from content providers a direct feed of detailed
stock quote data during trading hours and market information and news
throughout the day. Customers can create their own personal lists of stocks
and options for quick access to this current price information and other
company information and news 24 hours a day. We provide our customers easy and
free access from one screen to all the following information:
. 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
BASELINE and Morningstar;
. unlimited 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, PR
Newswire and Business Wire;
. summaries of composite indices, including those for the major U.S.
exchanges, Nasdaq and S&P 500 and market look tables that provide a quick
glance at the market;
. initial public offering filing and pricing data from IPO.com, provided by
Reuters Reality Online;
. indices and key news items for over 20 major global financial markets;
and
. information about mutual funds, searchable by specific desired criteria.
We are continuously looking to enhance the ways we can help investors
develop and evaluate their investment choices. Through our arrangement with
Reuters Reality Online, our customers can also view more detailed intra-day
and historical trading charts and quickly search for securities that satisfy
selected criteria. For example, a customer can find all stocks in a particular
industry that have a specified price-to-earnings ratio. In addition to these
basic services, we offer customers the ability to receive unlimited bid and
ask quotes that are automatically updated in real time. Customers can receive
this real-time feature, which enables them to trade while continually
monitoring their various positions, for $29.95 per month. For an additional
$50.00 per month, customers can receive these automatically updated real-time
quotes and real-time Nasdaq Level-2 market-maker information, which consists
of current lists of market-makers for each Nasdaq security, the bid and offer
by market-maker, the size of the bid and offer and the time the market-maker
was quoted. Through Web Street on Demand, our private label of Wall Street on
Demand, we also enable our customers to download or receive by fax detailed
research reports on companies from top research firms, including Standard &
Poor's, First Call, Business Wire, Vickers and Renaissance Capital. Customers
are charged for these reports on a per report basis. We also enable our
customers who access Web Street on Demand to receive a free stock portfolio
management tool.
Portfolio Tracking and Records Management
Customers have online access to a listing of all their portfolio activity
during the preceding 60 days, including transaction data on the date of
purchase, cost basis, current price, current market value and margin balances.
The system automatically calculates unrealized profits and losses for each
asset held. Detailed account balance and transaction information includes
money market balances, buying power, net market portfolio value, dividends,
commissions paid, trade dates, settlement dates, deposits and withdrawals.
Brokerage history includes a detailed status of all orders placed by a
customer, including whether any order is pending or open or has been executed
or canceled. Our customers can obtain historical account, transaction and
brokerage information that is more than 60 days old from our clearing agent.
We are developing advanced portfolio management features to enable customers
to maintain tax records, including total short-term or long-term capital gain
or loss, keep track of stock splits and create shadow portfolios to include
any number of financial instruments a customer is interested in tracking,
including assets held at another brokerage firm.
Private Client Group
Our private client group, Web Street Elite, offers premium service to our
largest and most active accounts. Customers who have at least $250,000 in
equity in their accounts or trade more than 25 times per month receive free
unlimited streaming real-time quotes, quick trade execution with one click of
a mouse and generally more personalized service. Customers who have at least
$500,000 in equity in their accounts or trade more than 45 times per month
receive free unlimited streaming real-time quotes, quick trade execution with
one click of a mouse, Nasdaq Level-2 market-maker information and the ability
to reach us on a dedicated toll-free telephone line any day of the week
between 9:00 a.m. and 5:00 p.m., Eastern Time.
Cash Management Services
Customer payments are received through the mail or federal wire system and
are credited to customer accounts upon receipt. Uninvested funds earn interest
in a money market account maintained by U.S. Clearing. In addition, we provide
free unlimited checking services through a commercial bank. We also provide
our
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customers with the opportunity to obtain a Web Street Platinum MasterCard
issued by First USA Bank. We enable customers who have this credit card to
view their credit card account summaries on our web site.
International and Content Relationships
We pursue relationships with international financial institutions and
content providers to increase our access to online consumers and expand the
services and products we offer to our online customers.
International
We are expanding into new markets through alliances with financial
institutions in international markets. These relationships provide us access
to international customer bases, market knowledge and contacts. We believe
that these alliances can accelerate worldwide acceptance of our online
brokerage services and Unified Global Brokerage Accounts, which we intend to
make available to customers worldwide.
In December 1998, we entered into a mutually exclusive three-year agreement
with ConSors Discount-Broker, a leading European online discount brokerage
firm, under which ConSors is required to direct to us all its customers in
Germany, Switzerland, Italy, Austria and Luxembourg who want to trade stocks
or options in U.S. markets. In January 2000, we amended and restated this
agreement (1) to require ConSors to also direct to us all of its customers in
France and Spain who want to trade stocks and options in U.S. markets, (2) to
extend the agreement to January 2003 and (3) to make us responsible for all
margin losses for trades executed by ConSors customers directed to us. We
currently provide our services to ConSors customers in Germany and expect to
begin serving ConSors customers in France and Switzerland in the second
quarter of 2000 and ConSors customers in the four other countries covered by
this agreement in the second half of 2000. ConSors customers who trade in U.S.
securities markets through us pay the same low transaction fees as investors
who trade directly through us in the United States. ConSors markets our online
services to, and provides customer service for, its international customers at
its own expense. We pay ConSors a portion of the gross profits earned by us on
trades executed by these customers, which consist of transaction revenues and
interest income less trade clearing and execution charges. In January 1999, we
entered into a similar agreement with Landsbref, Ltd., the securities house of
The Bank of Iceland, under which Landsbref is required to direct to us, and we
currently provide our services to, all its customers in Iceland who want to
trade stocks or options in U.S. markets. Our agreement with Landsbref has a
one-year term that automatically renews in January of each year. We or
Landsbref may terminate the agreement with one year's prior notice to the
other party. We have created co-branded web sites with ConSors and Landsbref
which include information translated into German and Icelandic.
In October 1999, we entered into an agreement for a mutually exclusive
five-year alliance with Sun Hung Kai Online Limited. Sun Hung Kai is a wholly-
owned subsidiary of Sun Hung Kai Securities Ltd., a leading brokerage firm in
Hong Kong. Under the agreement, we are the only U.S. online broker made
available and promoted by Sun Hung Kai to its customers who want to trade
stocks or equity-based options in U.S. markets. We recently launched a co-
branded web site with Sun Hung Kai which is currently in English, but will
include information translated into Chinese. Sun Hung Kai has also agreed to
pursue alliances or joint ventures on our behalf in China, Japan and Australia
and possibly other Asian markets. After the initial five-year term of our
agreement with Sun Hung Kai, the agreement automatically renews for one year
in October of each year and we or Sun Hung Kai may terminate the agreement
with 90 days' prior notice. The other terms of our agreement with Sun Hung Kai
are substantially similar to the terms of our agreement with ConSors. In
connection with this alliance, we issued Sun Hung Kai warrants to purchase
1,200,000 shares of our common stock, 1,000,000 of which are not exercisable
until at least 360 days after satisfaction of performance milestones and
200,000 of which were exercisable immediately.
In August 1999, we entered into an agreement for a mutually exclusive
three-year alliance with CB Corredores de Bolsa, S.A. to provide our online
brokerage services to its customers in Chile. CB Corredores is a wholly-owned
subsidiary of C.B. Capitales, a leading online brokerage firm in Chile. We
will create a co-branded
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web site with CB Corredores which includes information translated into
Spanish. After the initial three-year term of our agreement with CB
Corredores, the agreement automatically renews for one year in August of each
year and we or CB Corredores may terminate the agreement with 90 days' prior
notice. The other terms of our agreement with CB Corredores are also
substantially similar to the terms of our agreement with ConSors.
We are exploring alliances and joint venture opportunities in a number of
other international markets, including the United Kingdom, Japan, Canada,
Scandinavia and South America.
Content
We rely on leading content providers to provide us with all of the
financial information, market news, charts, stock quotes, research reports and
other fundamental data we offer to our customers. These content providers
include S&P Comstock, BASELINE, Reuters News Service, Wall Street on Demand,
PRNewswire, Business Wire, Morningstar, NewRiver Investor Communications and
IPO.com through Reuters Reality Online. We regularly add content to our web
site to satisfy the investing needs of our broad range of customers.
Technology and Systems
We completed the first version of our fully-automated proprietary
transaction and order routing system in July 1997. This system leverages the
speed and utility of the Internet to satisfy the demanding requirements of
real-time online trading activities. While some of our online competitors
require personnel to review each order to confirm that the order is accurate
and may be executed by the customer, our systems eliminate the need for this
time-consuming human intervention in the vast majority of cases. Our fully-
automated systems quickly determine whether customers' orders can be placed,
including ascertaining whether there is an error in the order, whether a
customer has enough funds in his or her account and whether the relevant
market is open. This automation:
. substantially reduces trade execution time;
. makes it more likely that investors' trades will be completed at desired
prices; because securities prices are often extremely volatile, delays in
processing can cause customer market orders to be completed at prices
that are different from those available at the time the orders were
originally entered by investors;
. enables customers to know in real time when their transactions have been
completed and how their accounts have been affected;
. minimizes human error; and
. lowers personnel costs.
The primary components of our proprietary transaction and order routing
system include a graphical user interface, a server that connects a customer
to the processor and an automated transaction processor. By using object
oriented analysis and design written in a combination of C++ and Java, we are
able to bring new services to market quickly and serve an expanding customer
base. Our in-house developers, technology specialists and technical
consultants continually work to develop technologically advanced services that
are user-friendly, reliable and versatile. We have also invested significantly
in customer service software and state-of-the-art phone systems from third
parties.
Our Deerfield, Illinois data center, which we recently expanded to support
our continued growth, supports systems, network, trading, customer service and
transaction redundancy. Our back-end system is implemented using 64-bit multi-
processor computers. Each component of the system, including the databases,
security systems, order processors, market data sources, web servers,
firewalls and Internet connections, is redundant to provide full fault
tolerance. We believe that a failure of any component of the system should be
transparent to the customer and should not interrupt our operations. However,
approximately five minutes will be required to completely remedy a database
failure. Our systems have access to electricity from two separate power-
generating stations. If either one fails, we expect our system to continue
operating without interruption. To confirm the
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integrity of our systems, we test back-up circuits daily, and each weekend we
restart the systems and again test back-up circuits. In addition, we have a
commitment for the supply of mobile back-up power generators, if needed, and
are in the process of obtaining an on-site permanent generator. We do not
currently have a second data center, but have begun constructing one.
We have instituted a number of encryption and protective features to ensure
investor confidence and protect customers' assets and information. We provide
our customers with the ability to use either 40- or 128-bit browser encryption
and authentication technology for the security and authentication necessary to
effect secure transmission of confidential information over the Internet. The
authentication technology we use requires customers to use their password and
user ID to access various sites on the system, including their accounts, and
an additional password to enter most trade orders. Our systems have other
features to prevent unauthorized access, including a fully redundant firewall.
Our system is designed to handle our anticipated volume of customers,
customer accounts and trade order flow. We continually evaluate our system
capacity and can easily and quickly add processing power. In anticipation of
significant growth, we try to provide system capacity that it is at least
three months ahead of what we perceive as our current needs. We also believe
that we can scale to five times our current capacity within a month. We
measure our system capacity in terms of the number of web server hits that we
can process in a given unit of time. To date, the number of hits our system
has been required to process in any 10-minute period has never exceeded 33% of
our capacity. We currently depend on U.S. Clearing to provide clearing and
execution services for our customers. See "--Operations--Clearing" and "--Risk
Factors--We could be subject to legal claims and our business could be harmed
if there are breaches of our security or misappropriation of our customers'
personal information."
U.S. Clearing currently subcontracts with a division of Automatic Data
Processing to process data and maintain electronic files regarding our
customers' transactions. To become self-clearing, we have contracted directly
with a different division of Automatic Data Processing to perform back office
services. To facilitate the transition to this new division, we are
reconfiguring our order processor software.
Marketing
We seek to attract new customers and increase recognition of our brand
through advertising, marketing, public relations and establishment of
financial services centers. Our marketing strategy is based on a marketing
model which employs a mix of communications media. Our initial marketing
campaign was developed in the fourth quarter of 1997 and launched in the first
quarter of 1998. Throughout 1998 and 1999, we advertised in both national and
local print publications, on television and radio, and on various internet
sites. These ads and related promotions were designed to build brand name
recognition, grow our customer base and gain market share. During the fourth
quarter of 1999, we began production of a new national advertising campaign.
In February 2000, we launched this national advertising campaign, principally
in the print, television and radio mediums, promoting our investing
philosophy. In 1999, we spent approximately $8.5 million on marketing. We
intend to devote a substantial portion of our advertising and marketing
expenditures in 2000 to continue and expand our new marketing campaign, which
will include advertising in the print, television, radio, direct mail and
outdoor medias. All of our communications with the public in the United
States, including advertising, are regulated by the NASD. See "--Operations--
Regulation and Supervision--Securities Industry."
Direct Response Advertising; Web Site Marketing
Our advertising focuses on building awareness of, and distinguishing, our
web site by marketing our online services as a better and less expensive way
to invest in securities, access financial and market data and manage
investment portfolios. We place print advertisements in a broad range of
business, technology and financial publications, including Barron's,
Investor's Business Daily, Money, SmartMoney, Online Investor, USA Today and
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The Wall Street Journal. We advertise in newspapers in major U.S. metropolitan
areas, including The Boston Globe, The Chicago Tribune, The Los Angeles Times
and The New York Times. We also advertise on financial cable networks,
including CNBC and CNNfn, local television networks and local radio networks
in major U.S. metropolitan areas.
Our advertising directs interested prospects to our web site for additional
information. Through our web site, prospective customers can get detailed
information about our services, use an interactive demonstration system,
request additional information and complete an account application. We closely
monitor the efficacy of our various direct response marketing efforts.
Public Relations Program
We pursue public relations opportunities to build brand awareness,
including appearances on CNN, FoxNews, CBS Weekend News and Bloomberg, in
addition to profiles in Barron's, Business Week, Crain's Chicago Business
Journal, Forbes ASAP, Fortune, Money, Time, USA Today and The Wall Street
Journal. We also actively seek speaking opportunities at industry conferences
and events.
Financial Services Centers
We opened our first financial services center in Beverly Hills, California
in June 1999. We intend to open additional financial services centers in other
select locations in the United States, including Boston, Massachusetts,
Denver, Colorado and San Francisco, California, and internationally to
increase our brand awareness. At our financial services center, customers can
participate in both group and personalized demonstrations of our online
services, open online trading accounts, personally interact with our
representatives, trade securities through licensed brokers, drop off payments
and attend investment training seminars. We staff our center with
professionals knowledgeable about financial services and the Internet.
Outdoor Advertising
We intend to establish billboards and other displays in a few select, high-
traffic locations to increase our brand awareness. For example, we previously
presented a comprehensive display, consisting of promotional banners and other
ads, at Boston's South Station commuter train station, and we currently have
billboards in New York and Los Angeles.
Customer Service
We believe that providing effective customer service to handle customer
needs and requests is critical to our success. At December 31, 1999, we
employed 38 licensed brokers and 46 other customer service, margin department,
technical and other brokerage support personnel to handle customer inquiries.
Our customers can reach these customer service personnel by e-mail or through
a toll-free telephone number, 24 hours a day, seven days a week. Our customer
service personnel have immediate access to customer account and systems
related-information necessary to quickly respond to customer inquiries. Our
licensed brokers and customer service representatives do not give investment
advice or solicit transactions. Our customer service representatives help
customers access our web site and handle service and account inquiries. Our
licensed brokers address general brokerage and investment questions. Our
technical personnel address questions regarding our automated processing of
trades and use of the Internet to invest online. In addition, our web site
contains an online help desk that provides basic information on how to use our
services, answers to frequently asked questions about our web site and
services and a glossary of frequently used financial terms. We believe our
ongoing investment in technology is also a key element in helping us provide
fast and consistent customer service. For example, we utilize leading-edge
customer service software and recently upgraded our telephone system to better
serve our customers. In December 1999, we moved our brokerage operations to
downtown Chicago, Illinois. This facility includes an expanded call center
that houses additional customer service representatives and technical support
personnel and our licensed brokers.
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Our customer service personnel receive training in brokerage operations,
our policies and procedures and basic telephone and clerical skills to ensure
quality and accuracy. We strive to respond quickly to telephone and e-mail
inquiries, rapidly resolve customer inquiries and maintain overall customer
satisfaction with our services. We record all telephone calls to customer
service personnel for training and supervision purposes and to assist in the
resolution of customer disputes.
Operations
Order Processing
We receive orders principally through the Internet and also by telephone.
All market orders for listed securities other than those with special
qualifiers, subject to certain size limitations based on the standard
transaction size in the primary market, are executed at the National Best
Bid/Offer (NBBO) or better at the time of receipt by the relevant market-maker
or exchange. Eligible orders are exposed to the marketplace for possible price
improvement, subject to the NBBO. Limit orders are executed based on an
indicated price and time priority. All market orders for Nasdaq securities,
subject to certain size limitations based on the trading characteristics of
the particular security, are executed at the Best Bid/Offer (Inside Market) or
better at the time of receipt by the relevant market-maker. Eligible orders
are subject to possible price improvement in the marketplace.
Clearing
U.S. Clearing currently provides clearing and execution services for our
customers' accounts. The clearing function involves a sharing of
responsibilities between the clearing broker and the introducing broker. We,
as introducing broker, are responsible for all customer contact, including
opening customer accounts, responding to customer inquiries, accepting
customer orders and placing these orders with the clearing broker. As clearing
broker, U.S. Clearing provides back office functions, including maintaining
customer accounts, extending credit to customers who maintain margin accounts,
settling securities transactions with the relevant securities clearing houses,
settling commissions and clearing fees, preparing and distributing customer
trade confirmations and account statements, safeguarding funds and securities
in customer accounts, transmitting tax accounting information to customers and
the applicable tax authorities, forwarding prospectuses, proxies and other
stockholder information to customers and preparing supporting books and
records. U.S. Clearing subcontracts with Automatic Data Processing, Inc. to
process data and maintain electronic files regarding our customers'
transactions. U.S. Clearing charges us a fee for each customer purchase or
sale transmitted to them and pays us a fee on margin loans and money fund
balances with our customers.
Our current clearing agreement with U.S. Clearing will end on April 30,
2000. In January 2000, we filed with the NASD to become a self-clearing
brokerage firm. In March 2000, we filed with the Internal Revenue Service to
allow us to act as a non-bank passive custodian of IRA assets. We are
developing an internal clearing operation and expect to begin performing
clearing services for all equity securities and mutual fund transactions in
our customers' accounts when our current clearing agreement with U.S. Clearing
expires. We are negotiating an agreement with a different third party to
perform clearing services for option transactions in our customers' accounts
when we become self-clearing for equity and mutual fund transactions. If for
any reason we are delayed in completing our conversion to self-clearing for
equity securities and mutual fund transactions by April 30, 2000, we have
entered into an agreement with U.S. Clearing to continue acting in its present
capacity for our customers' accounts on an interim basis until we are prepared
to perform those clearing functions ourselves. We engaged a consulting
organization to assist us in all areas of the conversion process, including
technical operations, regulatory compliance, accounting and project
management. We hired a Senior Vice President--Clearing Operations who has
substantial industry experience to manage the development and ongoing conduct
of our clearing operations. In addition, we have hired, and will continue to
hire, other experienced personnel to implement our clearing operations.
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When we implement self-clearing operations, our customers' securities
typically will be held by us in nominee name on deposit at one or more of the
recognized securities industry depository trust companies to facilitate ready
transferability. We will collect dividends and interest on securities held in
nominee name and make the appropriate credits to our customers' accounts. We
will also facilitate exercise of subscription rights on securities held for
our customers and arrange for the transmittal of proxy and tender offer
materials and issuer reports to our customers. We believe that, upon becoming
a self-clearing firm, we will:
. experience lower costs of order execution and trade processing;
. have greater control over the order execution process;
. receive increased interest income from margin and credit balances; and
. be able to offer our customers after-hours trading, lower margin rates
and increased international trading opportunities.
See "--Risk Factors--Our business may be adversely affected by the expiration
of our clearing agreement in April 2000," "--When we become self-clearing, we
will be subject to many new risks which could impair our business," "--We
expect to receive decreased payments related to order flow, which may
adversely affect our ability to offer commission-free trades on particular
over-the-counter orders and our per trade revenues and profit margins" and "--
If U.S. Clearing Corporation fails to accurately clear our customers' trades
in a timely manner, our business would be harmed."
Competition
The market for online brokerage services over the Internet is rapidly
evolving and intensely competitive. We expect this competition to further
intensify in the future. In the United States, we encounter direct competition
from other independent online brokerage firms, as well as traditional discount
brokerage firms providing online and/or touch-tone telephone services. These
competitors include A.B. Watley Group, Ameritrade, Charles Schwab, DLJ Direct,
E*Trade, JB Oxford, National Discount Brokers, TD Waterhouse and WIT Capital.
We are also encountering competition from established full-commission
brokerage firms, including Morgan Stanley Dean Witter and Prudential
Securities, mutual fund sponsors and other financial organizations, some of
which are actively expanding their online capabilities. For example, during
the past year, Merrill Lynch and American Express introduced online discount
brokerage services. We may also face increased competition from various
companies seeking to attract consumer financial assets, including commercial
banks and other financial institutions, insurance companies and providers of
online financial and information services, as these companies expand their
product lines.
We also face increasing competition in international markets, both from
international competitors and United States-based brokerage firms that have
established or acquired international operations or entered into partnerships
with international brokerage firms. For example, several of the largest
domestic online brokerage firms are aggressively expanding into international
markets.
We believe that the principal competitive factors affecting the market for
online financial services are:
. timeliness of execution;
. depth, breadth and quality of services and content;
. ease of use and graphical user interface look and feel;
. customer service and support;
. cost;
. brand loyalty; and
. financial strength and innovation.
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Many of our existing and potential competitors may have one or more of the
following:
. longer operating histories;
. greater name recognition;
. greater management depth and experience;
. larger customer bases;
. greater financial, technical and marketing resources; and
. a wider range of services and financial products.
As a result, these competitors may be able to adopt more aggressive pricing
policies, respond more quickly to new technologies, industry standards and
customer demands, undertake more extensive marketing campaigns, expand
globally more quickly and make more attractive offers to potential employees
and content providers. For example, several of our online competitors offer
after-hours trading, allowing their customers to buy and sell stocks when
traditional securities exchanges are closed. See "--Risk Factors--Intense
competition in the online brokerage industry could impair our ability to grow
and achieve profitability."
Intellectual Property and Other Proprietary Rights
Our success and ability to compete depend to a significant degree on our
proprietary software and other technology reflected in our web site. We have
no patents for this technology. We rely primarily on copyright and trade
secret law to protect our technology and trademark law to protect our
goodwill. The source code for our proprietary software is protected as a trade
secret. We enter into confidentiality and assignment agreements with our
employees, consultants and vendors and generally control access to, and
distribution of, our software and other proprietary information. We have
registered our name, logo and various advertising slogans as service marks in
the United States. We consider our service marks, particularly our family of
"Web Street" marks and related design marks, invaluable to our ability to
continue to develop and maintain the goodwill and recognition associated with
our brand. To date, we have aggressively and successfully protected our marks
against infringement. For example, in 1999, we negotiated the terms of a
voluntary injunction against a company using the mark "WebStNews.com" in
connection with a financial information web site. See "--Risk Factors--We
could lose our competitive advantages if we are not able to protect our
proprietary technology and intellectual property rights against infringement,
and any related litigation could be time-consuming and costly."
Regulation and Supervision
Securities Industry
United States
The securities industry is subject to extensive federal and state
regulation and the regulations of various self-regulatory organizations. We
are registered as a broker-dealer with the SEC and the NASD. Much of the
regulation of broker-dealers has been delegated to self-regulatory
organizations, principally the NASD, which has been designated by the SEC as
our primary regulator. These self-regulatory organizations adopt rules,
subject to approval by the SEC, that govern the industry and conduct periodic
examinations of our operations. Securities firms are also subject to
regulation by state securities administrators in those states in which they
conduct business. We are also authorized by the Municipal Securities
Rulemaking Board (MSRB) to conduct transactions in municipal securities on
behalf of our customers and, as a result, are subject to MSRB regulation with
respect to those transactions.
Broker-dealers are subject to regulations covering all aspects of the
securities business, including sales methods, advertising and communications
with the public, trade execution and practices, trade reporting, use and
safekeeping of customers' funds and securities, minimum capital requirements,
capital structure, record-keeping and disclosure and the conduct of directors,
officers and employees. We are required to comply with many
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complex laws and rules, including rules relating to possession and control of
customer funds and securities, margin lending and execution and settlement of
securities transactions. The SEC, the NASD or other self-regulatory
organizations, such as securities exchanges and state securities commissions,
can conduct administrative proceedings, which can result in censure, fines,
the issuance of cease-and-desist orders or the suspension or expulsion of a
broker-dealer or any of its officers or employees or the imposition of
limitations on its business activities. See "--Risk Factors--We operate in a
highly regulated industry and compliance failures could adversely affect our
business."
We are a member of the Securities Investor Protection Corporation (SIPC),
which provides, in the event of our liquidation, up to $500,000 of protection
for each of our customers' accounts held by our clearing agent, subject to a
limitation of $100,000 for claims for cash balances. In addition, through U.S.
Clearing, we have obtained protection, in excess of SIPC coverage, of
$99,500,000 for each customer account in the form of an excess security bond
from Asset Guaranty Insurance Company. When we become self-clearing, we plan
to obtain our own excess coverage from an insurance company with terms and
limits comparable to that which we currently maintain through U.S. Clearing.
The NASD regulates all our marketing activities, including advertising. The
NASD also requires that all of our marketing materials be reviewed and
approved by a registered principal prior to release, use or publication.
Except for Web Street Securities' participation as an underwriter in the
initial public offering of our common stock in November 1999, we do not
solicit orders from our customers and we do not make investment
recommendations. If in the future we solicit customer orders or make
investment recommendations, including as an underwriter in public offerings,
we will be subject to additional rules and regulations, including a broader
and more stringent application of regulations governing the suitability of
recommendations to customers and sales practices as well as the suitability of
customers' trading activity. We do not currently have any arrangement to act
as an underwriter in a public offering.
We are included from time to time in various administrative proceedings and
claims incident to the normal conduct of our business, including customer
complaints that are reported to federal and state securities regulators, the
NASD and securities exchanges and other self-regulatory organizations.
As part of their regular reviews of brokerage firms, the SEC and the NASD
have audited our business operations. In the course of these reviews, the SEC
and NASD have required us to modify our procedures to meet regulatory
requirements. See "--Risk Factors--We operate in a highly regulated industry
and compliance failures could adversely affect our business."
International
We are expanding our U.S. securities trading business to other countries
and intend to broaden our customers' abilities to trade securities in major
global financial markets through the Internet. As we expand our services
globally, we must comply with the regulatory requirements of each specific
country in which we conduct business, including the countries where we have
international alliances. Because the online brokerage industry is new, the
international regulatory environment is evolving and, in some cases, unclear.
These laws, rules and regulations may concern many aspects of our business,
including:
. trade practices;
. minimum capital;
. capital structure;
. record-keeping;
. broker-dealer and employee registration requirements; and
. the conduct of directors, officers and employees.
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Compliance with the requirements of other regulatory jurisdictions could
impede our planned international expansion. If we fail to comply with foreign
laws or regulatory requirements, we may be subject to civil and criminal
liabilities. Civil liability in some countries may include requiring us to
compensate our customers for any trading losses. We could also be subject to
increased administration and legal burdens, regulatory requirements and
expenses when we expand our Unified Global Brokerage Accounts to allow trading
by customers in international markets outside their home jurisdictions.
Regulations may limit our ability to allow trading by U.S. customers in
international markets. See "--Risk Factors--We may be subject to liability if
we fail to comply with applicable foreign regulatory requirements; there is
uncertainty regarding these requirements" and "--Our growth could be impaired
if we do not successfully handle other risks associated with international
business."
Net Capital Requirements
As a registered broker-dealer and a member of the NASD, we are subject to
the SEC's Uniform Net Capital Rule. The net capital rule is intended primarily
to protect a broker-dealer's customers by measuring the general financial
integrity and liquidity of a broker-dealer and requiring that at least a
minimum part of its assets be kept in relatively liquid form. Under the net
capital rule:
. a broker-dealer must maintain specified minimum net capital;
. a broker-dealer is prohibited from making dividend payments, redeeming
stock, repaying subordinated indebtedness or making any unsecured advance
or loan to a stockholder, employee or affiliate, if its aggregate debit
items rise beyond 5% of its net capital or its ratio of aggregate
indebtedness to net capital exceeds 10 to 1; and
. the SEC may restrict a broker-dealer, for up to 20 business days, from
making any withdrawal of equity capital, or unsecured loans or advances
to stockholders, employees or affiliates if (1) the capital withdrawal,
together with all other net capital withdrawals during a 30-day period,
exceeds 30% of excess net capital and (2) the SEC concludes that the
capital withdrawal may be detrimental to the financial integrity of the
broker-dealer.
If a broker-dealer fails to maintain the required net capital, it may be
subject to suspension or revocation of registration by the SEC and suspension
or expulsion by the NASD and other regulatory bodies and limitations on its
business activities. The broker-dealer could ultimately be required to
liquidate its business.
Net capital is essentially defined as net worth, plus qualifying
subordinated borrowings and certain discretionary liabilities, less certain
mandatory deductions that result from excluding assets that are not readily
convertible into cash and from valuing conservatively certain other assets.
Among these deductions are adjustments that reflect the possibility of a
decline in the market value of an asset prior to its disposition.
As of December 31, 1999, we were required to maintain minimum net capital
of $106,635 and had total net capital of $2,345,534, or approximately
$2,238,899 in excess of the minimum amount required. When we become self-
clearing, our minimum regulatory net capital requirements will increase by
approximately $2 to $3 million. As a self-clearing firm, we will have to pay
for a portion of the securities purchased by our customers, to the extent the
purchases are made on margin. As of December 31, 1999, our customers' total
margin debits at U.S. Clearing amounted to approximately $94 million. In
addition, we will have direct responsibility for the clearance of customer
securities transactions and for the possession and control of customer
securities and other assets. We will also have to record on our balance sheet
the customer receivables and customer payables to us that are a result of
customer margin loans and customer free credit balances, which will
significantly increase our total assets and total liabilities. Web Street
Securities participated as an underwriter in the initial public offering of
our common stock in November, 1999. If we engage in additional underwriting
activities, our minimum regulatory net capital requirements may increase
significantly. We currently have no arrangements to act as an underwriter in
other public offerings.
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Online Commerce
Because of the growth in the online commerce market, Congress has held
hearings on whether to regulate providers of services and transactions in the
electronic commerce market. For example, the U.S. Senate is currently
considering a bill called the Online Investor Protection Act that would
protect investors who use Internet brokerages by enabling the SEC to monitor
online brokers, strengthen penalties for online fraud and give investors
access to quarterly reports of online brokers. Recently, various regulatory
and enforcement agencies have been reviewing service and other issues,
including systems integrity and capacity, customer access, best execution
practices and advertising claims, as they relate to the online brokerage
industry, including us. For example, the New York Attorney General's Office
made an inquiry into the online brokerage industry because of a wave of
complaints about system crashes, delayed trades and busy signals which
resulted in the issuance of a report in November 1999 entitled "From Wall
Street to Web Street: a Report on the Problems and Promise of the Online
Brokerage Industry" (note that the reference to "Web Street" in the title of
the New York Attorney General's Report was coincidental and has no
relationship to us). Also, in November 1999, the SEC released a report
summarizing the findings from a series of online investing roundtables
entitled "On-Line Brokerage: Keeping Apace of Cyberspace." These reviews and
reports may result in new regulations or increased enforcement actions.
We anticipate that we may be required to comply with additional record-
keeping, data processing and other regulatory requirements as a result of
proposed federal legislation or other legislative developments, and we may be
subject to additional regulation as the market for online commerce evolves.
Federal or state authorities could enact laws, rules or regulations affecting
our business or operations. We also may be subject to federal, state, local
and foreign money transmitter laws and state, local and foreign sales and use
tax laws.
Due to the increasing popularity of the Internet, laws and regulations may
be enacted relating to the Internet, covering issues such as user privacy,
pricing, content, consumer protection and quality of products and services.
The Telecommunications Act of 1996 prohibits the transmission over the
Internet of certain types of information and content. Although certain of
these prohibitions have been held unconstitutional, the increased attention
focused upon these liability issues as a result of the Telecommunications Act
could adversely affect the growth of the Internet and online commerce. In
addition, several states have proposed legislation that would limit the uses
of personal information gathered over the Internet. The European Union has
enacted its own privacy regulations, which may result in limits on the
collection and use of personal information gathered over the Internet that are
more stringent than current Internet privacy standards in the United States.
If these regulations were applied to us, we could be prevented from collecting
data from users in European Union member countries and we could be subject to
liability for use of information in contravention of the regulations. Other
countries have adopted or may adopt similar legislation. See "--Risk Factors--
When we become self-clearing, we will be subject to many new risks which could
impair our business" and "--We operate in a highly regulated industry and
compliance failures could adversely affect our business."
Employees
At December 31, 1999, we had 115 full-time and 4 part-time employees. Of
these employees, 38 were licensed brokers providing trade execution and
customer support, 16 were engaged in technology and development, 46 were
engaged in customer service, margin department, technical support and other
brokerage operations and 19 were engaged in general management, marketing,
finance and administration. We plan to continue paying bonuses and awarding
stock options to our management and non-management employees based upon our
success and their individual job performance. None of our employees is covered
by a collective bargaining agreement. We consider our relations with our
employees to be good.
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Risk Factors
You should carefully consider the risks and uncertainties described below
because they could materially adversely affect our business, financial
condition or operating results.
Risks Related to Our Business
Our business may be adversely affected by the expiration of our clearing
agreement in April 2000.
Unlike some of our primary competitors, we do not currently provide our
customers with clearing services. These services include the consummation,
settlement and delivery functions in securities transactions and the
maintenance of customer accounts. Currently, U.S. Clearing clears all our
customers' trades and maintains all our customers' accounts. Our clearing
agreement with U.S. Clearing expires on April 30, 2000. By that time, we plan
to develop internal clearing operations. Developing our own clearing
operations has been and may continue to be time-consuming and costly and has
diverted and may continue to divert our attention and resources. We may not be
able to develop our own clearing operations by April 30, 2000. If for any
reason we are delayed in completing our conversion to self-clearing for equity
securities and mutual fund transactions by April 30, 2000, we have entered
into an agreement with U.S. Clearing to continue acting as clearing agent for
our customers' accounts on an interim basis until we are prepared to perform
these clearing services ourselves. We are negotiating an agreement with a
different third party to act as clearing agent for option transactions when we
become self-clearing for equity and mutual fund transactions. We may encounter
problems moving our customers from U.S. Clearing to our operations or our new
clearing firm for option transactions. In addition, clearing services have
accounted for a substantial portion of our costs of services, and, when we
become self-clearing, we may experience higher costs related to our clearing
operations, particularly in the short-term. Further, the NASD must agree to
amend our membership agreement and the IRS must give us permission to act as a
non-bank passive custodian of IRA assets before we will be able to engage in
self-clearing operations. The NASD may not agree to amend our membership
agreement and the IRS may not give us this permission. See "--When we become
self-clearing, we will be subject to many new risks which could impair our
business."
When we become self-clearing, we will be subject to many new risks which
could impair our business.
Self-clearing securities firms are subject to substantially more regulatory
control and examination than that to which we are currently subject. Errors in
performing clearing functions or reporting could lead to civil penalties
imposed by the SEC or the NASD. Self-clearing, especially because of our lack
of clearing experience, will involve a substantial risk of losses due to
clerical errors relating to the handling of customers' funds and securities.
We may not be able to perform these operations as accurately and efficiently
as these operations are currently being performed for us by U.S. Clearing.
Clearing processing errors also may lead to civil claims brought by parties
who are financially harmed by these errors. In addition, when we become self-
clearing, we will have to pay for a portion of the securities purchased by our
customers, to the extent the purchases are made on margin. This will increase
our net capital requirements substantially. We will need to have access to
sources of capital, which may not be available. We will also have a direct
responsibility for the possession and control of customers' securities and
other assets and the clearance of customers' securities transactions. This
will require us to record on our balance sheet the customer receivables and
customer payables to us that are a result of customer margin loans and
customer free credit balances maintained by us. This could have a significant
effect on our total assets and total liabilities.
We expect to receive decreased payments related to order flow, which may
adversely affect our ability to offer commission-free trades on particular
over-the-counter orders and our per trade revenues and profit margins.
We receive cash payments from U.S. Clearing that are related to, but not
dependent on, the payments U.S. Clearing receives from various Nasdaq market-
makers and third market firms in exchange for routing trade orders to them for
execution, commonly referred to as order flow. Our current clearing agreement
requires U.S. Clearing to make these payments to us at a contractually-
determined rate, regardless of the order flow rebates it actually receives. We
received payments relating to order flow from U.S. Clearing of $3,215,000 in
the year ended December 31, 1998, representing 41% of our total revenues for
1998, and of $10,032,000 for the year ended December 31, 1999, representing
39% of our total revenues for 1999. When our current clearing
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agreement ends on April 30, 2000, we plan to become a self-clearing brokerage
firm, and we expect to begin receiving payments that are directly based upon
order flow. We expect that those payments will be made to us directly from
market-makers and third market firms at regular market rates, which we believe
will be significantly below the current rate of payment to us by U.S.
Clearing. Our current above-market order flow payments have allowed us to
offer our customers commission-free trades on over-the-counter market and
limit orders of 1,000 or more shares that are priced at over $2.00 per share.
After April 2000, when our order flow payments decrease, it may no longer be
economical for us to continue to offer these commission-free trades and, thus,
we may lose the competitive advantage we gain by doing so. If for any reason
we are delayed in completing our conversion to self-clearing by the April 30,
2000 expiration of our current clearing agreement, we have entered into an
agreement with U.S. Clearing to continue acting in its present capacity for
our customers' accounts on an interim basis until we are prepared to perform
these clearing functions ourselves. Pursuant to this interim agreement, during
the period of any such delay, we would experience the reduction in order flow
payments described above, as well as an increase in the average cost per trade
compared to what we are charged by U.S. Clearing under the terms of our
current agreement. As a result, our revenues and profit margins would be
materially adversely affected during any such delay. In addition, payment to
us for order flow may further decrease after our current clearing agreement
expires because of:
. the SEC's enactment of order handling rules which have reduced market-
makers' spreads and correspondingly their profits;
. the emergence of electronic communication networks, which enable
securities trading without the use of market makers; and
. the quotation of stock prices in decimals, which could further reduce
spreads.
Further, the SEC, the NASD or other regulatory agencies, courts or
governmental units may prohibit payments for order flow in the future. When we
receive decreased order flow-related payments, our per trade revenue and
profit margins will be materially adversely affected.
We have a limited operating history, have incurred losses since our
founding and may not achieve future profitability.
We began offering online brokerage services in July 1997. As a result, we
have a limited operating history upon which you can evaluate us and our
prospects. Our limited operating history makes predicting our future operating
results difficult. We have incurred an operating and net loss in each fiscal
year since our founding and may continue to incur losses if our operating
expenses increase more quickly than our revenues. Our ability to achieve
profitability in the future will depend upon our ability to expand our brand
awareness and customer base, increase our global market presence and enhance
and maintain our proprietary technology. To achieve these goals, we will need
to increase spending on marketing, technology, product development and other
operating costs. To the extent that revenues do not increase as a result of
this increased spending, we may not be able to achieve profitability in the
future. If we do achieve profitability, we may not be able to sustain it.
We have had negative cash flows from operations and may not be able to
secure additional financing if we need it in the future.
To date, we have had negative cash flows from operations and have depended
on sales of our securities to meet our cash requirements. We may need to raise
additional funds to:
. support our planned rapid growth;
. develop new or enhanced services and technologies;
. increase our marketing efforts;
. acquire complementary businesses or technologies;
. respond to anticipated capital requirements; and
. respond to competitive pressures or unanticipated requirements.
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We may not be able to obtain additional financing on acceptable terms when
we need it. If we require, but are unable to obtain, additional financing in
the future, we may be unable to implement our business and growth strategies,
respond to changing business or economic conditions, withstand adverse
operating results, consummate desired acquisitions or compete effectively.
We may not be able to develop and increase public recognition of our Web
Street brand.
We believe that establishing and maintaining favorable consumer perception
of our Web Street brand is critical to attracting and expanding our Internet
customer base and alliances with financial institutions in key international
markets. The importance of developing our brand will increase due to the
growing number of Internet and financial services available to consumers. To
build our brand, we must succeed in our marketing efforts, provide high-
quality services and products, increase the number of visitors to our web site
and continue to receive high ratings from leading financial and technology
publications. If we do not accomplish each of these goals, our reputation
could be harmed, and we may not be able to attract and retain customers and
international partners.
If U.S. Clearing Corporation or our new clearing firm for option
transactions fails to accurately clear our customers' trades in a timely
manner, our business would be harmed.
We have or will have no control over the operations of U.S. Clearing or our
new clearing firm for option transactions. If U.S. Clearing or such other
clearing firm improperly handles the funds and securities of our customers, we
may be subject to claims by customers who are financially harmed. Further, if
our customers' trades are not cleared accurately and in a timely manner, our
reputation may be harmed and demand for our services may decrease. If U.S.
Clearing discontinues its contractual relationship with us before our current
agreement expires or if U.S. Clearing or such other clearing firm discontinues
its contractual relationship with us before we are prepared to perform
clearing functions ourselves or fails to perform adequately, our business,
financial condition and operating results could be materially adversely
affected. In addition, we may be liable for the failure of our customers to
make timely settlement on any transaction executed through U.S. Clearing or
such other clearing firm.
We may not be able to manage our growth effectively or budget adequately for
costs associated with our growth.
Our growth has placed, and is expected to continue to place, a significant
strain on our managerial, operational and financial resources and systems. To
manage our growth successfully we must continue to expand and improve our
operational, information management and financial systems and controls on a
timely basis. Our current senior management has limited experience managing a
rapidly growing enterprise and may not be able to manage effectively our
growth. We may not budget adequately for the costs associated with our
continued growth, which could adversely affect our ability to offer and expand
our online financial services.
We may not be able to hire and retain additional qualified personnel to
support our growth.
To continue our growth, we will need to recruit additional high-level
management personnel, including persons with marketing, financial and
information technology experience. In addition, we must hire, train and retain
a significant number of other skilled personnel, including persons with
experience in the Internet, computer and brokerage industries. Because of the
recent substantial growth in these industries, we have encountered intense
competition for these personnel. To develop internal clearing operations, we
must hire personnel to implement and manage those operations. Our success also
depends on our ability to attract and retain additional qualified senior and
middle managers and customer service representatives. We may not be able to
find or keep additional suitable senior and middle managers, licensed brokers,
clearing personnel, customer service representatives or technical personnel in
the future.
Our operations may be disrupted by technological problems.
Our systems could be overwhelmed by heavy trading or could fail. We receive
and process the overwhelming majority of our trade orders through the
Internet. Heavy trading volumes could cause significant
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backlogs and delays in order execution or could cause our systems to fail. We
may not be able to expand and upgrade our technology, transaction processing
systems and network hardware and software to accommodate increased trading by
our customers on a timely basis. Also, our systems, and those of the third
parties on which we depend, may not operate properly in the event of:
. a hardware or software error, failure or crash;
. a power or telecommunications failure;
. human error; or
. a fire, flood or other natural disaster.
Our systems may be more likely to suffer problems while we implement
upgrades to our network hardware and software. For example, other online
brokerage firms have experienced systems interruptions due to undetected
errors in upgraded software introduced to their networks. Additionally, our
computer systems and those of the third parties on which we depend may be
vulnerable to damage or interruption due to sabotage, computer viruses or
other criminal activities or security breaches. For example, there have been
recent incidents in which individuals have caused several hours of service
interruption on major electronic commerce web sites by flooding networks with
a steady stream of data.
Our data center operations are presently located at a single facility in
Deerfield, Illinois. Therefore, any systems slowdowns or failures that disrupt
our operations at this facility would impair our ability to execute our
customers' trade orders. In addition, we depend upon computer systems operated
by third parties to consummate and settle customer trades and to maintain
customer accounts. If the systems of these third parties slow down
significantly or fail even for a short time, our customers would suffer delays
in trading. Any delays could be of particular concern for customers when there
is significant stock price volatility. These delays could damage our
reputation, result in the filing of formal complaints with, and the initiation
of inquiries or proceedings by, industry regulatory organizations, cause
customers to close their accounts with us and cause customers to incur
substantial losses. We could be subject to claims or litigation with respect
to these losses. For example, some of our competitors have been served with
customer lawsuits after outages prevented customers from trading. Our property
and business interruption insurance may not adequately compensate us for all
losses we may incur.
We may lose customers if we encounter problems with Internet connections.
We depend on content providers to provide us with data feeds on a timely
basis. Our web site could experience interruptions in service due to a failure
or delay in the transmission or receipt of this information. These
interruptions could prevent our customers from accessing updated market
information that they need to make quick investment decisions. In addition,
our customers depend on Internet service providers, online service providers
and other web site operators for access to our web site. Some of them have
experienced significant outages in the past and could experience outages,
delays and other difficulties due to system failures unrelated to our systems.
These types of events could cause customers to perceive our web site as not
functioning properly and therefore cause them to use traditional brokerage
firms or other online brokerage firms to trade securities.
Our current services may become obsolete and unmarketable if we are not able
to respond adequately to rapidly changing technology and customer demands.
Our industry is characterized by rapid changes in technology and customer
demands. As a result, our current services may quickly become obsolete and
unmarketable. Our future success will depend on our ability to adapt to
technological advances, anticipate customer demands, develop new services and
enhance our current services on a timely and cost-effective basis. Further,
our services must remain competitive with those of other companies with
substantially greater resources. We may experience technical or other
difficulties that could delay or prevent the development, introduction or
marketing of new services or enhanced versions of existing services. Also, we
may not be able to adapt new or enhanced services to emerging industry
standards, and our new services may not be favorably received.
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We may not be successful in pursuing new business opportunities, and we may
not be able to compete successfully in any new business areas.
To date, our business activities have been limited almost entirely to
providing online brokerage services and related market information. However,
our growth may depend in part on our strategy of providing other online
financial services, including banking, consumer credit, home mortgage
brokerage services, insurance and merchandise payment, as well as the online
distribution of securities in public offerings led by established investment
banking firms. We may need to enter into acquisitions, joint ventures or other
alliances to offer these additional financial services. We may not be able to
identify suitable acquisition or partnership opportunities or enter into and
maintain these arrangements on favorable economic terms. Further, we have no
experience in providing these additional online financial services. If we
enter new areas outside of our current online brokerage business, we may be
subject to additional regulatory and other requirements. We may not be
successful in pursuing new business opportunities, and we may not be able to
compete successfully in any new business areas.
Our growth could be impaired if we are not able to develop and maintain the
relationships we need to implement our international strategy.
Our growth will depend, in large part, on the success of our international
strategy. We have limited experience in providing our online brokerage
services internationally, and we depend on financial institutions in
international markets to help us build our international operations. We depend
upon each of our international partners to provide marketing expertise and a
base of existing customers. If we are unable to maintain these relationships
or develop additional relationships in other countries, our ability to
penetrate, and compete successfully in, foreign markets would be materially
adversely affected. Further, our current agreements provide that our
international partners have the exclusive right to represent us in their
territories. If any of our international partners fails to adequately market
and support our services in a particular territory, we may have no way of
growing our business in that territory. To implement fully our international
strategy, we will need to expand our current relationships with international
partners. These partners may not agree to expand these relationships.
We may be subject to liability if we fail to comply with applicable foreign
regulatory requirements; there is uncertainty regarding these requirements.
We currently provide our services to customers in many countries around the
world and intend to expand overseas activities significantly in the coming
year. We must comply with the regulatory controls of each specific country in
which we conduct business, including the countries where we have international
alliances. We have not investigated whether our activities violate the local
laws and regulations of many of the countries whose residents buy and sell
securities on our web site and, therefore, the risks associated with our
activities in these countries are unclear. The growth of conducting
international business over the Internet has raised various legal issues
regarding, among other things, the circumstances in which other countries have
the right to regulate Internet services that are available to their citizens
from service providers located elsewhere. Because the online brokerage
industry is new, the international regulatory environment is evolving and, in
some cases, unclear. If we fail to comply with foreign laws or regulatory
requirements, we may be subject to civil and criminal liabilities. Civil
liability in some countries may include requiring us to compensate our
customers for any trading losses. We could be subject to increased legal and
administration burdens, regulatory requirements and expenses when we expand
our Unified Global Brokerage Accounts to allow trading by customers in
international markets outside their home jurisdictions. Regulations may limit
our ability to allow trading by U.S. customers in international markets.
Our growth could be impaired if we do not successfully handle other risks
associated with international business.
There are risks inherent in doing business in international markets,
particularly in the heavily regulated brokerage industry, including:
. less-developed technological infrastructures, resulting in lower customer
acceptance of, or access to, electronic channels;
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. less-developed automation in exchanges, depositories and clearing houses
and systems;
. fluctuations in currency exchange rates;
. difficulties in staffing and managing foreign operations;
. changes in regulatory requirements, tariffs and other trade barriers;
. potentially adverse tax consequences; and
. inadequate protection for intellectual property rights.
One or more of these factors may make it difficult for us to implement
fully our Unified Global Brokerage Account strategy, may materially adversely
affect our current or future international operations and may cause the volume
of transactions by international customers to be less than we anticipate.
If we are unable to provide our customers with critical market information
because we fail to maintain our relationships with third-party providers of
this content, our reputation could be harmed and we could lose customers.
We rely on third-party content providers, including BASELINE, S&P Comstock,
Reuters Reality Online, Morningstar, New River Investor Communications and
Reuters News Service, to provide us with all of the financial information,
market news, charts, stock quotes, research reports and other fundamental data
that we offer to our customers. We may be unable to maintain these existing
relationships. If we lose any of these relationships, we will need to find
other content providers that can provide similar information on commercially
reasonable terms and to integrate their information into our web site. During
this potentially time-consuming process, our customers could be unable to
access critical market information on our web site. If we are unable to
provide our customers with fundamental market and financial data for any
extended amount of time, our reputation could be harmed and we could lose
customers.
We could be subject to legal claims and our business could be harmed if
there are breaches of our security or misappropriation of our customers'
personal information.
Our computer systems may be vulnerable to physical or electronic computer
break-ins, viruses and similar disruptive problems. A person who is able to
circumvent our security measures could misappropriate proprietary information
or cause interruptions in our operations. If a person is able to penetrate our
network security or misappropriate our customers' personal financial or
trading account information, we could be liable for unauthorized trades,
impersonation or similar fraud claims. We could also be subject to claims for
other misuses of personal information, such as for unauthorized marketing
purposes. Any security breach or misappropriation of customer information
could damage our reputation and materially adversely affect our business,
financial condition and operating results. General concerns over the security
of Internet transactions and the privacy of users could also inhibit the use
of the Internet as a means of conducting commercial transactions, such as
securities trades.
We could lose our competitive advantages if we are not able to protect our
proprietary technology and intellectual property rights against
infringement, and any related litigation could be time consuming and costly.
Our success and ability to compete depend to a significant degree on our
proprietary software and other technology reflected in our web site. We do not
have patents for this technology nor have we obtained a registered copyright
for the source code for our proprietary software. If any of our competitors
copies or otherwise gains access to our proprietary technology or develops
similar software independently, we would not be able to compete as
effectively. We also consider our service marks, particularly our family of
"Web Street" marks and related design marks, invaluable to our ability to
continue to develop and maintain the goodwill and recognition associated with
our brand. The measures we take to protect our proprietary technology and
other
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intellectual property rights, which presently are based upon a combination of
confidentiality agreements and copyright, trade secret and trademark laws, may
not be adequate to prevent their unauthorized use. Further, the laws of
foreign countries may provide inadequate protection of our intellectual
property rights. We may need to bring legal claims to enforce or protect our
intellectual property rights. Any litigation, whether successful or
unsuccessful, could result in substantial costs and diversions of resources.
In addition, notwithstanding the rights we have secured in our intellectual
property, other persons may bring claims against us that we have infringed on
their intellectual property rights, including claims based upon the content we
license from third parties or claims that our intellectual property right
interests are not valid. For example, companies have recently brought claims
that allege infringement of patent rights relating to methods of doing
business over the Internet. Any claims against us, with or without merit,
could be time consuming and costly to defend or litigate, divert our attention
and resources, result in the loss of goodwill associated with our service
marks or require us to make changes to our web site or other of our
technologies.
Our growth may be impaired and our current business may suffer if we do not
successfully address risks associated with acquisitions.
Our growth may depend in part upon our ability to acquire successfully
other companies or technologies. We may encounter problems associated with
acquisitions. We have never completed an acquisition and may be vulnerable to
the following risks:
. difficulties in integrating acquired operations, technologies, services
and personnel with our existing operations and personnel;
. difficulties in meeting operating expectations for acquired businesses,
services and technologies;
. failure to obtain required regulatory approvals; disruption of our
ongoing business;
. errors or missed opportunities resulting from inexperience in new
business areas;
. diversion of management's attention from other business concerns; adverse
impact on earnings of amortization or write-offs of acquired goodwill and
other intangible assets; issuances of equity securities, which may be
dilutive to existing stockholders, to pay for acquisitions; and
. potential loss of key employees and/or customers of acquired companies.
We may suffer losses if we fail to manage effectively our customer credit
risks.
We indemnify our clearing agent for losses it suffers on cash and margin
transactions with our customers secured by securities in their accounts.
Therefore, we are subject to general risks of loss relating to extending
credit. We take the risk that a market decline could cause the value of the
securities of a customer held by our clearing agent as collateral to fall
below the amount of the customer's indebtedness before the securities can be
sold or the customer can repay the loan or provide additional collateral. We
run a risk of loss if there are decreases in market values of pledged
securities and the borrowers fail to honor their commitments to supply
additional collateral. When we become self-clearing, this risk will continue
because we will be extending credit directly to customers. Our policies and
procedures to identify, monitor and manage our customer credit risks may not
be fully effective.
If we fail to comply with net capital requirements, our business activities
could be limited or prohibited.
We are subject to stringent rules of the SEC, the NASD and various other
regulatory agencies regarding the maintenance of specific levels of net
capital by securities brokers, including the SEC's Uniform Net Capital Rule.
Net capital is the net worth of a broker or dealer, less deductions that
result from (1) excluding assets that are not readily convertible into cash,
(2) conservatively valuing other assets and (3) various charges for
operational matters. If we fail to maintain the required net capital, the SEC
could prohibit us from doing business, the NASD could suspend our registration
and other regulatory bodies could suspend or expel us or impose limitations on
our business activities. As a result, we could ultimately be required to cease
or discontinue expansion of business
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activities or to liquidate our business. Compliance with the net capital rule
could restrict our ability to pay dividends, repay debt and redeem or purchase
shares of outstanding stock. In addition, a change in the net capital rules,
the imposition of new rules or any unusually large charge against net capital
could limit our operations that require the intensive use of capital. If we
incur significant operating losses or any unusually large charge against net
capital, our ability to expand or even maintain our present level of business
could be materially adversely affected. When we become self-clearing, our
minimum regulatory net capital requirements will increase by approximately $2
to $3 million. In addition, if we engage in underwriting activities, our
minimum regulatory net capital requirements will increase further.
We may be subject to legal claims in connection with the content we
distribute.
We face potential indirect liability for claims of defamation, negligence,
copyright, patent or trademark infringement, violation of the securities laws
and other claims based upon the third-party content that we distribute online.
For example, by distributing negative investment research information, we may
find ourselves subject to defamation claims regardless of the merits of these
claims. Computer failures may also result in our widely publishing and
distributing incorrect data. In these and other instances, we may be required
to engage in protracted and expensive litigation, which would divert our
management's attention and require us to expend significant financial
resources. Our general liability insurance may not necessarily cover any of
these claims or may not be adequate to protect us against all liability that
may be imposed. Any claims or resulting litigation could have a material
adverse affect on our business, financial condition and results of operations.
Employee or customer misconduct could harm us and is difficult to detect and
deter.
There have been a number of highly publicized cases involving fraud or
other misconduct by employees in the financial services industry in recent
years, and we run the risk that employee misconduct could occur. Our employees
could bind us to transactions that exceed authorized limits or present
unacceptable risks or hide from us unauthorized or unsuccessful activities.
This misconduct could cause unknown and unmanaged risks or losses. Our
employees could also make improper use of confidential information, which
could result in regulatory sanctions and harm to our reputation. In addition,
we are exposed to potential losses resulting from fraud and other misconduct
by our customers, including fraudulent Internet trading, which could involve
fraudulent access to legitimate customer accounts or the use of a false
identity to open an account, or the use of forged or counterfeit checks for
payment.
The precautions we take to prevent and detect employee and customer
misconduct may not effectively deter these activities. If we do not prevent or
detect these activities, we may incur losses that we are not able to recover.
The loss of members of our senior management or systems development teams
could adversely affect our business.
We believe that our ability to implement successfully our business strategy
and to operate profitably depends on the continued employment of:
. our senior management team, led by Joseph J. Fox, our co-chairman of the
board and chief executive officer, and Avi Fox, our co-chairman of the
board and president; and
. our systems development team, led by William J. Mania, our chief
technology officer.
Our key man life insurance that covers the loss of Joseph Fox and William
Mania may not adequately compensate us for the loss of their services. We do
not maintain key man life insurance for any of our other key personnel. If we
lose the services of one or more members of our management or systems
development teams, our business, financial condition and results of operations
may be materially adversely affected.
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Risks Related to Our Industry
If the use of the Internet does not continue to grow or its growth cannot be
supported by its infrastructure, the growth in usage of our online services
could be impaired.
Our market is new and rapidly evolving. Our business will be adversely
affected if Internet usage does not continue to grow. Use of the Internet may
be inhibited by a number of factors, including:
. inadequate network infrastructure;
. security concerns;
. inconsistent quality of services; and
. lack of cost-effective, high-speed service.
If Internet usage continues to grow, the Internet infrastructure may be unable
to support the demands placed on it by this growth. The Internet's performance
and reliability may decline. In addition, web sites have experienced
interruptions as a result of outages and other delays occurring throughout the
Internet infrastructure. If these outages or delays frequently occur in the
future, Internet usage, as well as usage of our web site and online brokerage
services, could grow more slowly or decline.
If the use of online brokerage services is not readily accepted, the growth
in usage of our online services would be impaired.
Our online brokerage services involve a new approach to securities trading.
Individuals who have relied upon traditional means of commerce in the past may
not accept, or may be slow in accepting, this new and very different method of
conducting business. For example, investors who trade with more traditional
brokerage firms, or even discount brokers, may be reluctant to trade
securities over the Internet. Also, concerns and adverse publicity about
security and privacy on the Internet or systems failures by us or other online
brokerage firms could hinder the growth of online brokerage trading.
Intense competition in the online brokerage industry could impair our
ability to grow and achieve profitability.
We may not be able to compete effectively with current or future
competitors. The market for online brokerage services over the Internet is
new, rapidly evolving and intensely competitive. We expect this competition to
further intensify in the future. In the United States, we face direct
competition from a growing number of other independent online brokerage firms,
as well as traditional discount brokerage firms providing online and/or touch-
tone telephone services. We are also encountering competition from established
full commission brokerage firms, mutual fund sponsors and other financial
organizations, some of which are actively expanding their online capabilities.
In addition, we may face increased competition from commercial banks and other
financial institutions, insurance companies and providers of online financial
and information services, as these companies expand their product lines. We
also face increasing competition in international markets, both from
international competitors and U.S.-based brokerage firms that have established
or acquired international operations or entered into partnerships with
international brokerage firms. Many of our existing and potential competitors
may:
. have longer operating histories and significantly greater financial,
technical and marketing resources than we do;
. offer a wider range of services and financial products than we do; and
. have greater name recognition, larger customer bases and greater
management depth and experience than we do.
This may place us at a disadvantage in responding to our competitors' pricing
strategies, technological advances, marketing campaigns, global expansion,
alliances and other initiatives. Some of our competitors conduct more
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extensive promotional activities and offer lower prices to customers than we
do, which could allow them to gain greater market share or prevent us from
increasing our market share. In the future, we may need to decrease our prices
if our competitors continue to lower their prices. Our competitors may be able
to respond more quickly to new or changing opportunities, technologies and
customer requirements. This is particularly true because of the substantial
resources being devoted by our principal competitors to marketing and
technology development efforts. Further, to the extent our competitors are
able to attract and retain customers based on the convenience of one-stop
shopping or because of international operations or arrangements, our business
and ability to grow could be materially adversely affected. To be successful,
we must establish and strengthen our brand awareness and effectively
differentiate our online services from those of our competitors. We may
therefore have to substantially increase marketing or technology expenditures
in order to compete effectively.
The high volatility of the securities industry could adversely affect our
commission and order flow revenues.
Since our formation, almost all our revenues have been from online
brokerage services. We expect this business to continue to account for a
substantial majority of our revenues in the near future. Therefore, we are
directly affected by the same factors which affect the rest of the securities
industry. These factors include economic and political conditions, broad
trends in business and finance and changes in securities trading volumes and
price levels. Each of these factors is beyond our control.
The U.S. and international securities markets have fluctuated significantly
in the past several years. A downturn in the U.S. securities markets would,
and a downturn in international securities markets could, adversely affect our
operating results. Recently, the market for technology and Internet-related
stocks has been especially volatile. We believe an unusually large or extended
downturn in this market could have a significant adverse effect on us because
many of our customers invest in these types of stocks. In previous stock
market declines, many firms in the securities industry suffered financial
losses, and the level of individual investor trading activity temporarily
decreased. In the future, any decrease in trading activity may not be
temporary. In addition, in a market downturn we could suffer substantial
losses on margin loans made to our customers, and the customers may not trade
to the same extent they traded before the downturn or at all. Declines in
trading volume adversely affect our results of operations because our
commission and order flow revenues are directly related to the number of
trades we process. For these reasons, severe market fluctuations could have a
material adverse effect on our business, financial condition and results of
operations. Some of our competitors with greater financial resources and more
diversified business lines might withstand a downturn in the securities
industry better than we would.
We operate in a highly regulated industry and compliance failures could
adversely affect our business.
Our business could be harmed if we fail to comply with U.S. securities and
online brokerage industry regulations. As a participant in the U.S. securities
industry, we are subject to extensive federal and state regulation and the
regulation of various self-regulatory organizations. The rules, laws and
regulations are strictly enforced by:
. state and federal criminal authorities;
. the SEC;
. the NASD;
. other self-regulatory organizations, including the various securities
exchanges; and
. state securities commissions or agencies.
These laws, rules and regulations focus on the protection of customers and
the securities markets, rather than protection of creditors and stockholders
of broker-dealers. Because the online brokerage industry is a new and rapidly
evolving industry, its regulatory environment may be particularly subject to
changes. Further, the
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<PAGE>
SEC and NASD are focusing significant attention on online trading due to the
opportunity for abuse of federal securities laws and broker-dealer laws and
the ease with which individual investors can quickly lose large sums of money.
In recent years, various regulatory and enforcement agencies have been
reviewing service and other issues, including systems capacity, customer
access, best execution practices and advertising claims, as they relate to the
online brokerage industry, including us. These reviews may result in
enforcement actions or new regulations. If we fail to comply with the
securities laws, rules or regulations, we could be suspended, censured or
fined, receive a cease and desist order or have limitations imposed on our
business activities. Also, we or any of our officers or licensed brokers could
be subject to suspension or revocation of registration by the SEC and
suspension or expulsion by the NASD or other regulatory bodies. If we, or any
of our officers or licensed brokers, suffer any of these consequences, our
business, financial condition and operating results could be materially
adversely affected. In a worst-case situation, we could ultimately be required
to liquidate our business. In addition, if Web Street Securities engages in
underwriting activities in the future, we will be subject to various federal
and state securities laws, rules and regulations regarding the process by
which we sell and distribute securities to the public. If we fail to comply
with these laws, rules and regulations, we could be subject to enforcement
actions and civil claims which could be costly to defend and could damage our
reputation. Further, all our marketing activities are regulated by the NASD,
and designated officers must review all marketing materials prior to release,
use or publication. The NASD can impose penalties for violations of its
advertising regulations. Our operations and profitability could also be
directly affected by additional legislation, changes in rules promulgated by
the SEC, the NASD, the Board of Governors of the Federal Reserve System, state
regulators, the various securities exchanges and other self-regulatory
organizations, or changes in the interpretation or enforcement of existing
laws and rules.
When we become self-clearing, we will have to comply with additional laws
and rules, including those relating to possession and control of customer
funds and securities, margin lending and execution and settlement of
transactions.
Our business could be harmed if new laws and government regulations
relating to the Internet are adopted. Laws and regulations may be adopted in
the future that address issues such as privacy, pricing, tax treatment,
consumer protection standards and the characteristics and quality of online
products and services. For example, the Telecommunications Act of 1996 sought
to prohibit transmitting certain types of information and content over the
Internet. Several telecommunications companies have petitioned the Federal
Communications Commission to regulate Internet service providers in a manner
similar to long distance telephone carriers and to impose access fees on these
companies. The Federal Communications Commission recently decided that a web
user's telephone calls to gain access to the Internet are interstate
communications and, thus, subject to regulation by the federal government.
Increased regulation of the Internet could increase the cost of transmitting
or using data over the Internet. A number of proposals have been made at the
federal, state and local levels and by foreign governments that could impose
taxes on online commerce. The three-year moratorium preventing state and local
governments from taxing Internet access, taxing electronic commerce in
multiple states and discriminating against electronic commerce is scheduled to
expire on October 21, 2001. If the moratorium ends, state and local
governments could impose these types of taxes or discriminate against
electronic commerce. In addition, existing state and local laws that tax
Internet-related matters were expressly excluded from this moratorium. These
regulations and other attempts at regulating commerce over the Internet, could
impair the viability of online commerce and the growth of our business.
Several states have proposed legislation that would limit the uses of
personal information gathered using the Internet. The Federal Trade Commission
and state and local authorities have been investigating Internet companies
regarding their use of personal information. The European Union has enacted
its own privacy regulations, which may result in limits on the collection and
use of personal information gathered over the Internet that are more stringent
than current Internet privacy standards in the United States. If these
regulations were applied to us, we could be prevented from collecting data
from users in European Union member countries and we could be subject to
liability for use of information in contravention of the regulations. Other
countries have adopted or may adopt similar legislation. Our privacy programs
may not conform with laws or regulations
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of the United States or other countries that are adopted. In addition, changes
to existing laws or the passage of new laws intended to address these issues
could, among other things:
.create uncertainty in the marketplace that could reduce demand for our
services;
.limit our ability to collect and use data from our users; or
.increase the cost of doing business as a result of litigation costs or
increased service delivery costs.
Moreover, it may take years to determine the extent to which existing laws
relating to issues such as property ownership, libel and personal privacy are
applicable to the Internet. Any new laws or regulations relating to the
Internet or new interpretations of existing laws or regulations or violations
of these laws or regulations could materially adversely affect our business,
financial condition or operating results.
If our registered broker-dealer subsidiary, Web Street Securities, engages
in underwriting activities, we will be subject to significant economic,
regulatory and liability risks.
In November 1999, our registered broker-dealer subsidiary, Web Street
Securities, was one of the co-managing underwriters of our initial public
offering of common stock. Although this is the only transaction in which Web
Street Securities has acted as an underwriter, it may, in the future, act as
an underwriter in public offerings of other companies' securities. If Web
Street Securities engages in underwriting activities, we will be subject to
significant additional economic, regulatory and liability risks.
Web Street Securities' underwriting activities may involve the purchase and
sale of securities as principal in markets that may be characterized by
relative illiquidity or that may be particularly susceptible to rapid
fluctuations in liquidity. We will incur losses if Web Street Securities is
unable to resell the securities it is committed to purchase at expected prices
or at all.
Web Street Securities' underwriting activities will subject us to
substantial risks of liability under federal and state securities laws and
other federal and state laws and court decisions, including decisions with
respect to underwriters' liability and limitations on indemnification of
underwriters by issuers. For example, we may be held liable for material
misstatements or omissions of fact in a prospectus used in connection with
securities that Web Street Securities underwrites or for statements made by
our personnel. In recent years, there has been an increasing incidence of
litigation involving the securities industry, including class actions that
seek substantial damages. Plaintiffs' attorneys in securities class action
lawsuits frequently name as defendants the managing and syndicate underwriters
of a public offering and these underwriters are required by law, or pursuant
to the terms of an underwriting agreement, to bear a portion of any expenses
or losses, including amounts paid in settlement of the litigation, incurred by
the underwriters as a group in connection with the litigation, to the extent
not covered by the indemnification obligation of the issuer of the securities
underwritten. If Web Street Securities engages in underwriting activities, we
may be required to make substantial settlement payments in connection with
these types of lawsuits. In addition, Web Street Securities may act as an
underwriter in offerings of the securities of emerging and mid-size growth
companies, which often involve a higher degree of risk and are more volatile
than the securities of more established companies. In comparison with more
established companies, emerging and mid-size growth companies are more likely
to be the subject of securities class actions, to carry directors and officers
liability insurance policies with lower limits or no such insurance, and to
become insolvent. Each of these factors increases the likelihood that if Web
Street Securities is an underwriter of an emerging or mid-size growth
company's securities, we may be required to contribute to any adverse judgment
or settlement of a securities lawsuit. Further, Web Street Securities'
underwriting activities will subject us to various federal and state
securities laws, rules and regulations regarding the process by which we sell
and distribute securities to the public. If we fail to comply with these laws,
rules and regulations, we could be subject to enforcement actions and civil
claims which could be costly to defend and could damage our reputation.
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If we are unable to protect our Internet domain name, our efforts to
increase public recognition of our brand may be impaired.
We currently hold the Internet domain name "webstreet.com" and various
other related names. The acquisition and maintenance of domain names generally
is regulated by governmental agencies and their designees. The regulation of
domain names in the United States and in foreign countries is subject to
change. As a result, we may be unable to acquire or maintain relevant domain
names in all countries in which we intend to conduct business. This could
impair our efforts to build brand recognition and to increase traffic to our
web site. Furthermore, the relationship between regulations governing domain
names and laws protecting trademarks and similar proprietary rights is
unclear. Therefore, we may be unable to prevent third parties from acquiring
domain names that are similar to, infringe upon or otherwise decrease the
value of our trademarks and other proprietary rights.
Risks Related to Our Common Stock
Joseph Fox and Avi Fox can control matters requiring stockholder approval
because they own a large percentage of our common stock and they may vote
this common stock in a way with which you do not agree.
Joseph Fox, our co-chairman of the board and chief executive officer, and
his brother, Avi Fox, our co-chairman of the board and president, together own
approximately 41% of our outstanding common stock. Joseph Fox and Avi Fox have
entered into a shareholders agreement which provides that if one of them dies,
the other will have the power to vote the deceased's shares. As a result,
Messrs. Fox together have the ability to exercise a controlling influence over
our business and corporate actions requiring stockholder approval, including
the election of our directors, a sale of substantially all our assets, a
merger with another entity or an amendment to our certificate of
incorporation. This concentration of ownership could delay, defer or prevent a
change of control and could adversely affect the price that investors might be
willing to pay in the future for shares of our common stock. Also, in the
event of a sale of our business, Messrs. Fox could elect to receive any
control premium to the exclusion of other stockholders. Messrs. Fox will also
have the ability to maintain themselves as our directors and executive
officers even if our other stockholders believe other management would be
better for us.
If the market price of our common stock fluctuates widely, you may not be
able to sell your shares at or above the price at which you purchase them
and, therefore, you may suffer a loss on your investment.
We believe the following factors could cause the market price of our common
stock to continue to fluctuate widely and could cause our common stock to
trade at a price below the price at which you purchase your shares:
.actual or anticipated variations in our quarterly operating results;
.announcements of new services, products, acquisitions or strategic
relationships by us or our competitors;
.announcements of system slowdowns or failures by us or our competitors;
.new regulations or interpretations of regulations applicable to our online
brokerage activities;
.trends or conditions in the Internet industry;
.changes in accounting treatments or principles;
.changes in earnings estimates by securities analysts and in analyst
recommendations;
.changes in market valuations of other Internet companies; and
.general political, economic and market conditions.
The market price for our common stock may also be affected by our ability
to meet or exceed expectations of analysts or investors. Any failure to meet
these expectations, even if minor, could materially adversely affect the
market price of our common stock. In addition, the market prices of equity
securities of technology and Internet companies often fluctuate significantly
for reasons unrelated to the operating performance of these companies. The
trading prices of many technology and Internet companies, including online
brokerage firms,
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have reached historical highs within the last 52 weeks and have reflected
relative valuations substantially above historical levels. During the same
period, these companies' stocks have also been highly volatile and have
recorded lows well below such historical highs. Our common stock may not trade
at the same levels as other Internet stocks, and Internet stocks in general may
not sustain their current market prices. In the past, following periods of
volatility in the market price of a company's securities, securities class
action litigation has often been instituted against that company. If any
securities litigation is initiated against us, we could incur substantial costs
and our management's attention and resources could be diverted from our
business.
Provisions in our charter, our by-laws and Delaware law could delay or deter
tender offers or takeover attempts that may offer you a premium, which could
adversely affect our stock price.
Various provisions in our certificate of incorporation, our by-laws and
Delaware law could make it more difficult for a third party to acquire control
of us, even if the change in control would be beneficial to you. The existence
of these provisions may deprive you of an opportunity to sell your shares at a
premium over prevailing prices. The potential inability of our stockholders to
obtain a control premium could adversely affect the market price for our common
stock.
Our stock price may decline if a large number of shares are sold or there is
a perception that these sales may occur.
As of March 27, 2000, there were 25,684,777 shares of our common stock
outstanding, of which approximately 41% are held by Joseph Fox and Avi Fox.
Messrs. Fox may sell their shares in the public markets from time to time,
subject to limitations imposed by federal securities laws and lock-up
agreements with the underwriters of the initial public offering of our common
stock. The market price of our common stock could decline as a result of sales
of a large number of shares of our common stock by Messrs. Fox or other
stockholders in the market, or the perception that these sales could occur.
These factors also could make it more difficult for us to raise funds through
future offerings of our equity securities.
Cautionary Note Regarding Forward-Looking Statements
Because we want to provide you with more meaningful and useful information,
this annual report includes forward-looking statements that reflect our current
expectations and projections about our future results, performance, prospects
and opportunities. You can find many of these statements by looking for words
such as "may," "will," "expect," "anticipate," "believe," "intend," "estimate"
and similar expressions. These forward-looking statements are based on
information currently available to us and are subject to a number of risks,
uncertainties and other factors that could cause our actual results,
performance, prospects or opportunities in 2000 and beyond to differ materially
from those expressed in, or implied by, these forward-looking statements. These
risks, uncertainties and other factors include our ability to successfully
become self-clearing, our need to maintain and increase our customer accounts,
our need to establish additional international and content relationships, the
intense competition among web sites providing online financial services,
existing and future regulations affecting our business or the Internet
generally, and other factors described under the heading "Risk Factors" above.
We caution you not to place undue reliance on any forward-looking
statements. Except as otherwise required by federal securities laws, we
undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events, changed
circumstances or any other reason after the date of this annual report.
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Item 2. Our Properties
Our corporate headquarters and data center are located in Deerfield,
Illinois, where we occupy approximately 17,300 square feet of office space
under a lease that expires in April 2003. Our brokerage operations are located
in Chicago, Illinois, where we occupy 33,000 square feet of office space under
a lease that expires in March 2008. We occupy 6,000 square feet of space in
Northbrook, Illinois, which we use for software development activities, under
a lease that expires in March 2002. Our first financial services center
occupies 2,600 square feet of office space in Beverly Hills, California under
a lease that expires in February 2001. We also own approximately 30,000 square
feet of real estate in Arizona where we have begun to build a second data
center. We recently entered into leases for 4,300 square feet of office space
in Denver, Colorado and 6,700 square feet of office space in San Francisco,
California which will house financial services centers. We are also
negotiating a lease for office space in Boston, Massachusetts, which will also
house a financial services center. We believe that we have adequate space to
meet our needs for the near future.
Item 3. Legal Proceedings
On October 7, 1998, we filed a complaint against Yahoo!, Inc., in the
United States District Court for the Northern District of Illinois, seeking
$10 million in damages. We brought the suit in connection with Yahoo!'s
failure to fulfill its obligations under a sponsorship agreement with us that
obligated Yahoo! to properly maintain and run an interactive stock trading
game, the Investment Challenge, in Yahoo! Finance, which deprived us of the
benefit of the sponsorship agreement. Subsequently, we amended the complaint
to also allege that Yahoo! (1) failed to fulfill its obligations under an
Internet advertising agreement with us that obligated Yahoo! to maintain a
hypertext link to our web site in Yahoo! Finance, which deprived us of the
benefit of the Internet advertising agreement, (2) violated the Lanham
(federal trademark) Act, Illinois Consumer Fraud and Deceptive Business
Practices Act and Illinois Uniform Deceptive Trade Practices Act by continuing
to show us as a sponsor of the Investment Challenge after we had withdrawn our
sponsorship and (3) has been unjustly enriched by our payment of approximately
$1,000,000 under the sponsorship agreement and the Internet advertising
agreement. On November 12, 1998, Yahoo! filed a counterclaim against us
seeking $1.35 million for breach of the sponsorship agreement and the Internet
advertising agreement. On March 25, 1999, Yahoo! amended its counterclaim to
seek $1.43 million in damages. The parties have completed discovery and the
case has been assigned to a district court judge. No trial date has been set.
We believe that our claims are well-founded and that we have meritorious
defenses to Yahoo!'s counterclaims. We do not believe that resolution of the
complaint or counterclaims, even if not in our favor, will have a material
adverse effect on our business, financial condition or operating results.
We are not party to any other legal proceedings that we believe would,
individually or in the aggregate, have a material adverse effect on our
business, financial condition or operating results.
Item 4. Submission of Matters to a Vote of Our Security Holders
We did not submit any matter to a vote of our security holders during the
fourth quarter of 1999.
PART II
Item 5. Market for Our Common Equity and Related Stockholder Matters
Price Range of Common Stock
Our common stock is traded on the Nasdaq National Market under the symbol
WEBS. Our common stock began trading on Nasdaq on November 17, 1999 in
connection with the initial public offering of our common stock. For the
period from November 17, 1999 to December 31, 1999, the high closing price of
our common stock, as reported on the Nasdaq National Market, was $17.375 and
the low closing price of our common stock, as reported on the Nasdaq National
Market, was $12.375.
On March 27, 2000, the last reported sale price of our common stock was
$11.00 per share, and there were approximately 240 holders of record of our
common stock.
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Dividends
We have never declared or paid any cash dividends on our common stock, and
we do not currently anticipate paying any cash dividends or other
distributions on our common stock in the foreseeable future. We intend instead
to retain any future earnings for reinvestment in our business. Any future
determination to pay cash dividends will be at the discretion of our board of
directors and will be dependent upon our financial condition, results of
operations, capital requirements and other factors which our board of
directors deems relevant.
Sales of Unregistered Securities
In 1999, we issued and sold shares of our common stock in reliance upon the
exemption from registration available under Section 4(2) of the Securities Act
of 1933 to financially sophisticated entities or individuals who represented
that they (1) were aware of our activities and business and financial
condition and (2) understood the ramifications of their actions, in the
following transactions:
. In January 1999, we issued 1,552,518 shares of common stock to 40
investors, consisting of individuals, joint tenants, partnerships and
corporations, in exchange for cash in the aggregate amount of $6,094,235.
In connection with this issuance, we paid $184,579 to J. Edgar Hicks
Capital, which acted as placement agent for 461,448 shares of our common
stock. Also, we paid $45,000 to Viridian Capital and $30,000 to Marion
Bass Securities Corporation, which acted jointly as placement agent with
respect to 187,500 shares of common stock. In addition, we paid Marion
Bass Securities Corporation $250,500 for acting individually as placement
agent for the sale of 626,250 shares of our common stock. Finally, we
paid $79,900 to Talisman Inc., which acted as placement agent for 199,751
shares of our common stock. Also in January 1999, we issued to one
individual an option to purchase 5,625 shares of our common stock at an
exercise price of $2.66 2/3 per share in connection with the individual
referring an employee to us.
. In January and April 1999, we redeemed all outstanding shares of our
series C preferred stock.
. In June 1999, we issued to a joint tenant and two individuals options to
purchase a total of 191,250 shares of our common stock at an exercise
price per share of $7.33 1/3 in connection with the joint tenants selling
land and providing construction management services to us and the
individuals providing general business consulting services to us.
. In August 1999, we issued 244,942 shares of common stock to eight
investors, consisting of individuals and partnerships, in exchange for
cash in the aggregate amount of $2,082,000. In connection with this
issuance, we issued warrants exercisable for 47,000 shares of common
stock at an exercise price of $8.50 per share to Talisman Inc., which
acted as placement agent for the issuance. Also in August 1999, we issued
to one individual an option to purchase 75,000 shares of our common stock
at an exercise price per share of $11.00 in connection with providing
general business consulting services to us.
. In October 1999, we issued Sun Hung Kai Online Limited warrants to
purchase 1,200,000 shares of our common stock in connection with an
international alliance. Of these warrants, 1,000,000 have an exercise
price per share of $19.00 and 200,000 have an exercise price per share of
$30.00.
. In December 1999, we issued Talisman Inc. warrants to purchase 265,000
shares of our common stock in connection with its referral of Sun Hung
Kai Online Limited to us. Of these warrants, 215,000 have an exercise
price per share of $19.00 and 50,000 have an exercise price per share of
$30.00.
No underwriters were involved in any of these transactions. The substantial
majority of the purchasers in these transactions represented that they were
"accredited investors" as defined in Regulation D promulgated under the
Securities Act, and each purchaser represented that it was acquiring our
securities for investment for its own account and not for distribution. All
certificates representing the stock issued in these transactions were
imprinted with a legend stating that the shares have not been registered under
the Securities Act and cannot be transferred unless properly registered under
the Securities Act or an exemption applies.
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Use of Initial Public Offering Proceeds
On November 16, 1999, our registration statements on Form S-1 (File No.
333-85849 and File No. 333-91087) relating to the initial public offering of
our common stock was declared effective by the SEC. Pursuant to these
registration statements, we registered under the Securities Act 4,312,500
shares of our common stock having an aggregate offering price of $47,437,500.
We consummated the offering of 3,750,000 shares of common stock on November
22, 1999 and the offering of an additional 562,500 shares of common stock,
upon the exercise by the underwriters of their over-allotment option, on
December 2, 1999. We issued a total of 4,192,500 shares of common stock at
$11.00 per share, for an aggregate offering price of $46,117,500. One of our
stockholders sold 120,000 shares of common stock held by it at $11.00 per
share for an aggregate offering price of $1,320,000 as part of the
underwriters' over-allotment option. The managing underwriters of the offering
were Fahnestock & Co. Inc., Pacific Crest Securities Inc. and Web Street
Securities, Inc. After payment of the underwriting discount of $3,228,225 and
expenses of $1,911,082, we received net proceeds of $40,978,193 from the
offering. We have used approximately $1.5 million to market our online
brokerage services and other financial services and products and approximately
$1 million for working capital and general corporate purposes. We have
invested the remaining net proceeds, pending their use, in short-term,
investment grade, interest-bearing obligations.
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Item 6. Selected Financial Data
In this section, we present our selected consolidated financial and other
data. You should read the following data along with the financial statements
and the related notes included in this annual report and "Management's
Discussion and Analysis of Financial Condition and Results of Operations." We
derived the statement of operations data for the years ended December 31,
1999, 1998 and 1997 and the period from September 3, 1996, our inception, to
December 31, 1996, and the balance sheet data as of December 31, 1999, 1998,
1997 and 1996, from our audited consolidated financial statements.
<TABLE>
<CAPTION>
Period from
Year Ended December, 31 September 3, 1996
--------------------------------------- (our inception) to
1999 1998 1997 December 31, 1996
------------ ------------ ----------- ------------------
(in thousands, except share and per share data and Other
Data)
<S> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues
Transaction revenue... $ 23,471 $ 7,350 $ 291 $ --
Interest income....... 877 163 -- --
Other revenue......... 1,124 378 38 --
------------ ------------ ----------- ----------
Total revenues...... 25,472 7,891 329 --
Cost of services
Clearance and
execution............ 10,564 2,795 144 --
Employee compensation
and benefits......... 2,726 1,375 227 --
Communication and data
processing........... 1,728 946 127 --
------------ ------------ ----------- ----------
Total cost of
services........... 15,018 5,116 498 --
Operating expenses
Marketing and
advertising.......... 8,458 8,152 1,389 --
Technology
development.......... 2,005 1,559 430 --
General and
administrative....... 6,754 4,882 1,279 116
------------ ------------ ----------- ----------
Total operating
expenses........... 17,217 14,593 3,098 116
------------ ------------ ----------- ----------
Net loss................ $ (6,763) $ (11,818) $ (3,267) $ 116
============ ============ =========== ==========
Basic and diluted net
loss per common share.. $ (0.32) $ (0.71) $ (0.25) $ (0.01)
============ ============ =========== ==========
Shares used in computing
basic and diluted net
loss per common share.. 21,202,941 16,740,600 12,872,442 12,308,862
Other Data:
Total trades.......... 1,016,700 291,500 11,500 N/A
Average trades per
day.................. 4,034 1,200 100 N/A
Total customer
accounts(1)(2)....... 87,500 42,200 1,100 N/A
Total customer
assets(1)............ $795,105,000 $231,558,200 $16,082,900 N/A
Total employees(1).... 119 65 14 6
<CAPTION>
December 31,
-----------------------------------------------------------
1999 1998 1997 1996
------------ ------------ ----------- ------------------
(in thousands)
<S> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents.......... $ 39,189 $ 1,580 $ 1,272 $ 3
Total assets.......... 47,791 4,496 1,514 3
Total liabilities..... 4,828 3,345 412 --
Redeemable common
stock................ -- 624 278 --
Total stockholders'
equity............... 42,963 527 824 3
</TABLE>
- --------
(1) As of the end of each of the periods presented.
(2) Represents open accounts, regardless of whether there have ever been any
funds or securities in the account.
35
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
You should read the following discussion along with our financial
statements and the related notes included in this annual report. The following
discussion contains forward-looking statements that are subject to risks,
uncertainties and assumptions, including those discussed under the heading
"Business--Risk Factors" above. Our actual results, performance and
achievements in 2000 and beyond may differ materially from those expressed in,
or implied by, these forward-looking statements. See "Business--Cautionary
Note Regarding Forward-Looking Statements."
Overview
We were founded in September 1996 but did not begin generating revenues
until the third quarter of 1997, our first quarter online. During that
quarter, we processed approximately 40 trades per day. In January 1998, we
completed our initial system-testing phase and launched our initial marketing
campaign. In the fourth quarter of 1998, we executed an average of 2,095
trades per day. In the fourth quarter of 1999, our average daily trading
volume was 4,877 trades per day, an increase of 133% over the fourth quarter
of 1998.
We earn brokerage commissions for acting as agent in securities
transactions, including trading in Nasdaq and U.S. exchange-listed equities,
and equity and index options. Brokerage commissions represented 53% of our
total revenues for the year ended December 31, 1999 and 52% of our total
revenues for year ended December 31, 1998. Since we initiated services, we
have maintained commissions charged on equity transactions at $14.95 per
internet trade, $17.95 per trade executed by telephone through our automated
touch-tone service and $24.95 per trade executed by telephone through a
registered representative. On equity and index option trades, we also charge
$14.95, $17.95 and $24.95 per trade, plus $1.75 per contract, respectively. We
currently offer commission-free trades on over-the-counter orders of 1,000 or
more shares priced at more than $2.00 per share. We do not currently charge
our customers commissions on the purchase, sale or exchange of mutual funds in
transactions of $500 or more on our SuperSite.
Through our clearing agreement with U.S. Clearing Corporation, we use other
broker-dealers to execute our customers' orders. To date, we have derived a
significant portion of our revenues from U.S Clearing in the form of payments
related to, but not dependent on, the payments U.S. Clearing receives for this
order flow. We receive contractual payments directly from U.S. Clearing of
$0.025 per share for over-the-counter trades priced at more than $2.00 per
share; we receive these payments regardless of the order flow rebates U.S.
Clearing actually receives. The order flow-related payments we received under
this agreement represented 39% of our total revenues for the year ended
December 31, 1999 and 41% of our total revenues for the year ended December
31, 1998. When our current clearing agreement ends on April 30, 2000, we plan
to begin performing clearing functions for equity and mutual fund transactions
in our customers' accounts ourselves and to enter into an agreement with
another third party to perform clearing operations for option transactions in
our customers' accounts. When we become self-clearing, we will begin receiving
payments directly from market makers that are based upon actual order flow. We
expect that those payments will be made to us at regular market rates, which
will be significantly below the current rate of payment to us by U.S.
Clearing. Our current above-market order flow payments have allowed us to
offer our customers commission-free trades on over-the-counter orders of 1,000
or more shares priced at more than $2.00 per share. After April 2000, when our
order flow payments decrease, we anticipate that we will initially limit and
eventually may no longer continue to offer these commission-free trades and,
thus, we may lose the competitive advantage we gain by doing so. In addition,
payment to us for order flow may further decrease after our current clearing
agreement expires because of (1) the SEC's enactment of order handling rules
which reduced market-makers' spreads and correspondingly their profits, (2)
the emergence of electronic communication networks, which enable securities
trading without the use of market makers and (3) the quotation of stock prices
in decimals, which could further reduce spreads and profits. Further, the SEC,
the NASD or other regulatory agencies, courts or other governmental units may
prohibit payments for order flow in the future. We believe that the adverse
effect on per trade revenue and profit margins from decreased order flow-
related payments will be offset in part by (1) the increased average
commission per trade which we expect to result from our anticipated
discontinuation of commission-free over-the-counter trades discussed above and
(2) the decreased average cost per trade and increased interest income which
we
36
<PAGE>
expect to result from our conversion to being self-clearing. However, it may
take some time for us to fully experience these anticipated positive effects
of becoming self-clearing.
If for any reason we are delayed in completing our conversion to being
self-clearing by the April 30, 2000 expiration of our current clearing
agreement, we have entered into an agreement with U.S. Clearing to continue
acting in its present capacity for our customers' accounts on an interim basis
until we are fully prepared to perform these clearing functions ourselves.
Pursuant to this interim agreement, during the period of any such delay, we
would experience the reduction in order flow-related payments described above,
as well as a $1.25 increase in the clearance cost per trade compared to what
we are charged by U.S. Clearing under the terms of our present agreement. As a
result, our revenues and profit margins would be materially adversely affected
during any such interim period between April 30, 2000 and the date of actual
commencement of our self-clearing operations.
We are continuing to establish and develop our Unified Global Brokerage
Accounts. Through these accounts, we currently enable investors in Germany,
Iceland and Hong Kong to trade in U.S. securities markets from our web site.
Because all trades executed by us are settled in U.S. dollars, our customers
and our international partners bear the risk of fluctuations in foreign
currency exchange rates. We intend that once fully operational, these accounts
will allow our customers to trade in major global financial markets using
funds deposited in local currencies. We intend to continue to enter into
arrangements with international online brokerage service providers in major
capital markets around the world. Investors in European countries who trade
U.S. securities through our ConSors relationship pay the same transaction fees
as investors who trade directly through us in the United States. We pay
ConSors a portion of the gross profits earned by us on trades executed by
customers in these countries, in exchange for ConSors (1) facilitating access
to its existing customer base, (2) conducting local marketing and advertising
to attract new customers and (3) providing local customer service support.
Landsbref, our other international partner that was active in 1999, provides
similar customer acquisition and ongoing customer support functions for
Icelandic brokerage customers who trade U.S. securities through us.
Commissions charged by Landsbref include a mark-up above our normal commission
rates, and we remit the amount charged above our normal rate back to Landsbref
as its fee. We do not pay any other fee to Landsbref. We will share gross
profits with our partner in Hong Kong, Sun Hung Kai Online Limited, and our
partner in Chile, CB Corredores de Bolsa, S.A., in a similar manner as we
share gross profits with ConSors. We may structure future arrangements with
other international partners using these or other revenue models.
The following descriptions of the components of revenue and expense apply
to all periods presented below:
Transaction revenue consists of brokerage commissions on customer
transactions in equity securities, options and mutual funds and payments
related to order flow, recorded on a trade date basis.
Interest income represents interest paid to us by U.S. Clearing on our
customers' margin debt and money market account balances, as well as
interest earned on our own available cash balances. We participate in the
interest spread on our customers' margin debit and money market credit
balances through our clearing agreement with U.S. Clearing.
Other revenue consists of fees billed monthly to customers who choose to
subscribe to one of our automatically updating real-time quote services, as
well as revenue from investment banking transactions.
Cost of services consists of transaction-based clearance and execution
costs for customer trades paid to U.S. Clearing under the terms of our
clearing agreement, margin-sharing payments to international partners,
compensation and benefit costs for employees directly involved in brokerage
and subscription service operations, exchange and other market data fees
and the costs of communication lines and related equipment.
Marketing and advertising expenses consist of advertising agency fees,
third-party charges for producing and running television, print, internet,
outdoor and radio ads, the costs of brochures, contests and promotions and
the costs of our public relations program.
Technology development expenses include technology-related payroll,
consulting, supplies and equipment costs associated with the development
and enhancement of our web site and related product and service offerings.
37
<PAGE>
General and administrative expenses consist primarily of compensation
and benefits for corporate management and administrative personnel,
occupancy costs, insurance, professional fees, postage and the provision
for losses related to securities transactions.
Results of Operations
In the discussion below, we compare our results of operations for the years
ended December 31, 1999, 1998 and 1997.
The following table shows for the periods presented (1) the percentage of
total revenues represented by items on our consolidated statements of
operations and (2) the percentage change in each of the items from the prior
period:
<TABLE>
<CAPTION>
Percentage of Period-to-Period
Total Revenues Percentage Change
------------------ ---------------------
Year Ended 1999 1998
December 31, Compared Compared
------------------ -------- --------
1999 1998 1997 to 1998 to 1997
---- ---- ---- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Transaction revenue............. 92% 93% 88% 219% 2,426%
Interest income................. 3 2 -- 438 *
Other revenue................... 5 5 12 197 878
--- ---- ----
Total Revenues................ 100 100 100 223 2,298
Cost of Services:
Clearance and execution......... 41 35 44 278 1,841
Employee compensation and
benefits....................... 11 17 69 98 506
Communication and data
processing..................... 7 12 39 83 644
--- ---- ----
Total Cost of Services........ 59 64 152 194 927
Operating Expenses:
Marketing and advertising....... 33 103 422 4 487
Technology development.......... 8 20 131 29 263
General and administrative...... 27 62 389 38 282
--- ---- ----
Total Operating Expenses...... 68 185 942 18 371
--- ---- ----
Loss before income tax benefit.... (27) (149) (994) (43) 262
Income tax benefit -- -- -- -- --
--- ---- ----
Net loss...................... (27)% (149)% (994)% (43)% 262%
=== ==== ====
</TABLE>
- --------
* Not calculable.
Years Ended December 31, 1999, 1998 and 1997
Revenues
Total revenues increased to $25,472,000 in 1999, up 223% from $7,891,000 in
1998, which was up 2,298% from $329,000 in 1997. We did not launch our online
brokerage service or record our first revenues until July 1997. We continued
system testing and enhancement and development of our initial marketing
campaign during the second half of 1997. Our transaction volumes, customer
accounts and customer asset balances have grown rapidly through 1998 and 1999.
We executed approximately 100 average trades per day in the second half of
1997. This increased to approximately 1,200 average trades per day in 1998 and
4,034 average trades per day in 1999. By the fourth quarter of 1999, we
executed an average of 4,877 trades per day, up 133% over the 2,095 trades per
day executed in the fourth quarter of 1998. Total customer accounts increased
from 1,100 at December 31, 1997 to 42,200 at December 31, 1998 and 87,500 at
December 31, 1999. Total customer accounts represent open accounts regardless
of whether there have ever been any funds or securities in the account.
38
<PAGE>
Transaction revenues increased to $23,471,000 in 1999, up 219% from
$7,350,000 in 1998, which was up 2,426% from $291,000 in 1997. Transaction
revenues represented 92% of total revenues in 1999, compared to 93% in 1998
and 88% in 1997. Brokerage commissions remained fairly constant at 53%, 52%
and 52% of total revenues in 1999, 1998 and 1997, respectively, while order
flow-related rebates decreased to 39% of total revenue in 1999 from 41% in
1998, which was up from 36% of total revenue in 1997. For the year ended
December 31, 1999, equity transactions represented 88% and option transactions
represented 12% of our total transaction volumes. This compares to 78% and 72%
for equity transactions, and 22% and 28% for option transactions in 1998 and
1997, respectively. Average transaction revenue decreased to $23.08 per trade
in 1999 from $25.22 and $25.28 in 1998 and 1997, respectively, as a result of
this shift in trade mix away from the higher commission option trades and a
decline in average order flow-related payments per trade. Transaction revenue
from our international partnerships, principally our agreement with ConSors,
represented approximately 16% of our total revenues in 1999, including 25% in
the fourth quarter of 1999. Our relationship with ConSors became operational
at the end of the first quarter of 1999. We did not have any material revenues
attributable to international relationships in any prior years. We expect
revenues from our international relationships to increase as a percentage of
our total revenues in the future.
Interest income increased to $877,000 in 1999, up 438% from $163,000 in
1998 and $0 in 1997 due to increases in customer money market and margin debit
balances, as well as increases in our own available cash balances. Under our
clearing agreement we receive a share of the interest earned on our customers'
debit and credit balances held at U.S. Clearing. Customer money market credit
balances increased to $126,740,000 at December 31, 1999, up from $57,672,000
and $6,006,000 at December 31, 1998 and 1997, respectively. Customer margin
debits increased to $93,717,000 at December 31, 1999, up from $22,512,000 and
$2,366,000 at December 31, 1998 and 1997, respectively. As a percentage of
total revenue, interest income increased to 3% in 1999 from 2% in 1998. We
expect interest income to increase as a percentage of total revenue in the
future as we convert to self-clearing, retain the full interest spread
currently shared with U. S. Clearing, and experience additional growth in
customer credit and debit balances.
Other revenue increased to $1,124,000 in 1999, up 197% from $378,000 in
1998, which was up 869% from $39,000 in 1997. The majority of the increase in
both 1999 and 1998 was due to an increase in the number of subscribers to our
automatically updating real-time quote services at prices ranging from $19.95
to $79.95 per month. In 1999, we also earned $129,000 of underwriting revenue
from Web Street Securities' participation as a co-manager of our initial
public offering in November 1999. Other revenue declined to 5% of total
revenue in 1999 and 1998, from 12% in 1997, as transaction revenues and
interest income grew at a more rapid rate.
Cost of Services
Total cost of services increased to $15,018,000 in 1999, up 194% from
$5,116,000 in 1998, which was up 927% from $498,000 in 1997. These increases
were due primarily to the increase discussed above in the number of securities
transactions we executed during 1999 and 1998. Clearance and execution costs
increased to $10,564,000, up 278% from $2,795,000 in 1998, which was up 1,841%
from $144,000 in 1997. The transaction-based fees paid to U.S. Clearing for
trade execution, as well as to various market data vendors, increased
throughout 1999 and 1998 as transaction volumes increased. In addition, in
April 1999, we began making margin-sharing payments for trades directed to us
under agreements with our international partners, which we also recorded as
clearance and execution costs. The cost of these margin sharing payments
caused the average clearance and execution cost per trade to increase to
$10.39 in 1999 from $9.59 in 1998. As a result of initiating these margin-
sharing payments, as well as the decline in average transaction revenue per
trade described above, clearance and execution costs increased to 41% of total
revenues in 1999, after decreasing to 35% in 1998 from 44% in 1997.
Employee compensation and benefits increased to $2,726,000 in 1999, up 98%
from $1,375,000 in 1998, which was up 506% from $227,000 in 1997.
Communication and data processing costs increased to $1,728,000, up 83% from
$946,000 in 1998, which was up 645% from $127,000 in 1997. We continued
throughout these periods to add licensed brokers and other customer service
personnel, as well as third party market data services,
39
<PAGE>
communication lines and equipment, to accommodate the increased number of
customer accounts and associated traffic to our web site and to our customer
service call center. In December 1999, we moved the brokerage operations of
Web Street Securities into 33,000 square feet of newly leased space in
downtown Chicago, Illinois and significantly upgraded the telecommunications
systems and equipment in our call center. Total employees involved in
brokerage, customer service and technical support activities increased to 84
at December 31, 1999, from 42 and 10 at December 31, 1998 and 1997,
respectively. As a percentage of total revenues, however, employee
compensation and benefit costs decreased to 11% in 1999, from 17% in 1998 and
69% in 1997. Similarly, communication and data processing costs decreased as a
percentage of total revenues to 7% in 1999, from 12% in 1998 and 39% in 1997.
Operating Expenses
Total operating expenses increased to $17,218,000 in 1999, up 18% from
$14,593,000 in 1998, which was up 371% from $3,098,000 in 1997. These
increases were due to the costs associated with the development and growth of
our web site, systems, brand and infrastructure, as described in further
detail below. We expect to spend significant amounts in the future to continue
developing and delivering to our customers state-of-the-art online financial
products and services, to increase the number of our financial services
centers and to market our brand to expand our customer base. We also plan to
continue to enhance financial, operational and management controls and
reporting systems and procedures to support the continued expansion of our
operations. As a consequence, we intend to increase expenditures in all
operating areas to support our planned growth and the further development of
our infrastructure.
Marketing and advertising. Marketing and advertising expenses increased to
$8,458,000 in 1999, up 4% from $8,152,000 in 1998, which was up 487% from
$1,389,000 in 1997. Our initial marketing campaign was developed in the fourth
quarter of 1997 and launched in the first quarter of 1998. Throughout 1998 and
1999 we advertised in both national and local print publications, and on
television and radio, as well as on various internet sites. These ads and
related promotions were designed to build brand name recognition, grow our
customer base and gain market share. As a percentage of total revenues,
marketing and advertising expenses decreased to 33% in 1999, from 103% in 1998
and 422% in 1997. During the fourth quarter of 1999, we began production of a
new national advertising campaign that launched in February 2000. We expect
this advertising campaign to result in substantially increased levels of
advertising expense in the foreseeable future as we attempt to attract new
customer accounts and accelerate our revenue growth rate. As of December 31,
1999, approximately $684,000 of production costs related to this campaign were
deferred and reflected in prepaids and other assets in our consolidated
balance sheet. These costs will be expensed in the first quarter of 2000 as
the production work is completed and the advertising begins to run.
Technology development. Technology development expenses increased to
$2,005,000 in 1999, up 29% from $1,559,000 in 1998, which was up 263% from
$430,000 in 1997. The increased spending was due to an increase in the number
of technology department employees and expenses related to development of
software by third parties to regularly enhance our web site and expand our
product and service offerings. However, in 1999, technology development
expenses decreased to 8% of total revenues, from 20% in 1998 and 131% in 1997.
As of December 31, 1999 we capitalized approximately $563,000 of internally
developed software costs that would have been immediately charged to
technology development expenses under the accounting policy in effect prior to
January 1, 1999, when we adopted SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." We expect that
technology development expenditures will continue to increase in the future,
but may fluctuate as a percentage of revenues over time depending on the
timing of future development projects.
General and administrative. General and administrative expenses increased
to $6,755,000 in 1999, up 38% from $4,882,000 in 1998, which was up 282% from
$1,279,000 in 1997. These increases were due to a variety of factors, all
related to the significant growth we experienced during these periods. Among
these factors, an increase in the number of employees and improved
compensation and benefit levels to attract and retain qualified employees were
the primary causes of the increase. Other factors that contributed to the
increase were increased
40
<PAGE>
consulting expenses and other professional fees; increased occupancy costs
related to the relocation to larger corporate office facilities in Deerfield,
Illinois in June 1998 and opening new brokerage operation facilities in
Chicago, Illinois in December 1999; and increased costs for insurance and
postage associated with the higher customer and trade activity levels. These
increases in 1999 were partially offset by a decline in non-cash charges for
stock and options granted below market value in prior years to $527,000, from
$1,224,000 in 1998. In 1997, these non-cash charges totaled only $63,000. We
have not granted any below market value shares or options since September 1,
1998, nor do we expect to make any below market grants in the future. As a
result, these charges against income will decline significantly in future
periods. However, we have granted and may continue to grant options and
warrants at or above current fair market value to third parties, for services
rendered on which we will be required to record future charges against income.
We anticipate hiring additional personnel and incurring increased
administrative costs related to being a public company and to support the
expected future growth of our business.
41
<PAGE>
Quarterly Results of Operations
The following table shows, for the periods indicated, our quarterly results
of operations. We have derived our statement of operations data from our
unaudited interim financial statements, which have been prepared on
substantially the same basis as our audited financial statements and which we
believe include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the financial information
for the periods presented. You should read this information along with our
financial statements and notes in this annual report. Our operating results in
any quarter are not necessarily indicative of the results that may be expected
for any future period.
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30,
1998 1998 1998 1998 1999 1999 1999
----------- ------------ ------------ ------------ ------------ ------------ ------------
(unaudited)
(in thousands, except share and per share data and Other Data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of
Operations Data:
Revenues
Transaction
revenue.......... $ 561 $ 1,444 $ 2,073 $ 3,272 $ 4,271 $ 5,609 $ 6,061
Interest income... 20 43 47 53 148 167 162
Other revenue..... 13 41 124 200 218 260 268
----------- ------------ ------------ ------------ ------------ ------------ ------------
Total revenues.. 594 1,528 2,244 3,525 4,637 6,036 6,491
----------- ------------ ------------ ------------ ------------ ------------ ------------
Cost of Services
Clearance and
execution........ 233 475 704 1,383 1,718 2,659 2,802
Employee
compensation and
benefits......... 120 311 391 553 550 708 640
Communication and
data processing.. 73 251 161 461 288 331 418
----------- ------------ ------------ ------------ ------------ ------------ ------------
Total Cost of
Services....... 426 1,037 1,256 2,397 2,556 3,698 3,860
----------- ------------ ------------ ------------ ------------ ------------ ------------
Operating Expenses
Marketing and
advertising...... 1,727 1,926 872 3,627 633 1,611 3,290
Technology
development...... 218 369 635 337 314 599 489
General and
administrative... 1,221 889 935 1,837 1,119 1,370 1,618
----------- ------------ ------------ ------------ ------------ ------------ ------------
Total Operating
Expenses....... 3,166 3,184 2,442 5,801 2,066 3,580 5,397
----------- ------------ ------------ ------------ ------------ ------------ ------------
Income (loss)
before income tax
benefit........... (2,998) (2,693) (1,454) (4,673) 15 (1,242) (2,766)
Income tax benefit. -- -- -- -- -- -- --
----------- ------------ ------------ ------------ ------------ ------------ ------------
Net income
(loss)......... $ (2,998) $ (2,693) $ (1,454) $ (4,673) $ 15 $ (1,242) $ (2,766)
=========== ============ ============ ============ ============ ============ ============
Basic and diluted
net income (loss)
per common share.. $ (0.19) $ (0.16) $ (0.08) $ (0.28) $ 0.00 $ (0.06) $ (0.13)
=========== ============ ============ ============ ============ ============ ============
Shares used in
computing basic
and diluted net
income (loss) per
share............. 16,176,090 16,391,708 16,569,701 16,740,600 20,092,013(1) 20,404,466 20,841,324
Other Data:
Total trades....... 20,100 52,500 82,700 136,200 187,200 253,400 264,000
Average trades per
day............... 330 833 1,293 2,095 3,069 4,022 4,124
Total customer
accounts(2)(3).... 5,600 17,400 31,500 42,200 54,500 66,600 73,000
Total customer
assets(2)......... $43,163,400 $104,996,800 $156,307,300 $231,558,200 $348,308,300 $471,174,700 $519,029,300
Total employees(2). 34 61 76 65 80 112 119
<CAPTION>
Dec. 31,
1999
-------------
<S> <C>
Statement of
Operations Data:
Revenues
Transaction
revenue.......... $ 7,530
Interest income... 400
Other revenue..... 378
-------------
Total revenues.. 8,308
-------------
Cost of Services
Clearance and
execution........ 3,385
Employee
compensation and
benefits......... 828
Communication and
data processing.. 691
-------------
Total Cost of
Services....... 4,904
-------------
Operating Expenses
Marketing and
advertising...... 2,924
Technology
development...... 603
General and
administrative... 2,648
-------------
Total Operating
Expenses....... 6,175
-------------
Income (loss)
before income tax
benefit........... (2,771)
Income tax benefit. --
-------------
Net income
(loss)......... $ (2,771)
=============
Basic and diluted
net income (loss)
per common share.. $ (0.12)
=============
Shares used in
computing basic
and diluted net
income (loss) per
share............. 23,173,156
Other Data:
Total trades....... 312,100
Average trades per
day............... 4,877
Total customer
accounts(2)(3).... 87,500
Total customer
assets(2)......... $795,105,000
Total employees(2). 119
</TABLE>
- -------
(1) Represents shares used in computing basic net income per share. 20,485,997
shares were used in computing diluted net income of $0.00 per share.
(2) As of the end of each of the periods presented.
(3) Represents open accounts, regardless of whether there have ever been any
funds or securities in the account.
42
<PAGE>
Our quarterly operating results may fluctuate significantly in the future
due to a variety of factors, many of which are outside our control. These
factors include:
. the timing of our ability to experience the anticipated benefits of
becoming self-clearing;
. economic conditions specific to the internet, online commerce or the
brokerage industry, as well as general economic conditions;
. trends in securities markets;
. changes in trading volume in securities markets;
. the pace of development of the market for online commerce;
. customer acceptance of our online financial services and products;
. introductions of new or enhanced online financial services and products
by us or our competitors;
. our ability to upgrade and change our web site and systems;
. technical difficulties or system downtime affecting the internet or the
operation of our web site;
. changes in commissions charged by us or our competitors;
. changes in the level of our marketing and other operating expenses to
support our growth;
. changes in clearing, execution and exchange fees; and
. domestic and international regulation of the brokerage industry.
Due to these factors, period-to-period comparisons of our revenues and
operating results may not be meaningful and should not be relied upon as
indicators of future performance. In addition, we may not be able to sustain
the rates of revenue growth that we have experienced in the past or maintain
or improve our operating results.
Income Taxes
We account for income taxes under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes." Since our inception, we have
accumulated net operating loss carryforwards totaling approximately $20.2
million. We do not report any benefit for federal and state income tax net
operating loss carryforwards in our consolidated financial statements, as the
deferred tax asset generated has been offset by a full valuation allowance as
of December 31, 1999.
Liquidity and Capital Resources
As of December 31, 1999, we had cash and cash equivalents of $39,189,000
and no bank debt. From our inception in 1996 through November 1999, we
financed our operations through the private placement of common stock and, to
a much lesser extent, the private placement of preferred stock and equipment
lease financing. We have reported significant negative cash flows from
operating activities for each fiscal year to date. Cash flows used in
operating activities were a negative $6,006,000 for the year ended December
31, 1999, a negative $9,688,000 for the year ended December 31, 1998 and a
negative $2,765,000 for the year ended December 31, 1997. Significant uses of
cash in operations for each of these years included marketing activities to
establish our brand and to promote our products and services, as well as
expenditures to further develop the capacity and functionality of our web
site.
Cash used in investing activities, all of which has represented capital
expenditures, increased to $3,994,000 for the year ended December 31, 1999,
compared to $1,039,000 for the year ended December 31, 1998 and $245,000 for
the year ended December 31, 1997. We continued to acquire fixed assets and
software for cash and under operating leases during 1999 to support the
continued rapid growth of the business. As of December 31, 1999, we had
commitments under noncancellable operating leases for facilities and equipment
totaling approximately $9,083,000 that expire on various dates through March
31, 2008.
43
<PAGE>
In September 1999, we obtained a line of credit from LaSalle Bank N.A. in
the amount of $500,000, which bears interest at the bank's prime rate, which
was 8.5% at December 31, 1999, plus 1%. This line of credit is unsecured and
was originally scheduled to expire in September 2000. As of December 31, 1999,
we had no outstanding balance under the line of credit. In March 2000, we
amended this line of credit to increase the total amount available to $750,000
and to extend the expiration date until April 30, 2001. We intend to use this
credit facility to support letters of credit that we expect to provide from
time to time as security for new online financial service center and other
leases.
Between early 1997 and August 1999, we periodically completed private
placements of our stock as needed to fund the cash deficit from our operating
activities. We raised $300,000, net of offering costs, in the first quarter of
1997 in a private placement of our series A preferred stock. We completed
various private placements of our common stock providing us with proceeds
totaling $3,979,000 in 1997 and $11,224,000 in 1998, each net of offering
costs. During January 1999, we raised $5,504,000, net of offering costs,
through private placements of 1,552,518 shares of our common stock. In January
1999, we paid $400,000, and in April 1999 we paid $250,000, to redeem all
3,000,000 shares of our then issued and outstanding series C preferred stock.
All those shares were originally issued in January 1997 to Darwin Financial
Group. At the time of the issuance, Joseph Fox and Avi Fox were the principal
stockholders, directors and executive officers of Darwin. Messrs. Fox were the
only stockholders of Darwin at the time the shares were repurchased. During
August 1999, we raised $2,082,000 through private placements of 244,942 shares
of our common stock. In November and December 1999, from our initial public
offering of an aggregate of 4,192,500 shares of our common stock, we received
aggregate proceeds, net of issuance costs, of approximately $40,978,000.
In the future, we expect to incur significantly higher costs, particularly
marketing and advertising, technology development, payroll and occupancy
costs, to grow our business. We anticipate incurring between $1 and $1.5
million in nonrecurring expenses during the first and second quarters of 2000
to implement the conversion to self-clearing, consisting primarily of
consulting, personnel and training costs. We also expect to require, as of the
anticipated May 1, 2000 conversion date, approximately $2 to $3 million of
additional regulatory capital beyond our current requirement of approximately
$100,000. We anticipate increased levels of capital expenditures in 2000 to
continue construction of a second data center, which we expect to complete in
the second quarter, and to continue to expand our existing systems and network
of online financial service centers over the next year. It is our intention to
finance certain of these capital expenditures with additional lease financing
that we expect to be available to us.
We believe that our current cash and cash equivalents, supplemented with
lease financing that we expect to be available, will be sufficient to meet our
anticipated cash needs for working capital, regulatory capital and capital
expenditures for at least the next 12 months. However, during this period, we
may need to seek additional capital in the private and/or public equity
markets in order to support more rapid growth, to respond to competitive
pressures, to develop new products and services and to acquire complimentary
businesses. After that 12-month period, if cash generated from operations is
insufficient to satisfy our liquidity requirements, we may need to raise
additional funds through public or private financing, strategic relationships
or other arrangements. If we receive additional funds through the issuance of
equity securities, our existing stockholders may experience significant
dilution and these equity securities may have rights, preferences or
privileges senior to those of our common stock. Further, we may not be able to
obtain additional financing when needed or on terms favorable to us or our
stockholders. If we are unable to obtain additional financing when needed, or
to do so on acceptable terms, we may be unable to develop or enhance our
products or services, take advantage of business opportunities or respond to
competitive pressures.
44
<PAGE>
Year 2000 Readiness
We developed, purchased or licensed our internal systems and software in
the last few years. We designed the internal systems and software which we
developed to be fully year 2000 compliant. We have incurred no additional
expense for year 2000-related remediation. We have not experienced any year
2000 problems nor have our operations been affected by any year 2000 failures
of third parties on which we rely. Although we have not experienced any year
2000 problems to date, we plan to continue to monitor the situation closely,
as year 2000 problems could still arise.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which defines derivatives, requires that all
derivatives be carried at fair value and provides for hedge accounting when
certain conditions are met. This statement will be effective for us in 2001.
We believe that the adoption of this statement will not have a material impact
on our financial position or results of operation.
45
<PAGE>
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Our primary financial instruments are cash in banks, money market
instruments and short-term certificates of deposit. We do not believe that
these instruments are subject to material potential near-term losses in future
earnings from reasonably possible near-term changes in market rates or prices.
We do not have derivative financial instruments for speculative or trading
purposes. In the normal course of business, our customers enter into
transactions where the risk of potential loss due to market fluctuations or
failure to perform exceeds the amounts reported for the transaction. We have
established policies, procedures and internal processes governing our
management of market risks in the normal course of our business operations.
We, along with U.S. Clearing, continuously monitor our exposure to market and
counterparty risk through the use of a variety of financial, position and
credit exposure reporting and control procedures. In addition, we review the
credit-worthiness of each customer and/or other counterparty with which we
conduct business. We are not currently exposed to any material currency
exchange risks because the risk is borne by our international customers and
our international partners, and we do not hold any assets or incur any
liabilities denominated in foreign currencies.
Item 8. Financial Statements and Supplementary Data
The financial statements, with the report of independent public
accountants, listed in Item 14 are included in this annual report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
We changed accounting firms from Grant Thornton LLP to Arthur Andersen LLP,
effective September 8, 1998, primarily in contemplation of an initial public
offering. Our board of directors approved this decision. Grant Thornton did
not (1) issue any adverse opinion, (2) make any disclaimer of its opinion or
(3) qualify or modify its opinion as to uncertainty, audit scope or accounting
principles in its report for the year ended December 31, 1997. We had no
disagreements with Grant Thornton about accounting principles or practices,
financial statement disclosure or auditing scope or procedure. Grant Thornton
has not audited or otherwise expressed an opinion on any of the financial
statements included in this annual report.
46
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
The information in response to this item is incorporated by reference from
the "Nominees," "Other Directors" and "Executive Officers and Key Employees"
sections of our definitive proxy statement to be filed with the SEC in
connection with our 2000 annual meeting of stockholders.
Item 11. Executive Compensation
The information in response to this item is incorporated by reference from
the "Executive Compensation" section of our 2000 annual meeting definitive
proxy statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information in response to this item is incorporated by reference from
the "Security Ownership of Management and Principal Stockholders" section of
our 2000 annual meeting definitive proxy statement.
Item 13. Certain Relationships and Related Transactions
The information in response to this item is incorporated by reference from
the "Compensation Committee Interlocks and Insider Participation" and "Certain
Relationships and Related Transactions" sections of our 2000 annual meeting
definitive proxy statement.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) We have filed the following documents as part of this annual report:
1. We have filed the following financial statements, with the report of
independent public accountants, as part of this annual report:
Report of Arthur Andersen LLP, Independent Public Accountants
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Operations for the Years Ended December 31,
1999, 1998 and 1997
Consolidated Statements of Changes in Stockholders' Equity for the Years
Ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the Years Ended December 31,
1999, 1998 and 1997
Notes to Consolidated Financial Statements
2. We have filed the following financial statement schedules as part of
this annual report:
None.
3. We have filed, or incorporated by reference, the following exhibits
with this annual report:
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------- -------
<C> <S> <C>
2 Agreement and Plan of Merger dated March 19, 1998 between
us, Web Street Securities, Inc., an Illinois corporation,
and Web Street Securities, Inc., a Delaware corporation
("Web Street Securities"), incorporated by reference to
Exhibit 1 of the Registrant's Registration Statement on
Form S-1 (Reg. No. 333-85849) (the "IPO S-1").
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------- -------
<C> <S> <C>
3.1 Registrant's Amended and Restated Certificate of
Incorporation.
3.2 Registrant's Amended and Restated By-laws.
4 Specimen stock certificate representing common stock,
incorporated by reference to Exhibit 4 of the IPO S-1.
10.1* Registrant's 1998 Stock Option Plan, incorporated by
reference to Exhibit 10.1 of the IPO S-1.
10.2* Form of Option Agreement under our 1998 Stock Option Plan,
incorporated by reference to Exhibit 10.2 of the IPO S-1.
10.3* Form of Option Agreement prior to our 1998 Stock Option
Plan, incorporated by reference to Exhibit 10.3 of the IPO
S-1.
10.4* Registrant's 1999 Stock Incentive Plan, incorporated by
reference to Exhibit 10.4 of the IPO S-1.
10.5* Form of Option Agreement under Registrant's 1999 Stock
Incentive Plan, incorporated by reference to Exhibit 10.5
of the IPO S-1.
10.6* Employment Agreement between Registrant and Joseph J. Fox.
10.7* Employment Agreement between Registrant and Avi Fox.
10.8* Employment Agreement between Registrant and Joseph A.
Barr.
10.9* Employment Agreement between Registrant and Stuart A.
Cohn.
10.10* Employment Agreement between Registrant and William J.
Mania.
10.11* Employment Agreement between Registrant and D. Jonathan
Rosenberg.
10.12* Form of Indemnification Agreement for Directors and
Executive Officers, incorporated by reference to Exhibit
10.12 of the IPO S-1.
10.13+ Joint Brokerage Agreement dated as of December 11, 1998
between Web Street Securities and ConSors Discount-Broker,
incorporated by reference to Exhibit 10.13 of the IPO S-1.
10.14 Online Service Agreement dated January 19, 1999 between
Web Street Securities and Landsbref, Ltd, incorporated by
reference to Exhibit 10.14 of the IPO S-1.
10.15 Full Service Agreement dated January 19, 1999 between Web
Street Securities and Landsbref, Ltd, incorporated by
reference to Exhibit 10.15 of the IPO S-1.
10.16 Clearing Agreement dated as of April 18, 1997 between Web
Street Securities and U.S. Clearing Corp. and amendment
dated April 30, 1999, incorporated by reference to Exhibit
10.16 of the IPO S-1.
10.17 Letter Agreement dated January 28, 2000 between Web Street
Securities and U.S. Clearing Corp.
10.18 Sublease Agreement dated April 15, 1998 between Registrant
and Western Diversified Life Insurance Company,
incorporated by reference to Exhibit 10.17 of the IPO S-1.
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------- -------
<C> <S> <C>
10.19+ Joint Online Trading Agreement dated October 13, 1999
between Registrant and Sun Hung Kai Online Limited,
incorporated by reference to Exhibit 10.18 of the IPO S-1.
10.20+ Brokerage Arrangement Agreement dated August 13, 1999
between Registrant and CB Corredores de Bolsa, S.A.,
incorporated by reference to Exhibit 10.19 of the IPO S-1.
10.21 Business Loan Agreement effective as of March 7, 2000
between Registrant and LaSalle Bank National Association
and the related Promissory Note.
16 Letter of Grant Thornton, LLP to the Securities and
Exchange Commission.
21 Subsidiaries, incorporated by reference to Exhibit 21 of
the IPO S-1.
27 Financial Data Schedule
</TABLE>
- --------
*Management contract or compensatory plan or arrangement required to be filed
as an exhibit to this annual report.
+A portion of the exhibit has been omitted pursuant to a previously granted
request for confidential treatment
(b) Reports on Form 8-K:
We did not file any current reports on Form 8-K during the quarter ended
December 31, 1999.
49
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidated Financial Statements of Web Street, Inc.:
Report of Independent Public Accountants................................. F-2
Consolidated Balance Sheets.............................................. F-3
Consolidated Statements of Operations.................................... F-4
Consolidated Statements of Changes in Stockholders' Equity............... F-5
Consolidated Statements of Cash Flows.................................... F-6
Notes to Consolidated Financial Statements............................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Web Street, Inc:
We have audited the accompanying consolidated balance sheets of Web Street,
Inc. (a Delaware Corporation) and Subsidiary as of December 31, 1999 and 1998,
and the related consolidated statements of operations, stockholders' equity
and cash flows for each of the three years ended December 31, 1999, 1998 and
1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Web
Street, Inc. and Subsidiary as of December 31, 1999 and 1998, and the results
of their operations and their cash flows for each of the three years ended
December 31, 1999, 1998 and 1997, in conformity with accounting principles
generally accepted in the United States.
/s/ Arthur Andersen LLP
Chicago, Illinois
February 15, 2000
F-2
<PAGE>
WEB STREET, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
As of December 31,
--------------------------
ASSETS 1999 1998
------ ------------ ------------
<S> <C> <C>
Cash and cash equivalents.......................... $ 39,189,362 $ 1,579,639
Receivable from clearing broker.................... 2,395,679 1,008,716
Other receivables.................................. 359,917 687,861
Property and equipment, net........................ 3,994,411 886,223
Prepaids and other assets.......................... 1,851,534 333,185
------------ ------------
Total assets................................... $ 47,790,903 $ 4,495,624
============ ============
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Liabilities:
Accounts payable................................. $ 2,705,228 $ 1,823,400
Accrued compensation and benefits................ 1,202,561 433,950
Other accrued expenses........................... 774,072 936,785
Deferred rent.................................... 146,082 150,378
------------ ------------
Total liabilities.............................. $ 4,827,943 $ 3,344,513
Commitments and contingencies (note 6).............
Redeemable common stock............................ -- 624,375
Stockholders' equity:
Preferred stock--Series A ($.01 par value;
500,000 shares authorized; 0 and 112,500 shares
issued and outstanding as of December 31, 1999
and 1998, respectively)......................... -- 1,125
Preferred stock--Series C ($.01 par value;
5,000,000 shares authorized; 0 and 3,000,000
shares issued and outstanding as of December 31,
1999 and 1998, respectively).................... -- 30,000
Preferred stock ($.01 par value; 2,000,000 and
6,000,000 shares authorized as of December 31,
1999 and 1998, respectively; 0 shares issued and
outstanding).................................... -- --
Common stock--($.01 par value; 100,000,000 shares
authorized; 25,660,402 and 18,956,273 issued and
outstanding as of December 31, 1999 and 1998,
respectively)................................... 256,604 189,563
Receivable from related party.................... -- (190,000)
Additional paid-in capital....................... 65,317,651 16,343,846
Accumulated deficit.............................. (22,611,295) (15,847,798)
------------ ------------
Total stockholders' equity..................... $ 42,962,960 $ 526,736
------------ ------------
Total liabilities and stockholders' equity..... $ 47,790,903 $ 4,495,624
============ ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
WEB STREET, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
1999 1998 1997
----------- ------------ -----------
<S> <C> <C> <C>
Revenues
Transaction revenue.................. $23,471,194 $ 7,350,246 $ 290,699
Interest income...................... 876,938 162,912 --
Other revenue........................ 1,123,453 377,775 38,616
----------- ------------ -----------
Total revenues..................... 25,471,585 7,890,933 329,315
Cost of services
Clearance and execution.............. 10,564,306 2,794,584 143,603
Employee compensation and benefits... 2,725,779 1,375,203 226,641
Communication and data processing.... 1,727,605 946,150 127,886
----------- ------------ -----------
Total cost of services............. 15,017,690 5,115,937 498,130
Operating expenses
Marketing and advertising............ 8,457,773 8,151,578 1,388,916
Technology development............... 2,005,093 1,559,306 429,769
General and administrative........... 6,754,526 4,882,562 1,279,181
----------- ------------ -----------
Total operating expenses........... 17,217,392 14,593,446 3,097,866
----------- ------------ -----------
Net loss............................... $(6,763,497) $(11,818,450) $(3,266,681)
=========== ============ ===========
Basic and diluted net loss per common
share................................. $ (0.32) $ (0.71) $ (0.25)
=========== ============ ===========
Weighted average common shares
used in computation of basic and
diluted net loss per common share:.... 21,202,941 16,740,600 12,872,442
=========== ============ ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
WEB STREET, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Receivable
Series A Series C Additional From Total
Common Preferred Preferred Paid-In Accumulated Related Stockholders'
Stock Stock Stock Capital Deficit Party Equity
-------- --------- --------- ----------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1996................... $124,158 $ -- $ -- $ (4,946) $ (115,792) $ -- $ 3,420
Acquisition of Darwin
Financial Group's net
assets in exchange for
3,000,000 shares of
Series C preferred
stock.................. -- -- 30,000 (7,346) -- -- 22,654
Issuance of 2,736,867
shares of common stock. 27,369 -- -- 3,604,502 -- -- 3,631,871
Issuance of 112,500
shares of Series A
preferred stock........ -- 1,125 -- 298,875 -- -- 300,000
Additional capital
contributions.......... -- -- -- 69,150 -- -- 69,150
Compensation associated
with stock options..... -- -- -- 63,389 -- -- 63,389
Deemed dividend to
reflect discount from
fair value for issuance
of Series A preferred
stock with conversion
terms.................. -- -- -- 300,000 (300,000) -- --
Net loss and
comprehensive loss..... -- -- -- -- (3,266,681) -- (3,266,681)
-------- ------- ------- ----------- ------------ -------- -----------
Balance, December 31,
1997................... 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 3,375 common
stock options.......... 34 -- -- 191 -- -- 225
Receivable from related
party.................. -- -- -- -- -- (190,000) (190,000)
Accretion on redeemable
common stock........... -- -- -- -- (346,875) -- (346,875)
Compensation associated
with stock options..... -- -- -- 1,224,182 -- -- 1,224,182
Net loss and
comprehensive loss..... -- -- -- -- (11,818,450) -- (11,818,450)
-------- ------- ------- ----------- ------------ -------- -----------
Balance, 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 associated
with stock options and
issuance of common
stock.................. -- -- -- 527,114 -- -- 527,114
Exercise of 56,031
common stock options... 560 -- -- 2,445 -- -- 3,005
Net loss and
comprehensive loss..... -- -- -- -- (6,763,497) -- (6,763,497)
-------- ------- ------- ----------- ------------ -------- -----------
Balance, December 31,
1999................... $256,604 $ -- $ -- $65,317,651 $(22,611,295) $ -- $42,962,960
======== ======= ======= =========== ============ ======== ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
WEB STREET, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
1999 1998 1997
----------- ------------ -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................. $(6,763,497) $(11,818,450) $(3,266,681)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation and amortization...... 885,350 347,647 81,477
Compensation expense--stock and
stock option issuances............ 527,114 1,273,082 63,389
Deferred rent amortization......... (4,296) 150,378 --
Changes in operating assets and
liabilities:
(Increase) decrease in operating
assets:
Receivable from clearing broker.. (1,591,716) (1,008,716) --
Other receivables................ 532,697 (872,719) (5,000)
Prepaids and other assets........ (1,518,349) (101,660) (50,000)
Increase (decrease) in operating
liabilities:
Accounts payable................. 881,828 1,521,834 301,566
Accrued compensation and
benefits........................ 768,611 417,150 16,800
Other accrued expenses........... 276,577 403,495 94,000
----------- ------------ -----------
Net cash used in operating
activities.................... (6,005,681) (9,687,959) (2,764,449)
Cash flows from investing activities:
Purchases of property, equipment and
software............................ (3,993,538) (1,038,909) (245,451)
----------- ------------ -----------
Net cash used in investing
activities.................... (3,993,538) (1,038,909) (245,451)
Cash flows from financing activities:
Proceeds from issuance of common
stock, net of issuance costs........ 48,065,937 11,224,466 3,978,521
Issuance (redemption) of preferred
stock............................... (650,000) -- 300,000
Payment (to) from related party...... 190,000 (190,000) --
Proceeds from the exercise of stock
options............................. 3,005 -- --
----------- ------------ -----------
Net cash provided by financing
activities.................... 47,608,942 11,034,466 4,278,521
----------- ------------ -----------
Increase (decrease) in cash and
cash equivalents.............. 37,609,723 307,598 1,268,621
Cash and cash equivalents at beginning
of year............................... 1,579,639 1,272,041 3,420
----------- ------------ -----------
Cash and cash equivalents at end of
year.................................. $39,189,362 $ 1,579,639 $ 1,272,041
=========== ============ ===========
Supplemental disclosures of cash flow
information:
Deemed dividend to reflect discount
from fair value for issuance of
Series A preferred stock with
conversion terms.................... $ -- $ -- $ 300,000
Acquisition of net assets in exchange
for 3,000,000 shares of Series C
preferred stock..................... $ -- $ -- $ 22,654
Eliminate common stock put rights.... $ 624,375 $ -- $ --
Interest paid........................ $ 4,745 $ 338 $ --
Income taxes paid.................... $ 800 $ -- $ --
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
WEB STREET, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1--Organization and Basis of Presentation
Web Street, Inc. (known as Web Street Financial Group, Inc. prior to
February 9, 1999 and WebStreet.com, Inc. from February 9, 1999 to August 10,
1999 and hereinafter, the "Company") was incorporated on December 31, 1997
under the laws of the state of Delaware. The Company conducts business
primarily through its wholly owned subsidiary, Web Street Securities, Inc. Web
Street Securities was formed as an Illinois corporation on September 3, 1996
and is a registered broker-dealer with the Securities and Exchange Commission
and a member of the National Association of Securities Dealers, the Securities
Investor Protection Corporation and the Municipal Securities Rule Making
Board. Web Street Securities is an introducing broker-dealer that began
operations as an online broker in July 1997.
In November and December 1999, the Company completed an initial public
offering of an aggregate of 4,192,500 shares of its common stock at a price of
$11 per share. The Company's common stock now trades on the Nasdaq National
Market under the symbol "WEBS." Refer to Note 9 for further description of the
transactions consummated at the time of the public offering.
The consolidated financial statements include the accounts of the Company's
subsidiary after elimination of significant intercompany balances and
transactions. The Company operates as a single reportable business segment.
Note 2--Summary of Significant Accounting Policies
Transaction Revenue
The Company records commission income and payment for order flow from
securities transactions on a trade-date basis, along with any related
clearance and execution costs. All the payment for order flow is received
under an agreement with the Company's clearing broker, which expires April 30,
2000. Commission income for the years ended December 31, 1999, 1998 and 1997
was $13,438,665, $4,135,121 and $168,728, respectively, and the payment for
order flow for the years ended December 31, 1999, 1998 and 1997 was
$10,032,529, $3,215,125 and $121,971, respectively.
Interest Income
Interest income represents the Company's share of interest on outstanding
customer margin loans made by the Company's clearing broker and fee income
related to the sweep of excess customer funds into money market instruments.
Interest income also includes interest earned on the Company's invested cash
balances.
Other Revenue
Other revenue consists of fees billed monthly to customers who subscribe to
our automatically updating real-time market data services, as well as revenue
from investment banking transactions. In the year ended December 31, 1999,
other revenue included $129,000 of underwriting revenue from Web Street
Securities' participation as co-manager of the Company's 1999 initial public
offering.
Depreciation and Amortization
Depreciation on property and equipment is provided on a straight-line basis
using estimated useful service lives of three to seven years. Leasehold
improvements are amortized over the lesser of the economic useful life of the
improvement or the term of the lease. The Company capitalizes all purchased
software and amortizes it over is useful life of approximately three years.
The Company recorded depreciation and amortization expense
F-7
<PAGE>
WEB STREET, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
of $885,350, $347,647 and $81,477 for the years ended December 31, 1999, 1998
and 1997, respectively. In March 1998, the American Institute of Certified
Public Accountants issued Statement of Position (SOP) 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use." SOP
98-1 provides guidance on new cost recognition principles. The Company adopted
SOP 98-1 effective January 1, 1999, and has commenced capitalizing direct
costs of developing internal use software, which would otherwise have been
expensed under its previous accounting policy. Completed projects are
transferred to property and equipment and are amortized on a straight-line
basis over their estimated useful lives. Capitalized costs for internally
developed software, net of amortization, as of December 31, 1999 amounted to
$563,093.
Advertising Costs
Advertising costs are expensed as incurred, except for advertising
production costs, which are expensed when the initial advertisement is run.
Employee Costs
Compensation and benefits expense for technology and administrative
personnel are included in technology development and general and
administrative expense, respectively, in the consolidated statements of
operations.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. Included in cash
and cash equivalents at December 31, 1999 is $35,428,579 of money market
instruments.
Fair Value of Financial Instruments
All financial instruments, which are carried at cost, are short-term in
nature and, accordingly, their carrying value approximates fair value.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Income Taxes
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." SFAS
No. 109 requires an asset and liability based approach in accounting for
income taxes. Deferred income tax assets and liabilities are recorded to
reflect the tax consequences on future years of temporary differences of
revenue and expense items for financial statement and income tax purposes.
Deferred tax assets are reduced by a valuation allowance when, in the opinion
of management, it is more likely than not that some portion or all of the
deferred tax assets will not be realized.
Earnings Per Share
Basic earnings per share ("EPS") is computed by dividing net income by the
weighted average common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to increase common stock were exercised or converted into common
stock.
F-8
<PAGE>
WEB STREET, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock-Based Compensation
The Company accounts for employee stock-based compensation using the
intrinsic value method of accounting prescribed in Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." The
Company provides pro forma disclosures of net income (loss) and earnings
(loss) per share as required under SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 encourages but does not require companies to
record compensation expense for stock-based employee compensation plans based
on the fair-value method of accounting.
Note 3--Receivable from Clearing Broker
Receivable from clearing broker represents the net settlement due to the
Company for customer trading activity payable by its clearing broker. The
receivable from clearing broker at December 31, 1999 and 1998 consists of the
following:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Rebates receivable from payment for order flow..... $1,566,091 $ 651,925
Commissions receivable............................. 829,588 356,791
---------- ----------
$2,395,679 $1,008,716
========== ==========
</TABLE>
The clearing broker pursuant to a clearing agreement performs the clearing,
settlement and depository operations for the Company's securities
transactions. The clearing agreement required the Company to maintain a
minimum deposit of $50,000 with the clearing broker and the Company has agreed
to increase the amount of this deposit over time to $150,000. The balance was
$105,999 at December 31, 1999 and is included in other assets.
The Company has agreed to indemnify its clearing broker for losses that the
clearing broker may sustain as a result of the failure of the Company's
customers to satisfy their obligations related to securities purchased or sold
through the Company. The Company experienced losses of $274,631, $275,886 and
$111,534 for the years ended December 31, 1999, 1998 and 1997, respectively,
related to the failure of its customers to satisfy their outstanding unsecured
margin loan obligations.
Note 4--Other Receivables
The balance in other receivables at December 31, 1998 included $674,250 of
receivables from common stock subscriptions executed in December 1998 and
collected in January 1999.
Note 5--Property and Equipment
Property and equipment, net at December 31, 1999 and 1998 consists of the
following:
<TABLE>
<CAPTION>
1999 1998
---------- ---------
<S> <C> <C>
Hardware and equipment............................. $2,813,417 $ 783,737
Furniture and fixtures............................. 438,576 156,287
Software........................................... 872,458 161,243
Leasehold improvements............................. 1,151,101 205,747
Land............................................... 25,000 --
---------- ---------
Total cost..................................... 5,300,552 1,307,014
Less accumulated depreciation and amortization..... (1,306,141) (420,791)
---------- ---------
Total property and equipment, net.............. $3,994,411 $ 886,223
========== =========
</TABLE>
F-9
<PAGE>
WEB STREET, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 6--Commitments and Contingencies
The Company has obligations under various noncancellable operating leases
on its office facilities, computer and other office equipment and automobiles
that expire on various dates through March 31, 2008. Rent expense for the
years ended December 31, 1999, 1998 and 1997 was $784,969, $526,222 and
$145,297, respectively. Future minimum annual rent payments under leases with
an initial term of one year or more are as follows:
<TABLE>
<S> <C>
2000.......................... $1,774,097
2001.......................... 1,689,777
2002.......................... 1,468,747
2003.......................... 865,536
2004.......................... 747,309
Thereafter.................... 2,537,122
----------
Future minimum lease payments. $9,082,588
==========
</TABLE>
The Company has entered into employment agreements with several of its key
executive officers. These employment agreements provide for annual base salary
compensation, annual incentive compensation and serverance payments in the
event of termination of employment under certain defined circumstances,
including changes in the Company's control.
The Company is, from time to time, a party to certain pending and
threatened legal actions arising in the ordinary course of its business.
Management does not believe that any such current matters, either individually
or in the aggregate, will have a material adverse effect on the Company's
results of operations or its financial condition.
Note 7--Income Taxes
Significant components of the Company's deferred tax assets and liabilities
at December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Deferred tax assets--
Net operating loss carry forwards.............. $7,853,775 $5,257,739
Compensation expense recorded in connection
with stock issuance and options............... 529,929 492,082
Accrued expenses............................... 346,766 75,698
Depreciation and amortization.................. 8,548 35,856
Other.......................................... -- 970
---------- ----------
Total deferred tax assets.................... 8,739,018 5,862,345
Deferred tax liabilities-software develop.
costs......................................... (229,106) (9,252)
---------- ----------
8,509,912 5,853,093
Valuation allowance.............................. (8,509,912) (5,853,093)
---------- ----------
Net deferred tax assets.......................... $ -- $ --
========== ==========
</TABLE>
F-10
<PAGE>
WEB STREET, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Because the Company has incurred net operating losses since its inception,
valuation allowances have been provided in amounts equal to the net deferred
tax asset at December 31, 1999 and 1998. At December 31, 1999, the Company had
approximately $20.2 million of net operating loss carry forwards. Of these
carry forwards, $3.1 million will begin expiring in 2012. The remaining
amounts will begin expiring in 2018.
A reconciliation of the Company's effective income tax rate to an amount
computed by applying the statutory federal tax rate to the Company's pretax
loss is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Tax benefit at federal
statutory rate......... (34.0)% (34.0)% (34.0)%
State income taxes, net
of federal tax benefit. (4.8) (4.8) (4.8)
Increase in valuation
allowance.............. 38.7 38.7 38.8
Other................... 0.1 0.1 --
----- ----- -----
Effective tax rate...... -- % -- % -- %
===== ===== =====
</TABLE>
Note 8--Related Party Transactions
In January 1999, we redeemed 2,000,000 shares of our outstanding series C
preferred stock for an aggregate redemption price of $400,000. In April 1999,
we redeemed all of the 1,000,000 remaining shares of our outstanding series C
preferred stock for an aggregate redemption price of $250,000. All shares were
held by Darwin Financial Group, of which Joseph Fox and Avi Fox are the
principal stockholders, directors and executive officers.
As of December 31, 1999, the Company was owed approximately $518,000 from
officers and a director of the Company. Under unsecured promissory notes dated
March 16, 1999, we loaned each of Joseph Fox and Avi Fox $110,000 at an annual
interest rate of 5%, to be repaid on or before March 16, 2001. As of December
31, 1999, the full principal amount of each of these notes was outstanding and
is included in other assets in the consolidated balance sheet. In addition,
other receivables at December 31, 1999 included a $110,000 receivable from one
of the Company's directors related to the purchase of Company common stock.
This amount has been repaid in full subsequent to December 31, 1999.
Note 9--Stockholders' Equity
Preferred Stock
Prior to the completion of the Company's initial public offering in
November and December 1999, the Company's Certificate of Incorporation, as
amended, authorized 500,000 shares of Series A preferred stock, 5,000,000
shares of Series C preferred stock and 6,000,000 additional shares of
preferred stock which could have been issued from time to time in one or more
series, each having a par value of $.01. Upon consummation of the Company's
initial public offering, the Company's Certificate of Incorporation was
amended and restated. The Company's Amended and Restated Certificate of
Incorporation authorizes 2,000,000 shares of preferred stock, par value $0.01
per share, which may be issued from time to time in one or more series with
such powers, preferences and rights as may be designated by the Board without
further approval of the Company's stockholders.
F-11
<PAGE>
WEB STREET, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Series A
Prior to completion of the Company's initial public offering, the Company
had 112,500 shares of Series A preferred stock issued and outstanding. These
shares were issued in 1997 at a discount from fair market value, based on the
prices of recent sales of common stock by the Company to third parties, and
the difference between the price realized by the Company and the fair market
value of $300,000 is reflected as a deemed dividend in the accompanying
statement of changes in stockholders' equity for the year ended December 31,
1997. Upon consummation of the Company's initial public offering, each
outstanding share of Series A preferred stock was converted into four shares
of the Company's common stock, in accordance with its terms.
Series C
At December 31, 1998 and 1997, the Company had 3,000,000 shares of Series C
preferred stock issued and outstanding. These shares were held by Darwin
Financial Group, a company substantially owned by two officers of the Company.
On January 13, 1999, the Company repurchased and retired 2,000,000 of these
shares for consideration of $400,000 and on April 15, 1999 the Company
repurchased and retired the balance of 1,000,000 of these shares for
consideration of $250,000.
Common Stock
The Company's Amended and Restated Certificate of Incorporation authorizes
100,000,000 shares of common stock, par value $.01 per share, which may be
issued by the Company's board of directors without further approval of the
Company's stockholders.
During 1997, the Company issued 2,944,992 shares of common stock (208,125
of such shares providing for the right to sell shares back to the Company as
discussed below) for total proceeds of $3,909,371, representing an average
price per share of $1.33. During 1998, the Company issued 3,788,700 shares of
common stock for total net proceeds of $10,785,176. The price per share issued
in 1998 ranged from $3.00 to $4.00 and averaged $2.98 per share, exclusive of
3,375 shares issued upon the exercise of options with an exercise price of
$0.067 per share.
Of the shares of common stock issued during 1998, 188,304 of these shares
provided that, if subsequent private equity financing were to occur at prices
below the prices paid for these shares, additional shares would be issued to
the holders of these shares to effectively provide for the subsequent pricing.
An additional 95,031 shares were issued during 1998 pursuant to these pricing
terms. A reclassification from additional paid-in capital to common stock in
the amount of par value of these shares was made in connection with the
issuance of these additional shares.
Also during 1998, the Company issued 14,850 shares of common stock to
employees and outside consultants for services rendered. The Company recorded
compensation and consulting expense, and an increase in paid-in capital, in
the amount of $48,900. Compensation expense was computed based on the most
recent prices realized by the Company in the sale of common stock to third
parties.
During 1997, 208,125 shares of common stock were issued with a right
entitling the holder to sell the shares back to the Company at fair market
value during a period between 60 and 180 days after a public offering of the
Company's common stock. These shares are shown on the consolidated balance
sheet as redeemable common stock and are recorded at the fair market value at
December 31, 1998 based on the most recent prices realized by the Company in
the sale of common stock to third parties. The increase in fair market value
during 1998 is shown
F-12
<PAGE>
WEB STREET, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
as accretion on redeemable common stock in the consolidated statement of
changes in stockholders' equity. This right was eliminated during March 1999,
and as a result, the common stock has been reclassified as permanent equity as
of December 31, 1999.
In January 1999, the Company issued 1,552,518 shares of common stock for
gross proceeds of $6,094,235 in various private placement transactions with
third parties.
In August 1999, the Company issued an additional 244,942 shares of common
stock for gross proceeds of $2,082,000 in various private placement
transactions with third parties.
In November and December 1999, the Company issued an aggregate of 4,192,500
shares of common stock for gross proceeds of $46,117,500 in the Company's
initial public offering.
Note 10--Stock Options and Warrants
Common Stock Warrants
In connection with the sale of shares of its common stock and the
establishment of an international alliance with Sun Hung Kai, the Company has
also issued common stock warrants to purchase its common stock with various
terms and conditions. The terms of the warrants are summarized below:
<TABLE>
<CAPTION>
Year Shares issuable
Issued under warrants Exercise period Exercise price
------ --------------- --------------- --------------
<S> <C> <C> <C>
1996 26,625 From one to two years $ 3.20 per share
following a IPO
1997 41,250 From one to two years $ 3.20 per share
following a IPO
1997 225,000 From one to two years $11.00 per share
following a IPO
1998 428,367 From 15 months to five $ 3.00 per share
years following an IPO
1998 476,259 From 15 months to five $ 4.00 per share
years following an IPO
1998 375,000 From February 6, 1998 to $ 4.00 per share
two years following an IPO
1999 47,000 From November 17, 2000 $ 8.50 per share
to August 24, 2004
1999 1,465,000 From May 15, 2000 $19.00 to $30.00
through various dates per share
through 2005, contingent
on performance milestones
</TABLE>
The total number of shares of common stock issuable under the warrants was
3,084,501 at December 31, 1999, 1,572,501 at December 31, 1998, and 292,875 at
December 31, 1997. The weighted average exercise price of all outstanding
warrants at December 31, 1999, 1998 and 1997 was $12.46, $4.36 and $8.42,
respectively.
F-13
<PAGE>
WEB STREET, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Common Stock Options
Before adopting its stock option plan in September 1998, the Company issued
individual option agreements to various employees and outside service
providers. Under these individual option agreements, the Company had
outstanding options to purchase 945,502 shares of its common stock as of
December 31, 1999. The Company's board of directors selected the grantees,
determined the number of shares covered by option grants and determined the
terms and condition of the options. The weighted average exercise price of
$0.054 for options to purchase 667,746 shares was less than the fair market of
the Company's common stock at the time the options were issued. Compensation
expense has been recorded for these options based on the difference between
the exercise price and management's estimate of the fair market value of the
Company's common stock. This estimate was based on the most recent price per
share of common stock sold to third parties at the respective dates of grant.
The compensation expense is being recorded over the vesting period of the
respective stock options, ranging from immediate vesting to two years. The
Company recorded compensation expense of $527,114, $1,224,182 and $63,389 for
the years ended December 31, 1999, 1998 and 1997, respectively, related to
these options. The remaining options to purchase 27,000 shares issued pursuant
to individual option agreements have an exercise price of $4.00, which
management believes was not less than the fair market value of the Company's
common stock at the date of grant. In addition, the Company recorded
compensation expense of $200,058.
In September 1998, the Company adopted its 1998 stock option plan (the
"1998 Plan") which provides for the granting of incentive stock options, non-
qualified stock options and stock purchase rights to employees, consultants
and non-employee directors. Operating as the compensation committee, the board
of directors selected the participants, determined the number of option grants
and determined the terms and conditions of the options. The term of each
option issued was for no more than ten years from the date it was issued. The
exercise price of the options was not less than the fair market value of the
underlying common stock at the time the options were granted. This
determination was made by management based on recent sales of the Company's
common stock to third parties. At December 31, 1999, the Company had granted
options to purchase 1,088,125 shares of stock under the 1998 Plan. The Company
will not issue any more awards under this Plan.
In August 1999, the Company adopted its 1999 stock incentive plan (the
"1999 Plan"). The purpose of the 1999 Plan is to attract and retain persons
eligible to participate in the plan, motivate participants to achieve our
long-term goals and further align the interests of the participant with those
of our other stockholders through compensation that is directly linked to the
profitability of our business and increases in stockholder value. The Company
initially made available for issuance under the 1999 Plan 2,097,652 shares of
our common stock, equal to 10% of the Company's outstanding shares at the
August 26, 1999 effective date of the plan. Subsequent to that date, the
maximum number of shares avaiable for delivery under the plan increases by 10%
of any increase in our outstanding shares of common stock. The Company's
compensation committee administers the 1999 Plan. The 1999 Plan provides the
compensation committee with broad discretion to select the officers, employees
and consultants to whom awards may be granted, as well as the type, size and
terms and conditions of each award. The 1999 Plan will permit grants of non-
qualified and incentive stock options, stock appreciation rights, and other
stock-based awards. Options granted will provided for the purchase of common
stock at prices determined by the compensation committee. At December 31,
1999, there were outstanding options to purchase 48,000 shares of common stock
under the 1999 Plan.
Employee Stock Purchase Plan
In August 1999, the Company adopted its 1999 employee stock purchase plan
(the "Purchase Plan") under which a total of 1,000,000 shares of common stock
are available for sale to our employees. The Company's compensation committee
will administer the Purchase Plan, which is intended to be a noncompensatory
plan. The Purchase Plan permits the Company's eligible employees to purchase
common stock through payroll
F-14
<PAGE>
WEB STREET, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
deductions and operates on a calendar year basis. The Purchase Plan will be
implemented in a series of consecutive offering periods, each approximately
three months long. Each participant will be granted an option to purchase our
common stock on the first day of the three-month period, and the option will
be automatically exercised on the last day of each offering period. The
purchase price of each share of common stock under the Purchase Plan will
equal 85% of the lesser of (1) the fair market value of our common stock on
the first date of the offering period or (2) the fair market value on the date
of purchase. Currently, there are no outstanding options to purchase common
stock under the Purchase Plan, which is expected to begin on May 1, 2000.
A summary of the status of the Company's option plans for the years ended
December 31, 19997 and 1998 is presented in the table and narrative below:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
1999 1998
------------------ ------------------
Wtd Avg. Wtd Avg.
Ex Price Shares Ex Price Shares
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Outstanding at beginning of year. $ 2.56 1,458,622 $0.053 97,970
Options Granted.................. 10.14 680,875 2.68 1,364,027
Options Exercised................ 0.059 (56,031) 0.053 (3,375)
Options Forfeited................ 6.00 (1,840) -- --
------ --------- ------ ---------
Outstanding at end of year....... $ 4.83 2,081,626 $ 2.56 1,458,622
========= =========
Exercisable at end of year....... $ 1.37 641,126 $ 0.34 385,995
========= =========
Weighted average fair value of
options granted................. $10.66 $ 1.51
</TABLE>
The options to purchase 2,081,629 shares of common stock listed as
outstanding in the table above at December 31, 1999 have exercise prices
ranging between $0.053 and $17.38 and have a weighted average exercise price
of $2.56 and a weighted average remaining contractual life of 8 years.
In accordance with SFAS No. 123, "Accounting for Stock-Based Compensation",
the Company applied APB Opinion No. 25 and related interpretations in
accounting for its stock options, and accordingly does not record compensation
costs. Had compensation costs for stock options been determined consistent
with SFAS No. 123, the Company's net loss and loss per share would have been
as shown below:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
1999 1998 1997
----------- ------------ -----------
<S> <C> <C> <C>
Net Loss:
As Reported..................... $(6,763,497) $(11,818,450) $(3,266,681)
As Adjusted..................... (7,849,992) $(11,868,321) $(3,271,231)
Primary loss per share:
As Reported..................... $ (0.32) $ (0.71) $ (0.25)
As Adjusted..................... (0.37) $ (0.71) $ (0.25)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for the option grants in 1999, 1998 and 1997; risk-free
interest rates of 6.00%, 5.28% and 5.28%; expected dividend yield of 0.00%;
expected life of 10.0 years; and expected volatility of 60%, 0.00% and 0.00%.
The Black-Scholes option valuation model was developed for use in estimating
the fair market value of options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly objective assumptions, including expected stock price volatility and
expected time to exercise, which greatly affect the calculated values.
F-15
<PAGE>
WEB STREET, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Concluded)
Note 11--Off-Balance Sheet Risk and Concentration of Credit Risk
In the normal course of business, the Company executes, as agent,
transactions on behalf of its customers where the risk of potential loss due
to market fluctuations (market risk) or failure of the customers to perform
(counterparty risk) exceeds the amounts reported for the transaction. The
Company, along with its clearing broker, continuously monitors its exposure to
market and counterparty risk through the use of a variety of financial
position and credit exposure reporting and control procedures. In addition,
the Company reviews the credit-worthiness of each customer and/or other
counterparty with which it conducts business.
Note 12--Regulatory Requirements
As a registered broker-dealer, Web Street Securities, Inc. is subject to
the Uniform Net Capital Rule, Rule 15c3-1 under the Securities Exchange Act of
1934, which requires that it maintain minimum net capital, as defined, of 6
2/3% of aggregate indebtedness or $100,000, whichever is greater. At December
31, 1999, Web Street Securities had net capital of $2,345,534, which exceeded
the minimum net capital requirements by $2,238,899 and a ratio of aggregate
indebtedness to net capital of 0.68 to 1.
Web Street Securities is exempt from the customer protection rule, Rule
15c3-3 under the Securities Exchange Act of 1934, under paragraph (k)(2)(ii)
of that rule because it introduces customers to another broker and does not
hold customer funds or securities.
Note 13--Subsequent Events
Subsequent to December 31, 1999, the Company has filed with the NASD to
become a self-clearing broker-dealer. Clearing services include the
confirmation, receipt, settlement, custody and delivery functions involved in
securities transactions. The Company has begun hiring experienced clearing
operations personnel and has engaged a consulting firm to assist in converting
its operations from fully disclosed to self-clearing upon the expiration of
its current clearing agreement during the second quarter of 2000.
Once it is self-clearing, the Company will assume responsibility for the
possession and control of customer's securities and other assets and the
clearance of customer's securities transactions. The Company will then be
required to record on its balance sheet the customer receivables and customer
payables to the Company that are the result of customer margin loans (i.e.--
loans made to customers that are collateralized by securities held in the
customer's margin accounts at the Company) and customer free credit balances
(i.e.--customer cash balances maintained at the Company), respectively. In
addition, to the extent that the Company's customer debit balances exceed
customer free credit balances, the Company may be required to obtain financing
for any excess debit balances.
F-16
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report on Form 10-K
to be signed on its behalf by the undersigned, thereunto duly authorized, on
the 30th day of March, 2000.
Web Street, Inc.
/s/ Joseph J. Fox
By:__________________________________
Joseph J. Fox, Co-Chairman of the
Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the 30th day of March, 2000.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Joseph J. Fox Co-Chairman of the Board and Chief
___________________________________________ Executive Officer (principal executive
Joseph J. Fox officer)
/s/ Avi Fox Co-Chairman of the Board and President
___________________________________________
Avi Fox
/s/ Joseph A. Barr Executive Vice President, Chief Financial
___________________________________________ Officer (principal financial and
Joseph A. Barr accounting officer) and Treasurer
/s/ D. Jonathan Rosenberg Executive Vice President, Chief Operating
___________________________________________ Officer and Director
D. Jonathan Rosenberg
/s/ Robert F. Bernard Director
___________________________________________
Robert F. Bernard
/s/ Frederic J. Graber Director
___________________________________________
Frederic J. Graber
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------- -------
<C> <S> <C>
3.1 Registrant's Amended and Restated Certificate of
Incorporation.
3.2 Registrant's Amended and Restated By-laws.
10.6* Employment Agreement between Registrant and Joseph J. Fox.
10.7* Employment Agreement between Registrant and Avi Fox.
10.8* Employment Agreement between Registrant and Joseph A.
Barr.
10.9* Employment Agreement between Registrant and Stuart A.
Cohn.
10.10* Employment Agreement between Registrant and William J.
Mania.
10.11* Employment Agreement between Registrant and D. Jonathan
Rosenberg.
10.17 Letter Agreement dated January 28, 2000 between Web Street
Securities and U.S. Clearing Corp.
10.21 Business Loan Agreement effective as of March 7, 2000
between Registrant and LaSalle Bank National Association
and the related Promissory Note.
16 Letter of Grant Thornton, LLP to the Securities and
Exchange Commission.
27 Financial Data Schedule
</TABLE>
- --------
*Management contract or compensatory plan or arrangement required to be filed
as an exhibit to this annual report.
<PAGE>
EXHIBIT 3.1
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
WEB STREET, INC.
----------------
Originally incorporated on December 31, 1997.
Web Street, Inc., a corporation originally incorporated on December 31,
1997 under the name Web Street Financial Group, Inc. (the "Corporation") and
organized and existing under, and by virtue of, the General Corporation Law of
the State of Delaware (the "DGCL"), does hereby certify that this Amended and
Restated Certificate of Incorporation of the Corporation (the "Certificate of
Incorporation") set forth below has been duly adopted in accordance with
Sections 242 and 245 of the DGCL.
ARTICLE I.
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The name of the Corporation is Web Street, Inc.
ARTICLE II.
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The address of the Corporation's registered office in the State of Delaware
is 1013 Centre Road, Wilmington, County of New Castle, Delaware 19805. The name
of the Corporation's registered agent at such address is Corporation Service
Company.
ARTICLE III.
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The nature of the business to be conducted or promoted by the Corporation
is to engage in any lawful act or activity for which corporations may be
organized under the DGCL.
ARTICLE IV.
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A. Authorized Capital Stock.
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The Corporation shall have authority to issue 102,000,000 shares of capital
stock, consisting of (i) 100,000,000 shares of Common Stock, par value $0.01 per
share ("Common Stock"), and 2,000,000 shares of Preferred Stock, par value $0.01
per share ("Preferred Stock").
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B. Designations and Rights.
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The designations and the powers, preferences and relative, participating,
optional or other rights of the capital stock and the qualifications,
limitations or restrictions thereof are as follows:
1. Common Stock. Except as otherwise provided in this Section B.1.
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or as otherwise required by applicable law, all shares of Common Stock
shall be identical in all respects and shall entitle the holders thereof to
the same rights and privileges, subject to the same qualifications,
limitations and restrictions.
a. Voting Rights: Except as otherwise required by law or
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expressly provided herein, the holders of Common Stock shall vote as a
single class and be entitled to one (1) vote per share on each matter
submitted to a vote of the stockholders of the Corporation.
b. Dividends: Subject to the rights of the holders, if any, of
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Preferred Stock, the holders of Common Stock shall be entitled to
receive dividends at such times and in such amounts as may be declared
thereon by the Board of Directors of the Corporation (the "Board of
Directors") and shall share equally on a per share basis in all such
dividends.
c. Liquidation Rights: In the event of any liquidation,
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dissolution or winding up of the Corporation, whether voluntary or
involuntary, after payment or provision for payment of the debts and
other liabilities of the Corporation and the preferential amounts to
which the holders of any outstanding shares of Preferred Stock shall
be entitled upon dissolution, liquidation or winding up, the assets of
the Corporation available for distribution to stockholders shall be
distributed ratably among the holders of the shares of Common Stock.
2. Preferred Stock. Preferred Stock may be issued from time to time
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in one or more series. Subject to the other provisions of this Certificate
of Incorporation and any limitations prescribed by law, the Board of
Directors is authorized to provide for the issuance of and issue shares of
the Preferred Stock in series and, by filing a certificate pursuant to the
laws of the State of Delaware, to establish from time to time the number of
shares to be included in each such series and to fix the designation,
powers, preferences and rights of the shares of each such series and any
qualifications, limitations or restrictions thereof. The number of
authorized shares of Preferred Stock may be increased or decreased (but not
below the number of shares thereof then outstanding) by the affirmative
vote of the holders of a majority of the total voting power of Common
Stock, without a vote of the holders of any Preferred Stock, or of any
series thereof, unless a vote of any such holders is required pursuant to
the certificate or certificates establishing such series of Preferred
Stock.
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The corporation has designated 500,000 shares of Preferred Stock as
Series A Preferred Stock (the "Series A Preferred").
a. Voting Rights: Holders of the Series A Preferred shall have
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four (4) votes per Series A Preferred share, and at all times shall
have four (4) times the vote of the Common Stock on a per share basis.
The Series A Preferred will not be entitled to participate in the
profits of the Corporation beyond the Liquidation Preference (as
defined below) of the Series A Preferred and dividends on the Series A
Preferred when declared.
b. Dividends: Dividends will be payable only as and when
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declared on the Common Stock in a ratio of $4.00 of dividend for each
Series A Preferred share per $1.00 of dividend on each share of Common
Stock. No dividend may be declared on any Common Stock until all
declared and unpaid dividends on the Series A Preferred have been paid
in full. Dividends not declared on the Series A Preferred in a given
year will not be paid and will not cumulate.
c. Liquidation: In the event of a voluntary or involuntary
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liquidation of the Corporation, the holders of the Series A Preferred
shall be entitled to first receive $10.00 per share of Series A
Preferred (the "Liquidation Preference") plus a sum equal to all
dividends theretofore declared which at such time are unpaid. Such
Liquidation Preference shall have priority over the liquidation
preference(s), and any other rights to distributions on shares, of
holders of Common Stock and all other classes of Preferred Stock of
the Corporation.
d. Transfers: The Series A Preferred will not be transferable
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without a written opinion from counsel to the Corporation that any
such transfer will not violate any applicable securities laws or
regulations.
e. Conversion: Each of the Series A Preferred will be
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automatically converted into four (4) fully paid and nonassessable
shares of Common Stock of the Corporation upon the completion of a
public offering of the Common Stock of the Corporation, or upon the
sale of all or substantially all of the assets of the Corporation, or
upon the sale of shares (or series of such sales) constituting in the
aggregate more than fifty (50%) percent of the voting shares of the
Corporation.
f. Required Consent: No shares of Series A Preferred may be
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issued to anyone other than the holders of Series A Preferred without
the consent of such holders.
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ARTICLE V.
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The business and affairs of the Corporation shall be managed by, or under
the direction of, a board of directors consisting of not less than three (3) nor
more than nine (9) directors. The exact number shall be determined from time to
time by resolution adopted by the affirmative vote of a majority of the
directors in office at the time of adoption of such resolution. Initially, the
number of directors shall be five (5) and shall consist of the following
persons: Joseph J. Fox, Avi Fox, D. Jonathan Rosenberg, Robert F. Bernard and
Fredric J. Graber.
The directors shall be divided into three classes, Class I, Class II and
Class III with each class having as equal a number of members as reasonably
possible. Class I shall initially consist of the following directors: D.
Jonathan Rosenberg and Fredric J. Graber. Class II shall initially consist of
the following directors: Robert F. Bernard and Avi Fox. Class III shall
initially consist of the following director: Joseph J. Fox. The initial term of
office of the Class I, Class II and Class III directors shall expire at the
annual meeting of stockholders of the Corporation in 2000, 2001 and 2002,
respectively. Beginning in 2000, at each annual meeting of stockholders of the
Corporation, successors to the class of directors whose term expires at that
annual meeting shall be elected for a three-year term. If the number of
directors is changed, any increase or decrease shall be apportioned among the
classes by the Board of Directors so as to maintain the number of directors in
each class as nearly equal as is reasonably possible, and any additional
director of any class elected to fill a vacancy resulting from an increase in
such class shall hold office for a term that shall coincide with the remaining
term of that class. In no case will a decrease in the number of directors
shorten the term of any incumbent director, even though such decrease may result
in an inequality of the classes until the expiration of such term. A director
shall hold office until the annual meeting of stockholders of the Corporation in
the year in which his or her term expires and until his or her successor shall
be elected and qualified, subject, however, to prior death, resignation,
retirement or removal from office. Directors may only be removed for cause,
except as otherwise provided by law, by the holders of at least sixty-six and
two-thirds percent (66/2/3%) of the voting power of the shares entitled to vote
generally in the election of directors. Except as required by law or the
provisions of this Certificate of Incorporation, all vacancies on the Board of
Directors and newly-created directorships shall be filled by the Board of
Directors. Any director elected to fill a vacancy not resulting from an
increase in the number of directors shall have the same remaining term as that
of his or her predecessor.
Notwithstanding the foregoing, whenever the holders of any one or more
classes or series of Preferred Stock issued by the Corporation shall have the
right, voting separately by class or series, to elect directors at an annual or
special meeting of stockholders, the election, term of office, filling of
vacancies and other features of such directorships shall be governed by the
terms of this Certificate of Incorporation and any resolutions of the Board of
Directors applicable thereto, and such directors so elected shall not be divided
into classes pursuant to this Article V. Notwithstanding anything to the
contrary contained in this Certificate of Incorporation, the affirmative vote of
the holders of at least sixty-six and two-thirds percent (66 /2/3/%) of the
voting
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power of the shares entitled to vote generally in the election of directors
shall be required to amend, alter or repeal, or to adopt any provision
inconsistent with, this Article V.
ARTICLE VI.
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A. Written Consent.
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Any action required or permitted to be taken at any annual or special
meeting of stockholders may be taken without a meeting, without prior notice and
without a vote, if a consent in writing, setting forth the action so taken,
shall be signed by the holders of outstanding stock having not less than the
minimum number of votes that would be necessary to authorize or take such action
at a meeting at which all shares entitled to vote thereon were present and
voted. Prompt notice of the taking of the corporate action without a meeting by
less than unanimous written consent shall be given to those stockholders who
have not consented in writing and who, if the action had been taken at a meeting
would have been entitled to notice of the meeting if the record date for such
meeting had been the date that written consents signed by a sufficient number of
holders to take the action were delivered to the Corporation. Such written
consent shall be filed with the records of the Corporation. Notwithstanding the
foregoing, however, on and after the consummation of the Corporation's first
underwritten public offering of shares of Common Stock pursuant to a
registration statement filed with the United States Securities and Exchange
Commission (or any successor thereto), any action required or permitted to be
taken at any annual or special meeting of stockholders may be taken only at a
duly called meeting and may not be taken by written consent of the stockholders
in lieu of a meeting.
B. Special Meetings.
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Special meetings of stockholders of the Corporation may be called, upon not
less than ten (10) nor more than sixty (60) days' written notice, only by (i) a
Chairman of the Board of Directors, (ii) the Chief Executive Officer of the
Corporation, (iii) the President of the Corporation or (iv) the Board of
Directors pursuant to a resolution approved by a majority of the Board of
Directors.
C. Amendment.
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Notwithstanding anything contained in this Certificate of Incorporation to
the contrary, the affirmative vote of the holders of at least sixty-six and two-
thirds percent (66 /2/3/%) of the voting power of the shares entitled to vote
generally in the election of directors shall be required to amend, alter or
repeal, or to adopt any provision inconsistent with, this Article VI.
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ARTICLE VII.
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In furtherance and not in limitation of the power conferred by statute, the
Board of Directors is expressly authorized to make, alter, amend or repeal the
By-laws of the Corporation (the "By-laws"). The By-laws may be altered, amended
or repealed, or new By-laws may be adopted, by the vote of a majority of the
members of the Board of Directors in accordance with the preceding sentence or
by the vote of the holders of at least sixty-six and two-thirds percent (66
/2/3/%) of the voting power of the shares entitled to vote generally in the
election of directors; provided that, if such alteration, amendment, repeal or
adoption of new By-laws is effected at a duly called special meeting, notice of
such alteration, amendment, repeal or adoption of new By-laws is contained in
the notice of such special meeting. Notwithstanding anything contained in this
Certificate of Incorporation to the contrary, the affirmative vote of holders of
at least sixty-six and two-thirds percent (66 /2/3/%) of the voting power of the
shares entitled to vote generally in the election of directors shall be required
to amend, alter or repeal, or to adopt any provision inconsistent with, this
Article VII.
ARTICLE VIII.
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A director of the Corporation shall not, in the absence of fraud, be
disqualified by his office from dealing or contracting with the Corporation
either as a vendor, purchaser or otherwise, nor, in the absence of fraud, shall
a director of the Corporation be liable to account to the Corporation for any
profit realized by him or her from or through any transaction or contract of the
Corporation by reason of the fact that such director, or any firm of which such
director is a member, or any corporation of which such director is an officer,
director or stockholder, was interested in such transaction or contract if such
transaction or contract has been authorized, approved or ratified in a manner
provided in the DGCL for authorization, approval or ratification of transactions
or contracts between the Corporation and one or more of its directors or
officers or between the Corporation and any other corporation, partnership,
association or other organization in which one or more of its directors or
officers are directors or officers or have a financial interest.
ARTICLE IX.
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Meetings of stockholders may be held within or without the State of
Delaware as the By-laws may provide. The books of the Corporation may be kept
outside the State of Delaware at such place or places as may be designated from
time to time by the Board of Directors or in the By-laws.
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ARTICLE X.
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Whenever a compromise or arrangement is proposed between the Corporation
and its creditors or any class of them and/or between the Corporation and its
stockholders or any class of them, any court of equitable jurisdiction within
the State of Delaware may, on the application in a summary way of the
Corporation or of any creditor or stockholder thereof or on the application of
any receiver or receivers appointed for the Corporation under the provisions of
Section 291 of the DGCL or on the application of trustees in dissolution or of
any receiver or receivers appointed for the Corporation under the provisions of
Section 279 of the DGCL, order a meeting of the creditors or class of creditors
and/or the stockholders or class of stock of the Corporation, as the case may
be, to be summoned in such manner as said court directs. If a majority in
number representing three-fourths (3/4) of the value of the creditors or class
of creditors and/or the stockholders or class of stockholders of the
Corporation, as the case may be, agree to any compromise or arrangement or to
any reorganization of the Corporation as a consequence of such compromise or
arrangement, said compromise or arrangement of said reorganization shall, if
sanctioned by the court to which said application has been made, be binding on
all the creditors or class of creditors and/or on all the stockholders or class
of stockholders, of the Corporation, as the case may be, and also on the
Corporation.
ARTICLE XI.
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The Board of Directors may adopt a resolution proposing to amend, alter,
change or repeal any provision contained in this Certificate of Incorporation,
in the manner now or hereafter prescribed by statute.
ARTICLE XII.
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A. Indemnification of Officers and Directors.
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The Corporation shall:
1. indemnify, to the fullest extent permitted by the DGCL, any
present or former director of the Corporation, and may indemnify any
present or former officer, employee or agent of the Corporation selected
by, and to the extent determined by, the Board of Directors for
indemnification, such selection to be evidenced by an indemnification
agreement, 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 such person 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
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<PAGE>
enterprise, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by such
person in connection with such action, suit or proceeding if such person
acted in good faith and in a manner such person 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 such person's conduct was unlawful. The termination of any action,
suit or proceeding by judgment, order, settlement or conviction, or upon a
plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which
such person 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 reasonable cause to believe that such person's conduct was
unlawful; and
2. indemnify any present or former director of the Corporation, and
may indemnify any present or former officer, employee or agent of the
Corporation selected by, and to the extent determined by, the Board of
Directors for indemnification, such selection to be evidenced by an
indemnification agreement, who was or is a party or is threatened to be
made a party to any threatened, pending or completed action or suit by, or
in the right of, the Corporation to procure a judgment in its favor by
reason of the fact that such person 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) actually and reasonably incurred by
such person in connection with the defense or settlement of such action or
suit if such person acted in good faith and in a manner such person
reasonably believed to be in, or not opposed to, the best interests of the
Corporation and except that no indemnification shall be made in respect of
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; and
3. indemnify any present or former director or officer, and may
indemnify any present or former employee or agent of the Corporation
selected by, and to the extent determined by, the Board of Directors for
indemnification, such selection to be evidenced by an indemnification
agreement, against expenses (including attorneys' fees) actually and
reasonably incurred by such person in connection therewith, to the extent
that such person has been successful on the merits or otherwise in defense
of any action, suit or proceeding referred to in Article XII.A.1. and 2.,
or in defense of any claim, issue or matter therein; and
4. pay expenses incurred by a director, or an officer who is entitled
to indemnification hereunder, in defending a civil or criminal action, suit
or proceeding in
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<PAGE>
advance of the final disposition of such action, suit or proceeding upon
receipt of an undertaking by or on behalf of such director or officer to
repay such amount if it shall ultimately be determined that such director
or officer is not entitled to be indemnified by the Corporation as
authorized in this Article XII; and
5. notwithstanding the foregoing provisions and except as required by
the DGCL, the Corporation shall not be obligated to indemnify or pay
expenses incurred by any person with respect to any threatened, pending, or
completed claims, suits or actions, whether civil, criminal,
administrative, investigative or otherwise ("Proceedings"), initiated or
brought voluntarily by such person and not by way of defense (other than
Proceedings brought to establish or enforce a right to indemnification
under the provisions of this Article XII, unless a court of competent
jurisdiction determines that each of the material assertions made by such
person in such Proceedings were not made in good faith or were frivolous).
The Corporation shall not be obligated to indemnify such person for any
amount paid in settlement of a Proceeding covered hereby without the prior
written consent of the Corporation to such settlement; and
6. not deem the indemnification and advancement of expenses provided
by, or granted pursuant to, the other subsections of this Article XII as
exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any By-law, agreement or vote
of stockholders or disinterested directors, or otherwise, both as to action
in such director's or officer's official capacity and as to action in
another capacity while holding such office; and
7. have the right, authority and power to purchase and maintain
insurance on behalf of any person who 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
any liability asserted against such person and incurred by such person in
any such capacity, or arising out of such person's status as such, whether
or not the Corporation would have the power to indemnify such person
against such liability under the provisions of this Article XII; and
8. deem the provisions of this Article XII to be a contract between
the Corporation and each director, or appropriately designated officer,
employee or agent, who serves in such capacity at any time while this
Article XII is in effect, and any repeal or modification of this Article
XII shall not affect any rights or obligations then existing with respect
to any state of facts then or theretofore existing or any action, suit or
proceeding theretofore or thereafter brought or threatened based in whole
or in part upon such state of facts; provided, however, that the provisions
of this Article XII shall not be deemed to be a contract between the
Corporation and any directors, officers, employees or agents of any other
corporation (the "Second Corporation") which shall merge into or
consolidate with the Corporation where the Corporation shall be the
surviving or resulting
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corporation, and any such directors, officers, employees or agents of the
Second Corporation shall be indemnified to the extent required under the
DGCL only at the discretion of the Board of Directors; and
9. continue the indemnification and advancement of expenses provided
by, or granted pursuant to, this Article XII, unless otherwise provided
when authorized or ratified, as to a person who has ceased to be a
director, officer, employee or agent of the Corporation, and the
indemnification and advancement of expenses provided by, or granted
pursuant to, this Article XII shall inure to the benefit of the heirs,
executors and administrators of such a person.
B. Elimination of Certain Liability of Directors.
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No director of the Corporation shall be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (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, as the same exists or
hereafter may be amended, or (iv) for any transaction from which the director
derived an improper personal benefit. If the DGCL is amended to authorize the
further elimination or limitation of liability of directors, then the liability
of a director of the Corporation, in addition to the limitation on personal
liability provided herein, shall be limited to the fullest extent permitted by
the amended DGCL. Any repeal or modification of this Article XII by the
stockholders of the Corporation shall be prospective only and shall not
adversely affect any limitation on the personal liability of a director of the
Corporation existing at the time of such repeal or modification.
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<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Incorporation to be signed by its President on November 16, 1999.
WEB STREET, INC.
By: /s/ JOSEPH J. FOX
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Joseph J. Fox
Co-Chairman and Chief Executive Officer
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<PAGE>
EXHIBIT 3.2
AMENDED AND RESTATED BY-LAWS
OF
WEB STREET, INC.
(Amended and Restated November 16, 1999)
ARTICLE I
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OFFICES
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Section 1.1. Registered Office. The registered office of Web Street, Inc.
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(the "Corporation") shall be in the City of Wilmington, County of New Castle,
State of Delaware.
Section 1.2. Other Offices. The Corporation may also have offices at such
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other places both within and without the State of Delaware as the Board of
Directors of the Corporation (the "Board of Directors") may from time to time
determine or the business of the Corporation may require.
ARTICLE II
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MEETINGS OF STOCKHOLDERS
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Section 2.1. Place of Meeting. All meetings of the stockholders for the
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election of directors shall be held at such place either within or without the
State of Delaware as shall be designated from time to time by the Board of
Directors and stated in the notice of the meeting. Meetings of stockholders for
any other purpose may be held at such time and place, within or without the
State of Delaware, as shall be stated by a Chairman of the Board, the President
or Chief Executive Officer, or the Board of Directors in the notice of the
meeting or in a duly executed waiver of notice thereof.
Section 2.2. Time of Annual Meeting. Annual meetings of stockholders
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shall be held at 10:00 A.M., Central time, on the second Tuesday in May, if not
a legal holiday, or if a legal holiday, then on the next day that is not a
Saturday, Sunday or legal holiday, or at such other time and date as shall be
designated from time to time by the Board of Directors and stated in the notice
of the meeting, at which stockholders shall elect directors to hold office for
the term provided in the Amended and Restated Certificate of Incorporation of
the Corporation (the "Certificate of Incorporation") and conduct such other
business as shall be considered.
<PAGE>
Section 2.3. Notice of Annual Meetings. Except as otherwise required by
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law, written notice of the annual meeting stating the place, date and hour of
the meeting shall be given to each stock holder entitled to vote at such
meeting not fewer than ten (10) nor more than sixty (60) days before the date of
the meeting.
Section 2.4. Stockholder Proposals and Nominations for Annual Meetings.
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Nominations of persons for election to the Board of Directors and the proposal
of business to be transacted by the stockholders at an annual meeting of
stockholders may be made (i) pursuant to the Corporation's notice with respect
to such meeting, (ii) by, or at the direction of, the Board of Directors or
(iii) by any stockholder of record of the Corporation who was a stockholder of
record at the time of the giving of the notice provided for in the following
paragraph, who is entitled to vote at the meeting and who has complied with the
notice procedures set forth in this Article II, Section 2.4.
For nominations or other business to be properly brought before an annual
meeting by a stockholder pursuant to clause (iii) of the foregoing paragraph,
(a) the stockholder must have given timely notice thereof in writing to the
Secretary of the Corporation at the principal executive offices of the
Corporation, (b) such business must be a proper matter for stockholder action
under the General Corporation Law of the State of Delaware (the "DGCL"), (c) if
the stockholder, or the beneficial owner on whose behalf any such proposal or
nomination is made, has provided the Corporation with a Solicitation Notice, as
that term is defined in this Article II, Section 2.4, such stockholder or
beneficial owner must, in the case of a proposal, have delivered a proxy
statement and form of proxy to holders of at least the percentage of the
Corporation's voting shares required under applicable law to carry any such
proposal, or, in the case of a nomination or nominations, have delivered a proxy
statement and form of proxy to holders of a percentage of the Corporation's
voting shares reasonably believed by such stockholder or beneficial holder to be
sufficient to elect the nominee or nominees proposed to be nominated by such
stockholder (the number of voting shares required to carry the proposal or elect
the nominees being the "Required Number"), and must, in either case, have
included in such materials the Solicitation Notice and (d) if no Solicitation
Notice relating thereto has been timely provided pursuant to this Article II,
Section 2.4, the stockholder or beneficial owner proposing such business or
nomination must not have solicited proxies for a number of shares equal to or
greater than the Required Number. To be timely, a stockholder's notice shall be
delivered to the Secretary of the Corporation at the principal executive offices
of the Corporation not less than forty-five (45) nor more than seventy-five (75)
days prior to the first anniversary (the "Anniversary") of the date on which the
Corporation first mailed its proxy materials for the preceding year's annual
meeting of stockholders; provided, however, that if the date of the annual
meeting is advanced more than thirty (30) days prior to, or delayed by more than
thirty (30) days after, the anniversary of the preceding year's annual meeting,
notice by the stockholder to be timely must be so delivered not later than the
close of business on the later of (i) the 90/th/ day prior to such annual
meeting or (ii) the 10/th/ day following the day on which public announcement of
the date of such annual meeting is first made. Such stockholder's notice shall
set forth (a) as to each person whom the stockholder proposes to nominate for
election or reelection as a director, all information relating to such
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person as would be required to be disclosed in solicitations of proxies for the
election of such nominee as a director pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and such
person's written consent to serve as a director if elected; (b) as to any other
business that the stockholder proposes to bring before the meeting, a brief
description of such business, the reasons for conducting such business at the
meeting and any material interest in such business of such stockholder and the
beneficial owner, if any, on whose behalf the proposal is made; and (c) as to
the stockholder giving the notice and the beneficial owner, if any, on whose
behalf the nomination or proposal is made (i) the name and address of such
stockholder, as they appear on the Corporation's books, and of such beneficial
owner, (ii) the class and number of shares of the Corporation that are owned
beneficially and of record by such stockholder and such beneficial owner, and
(iii) whether either such stockholder or such beneficial owner intends to
deliver a proxy statement and form of proxy to holders of, in the case of a
proposal, at least the percentage of the Corporation's voting shares required
under applicable law to carry the proposal or, in the case of a nomination or
nominations, a sufficient number of holders of the Corporation's voting shares
to elect such nominee or nominees (an affirmative statement of such intent being
referred to as a "Solicitation Notice").
Notwithstanding anything in the second sentence of the second paragraph of
this Article II, Section 2.4 to the contrary, in the event that the number of
directors to be elected to the Board of Directors is increased and there is no
public announcement naming all of the nominees for director or specifying the
size of the increased Board of Directors made by the Corporation at least fifty-
five (55) days prior to the Anniversary, a stockholder's notice required by
these Amended and Restated By-laws (these "By-laws") shall also be considered
timely, but only with respect to nominees for any new positions created by such
increase, if it shall be delivered to the Secretary of the Corporation at the
principal executive offices of the Corporation not later than the close of
business on the 10/th/ day following the day on which such public announcement
is first made by the Corporation.
Only persons nominated in accordance with the procedures set forth in this
Article II, Section 2.4 shall be eligible to serve as directors, and only such
business shall be conducted at an annual meeting of stockholders as shall have
been brought before the meeting in accordance with the procedures set forth in
this Article II, Section 2.4. The chair of the meeting shall have the power and
the duty to determine whether a nomination or any business proposed to be
brought before the meeting has been made in accordance with the procedures set
forth in these By-laws and, if any proposed nomination or business is not in
compliance with these By-laws, to declare that such defective proposed business
or nomination shall not be presented for stockholder action at the meeting and
shall be disregarded.
Notwithstanding the foregoing provisions of this Article II, Section 2.4, a
stockholder shall also comply with all applicable requirements of the Exchange
Act and the rules and regulations thereunder with respect to matters set forth
in this Article II, Section 2.4. Nothing in this Article II, Section 2.4 shall
be deemed to affect any rights of stockholders to request inclusion of proposals
in the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange
Act.
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For purposes of these By-laws, "public announcement" shall mean disclosure
in a press release reported by the Dow Jones News Service, Associated Press, PR
Newswire, Business Wire or a comparable national news service or in a document
publicly filed by the corporation with the Securities and Exchange Commission
pursuant to Section 13, 14 or 15(d) of the Exchange Act.
Section 2.5. Special Meetings of Stockholders. Special meetings of the
----------- --------------------------------
stockholders of the Corporation may be called and conducted only in the manner
provided in the Certificate of Incorporation.
Section 2.6. Notice of Special Meetings. Written notice of a special
----------- --------------------------
meeting of stockholders, stating the place, date and hour of the meeting and the
purpose or purposes for which the meeting is called, shall be given by the
Secretary of the Corporation on behalf of a Chairman of the Board, the President
or the Chief Executive Officer, or the Board of Directors, not fewer than ten
(10) nor more than sixty (60) days before the date of the meeting, to each
stockholder entitled to vote at such meeting.
Section 2.7. Business at Special Meetings. Only such business shall be
----------- ----------------------------
conducted at a special meeting of stockholders as shall have been brought before
the meeting pursuant to the notice of meeting described in Section 2.6.
Section 2.8. Stockholder Nominations for Special Meetings. Nominations of
----------- --------------------------------------------
persons for election to the Board of Directors may be made at a special meeting
of stockholders at which directors are to be elected pursuant to the
Corporation's notice of meeting (i) by or at the direction of the Board of
Directors or (ii) by any stockholder of record of the Corporation who is a
stockholder of record at the time of giving notice provided for in this
paragraph, who shall be entitled to vote at the meeting and who complies with
the notice procedures set forth in Article II, Section 2.4. Nominations by
stockholders of persons for election to the Board of Directors may be made at
such a special meeting of stockholders if the stockholder's notice required by
the second paragraph of Article II, Section 2.4 shall be delivered to the
Secretary of the Corporation at the principal executive offices of the
Corporation not later than the close of business on the later of the 90/th/ day
prior to such special meeting or the 10/th/ day following the day on which
public announcement is first made of the date of the special meeting and of the
nominees proposed by the Board of Directors to be elected at such meeting.
Notwithstanding the foregoing provisions of this Article II, Section 2.8,
a stockholder shall also comply with all applicable requirements of the Exchange
Act and the rules and regulations thereunder with respect to matters set forth
in this Article II, Section 2.8.
Section 2.9. Written Consent. Any action required or permitted to be
----------- ---------------
taken at any annual or special meeting of stockholders may be taken without a
meeting, without prior notice and without a vote, only as permitted by, and in
the manner provided in, the Certificate of Incorporation.
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Section 2.10. Fixing of Record Date. In order that the Corporation may
------------ ---------------------
determine the stockholders entitled to notice of, or to vote at, any meeting of
stockholders or any adjournment thereof, or entitled to receive payment of any
dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock or
for the purpose of any other lawful action, the Board of Directors may fix a
record date, which shall not precede the date upon which the resolution fixing
the record date is adopted and which shall be (i) not more than sixty (60) nor
less than ten (10) days before the date of a meeting, and (ii) not more than
sixty (60) days prior to any other action. A determination of stockholders of
record entitled to notice of, or to vote at, a meeting of stockholders shall
apply to any adjournment of the meeting; provided, however, that the Board of
Directors may fix a new record date for any adjourned meeting.
Section 2.11. Voting Lists. The officer who has charge of the stock ledger
------------ ------------
of the Corporation shall prepare and make, at least ten (10) days before every
meeting of stockholders, a complete list of the stockholders entitled to vote at
the meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten (10) days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof and may be inspected by any stockholder who is
present.
Section 2.12. Quorum and Adjournments. At any meeting of stockholders, the
------------ -----------------------
presence in person or by proxy of the holders of shares entitled to cast a
majority of all the votes which could be cast at such meeting by the holders of
all of the outstanding shares of stock of the Corporation entitled to vote on
every matter that is to be voted on without regard to class at such meeting
shall constitute a quorum for purposes of such vote, except as otherwise
provided by the law of the State of Delaware or by the Certificate of
Incorporation. If, however, such quorum shall not be present or represented at
any such meeting of the stockholders, the holders of a majority of the voting
power of the stock entitled to vote thereat, present in person or represented by
proxy, shall have power to adjourn the meeting from time to time, without notice
other than announcement at the meeting, until a quorum shall be present or
represented; provided that if the adjournment is for more than thirty (30) days,
or if after the adjournment a new record date is fixed by the directors for the
adjourned meeting, a new notice shall be transmitted to the stockholders of
record entitled to vote at the adjourned meeting. At such adjourned meeting at
which a quorum shall be present or represented, any business may be transacted
which might have been transacted at the meeting as originally notified.
Section 2.13. Vote Required. At any meeting of stockholders duly called
------------ -------------
and held at which a quorum is present, (i) in all matters other than the
election of directors, a majority of the votes which could be cast at such
meeting upon a given question and (ii) in the case of the election of directors,
a plurality of the votes which could be cast at such meeting upon such election,
in
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<PAGE>
each case by such holders who are present in person or by proxy, shall be
necessary in addition to any vote or other action that may be expressly required
by the provisions of the Certificate of Incorporation or the law of the State of
Delaware, to decide such question or election, and shall decide such question or
election if no such additional vote or other action is so required.
Section 2.14. Voting Rights. Unless otherwise provided in the Certificate
------------ -------------
of Incorporation, each stockholder having voting power shall at every meeting of
the stockholders be entitled to one (1) vote in person or by proxy for each
share of the capital stock having voting power held by such stockholder. At any
meeting of the stockholders, every stockholder entitled to vote may vote in
person or by proxy authorized by an instrument in writing or by a transmission
permitted by law filed in accordance with the procedure established for the
meeting, but no proxy shall be voted on after three (3) years from its date,
unless the proxy provides for a longer period. Any copy, facsimile
telecommunication or other reliable reproduction of the writing or transmission
created pursuant to this paragraph may be substituted or used in lieu of the
original writing or transmission for any and all purposes for which the original
writing or transmission could be used; provided that such copy, facsimile
telecommunication or other reproduction shall be a complete reproduction of the
entire original writing or transmission. Every stock vote shall be taken by
ballots, each of which shall state the name of the stockholder or proxy voting
and such other information as may be required under the procedure established
for the meeting. The Corporation may, and to the extent required by law shall,
in advance of any meeting of stockholders, appoint one or more inspectors to act
at the meeting, count the votes, decide the results and make a written report
thereof. The Corporation may designate one or more persons as alternate
inspectors to replace any inspector who fails to act. If no inspector or
alternate is able to act at a meeting of stockholders, the person presiding at
the meeting may, and to the extent required by law shall, appoint one or more
inspectors to act at the meeting. Each inspector, before entering upon the
discharge of his or her duties, shall take and sign an oath to faithfully
execute the duties of inspector with strict impartiality and according to the
best of his or her ability.
Section 2.15. Presiding Over Meetings. A Chairman of the Board of
------------ -----------------------
Directors shall preside at all meetings of the stockholders (or if there is more
than one Chairman present at the meeting, such Chairmen shall preside). In the
absence or inability to act of a Chairman, the Vice Chairman (if one shall have
been chosen by the Board of Directors), the Chief Executive Officer or the
President (in that order) shall preside, and in their absence or inability to
act, another person designated by one of them shall preside. The Secretary of
the Corporation shall act as secretary of each meeting of the stockholders. In
the event of his or her absence or inability to act, the officer presiding at
the meeting shall appoint a person who need not be a stockholder to act as
secretary of the meeting.
Section 2.16. Conducting Meetings. Meetings of the stockholders shall be
------------ -------------------
conducted in a fair manner but need not be governed by any prescribed rules of
order. The officer presiding at the meeting shall establish an agenda for the
meeting. The presiding officer's rulings on procedural matters shall be final.
The presiding officer is authorized to impose reasonable time
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<PAGE>
limits on the remarks of individual stockholders and may take such steps as such
officer may deem necessary or appropriate to assure that the business of the
meeting is conducted in a fair and orderly manner.
ARTICLE III
-----------
DIRECTORS
---------
Section 3.1. General Powers. The business and affairs of the Corporation
----------- --------------
shall be under the direction of, and managed by, a board comprised of directors,
which may exercise all such powers of the Corporation and do all such lawful
acts and things as are not required by law, the Certificate of Incorporation or
these By-laws to be done by the stockholders. Directors need not be residents
of the State of Delaware or stockholders of the Corporation. The number of
directors shall be determined only in the manner provided in the Certificate of
Incorporation.
Section 3.2. Election. Directors shall be elected by and serve only in
----------- --------
the manner provided in the Certificate of Incorporation.
Section 3.3. Removal. Except as otherwise provided by law, directors may
----------- -------
be removed only in the manner provided in the Certificate of Incorporation.
Section 3.4. Vacancies. Any vacancies occurring in the Board of Directors
----------- ---------
and newly created directorships shall be filled only in the manner provided in
the Certificate of Incorporation.
Section 3.5. Place of Meetings. The Board of Directors of the Corporation
----------- -----------------
may hold meetings, both regular and special, either within or without the State
of Delaware. The first meeting of each newly elected Board of Directors shall
be held immediately following the adjournment of the annual meeting of the
stockholders at the same place as such annual meeting, and no notice of such
meeting shall be necessary to the newly elected directors in order to legally
constitute the meeting, provided a quorum shall be present. In the event such
meeting is not held at such time and place, the meeting may be held at such time
and place as shall be specified in a notice given as hereinafter provided for
special meetings of the Board of Directors, or as shall be specified in a
written waiver signed by all of the directors.
Section 3.6. Participation by Conference Telephone. Unless otherwise
----------- -------------------------------------
restricted by the Certificate of Incorporation or these By-laws, members of the
Board of Directors, or any committee designated by the Board of Directors, may
participate in a meeting of the Board of Directors, or committee, by means of
conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other, and participation by
such means shall constitute presence in person at such meeting.
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<PAGE>
Section 3.7. Regular Meetings. Regular meetings of the Board of Directors
----------- ----------------
may be held, without notice, at such time and at such place as shall from time
to time be determined by the Board of Directors.
Section 3.8. Special Meetings. Special meetings of the Board of Directors
----------- ----------------
may be called by a Chairman of the Board, the Chief Executive Officer or the
President of the Corporation on at least one day's notice to each director,
either personally, or by courier, telephone, telefax, mail, telegram or e-mail.
Special meetings shall be called by a Chairman, the Chief Executive Officer or
the President in like manner and on like notice at the written request of three
(3) or more of the directors comprising the Board of Directors stating the
purpose or purposes for which such meeting is requested. Notice of any meeting
of the Board of Directors for which a notice is required may be waived in
writing signed by the person or persons entitled to such notice, whether before
or after the time of such meeting, and such waiver shall be equivalent to the
giving of such notice. Attendance of a director at any such meeting shall
constitute a waiver of notice thereof, except where a director attends a meeting
for the express purpose of objecting to the transaction of any business because
such meeting is not lawfully convened. Neither the business to be transacted
at, nor the purpose of, any meeting of the Board of Directors for which a notice
is required need be specified in the notice, or waiver of notice, of such
meeting. The Chairman shall preside at all meetings of the Board of Directors
(or if there is more than one Chairman present at the meeting, such Chairmen
shall preside). In the absence or inability to act of a Chairman, then the Vice
Chairman (if one shall have been chosen by the Board), the Chief Executive
Officer or the President (in that order) shall preside, and in their absence or
inability to act, another director designated by one of them shall preside.
Section 3.9. Quorum; No Action on Certain Matters. At all meetings of the
----------- ------------------------------------
Board of Directors, a majority of the then duly elected directors shall
constitute a quorum for the transaction of business, and the act of a majority
of the directors present at any meeting at which there is a quorum shall be the
act of the Board of Directors, except as may be otherwise specifically provided
by law or the Certificate of Incorporation. If a quorum shall not be present at
any meeting of the Board of Directors, the directors present thereat may adjourn
the meeting from time to time, without notice other than announcement at the
meeting, until a quorum shall be present.
Section 3.10. Resignations. Any director of the Corporation may resign at
------------ ------------
any time by giving written notice to the Board of Directors, a Chairman, the
Chief Executive Officer or the President. Such resignation shall take effect at
the time specified therein and, unless tendered to take effect upon acceptance
thereof, the acceptance of such resignation shall not be necessary to make it
effective.
Section 3.11. Informal Action. Unless otherwise restricted by the
------------ ---------------
Certificate of Incorporation or these By-laws, any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee thereof
may be taken without a meeting, if all members
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<PAGE>
of the Board of Directors or committee consent thereto in writing and the
writing or writings are filed with the minutes of proceedings of the Board of
Directors or committee.
Section 3.12. Presumption of Assent. A director of the Corporation who is
------------ ---------------------
present at a meeting of the Board of Directors at which action on any corporate
matter is taken shall be conclusively presumed to have assented to the action
taken unless his or her dissent shall be entered in the minutes of the meeting
or unless he or she shall file his or her written dissent to such action with
the person acting as the secretary of the meeting before the adjournment thereof
or shall forward such dissent by registered mail to the secretary of the
Corporation immediately after the adjournment of the meeting. Such right to
dissent shall not apply to a director who voted in favor of such action.
Section 3.13. Compensation of Directors. In the discretion of the Board
------------ -------------------------
of Directors, the directors may be paid their expenses, if any, of attendance at
each meeting of the Board of Directors or a committee thereof, may be paid a
stated salary or a fixed sum for attendance at each meeting of the Board of
Directors or a committee thereof and may be awarded other compensation for their
service as directors. No such payment or award shall preclude any director from
serving the Corporation in any other capacity and receiving compensation
therefor. Members of special or standing committees may be allowed like
compensation for attending committee meetings.
ARTICLE IV
----------
COMMITTEES OF DIRECTORS
-----------------------
Section 4.1. Appointment and Powers. The Board of Directors may
----------- ----------------------
designate one or more committees, each committee to consist of one or more of
the directors of the Corporation. The resolution of the Board of Directors
appointing the members of any such committee shall be adopted by a majority of
the entire Board of Directors. The Board of Directors may designate one or more
directors as alternate members of any committee, who may replace any absent or
disqualified member at any meeting of the committee. In the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not such
member or members constitute a quorum, may unanimously appoint another member of
the Board of Directors to act at the meeting in the place of any such absent or
disqualified member. Any such committee, to the extent provided in the
resolution of the Board of Directors and permitted by law, shall have and may
exercise all the powers and authority of the Board of Directors in the
management of the business and affairs of the Corporation, and may authorize the
seal of the Corporation to be affixed to all papers which may require it; but no
such committee shall have the power or authority in reference to the following
matters: (a) approving or adopting, or recommending to the stockholders, any
action or matter expressly required by the DGCL to be submitted to stockholders
for approval or (b) adopting, amending or repealing any of these By-laws.
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<PAGE>
Section 4.2. Removal. Any member of any committee appointed by the Board
----------- -------
of Directors, or the entire membership of such committee, may be removed, with
or without cause, by the vote of a majority of the Board of Directors.
Section 4.3. Committee Minutes. Each committee shall keep regular minutes
----------- -----------------
of its meetings and shall file such minutes and all written consents executed by
its members with the Secretary of the Corporation. Each committee may determine
the procedural rules for meeting and conducting its business and shall act in
accordance therewith, except as otherwise provided herein or required by law.
Adequate provision shall be made for notice to members of all meetings; a
majority of the members shall constitute a quorum unless the committee shall
consist of one (1) or two (2) members, in which event one (1) member shall
constitute a quorum; and all matters shall be determined by a majority vote of
the members present. Action may be taken by any committee without a meeting if
all members thereof consent thereto in writing and the writing or writings are
filed with the minutes of the proceedings of such committee.
ARTICLE V
---------
NOTICES
-------
Section 5.1. Manner of Notice. Whenever, under applicable law or the
----------- ----------------
Certificate of Incorporation or these By-laws, notice is required to be given to
any director or stockholder, unless otherwise provided in the Certificate of
Incorporation or these By-laws, such notice may be given in writing, by courier
or mail, addressed to such director or stockholder, at such director's or
stockholder's address as it appears on the records of the Corporation, with
freight or postage thereon prepaid, and such notice shall be deemed to be given
at the time when the same shall have been deposited with such courier or in the
United States mail. Notice may be given orally if such notice is confirmed in
writing in a manner provided therein. Notice to directors may also be given by
telegram, mailgram, telex, telecopier or e-mail.
Section 5.2. Waiver. Whenever any notice is required to be given under
----------- ------
applicable law or the provisions of the Certificate of Incorporation or these
By-laws, a waiver thereof in writing, signed by the person or persons entitled
to said notice, whether before or after the time stated therein, shall be deemed
equivalent thereto.
ARTICLE VI
----------
OFFICERS
--------
Section 6.1. Number and Qualifications. The officers of the Corporation
----------- -------------------------
shall be chosen by the Board of Directors and shall be one or more Chairmen of
the Board, a Chief Executive Officer, a President, a Chief Financial Officer,
one or more Vice Presidents, a Secretary and a Treasurer. The Board of
Directors may also choose a Vice Chairman for the Board, one or more
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<PAGE>
Assistant Secretaries and Assistant Treasurers and such additional officers as
the Board of Directors may deem necessary or appropriate from time to time.
Membership on the Board of Directors shall not be a prerequisite to the holding
of any other office. Any number of offices may be held by the same person,
unless the Certificate of Incorporation or these By-laws otherwise provide.
Section 6.2. Election. The Board of Directors at its first meeting after
----------- --------
each annual meeting of stockholders shall elect one or more Chairmen of the
Board, a Chief Executive Officer, a President, a Chief Financial Officer, one or
more Vice Presidents, a Secretary and a Treasurer, and may choose a Vice
Chairman of the Board, one or more Assistant Secretaries and Assistant
Treasurers and such other officers as the Board of Directors shall deem
desirable.
Section 6.3. Other Officers and Agents. The Board of Directors may choose
----------- -------------------------
such other officers and agents as it shall deem necessary, which officers and
agents shall hold their offices for such terms and shall exercise such powers
and perform such duties as shall be determined from time to time by the Board of
Directors.
Section 6.4. Salaries. The salaries or other compensation of the officers
----------- --------
and agents of the Corporation shall be fixed from time to time by the Board of
Directors, and no officer shall be prevented from receiving such salary or other
compensation by reason of the fact that such officer is also a director of the
Corporation.
Section 6.5. Term of Office. The officers of the Corporation shall hold
----------- --------------
office until their successors are chosen and qualified or until their earlier
resignation or removal. Any officer elected or appointed by the Board of
Directors may be removed at any time, either with or without cause, by the
affirmative vote of a majority of the directors then in office at any meeting of
the Board of Directors. If a vacancy shall exist in any office of the
Corporation, the Board of Directors may elect any person to fill such vacancy,
such person to hold office as provided in Article VI, Section 6.1.
Section 6.6. Chairman of the Board. A Chairman of the Board shall preside
----------- ---------------------
at all meetings of the stockholders and of the Board of Directors and shall see
that orders and resolutions of the Board of Directors are carried into effect
(or if there is more than one Chairman present at the meeting, then such
Chairmen shall preside and shall see that orders and resolutions of the Board of
Directors are carried into effect). Any Chairman of the Board shall perform such
other duties as the Board of Directors may from time to time prescribe.
Section 6.7. The Chief Executive Officer. The Chief Executive Officer
----------- ---------------------------
shall be the principal executive officer of the Corporation and shall, in
general, supervise and control all of the business and affairs of the
Corporation, unless otherwise provided by the Board of Directors. In the
absence of a Chairman of the Board, the Chief Executive Officer shall preside at
all meetings of the stockholders and of the Board of Directors and shall see
that orders and resolutions of the Board of Directors are carried into effect.
The Chief Executive Officer may
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<PAGE>
sign bonds, mortgages, certificates for shares and all other contracts and
documents, whether or not under the seal of the Corporation, except in cases
where the signing and execution thereof shall be expressly delegated by law, the
Board of Directors or these By-laws to some other officer or agent of the
Corporation. The Chief Executive Officer shall have general powers of
supervision and shall be the final arbiter of all differences between officers
of the Corporation, and the Chief Executive Officer's decision as to any matter
affecting the Corporation shall be final and binding as between the officers of
the Corporation, subject only to the Board of Directors. The Chief Executive
Officer shall perform such other duties as the Board of Directors may from time
to time prescribe.
Section 6.8. The President. Unless another party has been designated as
----------- -------------
Chief Operating Officer, the President shall be the Chief Operating Officer of
the Corporation responsible for the day-to-day active management of the business
of the Corporation, under the general supervision of the Chief Executive
Officer. In the absence of the Chief Executive Officer, the President shall
perform the duties of the Chief Executive Officer and, when so acting, shall
have all the powers of and be subject to all the restrictions upon the Chief
Executive Officer. The President shall have concurrent power with the Chief
Executive Officer to sign bonds, mortgages, certificates for shares and other
contracts and documents, whether or not under the seal of the Corporation,
except in cases where the signing and execution thereof shall be expressly
delegated by law, the Board of Directors or these By-laws to some other officer
or agent of the Corporation. In general, the President shall perform all duties
incident to the office of the President and such other duties as the Chief
Executive Officer or the Board of Directors may from time to time prescribe.
Section 6.9. The Chief Financial Officer. The Chief Financial Officer
----------- ---------------------------
shall be the principal financial and accounting officer of the Corporation. The
Chief Financial Officer shall: (a) have charge of, and be responsible for, the
maintenance of adequate books of account for the Corporation; (b) have charge
and custody of all funds and securities of the Corporation, and be responsible
therefor and for the receipt and disbursement thereof; and (c) perform all the
duties incident to the office of the Chief Financial Officer and such other
duties as the Chief Executive Officer, the President or the Board of Directors
may from time to time prescribe. If required by the Board of Directors, the
Chief Financial Officer shall give a bond for the faithful discharge of the
Chief Financial Officer's duties in such sum and with such surety or sureties as
the Board of Directors may determine.
Section 6.10. The Vice Presidents. In the absence of the President or in
------------ -------------------
the event of the President's inability or refusal to act, the Vice Presidents
(in the order designated, or in the absence of any designation, then in the
order of their election) shall perform the duties of the President and, when so
acting, shall have all the powers of, and be subject to all the restrictions
upon, the President. The Vice Presidents shall perform such other duties and
have such other powers as the Chief Executive Officer, the President or the
Board of Directors may from time to time prescribe.
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Section 6.11. The Secretary. The Secretary shall attend all meetings of
------------ -------------
the Board of Directors and all meetings of the stockholders and record all the
proceedings of the meetings of the Corporation and of the Board of Directors in
a book to be kept for that purpose and shall perform like duties for the
committees of the Board of Directors when required. The Secretary shall give,
or cause to be given, or cause to be given notice of all meetings of the
stockholders and special meetings of the Board of Directors and shall perform
such other duties as the Chief Executive Officer, the President or the Board of
Directors may from time to time prescribe. The Secretary shall have custody of
the corporate seal of the Corporation, and the Secretary or an Assistant
Secretary shall have authority to affix the same to any instrument requiring it,
and when so affixed, it may be attested by the Secretary's signature or by the
signature of such Assistant Secretary. The Board of Directors may give general
authority to any other officer to affix the seal of the Corporation and to
attest the affixing by such officer's signature.
Section 6.12. The Treasurer. In the absence of the Chief Financial
------------ -------------
Officer or in the event of the Chief Financial Officer's inability or refusal to
act, the Treasurer shall perform the duties of the Chief Financial Officer, and
when so acting, shall have all the powers of and be subject to all the
restrictions upon the Chief Financial Officer. The Treasurer shall perform such
other duties and have such other powers as the Chief Executive Officer, the
President, the Chief Financial Officer or the Board of Directors may from time
to time prescribe.
Section 6.13. The Assistant Secretary. The Assistant Secretary, or if
------------ -----------------------
there be more than one, the Assistant Secretaries in the order determined by the
Board of Directors (or if there be no such determination, then in the order of
their election), shall, in the absence of the Secretary or in the event of the
Secretary's inability or refusal to act, perform the duties and exercise the
powers of the Secretary and shall perform such other duties and have such other
powers as the Chief Executive Officer, the President or the Board of Directors
may from time to time prescribe.
Section 6.14. The Assistant Treasurer. The Assistant Treasurer, or if
------------ -----------------------
there shall be more than one, the Assistant Treasurers in the order determined
by the Board of Directors (or if there be no such determination, then in the
order of their election), shall, in the absence of the Treasurer or in the event
of the Treasurer's inability or refusal to act, perform the duties and exercise
the powers of the Treasurer and shall perform such other duties and have such
other powers as the Chief Executive Officer, the President, the Chief Financial
Officer or the Board of Directors may from time to time prescribe.
ARTICLE VII
-----------
CERTIFICATES OF STOCK, TRANSFERS AND RECORD DATES
-------------------------------------------------
Section 7.1. Form of Certificates. Every holder of stock in the
----------- --------------------
Corporation shall be entitled to have a certificate signed by, or in the name
of, the Corporation by (a) a Chairman of the Board, the Vice-Chairman of the
Board or the President of the Corporation, and (b) the Secretary, the Treasurer,
an Assistant Secretary or an Assistant Treasurer of the Corporation,
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<PAGE>
certifying the number of shares owned by such holder in the Corporation. If the
Corporation shall be authorized to issue more than one class of stock or more
than one series of any class, the powers, designations, preferences and
relative, participating, optional or other special rights of each class of stock
or series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights shall be set forth in full or summarized on the face
or back of the certificate which the Corporation shall issue to represent such
class or series of stock; provided that, except as otherwise provided in Section
202 of the DGCL, in lieu of the foregoing requirements, there may be set forth,
on the face or back of the certificate which the Corporation shall issue to
represent such class or series of stock, a statement that the Corporation will
furnish without charge to each stockholder who so requests the powers,
designations, preferences and relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights. Subject to the
foregoing, certificates of stock of the Corporation shall be in such form as the
Board of Directors may from time to time prescribe.
Section 7.2. Facsimile Signatures. Where a certificate is countersigned
----------- --------------------
(i) by a transfer agent other than the Corporation or its employee or (ii) by a
registrar other than the Corporation or its employee, any other signatures on
the certificate may be facsimile. In case any officer, transfer agent or
registrar who has signed, or whose facsimile signature has been placed upon, a
certificate shall have ceased to be such officer, transfer agent or registrar
before such certificate is issued, it may be issued by the Corporation with the
same effect as if such person were such officer, transfer agent or registrar at
the date of issue.
Section 7.3. Lost Certificates. The Board of Directors may direct a new
----------- -----------------
certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the Corporation alleged to have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the person
claiming the certificate of stock to be lost, stolen or destroyed. When
authorizing such issue of a new certificate or certificates, the Board of
Directors may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed certificate or
certificates, or such owner's legal representative, to advertise the same in
such manner as the Corporation shall require and/or give the Corporation a bond
in such sum as it may direct as indemnity against any claim that may be made
against the Corporation or its transfer agent or registrar with respect to the
certificate alleged to have been lost, stolen or destroyed.
Section 7.4. Transfers of Shares. All transfers of shares of the stock
----------- -------------------
of the Corporation are subject to the terms, conditions and restrictions, if
any, of the Certificate of Incorporation. Transfers of shares of the capital
stock of the Corporation shall be made on the books of the Corporation by the
registered holder thereof, or by his attorney thereunder authorized by power of
attorney duly executed and filed with the Secretary of the Corporation, or with
a transfer agent appointed as provided in Article VII, Section 7.5, and, if
certificated shares, on surrender of the certificate or certificates for the
shares properly endorsed and the payment of all taxes thereon. The person in
whose names shares of stock are registered on the books of the Corporation shall
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<PAGE>
be considered the owner thereof for all purposes as regards the Corporation; but
whenever any transfer of shares is made for collateral security, and not
absolutely, that fact, if known to the Secretary, shall be stated in the entry
of transfer. The Board of Directors may, from time to time, make any additional
rules and regulations as it may deem expedient, not inconsistent with these By
laws, concerning the issue, transfer and registration of certificates for shares
of the stock of the Corporation.
Section 7.5. Transfer Agents and Registrants The Board of Directors may
----------- -------------------------------
appoint one or more transfer agents and one or more registrars for the stock of
the Corporation.
Section 7.6. Registered Stockholders. The Corporation shall be entitled
----------- -----------------------
to recognize the exclusive right of a person registered on its books as the
owner of shares to receive dividends and to vote as such owner and to hold
liable for calls and assessments a person registered on its books as the owner
of shares, and shall not be bound to recognize any equitable or other claim to,
or interest in, such share or shares on the part of any other person, whether or
not the Corporation shall have express or other notice thereof, except as
otherwise provided by the law of the State of Delaware.
ARTICLE VIII
------------
CONFLICT OF INTERESTS
---------------------
Section 8.1. Contract or Relationship Not Void. No contract or
----------- ---------------------------------
transaction between the Corporation and one or more of its directors or
officers, or between the Corporation and any other corporation, partnership,
association or other organization in which one or more of its directors or
officers are directors or officers or have a financial interest shall be void or
voidable solely for this reason, or solely because such director or officer is
present at, or participates in, the meeting of the Board of Directors or
committee thereof which authorizes the contract or transaction, or solely
because such director's or officer's vote is counted for such purpose, if:
(i) the material facts as to such director's or officer's relationship or
interest and as to the contract or transaction are disclosed or are
known to the Board of Directors or the committee, and the board or
committee in good faith authorizes the contract or transaction by the
affirmative vote of a majority of the disinterested directors, even
though the disinterested directors be less than a quorum; or
(ii the material facts as to such director's or officer's relationship or
interest and as to the contract or transaction are disclosed or are
known to the stockholders entitled to vote thereon, and the contract
or transaction is specifically approved in good faith by vote of the
stockholders; or
-15-
<PAGE>
(iii) the contract or transaction is fair as to the Corporation as of the
time it is authorized, approved or ratified by the Board of
Directors, a committee thereof, or the stockholders.
Section 8.2. Quorum. Common or interested directors may be counted in
----------- ------
determining the presence of a quorum at a meeting of the Board of Directors or
of a committee which authorizes the contract or transaction.
ARTICLE IX
----------
GENERAL PROVISIONS
------------------
Section 9.1. Dividends. Dividends upon the capital stock of the
----------- ---------
Corporation, subject to the provisions of the Certificate of Incorporation, if
any, may be declared by the Board of Directors at any regular or special
meeting, pursuant to law. Dividends may be paid in cash, in property or in
shares of the capital stock or rights to acquire the same, subject to the
provisions of the Certificate of Incorporation. Before payment of any
dividend, there may be set aside out of any funds of the Corporation available
for dividends such sum or sums as the directors from time to time, in their ab
solute discretion, think proper as a reserve or reserves to meet contingencies,
or for equalizing dividends, or for repairing or maintaining any property of the
Corporation, or for such other purpose as the directors shall think conducive to
the interest of the Corporation, and the directors may modify or abolish any
such reserve in the manner in which it was created.
Section 9.2. Checks. All checks or demands for money and notes of the
----------- ------
Corporation shall be signed by such officer or officers or such other person or
persons as the Board of Directors may from time to time designate.
Section 9.3. Fiscal Year. The fiscal year of the Corporation shall be
----------- -----------
the twelve (12) months ending December 31 unless determined otherwise by
resolution of the Board of Directors.
Section 9.4. Seal. The corporate seal shall have inscribed thereon the
----------- ----
name of the Corporation and the words "Corporate Seal, Delaware." The seal may
be used by causing it or a facsimile thereof to be impressed or affixed or
reproduced or otherwise.
Section 9.5. Stock in Other Corporations. Shares of any other
----------- ---------------------------
corporation which may from time to time be held by this Corporation may be
represented and voted at any meeting of stockholders of such corporation by a
Chairman, the Chief Executive Officer, the President, the Chief Financial
Officer or a Vice President of the Corporation, or by any proxy appointed in
writing by a Chairman, the Chief Executive Officer, the President, the Chief
Financial Officer or a Vice President of the Corporation, or by any other person
or persons thereunto authorized by the Board of Directors. Shares represented
by certificates standing in the name of the
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<PAGE>
Corporation may be endorsed for sale or transfer in the name of the Corporation
by a Chairman, the Chief Executive Officer, the President, the Chief Financial
Officer or any Vice President of the Corporation or by any other officer or
officers thereunto authorized by the Board of Directors. Shares belonging to the
Corporation need not stand in the name of the Corporation, but may be held for
the benefit of the Corporation in the individual name of the Chief Financial
Officer or of any other nominee designated for the purpose of the Board of
Directors.
ARTICLE X
---------
AMENDMENTS
----------
These By-laws may be altered, amended or repealed, and new by-laws may be
adopted, only in the manner provided in the Certificate of Incorporation.
-17-
<PAGE>
EXHIBIT 10.6
WEB STREET, INC.
________________________________________________________________________________
Employment Agreement for Joseph J. Fox
________________________________________________________________________________
<PAGE>
WEB STREET, INC.
________________________________________________________________________________
Employment Agreement for Joseph J. Fox
________________________________________________________________________________
Page
----
1. Employment............................................................ 1
2. Term.................................................................. 1
3. Offices and Duties.................................................... 2
4. Salary and Annual Incentive Compensation.............................. 2
5. Long-Term Compensation, Benefits and Expense Reimbursement............ 2
6. Termination Due to Death or Disability................................ 3
7. Termination of Employment For Reasons Other Than Death or Disability.. 5
8. Definitions Relating to Termination Events............................ 8
9. Excise Tax Gross-Up................................................... 11
10. Executive Covenants................................................... 11
11. Governing Law; Disputes; Arbitration.................................. 14
12. Miscellaneous......................................................... 16
13. Income Tax Treatment.................................................. 18
14. Key Man Life Insurance................................................ 18
<PAGE>
WEB STREET, INC.
________________________________________________________________________________
Employment Agreement for Joseph J. Fox
________________________________________________________________________________
THIS EMPLOYMENT AGREEMENT (this "Agreement"), by and between WEB
STREET, INC., a Delaware corporation (the "Company"), and Joseph J. Fox
("Executive"), is hereby entered into effective as October 1, 1999 (the
"Effective Date").
W I T N E S S E T H
WHEREAS, Executive is currently an employee of the Company;
WHEREAS, the Company desires to continue to employ Executive in his
capacity as Chief Executive Officer in connection with the conduct of its
business, and Executive desires to accept such employment on the terms and
conditions herein set forth; and
WHEREAS, the Company and Executive desire to set forth the terms upon
which Executive shall be so employed.
NOW, THEREFORE, in consideration of the foregoing, the mutual
covenants contained herein, and other good and valuable consideration the
receipt and adequacy of which the Company and Executive each hereby acknowledge,
the Company and Executive hereby agree as follows:
1. Employment.
The Company hereby agrees to employ Executive as its Chief Executive
Officer, and Executive hereby agrees to accept such employment and serve in such
capacities, during the Term (as defined in Section 2) and upon the terms and
conditions set forth in this Agreement.
2. Term.
The term of employment of Executive under this Agreement (the "Term")
shall, unless this Agreement is terminated in accordance with Section 6 or 7, be
a three-year period initially commencing on the Effective Date which, at
September 30 of each year, shall automatically be extended by one year, unless
the Company notifies the Executive in writing prior to September 30 of such year
(the "Termination Notice Date") that the Term shall not be so extended and, in
such case, the Term shall terminate on the second anniversary of such
Termination Notice Date.
<PAGE>
3. Offices and Duties.
The provisions of this Section 3 will apply during the Term:
(a) Generally. Executive shall serve as the Chief Executive Officer
---------
of the Company. Executive shall have and perform such duties, responsibilities
and authorities as are customary for the Chief Executive Officer of a publicly
held corporation of the size, type, and nature of the Company as they may exist
from time to time and consistent with such position and status and as the
Company's Board of Directors (the "Board") shall from time to time direct, but
in no event shall such duties, responsibilities, and authorities be reduced from
those of Executive prior to the Effective Date. Executive shall devote such
business time and attention as is necessary to appropriately and efficiently
discharge his duties and responsibilities as set forth herein.
(b) Place of Employment. Executive's principal place of employment
-------------------
shall be the current corporate offices of the Company in Deerfield, Illinois.
In no event shall the Executive's principal place of employment be relocated to
any location other than the greater metropolitan Chicago area, without his prior
written consent.
4. Salary and Annual Incentive Compensation.
As partial compensation for the services to be rendered hereunder by
Executive, the Company agrees to pay to Executive during the Term the
compensation set forth in this Section 4.
(a) Base Salary. The Company will pay to Executive during the Term a
-----------
base salary at the initial annual rate of $250,000 payable in cash in accordance
with the Company's usual payroll practices with respect to senior executives,
and during the first year of the Term, a guaranteed bonus of $100,000 payable in
cash in equal quarterly installments. Executive's annual base salary shall be
reviewed by the Compensation Committee of the Board (the "Committee") at least
once in each calendar year and may be increased above, but may not be reduced
below, the then-current rate of such base salary.
(b) Annual Incentive Compensation. The Company will pay to Executive
-----------------------------
during the Term annual incentive compensation, if any, in amounts determined
each fiscal year by the Committee. Any such annual incentive compensation
payable to Executive shall be paid in accordance with the Company's usual
practices with respect to payment of incentive compensation to senior
executives.
5. Long-Term Compensation, Benefits and Expense Reimbursement
(a) Executive Compensation Plans. Executive shall be entitled during
----------------------------
the Term to participate, without discrimination or duplication, in all executive
compensation plans and
2
<PAGE>
programs intended for general participation by senior executives of the Company,
as presently in effect or as they may be modified or added to by the Company
from time to time, subject to the eligibility and other requirements of such
plans and programs, including, without limitation, the Company's 1999 Stock
Incentive Plan, and any successors to such plan, any other stock option plans,
performance share plans, management incentive plans, deferred compensation plans
and supplemental retirement plans; provided, however, that such plans and
-------- -------
programs, in the aggregate, shall provide Executive with benefits and
compensation and incentive award opportunities substantially no less favorable
than those provided by the Company to Executive under such plans and programs as
in effect on the Effective Date.
(b) Employee and Executive Benefit Plans. Executive shall be entitled
------------------------------------
during the Term to participate, without discrimination or duplication, in all
employee, executive benefit and special individual plans and programs of the
Company, as presently in effect or as they may be modified or added to by the
Company from time to time, to the extent such plans and programs are available
to other senior executives or employees of the Company, subject to the
eligibility and other requirements of such plans and programs, including,
without limitation, plans providing health and medical insurance, life
insurance, disability insurance and accidental death or dismemberment insurance,
and pension or other retirement plans, savings plans, vacation and time-off
programs, profit-sharing plans, stock purchase plans and stock ownership plans;
provided, however, that such plans and programs, in the aggregate, shall provide
- -------- -------
Executive with benefits and compensation and incentive award opportunities
substantially no less favorable than those provided by the Company to Executive
under such plans and programs as in effect on the Effective Date.
(c) Reimbursement of Expenses. The Company will promptly reimburse
-------------------------
Executive for all reasonable business expenses and disbursements incurred by
Executive in the performance of Executive's duties during the Term in accordance
with the Company's reimbursement policies as in effect from time to time.
(d) Funding of Rabbi Trust. Not later than 30 days following a Change
----------------------
in Control, the Company shall contribute to a "rabbi trust" an amount equal to
the amount that would be payable to the Executive upon a termination of
employment described in Section 7(b), under (i), (iii), (iv), (v), and (viii) of
such Section 7(b) (and the trustee of the rabbi trust shall be instructed to pay
such amounts (plus earnings thereon) to the Executive upon the Executive's
termination of employment, if the amounts due to the Executive hereunder are not
otherwise paid to the Executive by the Company).
6. Termination Due to Death or Disability.
Executive's employment and the Term shall terminate upon Executive's
death. The Company may terminate the employment of Executive as Chief Executive
Officer due to the Disability (as defined in Section 8(c)) of Executive. In the
event Executive's employment terminates due to Disability, the Term will
terminate at the expiration of the 30-day period set forth in Section 8(c),
absent the actions referred to therein being taken by Executive to return to
service and Executive's presentation to the Company of a certificate of good
health.
3
<PAGE>
Upon a termination of Executive's employment due to death or
Disability, all obligations of the Company and Executive under Sections 1
through 5 of this Agreement will immediately cease; provided, however, that
-------- -------
subject to the provisions of Section 12(i), the Company will pay Executive (or,
in the case of Executive's death, his beneficiaries or estate), and Executive
(or, in the case of Executive's death, his beneficiaries or estate) will be
entitled to receive, the following:
(i) The unpaid portion of annual base salary at the rate payable, in
accordance with Section 4(a) hereof, at the date of termination of
employment, pro rated through such date of termination;
(ii) All vested, nonforfeitable amounts owing or accrued at the date of
termination of employment under any compensation and benefit plans,
programs and arrangements set forth or referred to in Sections 4(b),
5(a) and 5(b) (including any earned and vested annual incentive
compensation) in which Executive theretofore participated, under the
terms and conditions of the plans, programs and arrangements (and
agreements and documents thereunder) pursuant to which such
compensation and benefits were granted;
(iii) In lieu of any annual incentive compensation under Section 4(b) for
the year in which Executive's employment terminated (unless otherwise
payable under (ii) above), an amount equal to the average annual
incentive compensation paid to Executive in the three years
immediately preceding the year of termination (or, if Executive was
not eligible to receive or did not receive such incentive
compensation for any year in such three-year period, the Executive's
target annual incentive compensation for such year shall be used to
calculate average annual incentive compensation) (the "Severance
Annual Incentive Amount"), multiplied by a fraction the numerator of
which is the number of days Executive was employed in the year of
termination and the denominator of which is the total number of days
in the year of termination; and
(iv) Reimbursement of reasonable business expenses and disbursements
incurred by Executive prior to such termination of employment, as
authorized under Section 5(c).
In addition, upon a termination of Executive's employment due to death or
Disability, stock options then held by Executive will be exercisable to the
extent and for such periods indicated in, and otherwise be governed by, the
plans and programs (and agreements and other documents thereunder) pursuant to
which such stock options were granted. Furthermore, if Executive's employment
terminates due to Disability, for the period extending from such termination
until Executive reaches age 65, Executive shall continue to participate in all
employee benefit plans, programs and arrangements under Section 5(b) providing
health, medical and life insurance benefits in which Executive was participating
immediately prior to termination and the terms of which allow Executive's
continued participation, as if Executive had continued in employment with the
Company during such period (except that additional years of service shall not be
credited
4
<PAGE>
as a result of such deemed continued participation following termination), or,
if such plans, programs or arrangements do not allow Executive's continued
participation, Executive shall receive a cash payment equivalent on an after-tax
basis to the value of the additional benefits Executive would have received
under such employee benefit plans, programs and arrangements in which Executive
was participating immediately prior to termination, as if Executive had received
credit under such plans, programs and arrangements for service and age with the
Company during such period following Executive's termination as provided in this
sentence, with such benefits payable by the Company at the same times and in the
same manner as such benefits would have been received by Executive under such
plans (it being understood that the value of any insurance-provided benefits
will be based on the premium cost to Executive, which shall not exceed the
highest risk premium charged by a carrier having an investment grade or better
credit rating). However, in the case of termination of Executive's employment
due to Disability, Executive must continue to comply with his covenants and
agreements set forth in Section 10 in order to continue receiving the
compensation and benefits set forth in the previous sentence. Amounts payable
under Sections 6(i), (ii), (iii) and (iv) above or in lieu of health, medical
and life insurance benefits pursuant to this paragraph will be paid as promptly
as practicable after termination of Executive's employment and in no event more
than 45 days after such termination; provided, however, that, to the extent that
-------- -------
the Company would not be entitled to deduct any such payments under Section
162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), such
payments shall be made at the earliest time that the payments would be
deductible by the Company without limitation under Section 162(m) (unless this
provision is waived by the Company).
7. Termination of Employment For Reasons Other Than Death or Disability.
(a) Termination by the Company for Cause and Termination by Executive
-----------------------------------------------------------------
Other Than For Good Reason. In accordance with the provisions of this Section
- --------------------------
7(a), the Company may terminate the employment of Executive as Chief Executive
Officer for Cause at any time prior to a Change in Control, and Executive may
terminate his employment as Chief Executive Officer voluntarily for reasons
other than Good Reason (as defined in Section 8(d)) at any time.
Upon a termination of Executive's employment by the Company for Cause
or by the Executive for reasons other than Good Reason, the Term will
immediately terminate, and all obligations of the Company and Executive under
Sections 1 through 5 of this Agreement will immediately cease; provided,
--------
however, that, subject to the provisions of Section 12(i), the Company shall pay
- -------
Executive, and Executive shall be entitled to receive, the following:
(i) The unpaid portion of annual base salary at the rate payable, in
accordance with Section 4(a) hereof, at the date of termination of
employment, pro rated through such date of termination;
(ii) All vested, nonforfeitable amounts owing or accrued at the date of
termination of employment under any compensation and benefit plans,
programs and arrangements set forth or referred to in Sections 4(b),
5(a) and 5(b) hereof (including any earned and vested annual incentive
compensation and long-term incentive award)
5
<PAGE>
in which Executive theretofore participated, under the terms and
conditions of the plans, programs and arrangements (and agreements
and documents thereunder) pursuant to which such compensation and
benefits were granted; and
(iii) Reimbursement of reasonable business expenses and disbursements
incurred by Executive prior to such termination of employment, as
authorized under Section 5(c).
Amounts payable under Section 7(a)(i), (ii) and (iii) will be paid as promptly
as practicable after termination of Executive's employment; provided, however,
-------- -------
that, to the extent that the Company would not be entitled to deduct any such
payments under Section 162(m) of the Code, such payments shall be made at the
earliest time that the payments would be deductible by the Company without
limitation under Section 162(m) (unless this provision is waived by the
Company).
(b) Termination by the Company Without Cause and Termination by
-----------------------------------------------------------
Executive for Good Reason. In accordance with the provisions of this Section
- -------------------------
7(b), the Company may terminate the employment of Executive without Cause,
including after a Change in Control, upon 90 days' written notice to Executive,
and Executive may terminate his employment with the Company for Good Reason upon
90 days' written notice to the Company; provided, however, that, if the basis
-------- -------
for such Good Reason is remediable, the Company shall have 30 days after receipt
of such notice to remedy the basis for such Good Reason. Notwithstanding the
foregoing, the Company may terminate Executive without Cause and without
providing 90 days' written notice to Executive if the Company pays Executive the
portion of his then-current annual base salary under Section 4(a) for such 90-
day period and credits Executive with service for 90 days for all purposes
hereunder.
Upon a termination of Executive's employment by the Company without
Cause, or termination of Executive's employment by the Executive for Good
Reason, the Term will immediately terminate and all obligations of the parties
under Sections 1 through 5 of this Agreement will immediately cease, except that
subject to the provisions of Section 12(i) the Company shall pay Executive, and
Executive shall be entitled to receive, the following:
(i) A lump sum cash payment in an amount equal to the product of (x) the
sum of (A) Executive's then-current annual base salary at the rate
payable under Section 4(a) immediately prior to termination plus (B)
the Severance Annual Incentive Amount multiplied by (y) the Severance
Multiplier. For purposes of this Section 7(b)(i), the "Severance
Multiplier" shall be two and one-half (2.5).
(ii) The unpaid portion of annual base salary at the rate payable, in
accordance with Section 4(a) hereof, at the date of termination of
employment, pro rated through such date of termination;
(iii) All vested, nonforfeitable amounts owing or accrued at the date of
termination of employment under any compensation and benefit plans,
programs and arrangements set forth or referred to inc Sections 4(b),
5(a) and 5(b) hereof
6
<PAGE>
(including any vested and earned annual incentive compensation) in
which Executive theretofore participated and all amounts not vested
and nonforfeitable, but owing and accrued at the date of termination
of employment, under such benefit plans, programs and arrangements, to
the extent that such amounts would be vested and nonforfeitable if
such amounts become vested, under the terms and conditions of the
plans, programs and arrangements (and agreements and documents
thereunder) pursuant to which such compensation and benefits were
granted;
(iv) In lieu of any annual incentive compensation under Section 4(b) for
the year in which Executive's employment terminated (unless otherwise
payable under Section 7(b)(iii)), an amount equal to the Severance
Annual Incentive Amount, which, unless a termination occurs during the
period beginning 60 days prior to a Change in Control and ending two
years after a Change in Control, shall be multiplied by a fraction,
the numerator of which is the number of days Executive was employed in
the year of termination and the denominator of which is the total
number of days in the year of termination; and
(v) Reimbursement of reasonable business expenses and disbursements
incurred by Executive prior to such termination of employment, as
authorized under Section 5(c).
In addition, upon a termination of Executive's employment by the
Company without Cause, or termination of Executive's employment by the
Executive for Good Reason, stock options then held by Executive will
be exercisable to the extent and for such periods indicated in, and
otherwise be governed by, the plans and programs (and agreements and
other documents thereunder) pursuant to which such stock options were
granted. Furthermore, for a period of one (1) year after such
termination, Executive shall continue to participate in all employee
benefit plans, programs and arrangements under Section 5(c) providing
health, medical and life insurance benefits in which Executive was
participating immediately prior to termination and the terms of which
allow Executive's continued participation, as if Executive had
continued in employment with the Company during such period or, if
such plans, programs or arrangements do not allow Executive's
continued participation, a cash payment equivalent on an after-tax
basis to the value of the additional benefits Executive would have
received under such employee benefit plans, programs and arrangements
in which Executive was participating immediately prior to termination,
as if Executive had received credit under such plans, programs and
arrangements for service and age with the Company during such period
following Executive's termination, with such benefits payable by the
Company at the same times and in the same manner as such benefits
would have been received by Executive under such plans (it being
understood that the value of any insurance-provided benefits will be
based on the premium cost to Executive, which shall not exceed the
highest risk premium charged by a carrier having an investment grade
or better credit rating). Amounts payable under Sections 7(b)(i),
7
<PAGE>
(ii), (iii), (iv) and (v) above or in lieu of health, medical and life
insurance benefits pursuant to this paragraph will be paid as promptly
as practicable after termination of Executive's employment, and in no
event more than 45 days after such termination; provided, however,
-------- -------
that, if such termination is a termination by the Company without
Cause and prior to a Change in Control, to the extent that the Company
would not be entitled to deduct any such payments under Section 162(m)
of the Code, such payments shall be made at the earliest time that the
payments would be deductible by the Company without limitation under
Section 162(m) (unless this provision is waived by the Company), but
in no event later than 12 months subsequent to the date of
termination.
Upon a termination of Executive's employment by the Company
without Cause or by the Executive for Good Reason during the period
beginning 60 days prior to a Change in Control and ending two years
after a Change in Control, the Company will use its reasonable best
efforts to file with the Commission within 30 days of the effective
date of such termination, a registration statement registering under
the Securities Act of 1933, as amended (the "Securities Act"), the
offer and sale (or other disposition) of all shares of the class of
Common Stock of the Company registered under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and beneficially owned
by the Executive at the time of such termination. The Company will
use its reasonable best efforts to cause such registration statement
to become effective and to maintain the continuous effectiveness of
such registration statement until the end of the 90th day after
Executive is no longer, in the opinion of counsel to the Company, an
affiliate for purposes of Rule 144 under the Securities Act. The
Company will also use its reasonable best efforts to maintain as
current all offering materials under such registration statement at
all times that offers and sales of such shares can be made by
Executive.
8. Definitions Relating to Termination Events.
(a) "Cause." For purposes of this Agreement, "Cause" shall mean
-----
Executive's gross misconduct (as defined below) or willful (as defined below)
and material breach of Section 10 of this Agreement. For purposes of this
definition, "gross misconduct" shall mean (A) a felony conviction in a court of
law under applicable federal or state laws which results in material damage to
the Company or its subsidiaries or materially impairs the value of the
Executive's services to the Company, or (B) willfully engaging in one or more
acts, or willfully omitting to act in accordance with duties hereunder, which
act or omission is demonstrably and materially damaging to the Company or its
subsidiaries, including acts and omissions which materially impair the ability
of the Company to continue its business in accordance with applicable
governmental and regulatory rules and regulations. For purposes of this
Agreement, an act or failure to act on Executive's part shall be considered
"willful" if it was done or omitted to be done by him not in good faith, and
shall not include any act or failure to act resulting from any incapacity of
Executive. Notwithstanding the foregoing, Executive may not be terminated for
Cause unless and until there shall have been delivered to him, within six months
after the Board
8
<PAGE>
(A) had knowledge of conduct or an event allegedly constituting Cause and (B)
had reason to believe that such conduct or event could be grounds for Cause, a
copy of a resolution duly adopted by a majority affirmative vote of the
membership of the Board (excluding Executive) (after giving Executive reasonable
notice specifying the nature of the grounds for such termination and not less
than 30 days to correct the acts or omissions complained of, if correctable, and
affording Executive the opportunity, together with his counsel, to be heard
before the Board) finding that, in the good faith opinion of the Board,
Executive was guilty of conduct set forth above in this Section 8(a).
(b) "Change in Control." A "Change in Control" shall be deemed to
-----------------
have occurred upon the happening of any of the following events:
(i) An acquisition by any individual, entity or group, within the
meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act, (a "Person")
of beneficial ownership (within the meaning of Rule 13d-3 promulgated under
the Exchange Act) of more than fifty percent (50%) of either (1) the then
outstanding shares of Common Stock of the Company (the "Outstanding Common
Stock") or (2) the combined voting power of the then outstanding voting
securities of the Company entitled to vote generally in the election of
directors (the "Outstanding Voting Securities"); excluding, however, the
following: (1) any acquisition directly from the Company, other than an
acquisition by virtue of the exercise of a conversion privilege unless the
security being so converted was itself acquired directly from the Company,
(2) any acquisition by the Company; (3) any acquisition by Joseph Fox, Avi
Fox or any of their affiliates, (4) any acquisition by any employee benefit
plan (or related trust) sponsored or maintained by the Company or by any
Company controlled by the Company; or (5) any acquisition by any Person
pursuant to a transaction which complies with clauses (1), (2) and (3) of
subsection (iii) of this Section 8(b); or
(ii) Within any period of 24 consecutive months, a change in the
composition of the Board such that the individuals who, immediately prior
to such period, constituted the Board (such Board shall be hereinafter
referred to as the "Incumbent Board") cease for any reason to constitute at
least a majority of the Board; provided, however, for purposes hereof, that
any individual who becomes a member of the Board during such period, whose
election, or nomination for election by the Company's stockholders, was
approved by a vote of at least a majority of those individuals who are
members of the Board and who were also members of the Incumbent Board (or
deemed to be such pursuant to this proviso) shall be considered as though
such individual were a member of the Incumbent Board; but, provided
further, that any such individual whose initial assumption of office occurs
as a result of either an actual or threatened election contest (as such
terms are used in Rule 14a-11 of Regulation 14A promulgated under the
Exchange Act) or other actual or threatened solicitation of proxies or
consents by or on behalf of a Person other than the Board shall not be so
considered as a member of the Incumbent Board; or
(iii) The approval by the stockholders of the Company of a
reorganization, merger or consolidation or sale or other disposition of all
or substantially all of the assets
9
<PAGE>
of the Company ("Corporate Transaction"); excluding, however, such a
Corporate Transaction pursuant to which (1) all or substantially all of the
individuals and entities who are the beneficial owners, respectively, of
the Outstanding Common Stock and Outstanding Voting Securities immediately
prior to such Corporate Transaction will beneficially own, directly or
indirectly, more than sixty percent (60%) of, respectively, the outstanding
shares of common stock, and the combined voting power of the outstanding
voting securities entitled to vote generally in the election of directors,
as the case may be, of the Company resulting from such Corporate
Transaction (including, without limitation, a Company which as a result of
such transaction owns the Company or all or substantially all of the
Company's assets, either directly or through one or more subsidiaries) in
substantially the same proportions as their ownership, immediately prior to
such Corporate Transaction, of the Outstanding Common Stock and Outstanding
Voting Securities, as the case may be, (2) no Person (other than the
Company or any employee benefit plan (or related trust) sponsored or
maintained by the Company, by any Company controlled by the Company or by
such Company resulting from such Corporate Transaction) will beneficially
own, directly or indirectly, more than twenty-five percent (25%) of,
respectively, the outstanding shares of common stock of the Company
resulting from such Corporate Transaction or the combined voting power of
the outstanding voting securities of such Company entitled to vote
generally in the election of directors, except to the extent that such
ownership existed with respect to the Company prior to the Corporate
Transaction, and (3) individuals who were members of the Board immediately
prior to the approval by the stockholders of the Company of such Corporate
Transaction will constitute at least a majority of the members of the board
of directors of the Company resulting from such Corporate Transaction; or
(iv) The approval by the stockholders of the Company of a complete
liquidation or dissolution of the Company, other than to a corporation
pursuant to a transaction which would comply with clauses (1), (2) and (3)
of subsection (iii) of this Section 1(b), assuming for this purpose that
such transaction were a Corporate Transaction.
(c) "Disability." "Disability" means the failure of Executive to
----------
render and perform the services required of him under this Agreement, for a
total of 180 days of more during any consecutive 12 month period, because of any
physical or mental incapacity or disability as determined by a physician or
physicians selected by the Company and reasonably acceptable to Executive,
unless, within 30 days after Executive has received written notice from the
Company of a proposed termination due to such absence, Executive shall have
returned to the full performance of his duties hereunder and shall have
presented to the Company a written certificate of Executive's good health
prepared by a physician selected by the Company and reasonably acceptable to
Executive.
(d) "Good Reason." For purposes of this Agreement, "Good Reason"
-----------
shall mean, without Executive's prior written consent, (A) a material change,
adverse to Executive, in Executive's positions, titles or offices as set forth
in Section 3(a), status, rank, nature of responsibilities or authority within
the Company, including, without limitation, a change in the Company's reporting
structure whereby Executive is no longer reporting to the Company's
10
<PAGE>
Chairman of the Board or a Co-Chairman of the Board, except in connection with
the termination of Executive's employment for Cause or Disability or as a result
of Executive's death, or as requested or consented to by Executive, (B) an
assignment of any duties to Executive which are inconsistent with his status,
duties, responsibilities and authorities under Section 3(a), (C) a decrease in
annual base salary or other compensation opportunities and maximums or benefits
provided under this Agreement, (D) any other failure by the Company to perform
any material obligation under, or breach by the Company of any material
provision of, this Agreement, (E) a relocation of the corporate offices of the
Company more than 35 miles from the latest location of such offices prior to the
date of a Change in Control, (F) any failure to secure the agreement of any
successor corporation or other entity to the Company to fully assume the
Company's obligations under this Agreement in a form reasonably acceptable to
Executive, and (G) any attempt by the Company to terminate Executive for Cause
which does not result in a valid termination for Cause, except in the case that
valid grounds for termination for Cause exist but are corrected as permitted
under Section 8(a).
9. Excise Tax Gross-Up.
If it shall be determined that any payment or benefit received or to be
received by Executive under this Agreement or any other plan, arrangement or
agreement of the Company (all such payments and benefits a "Payment"), would be
subject to the excise tax imposed by Section 4999 of the Code (the "Excise
Tax"), then the Company shall pay to Executive an additional payment (a "Gross-
Up Payment") in an amount necessary to reimburse Executive, on an after-tax
basis, for the Excise Tax and for any federal, state and local income tax and
excise tax (including any interest and penalties imposed with respect to such
taxes) that may be imposed by reason of the Payment. For purposes of
determining the amount of any Gross-Up Payment, Executive shall be deemed to pay
federal, state and local income taxes at the highest applicable marginal rate of
taxation in the calendar year in which the Gross-Up Payment is to be made. All
determinations required to be made under this Section 9, including whether a
Gross-Up Payment is required and the amount of such Gross-Up Payment, shall be
made by a nationally known independent accounting firm regularly retained by the
Company (the "Accounting Firm") which shall provide detailed supporting
calculations both to the Company and Executive within 15 business days of the
request for such determination. Such request may be made by either party. The
Company shall pay the fees and expenses of the Accounting Firm in connection
with any determinations hereunder. The Gross-Up Payment shall be paid by the
Company within 10 days of the Accounting Firm's determination of the amount
thereof.
10. Executive Covenants.
(a) Executive's Acknowledgment. Executive agrees and acknowledges that in
--------------------------
order to assure the Company that the Company will retain its value as a going
concern, it is necessary that Executive undertake not to utilize his special
knowledge of the Company's business and his relationships with customers and
suppliers to compete with the Company. Executive further acknowledges that:
11
<PAGE>
(i) Executive is one of a limited number of persons who has
developed the Company's business;
(ii) Executive has occupied a position of trust and confidence with
the Company prior to the date of this Agreement and, during such period and
Employee's employment under this Agreement, Employee has acquired and will
acquire an intimate knowledge of proprietary and confidential information
concerning the Company and its business;
(iii) the agreements and covenants contained in Sections 10(b), (c),
(d), (e), (f) and (g) are essential to protect the Company and the goodwill
of its business;
(iv) Executive's employment with the Company has special, unique and
extraordinary value to the Company, and the Company would be irreparably
damaged if Executive were to provide services to any person or entity or
otherwise act in violation of the provisions of this Agreement;
(v) the scope and duration of the restrictive covenants in Section
10(b) are reasonably designed to protect a protected interest of the
Company and are not excessive in light of the circumstances; and
(vi) Executive has a means to support himself and his dependents
other than by engaging in conduct prohibited by the restrictive covenants
in Section 10(b), and the provisions of Sections 10(b) will not impair such
ability.
(b) Non-Competition; Non-Solicitation; Non-Interference. During the
---------------------------------------------------
Term and for a period of two years after the termination of Executive's
employment hereunder, Executive will not by himself or in conjunction with
others, directly or indirectly engage (either as owner, investor, partner,
member stockholder, employer, employee, consultant, advisor, manager or
director) in any business in the United States which, at the time of such
termination, is directly or indirectly in competition with a business then
conducted or proposed to be conducted by the Company or any of its subsidiaries;
provided, however, this the limitation shall not apply if Executive's employment
- -------- --------
is terminated as a result of a termination by the Company without Cause or a
termination by Executive for Good Reason. During the Term and for a period of
three years after the termination of Executive's employment hereunder, Executive
will not by himself or in conjunction with others, directly or indirectly (i)
induce any account holders of the Company or any of its subsidiaries with whom
Executive has had contacts or relationships, directly or indirectly, during and
within the scope of his employment with the Company, to curtail or cancel their
relationship with the Company or its subsidiaries; or (ii) induce, or attempt to
influence, any employee of the Company or any of its subsidiaries to terminate
their employment therewith. The provisions of the first sentence of this
Section 10(b) and clauses (ii) and (iii) of this Section 10(b) are separate and
distinct commitments independent of each of the other subparagraphs. It is
agreed that the ownership of not more than one percent of the equity securities
of any company having securities listed on an exchange or regularly traded in an
over-the-counter market shall not, of itself, be deemed inconsistent with the
first sentence of this Section 10(b).
12
<PAGE>
(c) Non-Disclosure. Executive shall not, at any time during the Term
--------------
and thereafter (including following Executive's termination of employment for
any reason), disclose, use, transfer or sell, except in the course of employment
with, or providing other service to, the Company, any confidential or
proprietary information of the Company and its subsidiaries so long as such
information has not otherwise been publicly disclosed or is not otherwise in the
public domain, except as required by law or pursuant to legal process.
(d) Return of Company Materials Upon Termination. Executive
--------------------------------------------
acknowledges that all records and documents containing confidential or
proprietary information of the Company or its subsidiaries prepared by Executive
or coming into his possession by virtue of his employment by the Company are and
will remain the property of the Company and its subsidiaries. Upon termination
of his employment with the Company, Executive shall immediately return to the
Company all such items and all copies of such items, in his possession.
(e) Cooperation With Regard to Litigation. Executive agrees to
-------------------------------------
cooperate with the Company, during the Term and thereafter (including following
Executive's termination of employment for any reason), by making himself
available to testify on behalf of the Company or any subsidiary or affiliate of
the Company, in any action, suit or proceeding, whether civil, criminal,
administrative or investigative, and to assist the Company, or any subsidiary or
affiliate of the Company, in any such action, suit or proceeding, by providing
information and meeting and consulting with the Board or its representatives or
counsel, or representatives or counsel to the Company or any subsidiary or
affiliate of the Company, as reasonably requested and at a time mutually
convenient to Executive and the Company. The Company agrees to reimburse the
Executive, on an after-tax basis, for all expenses actually incurred in
connection with his provision of testimony or assistance.
(f) Non-Disparagement. Executive shall not, at any time during the
-----------------
Term and thereafter, make statements or representations, or otherwise
communicate, directly or indirectly, in writing, orally or otherwise, or take
any action which may, directly or indirectly, disparage or be damaging to the
Company or any of its subsidiaries or affiliates or their respective officers,
directors, employees, advisors, businesses or reputations. Notwithstanding the
foregoing, nothing in this Agreement shall preclude Executive from making
truthful statements or disclosures that are required by applicable law,
regulation or legal process.
(g) Inventions. Executive acknowledges that all inventions,
----------
innovations, discoveries, improvements, developments, methods, know-how,
designs, analyses, drawings, reports and all similar or related information
(whether or not patentable) which (i) relate to the then current business or any
anticipated business of the Company, the Company's research and development or
the Company's existing or future services or products and (ii) which are
conceived, developed or made by Executive while employed by the Company ("Work
Product") belong to the Company. Executive shall promptly disclose such Work
Product to the Company and perform all actions reasonably requested by the
Company (whether during or after his period of employment with the Company) to
establish and confirm such ownership (including the execution of assignments,
consents, powers of attorney and other instruments).
13
<PAGE>
(h) Release of Employment Claims. Executive agrees, as a condition to
----------------------------
receipt of any termination payments and benefits provided for in Sections 6 and
7 herein (other than salary earned through the date of termination), that he
will execute a general release agreement, in a form satisfactory to the Company,
releasing any and all claims arising out of Executive's employment (other than
enforcement of this Agreement).
(i) Forfeiture of Outstanding Options. The provisions of Sections 6
---------------------------------
and 7 notwithstanding, if Executive materially fails to substantially comply
with any obligation imposed under this Section 10, all options to purchase
capital stock of the Company granted by the Company and then held by Executive
or a transferee of Executive shall be immediately forfeited, and thereupon such
options shall be canceled. Notwithstanding the foregoing, Executive shall not
forfeit any option unless and until there shall have been delivered to him,
within six months after the Board (A) had knowledge of conduct or an event
allegedly constituting grounds for such forfeiture and (B) had reason to believe
that such conduct or event could be grounds for such forfeiture, a copy of a
resolution duly adopted by a majority affirmative vote of the membership of the
Board (excluding Executive, if he is a director) at a meeting of the Board
called and held for such purpose (after giving Executive reasonable notice
specifying the nature of the grounds for such forfeiture, and not less than 30
days to correct the acts or omissions complained of, if correctable, and
affording Executive the opportunity, together with his counsel, to be heard
before the Board) finding that, in the good faith opinion of the Board,
Executive has engaged and continues to engage in conduct set forth in this
Section 10(i) which constitutes grounds for forfeiture of Executive's options.
Any such forfeiture shall apply to such options notwithstanding any term or
provision of any option agreement.
(j) Remedies. Executive acknowledges that the agreements and
--------
covenants in Sections 10(b), (c), (d), (e) and (f) are reasonable and necessary
for the protection of the Company's business interests, that in the event of any
actual or threatened violation of the covenants contained in Sections 10(b),
(c), (d), (e) and (f), the Company will suffer irreparable injury, Company's
damages will be difficult to ascertain and the Company's remedy at law will be
inadequate. Employee accordingly agrees that in the event of any actual or
threatened breach by him of any of the covenants set forth in Sections 10(b),
(c), (d), (e) and (f), the Company shall be entitled to injunctive and other
equitable relief, including immediate temporary injunctive and other equitable
relief, without bond and without the necessity of showing actual monetary
damages, subject to hearing as soon thereafter as possible. Nothing contained
herein shall be construed as prohibiting the Company from pursuing any other
remedies available to it for such breach or threatened breach, including the
recovery of any damages which it is able to prove.
(k) Survival. The provisions of this Section 10 shall survive the
--------
termination or expiration of this Agreement in accordance with the terms hereof.
11. Governing Law; Disputes; Arbitration.
(a) Governing Law. This Agreement is governed by and is to be
-------------
construed, administered and enforced in accordance with the laws of the State of
Illinois, without regard to Illinois conflicts of law principles, except insofar
as the Delaware General Corporation Law and
14
<PAGE>
federal laws and regulations may be applicable. If, under the governing law, any
portion of this Agreement is at any time deemed to be in conflict with any
applicable statute, rule, regulation, ordinance or other principle of law, such
portion shall be deemed to be modified or altered to the extent necessary to
conform thereto or, if that is not possible, to be omitted from this Agreement.
The invalidity of any such portion shall not affect the force, effect, and
validity of the remaining portion hereof. If any court determines that any
provision of Section 10 is unenforceable because of the duration or geographic
scope of such provision, it is the parties' intent that such court shall have
the power to modify the duration or geographic scope of such provision, as the
case may be, to the extent necessary to render the provision enforceable, and,
in its modified form, such provision shall be enforced.
(b) Reimbursement of Expenses in Enforcing Rights. All reasonable
---------------------------------------------
costs and expenses (including reasonable fees and disbursements of counsel)
incurred by Executive in seeking to interpret this Agreement or enforce rights
pursuant to this Agreement shall be paid on behalf of or reimbursed to Executive
promptly by the Company, whether or not Executive is successful in asserting
such rights; provided, however, that no reimbursement shall be made of such
-------- -------
expenses relating to any unsuccessful assertion of rights if and to the extent
that Executive's assertion of such rights was in bad faith or frivolous, as
determined by independent counsel mutually acceptable to the Executive and the
Company.
(c) Arbitration. Any dispute or controversy arising under or in
-----------
connection with this Agreement shall be settled exclusively by arbitration in
Chicago, Illinois by a panel of three arbitrators in accordance with the rules
of the American Arbitration Association in effect at the time of submission to
arbitration. Judgment may be entered on the arbitrators' award in any court
having jurisdiction. For purposes of entering any judgment upon an award
rendered by the arbitrators, the Company and Executive hereby consent to the
jurisdiction of any or all of the following courts: (i) the United States
District Court for the Northern District of Illinois, (ii) any of the courts of
the State of Illinois, or (iii) any other court having jurisdiction. The
Company and Executive further agree that any service of process or notice
requirements in any such proceeding shall be satisfied if the rules of such
court relating thereto have been substantially satisfied. The Company and
Executive hereby waive, to the fullest extent permitted by applicable law, any
objection which they may now or hereafter have to such jurisdiction and any
defense of inconvenient forum. The Company and Executive hereby agree that a
judgment upon an award rendered by the arbitrators may be enforced in other
jurisdictions by suit on the judgment or in any other manner provided by law.
Subject to Section 11(b), the Company shall bear all costs and expenses arising
in connection with any arbitration proceeding pursuant to this Section 11.
Notwithstanding any provision in this Section 11, Executive shall be entitled to
seek specific performance of Executive's right to be paid during the pendency of
any dispute or controversy arising under or in connection with this Agreement.
(d) Interest on Unpaid Amounts. Any amounts that have become payable
--------------------------
pursuant to the terms of this Agreement or any decision by arbitrators or
judgment by a court of law pursuant to this Section 11 but which are not timely
paid shall bear interest at the prime rate
15
<PAGE>
in effect at the time such payment first becomes payable, as quoted in The Wall
Street Journal (Midwest edition).
12. Miscellaneous.
(a) Integration. This Agreement cancels and supersedes any and all
-----------
prior agreements and understandings between the parties hereto with respect to
the employment of Executive by the Company and its subsidiaries. This Agreement
constitutes the entire agreement among the parties with respect to the matters
herein provided, and no modification or waiver of any provision hereof shall be
effective unless in writing and signed by the parties hereto. Executive shall
not be entitled to any payment or benefit under this Agreement which duplicates
a payment or benefit received or receivable by Executive under such prior
agreements and understandings or under any benefit or compensation plan of the
Company.
(b) Non-Transferability. Neither this Agreement nor the rights or
-------------------
obligations hereunder of the parties hereto shall be transferable or assignable
by Executive, except in accordance with the laws of descent and distribution or
as specified in Section 12(c). The Company may assign this Agreement and the
Company's rights and obligations hereunder, and shall assign this Agreement, to
any Successor (as hereinafter defined) which, by operation of law or otherwise,
continues to carry on substantially the business of the Company prior to the
event of succession, and the Company shall, as a condition of the succession,
require such Successor to agree to assume the Company's obligations under, and
be bound by, this Agreement. For purposes of this Agreement, "Successor" shall
mean any person that succeeds to, or has the practical ability to control
(either immediately or with the passage of time), the Company's business
directly, by merger or consolidation, or indirectly, by purchase of the
Company's voting securities or all or substantially all of its assets, or
otherwise.
(c) Beneficiaries. Executive shall be entitled to designate (and
-------------
change, to the extent permitted under applicable law) a beneficiary or
beneficiaries to receive any compensation or benefits payable hereunder
following Executive's death.
(d) Notices. Whenever under this Agreement it becomes necessary to
-------
give notice, such notice shall be in writing, signed by the party or parties
giving or making the same, and shall be deemed to have been duly given (i) upon
actual receipt (or refusal of receipt) if delivered personally; (ii) three
business days following deposit, if sent by certified or registered mail, return
receipt requested, postage prepaid; (iii) one business day following deposit
with a documented overnight delivery service or (iv) upon transmission, if sent
by facsimile (with confirmation receipt and followed by a copy sent by regular
mail), in each case to the appropriate address or number as set forth below or
at such other address as may be designated by such party by like notice:
16
<PAGE>
If to the Company:
Web Street, Inc.
510 Lake Cook Road, 4/th/ Floor
Deerfield, Illinois 60015
Attention: Joseph J. Fox
Stuart A. Cohn
Telephone: 847/444-4700
Facsimile: 847/267-9295
With a copy to:
Katten Muchin & Zavis
525 W. Monroe St., Suite 1600
Chicago, Illinois 60661
Attention: Mark D. Wood
Telephone: 312/902-5200
Facsimile: 312/902-1061
If to Executive:
Joseph J. Fox
5225 Briarcrest Lane
Long Grove, Illinois 60047
Telephone: 847/821-9844
Facsimile: 847/821-9056
(e) Reformation. The invalidity of any portion of this Agreement
-----------
shall not be deemed to render the remainder of this Agreement invalid.
(f) Headings. The headings of this Agreement are for convenience of
--------
reference only and do not constitute a part hereof.
(g) No General Waivers. The failure of any party at any time to
------------------
require performance by any other party of any provision hereof or to resort to
any remedy provided herein or at law or in equity shall in no way affect the
right of such party to require such performance or to resort to such remedy at
any time thereafter, nor shall the waiver by any party of a breach of any of the
provisions hereof be deemed to be a waiver of any subsequent breach of such
provisions. No such waiver shall be effective unless in writing and signed by
the party against whom such waiver is sought to be enforced.
(h) No Obligation To Mitigate. Executive shall not be required to
-------------------------
seek other employment or otherwise to mitigate Executive's damages upon any
termination of employment; provided, however, that, to the extent Executive
-------- -------
receives from a subsequent employer health or other insurance benefits that are
substantially similar to the benefits referred to in Section 5(c)
17
<PAGE>
hereof, any such benefits to be provided by the Company to Executive following
the Term shall be correspondingly reduced.
(i) Offsets; Withholding. The amounts required to be paid by the
--------------------
Company to Executive pursuant to this Agreement shall not be subject to offset
other than with respect to any amounts that are owed to the Company by Executive
due to his receipt of funds as a result of his fraudulent activity. The
foregoing and other provisions of this Agreement notwithstanding, all payments
to be made to Executive under this Agreement, including under Sections 6 and 7,
or otherwise by the Company will be subject to required withholding taxes and
other required deductions.
(j) Successors and Assigns. This Agreement shall be binding upon and
----------------------
shall inure to the benefit of Executive, his heirs, executors, administrators
and beneficiaries, and shall be binding upon and inure to the benefit of the
Company and its successors and assigns.
13. Income Tax Treatment.
Executive and the Company acknowledge that it is the intention of the
Company to deduct all amounts paid by the Company to Executive pursuant to this
Agreement, including under Sections 6 and 7 as ordinary and necessary business
expenses for income tax purposes. Executive agrees and represents that he will
treat all such amounts as ordinary income for income tax purposes, and should he
report such amounts as other than ordinary income for income tax purposes, he
will indemnify and hold the Company harmless from and against any and all taxes,
penalties, interest, costs and expenses, including reasonable attorneys' and
accounting fees and costs, which are incurred by Company directly or indirectly
as a result thereof.
14. Key Man Life Insurance.
If the Company, in its sole discretion, desires to procure "key man"
insurance covering the life of Executive, Executive shall cooperate with the
Company in procuring such insurance and shall, at the request of the Company,
submit to such medical examinations, supply such information and execute such
documents as may be required by the insurance company to which the Company has
applied for insurance. Executive shall use his best efforts to qualify for the
standard premium category of such insurance company. Executive shall have no
interest whatsoever in any "key man" insurance policy procured by the Company.
18
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
WEB STREET, INC.
By: /s/ Stuart A. Cohn
------------------------------------
Name: Stuart A. Cohn
Title: Executive Vice President,
General Counsel
EXECUTIVE
/s/ Joseph J. Fox
---------------------------------------
Joseph J. Fox
Chief Executive Officer
19
<PAGE>
EXHIBIT 10.7
WEB STREET, INC.
________________________________________________________________________________
Employment Agreement for Avi Fox
________________________________________________________________________________
<PAGE>
WEB STREET, INC.
________________________________________________________________________________
Employment Agreement for Avi Fox
________________________________________________________________________________
Page
----
1. Employment............................................................ 1
2. Term.................................................................. 1
3. Offices and Duties.................................................... 2
4. Salary and Annual Incentive Compensation.............................. 2
5. Long-Term Compensation, Benefits and Expense Reimbursement............ 2
6. Termination Due to Death or Disability................................ 3
7. Termination of Employment For Reasons Other Than Death or Disability.. 5
8. Definitions Relating to Termination Events............................ 8
9. Excise Tax Gross-Up................................................... 11
10. Executive Covenants................................................... 11
11. Governing Law; Disputes; Arbitration.................................. 14
12. Miscellaneous......................................................... 16
13. Income Tax Treatment.................................................. 18
14. Key Man Life Insurance................................................ 18
<PAGE>
WEB STREET, INC.
________________________________________________________________________________
Employment Agreement for Avi Fox
________________________________________________________________________________
THIS EMPLOYMENT AGREEMENT (this "Agreement"), by and between WEB
STREET, INC., a Delaware corporation (the "Company"), and Avi Fox ("Executive"),
is hereby entered into effective as of October 1, 1999 (the "Effective Date").
W I T N E S S E T H
WHEREAS, Executive is currently an employee of the Company;
WHEREAS, the Company desires to continue to employ Executive in his
capacity as President in connection with the conduct of its business, and
Executive desires to accept such employment on the terms and conditions herein
set forth; and
WHEREAS, the Company and Executive desire to set forth the terms upon
which Executive shall be so employed.
NOW, THEREFORE, in consideration of the foregoing, the mutual
covenants contained herein, and other good and valuable consideration the
receipt and adequacy of which the Company and Executive each hereby acknowledge,
the Company and Executive hereby agree as follows:
1. Employment.
The Company hereby agrees to employ Executive as its President, and
Executive hereby agrees to accept such employment and serve in such capacities,
during the Term (as defined in Section 2) and upon the terms and conditions set
forth in this Agreement.
2. Term.
The term of employment of Executive under this Agreement (the "Term")
shall, unless this Agreement is terminated in accordance with Section 6 or 7, be
a three-year period initially commencing on the Effective Date which, at
September 30 of each year, shall automatically be extended by one year, unless
the Company notifies the Executive in writing prior to September 30 of such year
(the "Termination Notice Date") that the Term shall not be so extended and, in
such case, the Term shall terminate on the second anniversary of such
Termination Notice Date.
<PAGE>
3. Offices and Duties.
The provisions of this Section 3 will apply during the Term:
(a) Generally. Executive shall serve as the President of the Company.
---------
Executive shall have and perform such duties, responsibilities and authorities
as are customary for the President of a publicly held corporation of the size,
type, and nature of the Company as they may exist from time to time and
consistent with such position and status and as the proper officers of the
Company or the Company's Board of Directors (the "Board") shall from time to
time direct, but in no event shall such duties, responsibilities, and
authorities be reduced from those of Executive prior to the Effective Date.
Executive shall devote such business time and attention as is necessary to
appropriately and efficiently discharge his duties and responsibilities as set
forth herein.
(b) Place of Employment. Executive's principal place of employment
-------------------
shall be the current corporate offices of the Company in Deerfield, Illinois.
In no event shall the Executive's principal place of employment be relocated to
any location other than the greater metropolitan Chicago area, without his prior
written consent.
4. Salary and Annual Incentive Compensation.
As partial compensation for the services to be rendered hereunder by
Executive, the Company agrees to pay to Executive during the Term the
compensation set forth in this Section 4.
(a) Base Salary. The Company will pay to Executive during the Term a
-----------
base salary at the initial annual rate of $250,000 payable in cash in accordance
with the Company's usual payroll practices with respect to senior executives,
and during the first year of the Term, a guaranteed bonus of $100,000 payable in
cash in equal quarterly installments. Executive's annual base salary shall be
reviewed by the Compensation Committee of the Board (the "Committee") at least
once in each calendar year and may be increased above, but may not be reduced
below, the then-current rate of such base salary.
(b) Annual Incentive Compensation. The Company will pay to Executive
-----------------------------
during the Term annual incentive compensation, if any, in amounts determined
each fiscal year by the Committee. Any such annual incentive compensation
payable to Executive shall be paid in accordance with the Company's usual
practices with respect to payment of incentive compensation to senior
executives.
5. Long-Term Compensation, Benefits and Expense Reimbursement
(a) Executive Compensation Plans. Executive shall be entitled during
----------------------------
the Term to participate, without discrimination or duplication, in all executive
compensation plans and programs intended for general participation by senior
executives of the Company, as presently in
2
<PAGE>
effect or as they may be modified or added to by the Company from time to time,
subject to the eligibility and other requirements of such plans and programs,
including, without limitation, the Company's 1999 Stock Incentive Plan, and any
successors to such plan, any other stock option plans, performance share plans,
management incentive plans, deferred compensation plans and supplemental
retirement plans; provided, however, that such plans and programs, in the
-------- -------
aggregate, shall provide Executive with benefits and compensation and incentive
award opportunities substantially no less favorable than those provided by the
Company to Executive under such plans and programs as in effect on the Effective
Date.
(b) Employee and Executive Benefit Plans. Executive shall be entitled
------------------------------------
during the Term to participate, without discrimination or duplication, in all
employee, executive benefit and special individual plans and programs of the
Company, as presently in effect or as they may be modified or added to by the
Company from time to time, to the extent such plans and programs are available
to other senior executives or employees of the Company, subject to the
eligibility and other requirements of such plans and programs, including,
without limitation, plans providing health and medical insurance, life
insurance, disability insurance and accidental death or dismemberment insurance,
and pension or other retirement plans, savings plans, vacation and time-off
programs, profit-sharing plans, stock purchase plans and stock ownership plans;
provided, however, that such plans and programs, in the aggregate, shall provide
- -------- -------
Executive with benefits and compensation and incentive award opportunities
substantially no less favorable than those provided by the Company to Executive
under such plans and programs as in effect on the Effective Date.
(c) Reimbursement of Expenses. The Company will promptly reimburse
-------------------------
Executive for all reasonable business expenses and disbursements incurred by
Executive in the performance of Executive's duties during the Term in accordance
with the Company's reimbursement policies as in effect from time to time.
(d) Funding of Rabbi Trust. Not later than 30 days following a Change
----------------------
in Control, the Company shall contribute to a "rabbi trust" an amount equal to
the amount that would be payable to the Executive upon a termination of
employment described in Section 7(b), under (i), (iii), (iv), (v), and (viii) of
such Section 7(b) (and the trustee of the rabbi trust shall be instructed to pay
such amounts (plus earnings thereon) to the Executive upon the Executive's
termination of employment, if the amounts due to the Executive hereunder are not
otherwise paid to the Executive by the Company).
6. Termination Due to Death or Disability.
Executive's employment and the Term shall terminate upon Executive's
death. The Company may terminate the employment of Executive as President due
to the Disability (as defined in Section 8(c)) of Executive. In the event
Executive's employment terminates due to Disability, the Term will terminate at
the expiration of the 30-day period set forth in Section 8(c), absent the
actions referred to therein being taken by Executive to return to service and
Executive's presentation to the Company of a certificate of good health.
3
<PAGE>
Upon a termination of Executive's employment due to death or
Disability, all obligations of the Company and Executive under Sections 1
through 5 of this Agreement will immediately cease; provided, however, that
-------- -------
subject to the provisions of Section 12(i), the Company will pay Executive (or,
in the case of Executive's death, his beneficiaries or estate), and Executive
(or, in the case of Executive's death, his beneficiaries or estate) will be
entitled to receive, the following:
(i) The unpaid portion of annual base salary at the rate payable, in
accordance with Section 4(a) hereof, at the date of termination of
employment, pro rated through such date of termination;
(ii) All vested, nonforfeitable amounts owing or accrued at the date of
termination of employment under any compensation and benefit plans,
programs and arrangements set forth or referred to in Sections 4(b),
5(a) and 5(b) (including any earned and vested annual incentive
compensation) in which Executive theretofore participated, under the
terms and conditions of the plans, programs and arrangements (and
agreements and documents thereunder) pursuant to which such
compensation and benefits were granted;
(iii) In lieu of any annual incentive compensation under Section 4(b) for
the year in which Executive's employment terminated (unless otherwise
payable under (ii) above), an amount equal to the average annual
incentive compensation paid to Executive in the three years
immediately preceding the year of termination (or, if Executive was
not eligible to receive or did not receive such incentive
compensation for any year in such three-year period, the Executive's
target annual incentive compensation for such year shall be used to
calculate average annual incentive compensation) (the "Severence
Annual Incentive Amount"), multiplied by a fraction the numerator of
which is the number of days Executive was employed in the year of
termination and the denominator of which is the total number of days
in the year of termination; and
(iv) Reimbursement of reasonable business expenses and disbursements
incurred by Executive prior to such termination of employment, as
authorized under Section 5(c).
In addition, upon a termination of Executive's employment due to death or
Disability, stock options then held by Executive will be exercisable to the
extent and for such periods indicated in, and otherwise be governed by, the
plans and programs (and agreements and other documents thereunder) pursuant to
which such stock options were granted. Furthermore, if Executive's employment
terminates due to Disability, for the period extending from such termination
until Executive reaches age 65, Executive shall continue to participate in all
employee benefit plans, programs and arrangements under Section 5(b) providing
health, medical and life insurance benefits in which Executive was participating
immediately prior to termination and the terms of which allow Executive's
continued participation, as if Executive had continued in employment with the
Company during such period (except that additional years of service shall not be
credited
4
<PAGE>
as a result of such deemed continued participation following termination), or,
if such plans, programs or arrangements do not allow Executive's continued
participation, Executive shall receive a cash payment equivalent on an after-tax
basis to the value of the additional benefits Executive would have received
under such employee benefit plans, programs and arrangements in which Executive
was participating immediately prior to termination, as if Executive had received
credit under such plans, programs and arrangements for service and age with the
Company during such period following Executive's termination as provided in this
sentence, with such benefits payable by the Company at the same times and in the
same manner as such benefits would have been received by Executive under such
plans (it being understood that the value of any insurance-provided benefits
will be based on the premium cost to Executive, which shall not exceed the
highest risk premium charged by a carrier having an investment grade or better
credit rating). However, in the case of termination of Executive's employment
due to Disability, Executive must continue to comply with his covenants and
agreements set forth in Section 10 in order to continue receiving the
compensation and benefits set forth in the previous sentence. Amounts payable
under Sections 6(i), (ii), (iii) and (iv) above or in lieu of health, medical
and life insurance benefits pursuant to this paragraph will be paid as promptly
as practicable after termination of Executive's employment and in no event more
than 45 days after such termination; provided, however, that, to the extent that
-------- -------
the Company would not be entitled to deduct any such payments under Section
162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), such
payments shall be made at the earliest time that the payments would be
deductible by the Company without limitation under Section 162(m) (unless this
provision is waived by the Company).
7. Termination of Employment For Reasons Other Than Death or Disability.
(a) Termination by the Company for Cause and Termination by Executive
-----------------------------------------------------------------
Other Than For Good Reason. In accordance with the provisions of this Section
- --------------------------
7(a), the Company may terminate the employment of Executive as President for
Cause at any time prior to a Change in Control, and Executive may terminate his
employment as President voluntarily for reasons other than Good Reason (as
defined in Section 8(d)) at any time.
Upon a termination of Executive's employment by the Company for Cause
or by the Executive for reasons other than Good Reason, the Term will
immediately terminate, and all obligations of the Company and Executive under
Sections 1 through 5 of this Agreement will immediately cease; provided,
--------
however, that, subject to the provisions of Section 12(i), the Company shall pay
- -------
Executive, and Executive shall be entitled to receive, the following:
(i) The unpaid portion of annual base salary at the rate payable, in
accordance with Section 4(a) hereof, at the date of termination of
employment, pro rated through such date of termination;
(ii) All vested, nonforfeitable amounts owing or accrued at the date of
termination of employment under any compensation and benefit plans,
programs and arrangements set forth or referred to in Sections 4(b),
5(a) and 5(b) hereof (including any earned and vested annual incentive
compensation and long-term incentive award)
5
<PAGE>
in which Executive theretofore participated, under the terms and
conditions of the plans, programs and arrangements (and agreements
and documents thereunder) pursuant to which such compensation and
benefits were granted; and
(iii) Reimbursement of reasonable business expenses and disbursements
incurred by Executive prior to such termination of employment, as
authorized under Section 5(c).
Amounts payable under Section 7(a)(i), (ii) and (iii) will be paid as promptly
as practicable after termination of Executive's employment; provided, however,
-------- -------
that, to the extent that the Company would not be entitled to deduct any such
payments under Section 162(m) of the Code, such payments shall be made at the
earliest time that the payments would be deductible by the Company without
limitation under Section 162(m) (unless this provision is waived by the
Company).
(b) Termination by the Company Without Cause and Termination by
-----------------------------------------------------------
Executive for Good Reason. In accordance with the provisions of this Section
- -------------------------
7(b), the Company may terminate the employment of Executive without Cause,
including after a Change in Control, upon 90 days' written notice to Executive,
and Executive may terminate his employment with the Company for Good Reason upon
90 days' written notice to the Company; provided, however, that, if the basis
-------- -------
for such Good Reason is remediable, the Company shall have 30 days after receipt
of such notice to remedy the basis for such Good Reason. Notwithstanding the
foregoing, the Company may terminate Executive without Cause and without
providing 90 days' written notice to Executive if the Company pays Executive the
portion of his then-current annual base salary under Section 4(a) for such 90-
day period and credits Executive with service for 90 days for all purposes
hereunder.
Upon a termination of Executive's employment by the Company without
Cause, or termination of Executive's employment by the Executive for Good
Reason, the Term will immediately terminate and all obligations of the parties
under Sections 1 through 5 of this Agreement will immediately cease, except that
subject to the provisions of Section 12(i) the Company shall pay Executive, and
Executive shall be entitled to receive, the following:
(i) A lump sum cash payment in an amount equal to the product of (x) the
sum of (A) Executive's then-current annual base salary at the rate
payable under Section 4(a) immediately prior to termination plus (B)
the Severance Annual Incentive Amount multiplied by (y) the Severance
Multiplier. For purposes of this Section 7(b)(i), the "Severance
Multiplier" shall be two and one-half (2.5).
(ii) The unpaid portion of annual base salary at the rate payable, in
accordance with Section 4(a) hereof, at the date of termination of
employment, pro rated through such date of termination;
(iii) All vested, nonforfeitable amounts owing or accrued at the date of
termination of employment under any compensation and benefit plans,
programs and arrangements set forth or referred to inc Sections 4(b),
5(a) and 5(b) hereof
6
<PAGE>
(including any vested and earned annual incentive compensation) in
which Executive theretofore participated and all amounts not vested
and nonforfeitable, but owing and accrued at the date of termination
of employment, under such benefit plans, programs and arrangements, to
the extent that such amounts would be vested and nonforfeitable if
such amounts become vested, under the terms and conditions of the
plans, programs and arrangements (and agreements and documents
thereunder) pursuant to which such compensation and benefits were
granted;
(iv) In lieu of any annual incentive compensation under Section 4(b) for
the year in which Executive's employment terminated (unless otherwise
payable under Section 7(b)(iii)), an amount equal to the Severance
Annual Incentive Amount, which, unless a termination occurs during the
period beginning 60 days prior to a Change in Control and ending two
years after a Change in Control, shall be multiplied by a fraction,
the numerator of which is the number of days Executive was employed in
the year of termination and the denominator of which is the total
number of days in the year of termination; and
(v) Reimbursement of reasonable business expenses and disbursements
incurred by Executive prior to such termination of employment, as
authorized under Section 5(c).
In addition, upon a termination of Executive's employment by the
Company without Cause, or termination of Executive's employment by the
Executive for Good Reason, stock options then held by Executive will
be exercisable to the extent and for such periods indicated in, and
otherwise be governed by, the plans and programs (and agreements and
other documents thereunder) pursuant to which such stock options were
granted. Furthermore, for a period of one (1) year after such
termination, Executive shall continue to participate in all employee
benefit plans, programs and arrangements under Section 5(c) providing
health, medical and life insurance benefits in which Executive was
participating immediately prior to termination and the terms of which
allow Executive's continued participation, as if Executive had
continued in employment with the Company during such period or, if
such plans, programs or arrangements do not allow Executive's
continued participation, a cash payment equivalent on an after-tax
basis to the value of the additional benefits Executive would have
received under such employee benefit plans, programs and arrangements
in which Executive was participating immediately prior to termination,
as if Executive had received credit under such plans, programs and
arrangements for service and age with the Company during such period
following Executive's termination, with such benefits payable by the
Company at the same times and in the same manner as such benefits
would have been received by Executive under such plans (it being
understood that the value of any insurance-provided benefits will be
based on the premium cost to Executive, which shall not exceed the
highest risk premium charged by a carrier having an investment grade
or better credit rating). Amounts payable under Sections 7(b)(i),
7
<PAGE>
(ii), (iii), (iv) and (v) above or in lieu of health, medical and life
insurance benefits pursuant to this paragraph will be paid as promptly
as practicable after termination of Executive's employment, and in no
event more than 45 days after such termination; provided, however,
-------- -------
that, if such termination is a termination by the Company without
Cause and prior to a Change in Control, to the extent that the Company
would not be entitled to deduct any such payments under Section 162(m)
of the Code, such payments shall be made at the earliest time that the
payments would be deductible by the Company without limitation under
Section 162(m) (unless this provision is waived by the Company), but
in no event later than 12 months subsequent to the date of
termination.
Upon a termination of Executive's employment by the Company
without Cause or by the Executive for Good Reason during the period
beginning 60 days prior to a Change in Control and ending two years
after a Change in Control, the Company will use its reasonable best
efforts to file with the Commission within 30 days of the effective
date of such termination, a registration statement registering under
the Securities Act of 1933, as amended (the "Securities Act"), the
offer and sale (or other disposition) of all shares of the class of
Common Stock of the Company registered under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and beneficially owned
by the Executive at the time of such termination. The Company will
use its reasonable best efforts to cause such registration statement
to become effective and to maintain the continuous effectiveness of
such registration statement until the end of the 90th day after
Executive is no longer, in the opinion of counsel to the Company, an
affiliate for purposes of Rule 144 under the Securities Act. The
Company will also use its reasonable best efforts to maintain as
current all offering materials under such registration statement at
all times that offers and sales of such shares can be made by
Executive.
8. Definitions Relating to Termination Events.
(a) "Cause." For purposes of this Agreement, "Cause" shall mean
-----
Executive's gross misconduct (as defined below) or willful (as defined below)
and material breach of Section 10 of this Agreement. For purposes of this
definition, "gross misconduct" shall mean (A) a felony conviction in a court of
law under applicable federal or state laws which results in material damage to
the Company or its subsidiaries or materially impairs the value of the
Executive's services to the Company, or (B) willfully engaging in one or more
acts, or willfully omitting to act in accordance with duties hereunder, which
act or omission is demonstrably and materially damaging to the Company or its
subsidiaries, including acts and omissions which materially impair the ability
of the Company to continue its business in accordance with applicable
governmental and regulatory rules and regulations. For purposes of this
Agreement, an act or failure to act on Executive's part shall be considered
"willful" if it was done or omitted to be done by him not in good faith, and
shall not include any act or failure to act resulting from any incapacity of
Executive. Notwithstanding the foregoing, Executive may not be terminated for
Cause unless and until there shall have been delivered to him, within six months
after the Board
8
<PAGE>
(A) had knowledge of conduct or an event allegedly constituting Cause and (B)
had reason to believe that such conduct or event could be grounds for Cause, a
copy of a resolution duly adopted by a majority affirmative vote of the
membership of the Board (excluding Executive) (after giving Executive reasonable
notice specifying the nature of the grounds for such termination and not less
than 30 days to correct the acts or omissions complained of, if correctable, and
affording Executive the opportunity, together with his counsel, to be heard
before the Board) finding that, in the good faith opinion of the Board,
Executive was guilty of conduct set forth above in this Section 8(a).
(b) "Change in Control." A "Change in Control" shall be deemed to
-----------------
have occurred upon the happening of any of the following events:
(i) An acquisition by any individual, entity or group, within the
meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act, (a "Person")
of beneficial ownership (within the meaning of Rule 13d-3 promulgated under
the Exchange Act) of more than fifty percent (50%) of either (1) the then
outstanding shares of Common Stock of the Company (the "Outstanding Common
Stock") or (2) the combined voting power of the then outstanding voting
securities of the Company entitled to vote generally in the election of
directors (the "Outstanding Voting Securities"); excluding, however, the
following: (1) any acquisition directly from the Company, other than an
acquisition by virtue of the exercise of a conversion privilege unless the
security being so converted was itself acquired directly from the Company,
(2) any acquisition by the Company; (3) any acquisition by Joseph Fox, Avi
Fox or any of their affiliates, (4) any acquisition by any employee benefit
plan (or related trust) sponsored or maintained by the Company or by any
Company controlled by the Company; or (5) any acquisition by any Person
pursuant to a transaction which complies with clauses (1), (2) and (3) of
subsection (iii) of this Section 8(b); or
(ii) Within any period of 24 consecutive months, a change in the
composition of the Board such that the individuals who, immediately prior
to such period, constituted the Board (such Board shall be hereinafter
referred to as the "Incumbent Board") cease for any reason to constitute at
least a majority of the Board; provided, however, for purposes hereof, that
any individual who becomes a member of the Board during such period, whose
election, or nomination for election by the Company's stockholders, was
approved by a vote of at least a majority of those individuals who are
members of the Board and who were also members of the Incumbent Board (or
deemed to be such pursuant to this proviso) shall be considered as though
such individual were a member of the Incumbent Board; but, provided
further, that any such individual whose initial assumption of office occurs
as a result of either an actual or threatened election contest (as such
terms are used in Rule 14a-11 of Regulation 14A promulgated under the
Exchange Act) or other actual or threatened solicitation of proxies or
consents by or on behalf of a Person other than the Board shall not be so
considered as a member of the Incumbent Board; or
(iii) The approval by the stockholders of the Company of a
reorganization, merger or consolidation or sale or other disposition of all
or substantially all of the assets
9
<PAGE>
of the Company ("Corporate Transaction"); excluding, however, such a
Corporate Transaction pursuant to which (1) all or substantially all of the
individuals and entities who are the beneficial owners, respectively, of
the Outstanding Common Stock and Outstanding Voting Securities immediately
prior to such Corporate Transaction will beneficially own, directly or
indirectly, more than sixty percent (60%) of, respectively, the outstanding
shares of common stock, and the combined voting power of the outstanding
voting securities entitled to vote generally in the election of directors,
as the case may be, of the Company resulting from such Corporate
Transaction (including, without limitation, a Company which as a result of
such transaction owns the Company or all or substantially all of the
Company's assets, either directly or through one or more subsidiaries) in
substantially the same proportions as their ownership, immediately prior to
such Corporate Transaction, of the Outstanding Common Stock and Outstanding
Voting Securities, as the case may be, (2) no Person (other than the
Company or any employee benefit plan (or related trust) sponsored or
maintained by the Company, by any Company controlled by the Company or by
such Company resulting from such Corporate Transaction) will beneficially
own, directly or indirectly, more than twenty-five percent (25%) of,
respectively, the outstanding shares of common stock of the Company
resulting from such Corporate Transaction or the combined voting power of
the outstanding voting securities of such Company entitled to vote
generally in the election of directors, except to the extent that such
ownership existed with respect to the Company prior to the Corporate
Transaction, and (3) individuals who were members of the Board immediately
prior to the approval by the stockholders of the Company of such Corporate
Transaction will constitute at least a majority of the members of the board
of directors of the Company resulting from such Corporate Transaction; or
(iv) The approval by the stockholders of the Company of a complete
liquidation or dissolution of the Company, other than to a corporation
pursuant to a transaction which would comply with clauses (1), (2) and (3)
of subsection (iii) of this Section 1(b), assuming for this purpose that
such transaction were a Corporate Transaction.
(c) "Disability." "Disability" means the failure of Executive to
----------
render and perform the services required of him under this Agreement, for a
total of 180 days of more during any consecutive 12 month period, because of any
physical or mental incapacity or disability as determined by a physician or
physicians selected by the Company and reasonably acceptable to Executive,
unless, within 30 days after Executive has received written notice from the
Company of a proposed termination due to such absence, Executive shall have
returned to the full performance of his duties hereunder and shall have
presented to the Company a written certificate of Executive's good health
prepared by a physician selected by the Company and reasonably acceptable to
Executive.
(d) "Good Reason." For purposes of this Agreement, "Good Reason"
-----------
shall mean, without Executive's prior written consent, (A) a material change,
adverse to Executive, in Executive's positions, titles or offices as set forth
in Section 3(a), status, rank, nature of responsibilities or authority within
the Company, except in connection with the termination of Executive's employment
for Cause or Disability or as a result of Executive's death, or as
10
<PAGE>
requested or consented to by Executive, (B) an assignment of any duties to
Executive which are inconsistent with his status, duties, responsibilities and
authorities under Section 3(a), (C) a decrease in annual base salary or other
compensation opportunities and maximums or benefits provided under this
Agreement, (D) any other failure by the Company to perform any material
obligation under, or breach by the Company of any material provision of, this
Agreement, (E) a relocation of the corporate offices of the Company more than 35
miles from the latest location of such offices prior to the date of a Change in
Control, (F) any failure to secure the agreement of any successor corporation or
other entity to the Company to fully assume the Company's obligations under this
Agreement in a form reasonably acceptable to Executive, and (G) any attempt by
the Company to terminate Executive for Cause which does not result in a valid
termination for Cause, except in the case that valid grounds for termination for
Cause exist but are corrected as permitted under Section 8(a).
9. Excise Tax Gross-Up.
If it shall be determined that any payment or benefit received or to be
received by Executive under this Agreement or any other plan, arrangement or
agreement of the Company (all such payments and benefits a "Payment"), would be
subject to the excise tax imposed by Section 4999 of the Code (the "Excise
Tax"), then the Company shall pay to Executive an additional payment (a "Gross-
Up Payment") in an amount necessary to reimburse Executive, on an after-tax
basis, for the Excise Tax and for any federal, state and local income tax and
excise tax (including any interest and penalties imposed with respect to such
taxes) that may be imposed by reason of the Payment. For purposes of
determining the amount of any Gross-Up Payment, Executive shall be deemed to pay
federal, state and local income taxes at the highest applicable marginal rate of
taxation in the calendar year in which the Gross-Up Payment is to be made. All
determinations required to be made under this Section 9, including whether a
Gross-Up Payment is required and the amount of such Gross-Up Payment, shall be
made by a nationally known independent accounting firm regularly retained by the
Company (the "Accounting Firm") which shall provide detailed supporting
calculations both to the Company and Executive within 15 business days of the
request for such determination. Such request may be made by either party. The
Company shall pay the fees and expenses of the Accounting Firm in connection
with any determinations hereunder. The Gross-Up Payment shall be paid by the
Company within 10 days of the Accounting Firm's determination of the amount
thereof.
10. Executive Covenants.
(a) Executive's Acknowledgment. Executive agrees and acknowledges that in
--------------------------
order to assure the Company that the Company will retain its value as a going
concern, it is necessary that Executive undertake not to utilize his special
knowledge of the Company's business and his relationships with customers and
suppliers to compete with the Company. Executive further acknowledges that:
(i) Executive is one of a limited number of persons who has developed
the Company's business;
11
<PAGE>
(ii) Executive has occupied a position of trust and confidence with
the Company prior to the date of this Agreement and, during such period and
Employee's employment under this Agreement, Employee has acquired and will
acquire an intimate knowledge of proprietary and confidential information
concerning the Company and its business;
(iii) the agreements and covenants contained in Sections 10(b), (c),
(d), (e), (f) and (g) are essential to protect the Company and the goodwill
of its business;
(iv) Executive's employment with the Company has special, unique and
extraordinary value to the Company, and the Company would be irreparably
damaged if Executive were to provide services to any person or entity or
otherwise act in violation of the provisions of this Agreement;
(v) the scope and duration of the restrictive covenants in Section
10(b) are reasonably designed to protect a protected interest of the
Company and are not excessive in light of the circumstances; and
(vi) Executive has a means to support himself and his dependents
other than by engaging in conduct prohibited by the restrictive covenants
in Section 10(b), and the provisions of Sections 10(b) will not impair such
ability.
(b) Non-Competition; Non-Solicitation; Non-Interference. During the
---------------------------------------------------
Term and for a period of two years after the termination of Executive's
employment hereunder, Executive will not by himself or in conjunction with
others, directly or indirectly engage (either as owner, investor, partner,
member stockholder, employer, employee, consultant, advisor, manager or
director) in any business in the United States which, at the time of such
termination, is directly or indirectly in competition with a business then
conducted or proposed to be conducted by the Company or any of its subsidiaries;
provided, however, this the limitation shall not apply if Executive's employment
- -------- --------
is terminated as a result of a termination by the Company without Cause or a
termination by Executive for Good Reason. During the Term and for a period of
three years after the termination of Executive's employment hereunder, Executive
will not by himself or in conjunction with others, directly or indirectly (i)
induce any account holders of the Company or any of its subsidiaries with whom
Executive has had contacts or relationships, directly or indirectly, during and
within the scope of his employment with the Company, to curtail or cancel their
relationship with the Company or its subsidiaries; or (ii) induce, or attempt to
influence, any employee of the Company or any of its subsidiaries to terminate
their employment therewith. The provisions of the first sentence of this
Section 10(b) and clauses (ii) and (iii) of this Section 10(b) are separate and
distinct commitments independent of each of the other subparagraphs. It is
agreed that the ownership of not more than one percent of the equity securities
of any company having securities listed on an exchange or regularly traded in an
over-the-counter market shall not, of itself, be deemed inconsistent with the
first sentence of this Section 10(b).
(c) Non-Disclosure. Executive shall not, at any time during the Term
--------------
and thereafter (including following Executive's termination of employment for
any reason), disclose, use, transfer or sell, except in the course of employment
with, or providing other service to, the
12
<PAGE>
Company, any confidential or proprietary information of the Company and its
subsidiaries so long as such information has not otherwise been publicly
disclosed or is not otherwise in the public domain, except as required by law or
pursuant to legal process.
(d) Return of Company Materials Upon Termination. Executive
--------------------------------------------
acknowledges that all records and documents containing confidential or
proprietary information of the Company or its subsidiaries prepared by Executive
or coming into his possession by virtue of his employment by the Company are and
will remain the property of the Company and its subsidiaries. Upon termination
of his employment with the Company, Executive shall immediately return to the
Company all such items and all copies of such items, in his possession.
(e) Cooperation With Regard to Litigation. Executive agrees to
-------------------------------------
cooperate with the Company, during the Term and thereafter (including following
Executive's termination of employment for any reason), by making himself
available to testify on behalf of the Company or any subsidiary or affiliate of
the Company, in any action, suit or proceeding, whether civil, criminal,
administrative or investigative, and to assist the Company, or any subsidiary or
affiliate of the Company, in any such action, suit or proceeding, by providing
information and meeting and consulting with the Board or its representatives or
counsel, or representatives or counsel to the Company or any subsidiary or
affiliate of the Company, as reasonably requested and at a time mutually
convenient to Executive and the Company. The Company agrees to reimburse the
Executive, on an after-tax basis, for all expenses actually incurred in
connection with his provision of testimony or assistance.
(f) Non-Disparagement. Executive shall not, at any time during the
-----------------
Term and thereafter, make statements or representations, or otherwise
communicate, directly or indirectly, in writing, orally or otherwise, or take
any action which may, directly or indirectly, disparage or be damaging to the
Company or any of its subsidiaries or affiliates or their respective officers,
directors, employees, advisors, businesses or reputations. Notwithstanding the
foregoing, nothing in this Agreement shall preclude Executive from making
truthful statements or disclosures that are required by applicable law,
regulation or legal process.
(g) Inventions. Executive acknowledges that all inventions,
----------
innovations, discoveries, improvements, developments, methods, know-how,
designs, analyses, drawings, reports and all similar or related information
(whether or not patentable) which (i) relate to the then current business or any
anticipated business of the Company, the Company's research and development or
the Company's existing or future services or products and (ii) which are
conceived, developed or made by Executive while employed by the Company ("Work
Product") belong to the Company. Executive shall promptly disclose such Work
Product to the Company and perform all actions reasonably requested by the
Company (whether during or after his period of employment with the Company) to
establish and confirm such ownership (including the execution of assignments,
consents, powers of attorney and other instruments).
(h) Release of Employment Claims. Executive agrees, as a condition to
----------------------------
receipt of any termination payments and benefits provided for in Sections 6 and
7 herein (other than salary earned through the date of termination), that he
will execute a general release agreement,
13
<PAGE>
in a form satisfactory to the Company, releasing any and all claims arising out
of Executive's employment (other than enforcement of this Agreement).
(i) Forfeiture of Outstanding Options. The provisions of Sections 6
---------------------------------
and 7 notwithstanding, if Executive materially fails to substantially comply
with any obligation imposed under this Section 10, all options to purchase
capital stock of the Company granted by the Company and then held by Executive
or a transferee of Executive shall be immediately forfeited, and thereupon such
options shall be canceled. Notwithstanding the foregoing, Executive shall not
forfeit any option unless and until there shall have been delivered to him,
within six months after the Board (A) had knowledge of conduct or an event
allegedly constituting grounds for such forfeiture and (B) had reason to believe
that such conduct or event could be grounds for such forfeiture, a copy of a
resolution duly adopted by a majority affirmative vote of the membership of the
Board (excluding Executive, if he is a director) at a meeting of the Board
called and held for such purpose (after giving Executive reasonable notice
specifying the nature of the grounds for such forfeiture, and not less than 30
days to correct the acts or omissions complained of, if correctable, and
affording Executive the opportunity, together with his counsel, to be heard
before the Board) finding that, in the good faith opinion of the Board,
Executive has engaged and continues to engage in conduct set forth in this
Section 10(i) which constitutes grounds for forfeiture of Executive's options.
Any such forfeiture shall apply to such options notwithstanding any term or
provision of any option agreement.
(j) Remedies. Executive acknowledges that the agreements and
--------
covenants in Sections 10(b), (c), (d), (e) and (f) are reasonable and necessary
for the protection of the Company's business interests, that in the event of any
actual or threatened violation of the covenants contained in Sections 10(b),
(c), (d), (e) and (f), the Company will suffer irreparable injury, Company's
damages will be difficult to ascertain and the Company's remedy at law will be
inadequate. Employee accordingly agrees that in the event of any actual or
threatened breach by him of any of the covenants set forth in Sections 10(b),
(c), (d), (e) and (f), the Company shall be entitled to injunctive and other
equitable relief, including immediate temporary injunctive and other equitable
relief, without bond and without the necessity of showing actual monetary
damages, subject to hearing as soon thereafter as possible. Nothing contained
herein shall be construed as prohibiting the Company from pursuing any other
remedies available to it for such breach or threatened breach, including the
recovery of any damages which it is able to prove.
(k) Survival. The provisions of this Section 10 shall survive the
--------
termination or expiration of this Agreement in accordance with the terms hereof.
11. Governing Law; Disputes; Arbitration.
(a) Governing Law. This Agreement is governed by and is to be
-------------
construed, administered and enforced in accordance with the laws of the State of
Illinois, without regard to Illinois conflicts of law principles, except insofar
as the Delaware General Corporation Law and federal laws and regulations may be
applicable. If, under the governing law, any portion of this Agreement is at
any time deemed to be in conflict with any applicable statute, rule, regulation,
ordinance or other principle of law, such portion shall be deemed to be modified
or altered to the
14
<PAGE>
extent necessary to conform thereto or, if that is not possible, to be omitted
from this Agreement. The invalidity of any such portion shall not affect the
force, effect, and validity of the remaining portion hereof. If any court
determines that any provision of Section 10 is unenforceable because of the
duration or geographic scope of such provision, it is the parties' intent that
such court shall have the power to modify the duration or geographic scope of
such provision, as the case may be, to the extent necessary to render the
provision enforceable, and, in its modified form, such provision shall be
enforced.
(b) Reimbursement of Expenses in Enforcing Rights. All reasonable
---------------------------------------------
costs and expenses (including reasonable fees and disbursements of counsel)
incurred by Executive in seeking to interpret this Agreement or enforce rights
pursuant to this Agreement shall be paid on behalf of or reimbursed to Executive
promptly by the Company, whether or not Executive is successful in asserting
such rights; provided, however, that no reimbursement shall be made of such
-------- -------
expenses relating to any unsuccessful assertion of rights if and to the extent
that Executive's assertion of such rights was in bad faith or frivolous, as
determined by independent counsel mutually acceptable to the Executive and the
Company.
(c) Arbitration. Any dispute or controversy arising under or in
-----------
connection with this Agreement shall be settled exclusively by arbitration in
Chicago, Illinois by a panel of three arbitrators in accordance with the rules
of the American Arbitration Association in effect at the time of submission to
arbitration. Judgment may be entered on the arbitrators' award in any court
having jurisdiction. For purposes of entering any judgment upon an award
rendered by the arbitrators, the Company and Executive hereby consent to the
jurisdiction of any or all of the following courts: (i) the United States
District Court for the Northern District of Illinois, (ii) any of the courts of
the State of Illinois, or (iii) any other court having jurisdiction. The
Company and Executive further agree that any service of process or notice
requirements in any such proceeding shall be satisfied if the rules of such
court relating thereto have been substantially satisfied. The Company and
Executive hereby waive, to the fullest extent permitted by applicable law, any
objection which they may now or hereafter have to such jurisdiction and any
defense of inconvenient forum. The Company and Executive hereby agree that a
judgment upon an award rendered by the arbitrators may be enforced in other
jurisdictions by suit on the judgment or in any other manner provided by law.
Subject to Section 11(b), the Company shall bear all costs and expenses arising
in connection with any arbitration proceeding pursuant to this Section 11.
Notwithstanding any provision in this Section 11, Executive shall be entitled to
seek specific performance of Executive's right to be paid during the pendency of
any dispute or controversy arising under or in connection with this Agreement.
(d) Interest on Unpaid Amounts. Any amounts that have become payable
--------------------------
pursuant to the terms of this Agreement or any decision by arbitrators or
judgment by a court of law pursuant to this Section 11 but which are not timely
paid shall bear interest at the prime rate in effect at the time such payment
first becomes payable, as quoted in The Wall Street Journal (Midwest edition).
15
<PAGE>
12. Miscellaneous.
(a) Integration. This Agreement cancels and supersedes any and all
-----------
prior agreements and understandings between the parties hereto with respect to
the employment of Executive by the Company and its subsidiaries. This Agreement
constitutes the entire agreement among the parties with respect to the matters
herein provided, and no modification or waiver of any provision hereof shall be
effective unless in writing and signed by the parties hereto. Executive shall
not be entitled to any payment or benefit under this Agreement which duplicates
a payment or benefit received or receivable by Executive under such prior
agreements and understandings or under any benefit or compensation plan of the
Company.
(b) Non-Transferability. Neither this Agreement nor the rights or
-------------------
obligations hereunder of the parties hereto shall be transferable or assignable
by Executive, except in accordance with the laws of descent and distribution or
as specified in Section 12(c). The Company may assign this Agreement and the
Company's rights and obligations hereunder, and shall assign this Agreement, to
any Successor (as hereinafter defined) which, by operation of law or otherwise,
continues to carry on substantially the business of the Company prior to the
event of succession, and the Company shall, as a condition of the succession,
require such Successor to agree to assume the Company's obligations under, and
be bound by, this Agreement. For purposes of this Agreement, "Successor" shall
mean any person that succeeds to, or has the practical ability to control
(either immediately or with the passage of time), the Company's business
directly, by merger or consolidation, or indirectly, by purchase of the
Company's voting securities or all or substantially all of its assets, or
otherwise.
(c) Beneficiaries. Executive shall be entitled to designate (and
-------------
change, to the extent permitted under applicable law) a beneficiary or
beneficiaries to receive any compensation or benefits payable hereunder
following Executive's death.
(d) Notices. Whenever under this Agreement it becomes necessary to
-------
give notice, such notice shall be in writing, signed by the party or parties
giving or making the same, and shall be deemed to have been duly given (i) upon
actual receipt (or refusal of receipt) if delivered personally; (ii) three
business days following deposit, if sent by certified or registered mail, return
receipt requested, postage prepaid; (iii) one business day following deposit
with a documented overnight delivery service or (iv) upon transmission, if sent
by facsimile (with confirmation receipt and followed by a copy sent by regular
mail), in each case to the appropriate address or number as set forth below or
at such other address as may be designated by such party by like notice:
16
<PAGE>
If to the Company:
Web Street, Inc.
510 Lake Cook Road, 4/th/ Floor
Deerfield, Illinois 60015
Attention: Joseph J. Fox
Stuart A. Cohn
Telephone: 847/444-4700
Facsimile: 847/267-9295
With a copy to:
Katten Muchin & Zavis
525 W. Monroe St., Suite 1600
Chicago, Illinois 60661
Attention: Mark D. Wood
Telephone: 312/902-5200
Facsimile: 312/902-1061
If to Executive:
Avi Fox
1818 North Burling
Chicago, Illinois 60614
(e) Reformation. The invalidity of any portion of this Agreement
-----------
shall not be deemed to render the remainder of this Agreement invalid.
(f) Headings. The headings of this Agreement are for convenience of
--------
reference only and do not constitute a part hereof.
(g) No General Waivers. The failure of any party at any time to
------------------
require performance by any other party of any provision hereof or to resort to
any remedy provided herein or at law or in equity shall in no way affect the
right of such party to require such performance or to resort to such remedy at
any time thereafter, nor shall the waiver by any party of a breach of any of the
provisions hereof be deemed to be a waiver of any subsequent breach of such
provisions. No such waiver shall be effective unless in writing and signed by
the party against whom such waiver is sought to be enforced.
(h) No Obligation To Mitigate. Executive shall not be required to
-------------------------
seek other employment or otherwise to mitigate Executive's damages upon any
termination of employment; provided, however, that, to the extent Executive
-------- -------
receives from a subsequent employer health or other insurance benefits that are
substantially similar to the benefits referred to in Section 5(c) hereof, any
such benefits to be provided by the Company to Executive following the Term
shall be correspondingly reduced.
17
<PAGE>
(i) Offsets; Withholding. The amounts required to be paid by the
--------------------
Company to Executive pursuant to this Agreement shall not be subject to offset
other than with respect to any amounts that are owed to the Company by Executive
due to his receipt of funds as a result of his fraudulent activity. The
foregoing and other provisions of this Agreement notwithstanding, all payments
to be made to Executive under this Agreement, including under Sections 6 and 7,
or otherwise by the Company will be subject to required withholding taxes and
other required deductions.
(j) Successors and Assigns. This Agreement shall be binding upon and
----------------------
shall inure to the benefit of Executive, his heirs, executors, administrators
and beneficiaries, and shall be binding upon and inure to the benefit of the
Company and its successors and assigns.
13. Income Tax Treatment.
Executive and the Company acknowledge that it is the intention of the
Company to deduct all amounts paid by the Company to Executive pursuant to this
Agreement, including under Sections 6 and 7 as ordinary and necessary business
expenses for income tax purposes. Executive agrees and represents that he will
treat all such amounts as ordinary income for income tax purposes, and should he
report such amounts as other than ordinary income for income tax purposes, he
will indemnify and hold the Company harmless from and against any and all taxes,
penalties, interest, costs and expenses, including reasonable attorneys' and
accounting fees and costs, which are incurred by Company directly or indirectly
as a result thereof.
14. Key Man Life Insurance.
If the Company, in its sole discretion, desires to procure "key man"
insurance covering the life of Executive, Executive shall cooperate with the
Company in procuring such insurance and shall, at the request of the Company,
submit to such medical examinations, supply such information and execute such
documents as may be required by the insurance company to which the Company has
applied for insurance. Executive shall use his best efforts to qualify for the
standard premium category of such insurance company. Executive shall have no
interest whatsoever in any "key man" insurance policy procured by the Company.
18
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
WEB STREET, INC.
By: /s/ Stuart A. Cohn
--------------------------------
Name: Stuart A. Cohn
Title: Executive Vice President,
General Counsel
EXECUTIVE
/s/ Avi Fox
-----------------------------------
Avi Fox
President
19
<PAGE>
EXHIBIT 10.8
WEB STREET, INC.
________________________________________________________________________________
Employment Agreement for Joseph A. Barr
________________________________________________________________________________
<PAGE>
WEB STREET, INC.
________________________________________________________________________________
Employment Agreement for Joseph A. Barr
________________________________________________________________________________
Page
----
1. Employment............................................................ 1
2. Term.................................................................. 1
3. Offices and Duties.................................................... 2
4. Salary and Annual Incentive Compensation.............................. 2
5. Long-Term Compensation, Benefits and Expense Reimbursement............ 2
6. Termination Due to Death or Disability................................ 3
7. Termination of Employment For Reasons Other Than Death or Disability.. 5
8. Definitions Relating to Termination Events............................ 8
9. Excise Tax Gross-Up................................................... 11
10. Executive Covenants................................................... 11
11. Governing Law; Disputes; Arbitration.................................. 14
12. Miscellaneous......................................................... 16
13. Income Tax Treatment.................................................. 18
14. Key Man Life Insurance................................................ 18
<PAGE>
WEB STREET, INC.
________________________________________________________________________________
Employment Agreement for Joseph A. Barr
________________________________________________________________________________
THIS EMPLOYMENT AGREEMENT (this "Agreement"), by and between WEB
STREET, INC., a Delaware corporation (the "Company"), and Joseph A. Barr
("Executive"), is hereby entered into effective as of October 1, 1999 and shall
be effective as of October 1, 1999 (the "Effective Date").
W I T N E S S E T H
WHEREAS, Executive is currently an employee of the Company;
WHEREAS, the Company desires to continue to employ Executive in his
capacity as Chief Financial Officer in connection with the conduct of its
business, and Executive desires to accept such employment on the terms and
conditions herein set forth; and
WHEREAS, the Company and Executive desire to set forth the terms upon
which Executive shall be so employed, which terms replace that certain
Employment Agreement previously entered into between the Company and Executive.
NOW, THEREFORE, in consideration of the foregoing, the mutual
covenants contained herein, and other good and valuable consideration the
receipt and adequacy of which the Company and Executive each hereby acknowledge,
the Company and Executive hereby agree as follows:
1. Employment.
The Company hereby agrees to employ Executive as its Chief Financial
Officer, and Executive hereby agrees to accept such employment and serve in such
capacities, during the Term (as defined in Section 2) and upon the terms and
conditions set forth in this Agreement.
2. Term.
The term of employment of Executive under this Agreement (the "Term")
shall, unless this Agreement is terminated in accordance with Section 6 or 7, be
a three-year period initially commencing on the Effective Date which, at
September 30 of each year, shall automatically be extended by one year, unless
the Company notifies the Executive in writing at least 90 days prior to
September 30 of such year that such Term shall not be so extended.
<PAGE>
3. Offices and Duties.
The provisions of this Section 3 will apply during the Term:
(a) Generally. Executive shall serve as the Chief Financial Officer
---------
of the Company. Executive shall have and perform such duties, responsibilities
and authorities as are customary for the Chief Financial Officer of a publicly
held corporation of the size, type, and nature of the Company as they may exist
from time to time and consistent with such position and status and as the proper
officers of the Company or the Company's Board of Directors (the "Board") shall
from time to time direct, but in no event shall such duties, responsibilities,
and authorities be reduced from those of Executive prior to the Effective Date.
Executive shall devote such business time and attention as is necessary to
appropriately and efficiently discharge his duties and responsibilities as set
forth herein.
(b) Place of Employment. Executive's principal place of employment
-------------------
shall be the current corporate offices of the Company in Deerfield, Illinois.
In no event shall the Executive's principal place of employment be relocated to
any location other than the greater metropolitan Chicago area, without his prior
written consent.
4. Salary and Annual Incentive Compensation.
As partial compensation for the services to be rendered hereunder by
Executive, the Company agrees to pay to Executive during the Term the
compensation set forth in this Section 4.
(a) Base Salary. The Company will pay to Executive during the Term a
-----------
base salary at the initial annual rate of $200,000, payable in cash in
accordance with the Company's usual payroll practices with respect to senior
executives. Executive's annual base salary shall be reviewed by the
Compensation Committee of the Board (the "Committee") at least once in each
calendar year and may be increased above, but may not be reduced below, the
then-current rate of such base salary.
(b) Annual Incentive Compensation. The Company will pay to Executive
-----------------------------
during the Term annual incentive compensation, if any, in amounts determined
each fiscal year by the Committee. Any such annual incentive compensation
payable to Executive shall be paid in accordance with the Company's usual
practices with respect to payment of incentive compensation to senior
executives.
5. Long-Term Compensation, Benefits and Expense Reimbursement
(a) Executive Compensation Plans. Executive shall be entitled during
----------------------------
the Term to participate, without discrimination or duplication, in all executive
compensation plans and programs intended for general participation by senior
executives of the Company, as presently in effect or as they may be modified or
added to by the Company from time to time, subject to the eligibility and other
requirements of such plans and programs, including, without limitation, the
2
<PAGE>
Company's 1999 Stock Incentive Plan, and any successors to such plan, any other
stock option plans, performance share plans, management incentive plans,
deferred compensation plans and supplemental retirement plans; provided,
--------
however, that such plans and programs, in the aggregate, shall provide Executive
- -------
with benefits and compensation and incentive award opportunities substantially
no less favorable than those provided by the Company to Executive under such
plans and programs as in effect on the Effective Date.
(b) Employee and Executive Benefit Plans. Executive shall be entitled
------------------------------------
during the Term to participate, without discrimination or duplication, in all
employee, executive benefit and special individual plans and programs of the
Company, as presently in effect or as they may be modified or added to by the
Company from time to time, to the extent such plans and programs are available
to other senior executives or employees of the Company, subject to the
eligibility and other requirements of such plans and programs, including,
without limitation, plans providing health and medical insurance, life
insurance, disability insurance and accidental death or dismemberment insurance,
and pension or other retirement plans, savings plans, vacation and time-off
programs, profit-sharing plans, stock purchase plans and stock ownership plans;
provided, however, that such plans and programs, in the aggregate, shall provide
- -------- -------
Executive with benefits and compensation and incentive award opportunities
substantially no less favorable than those provided by the Company to Executive
under such plans and programs as in effect on the Effective Date.
(c) Reimbursement of Expenses. The Company will promptly reimburse
-------------------------
Executive for all reasonable business expenses and disbursements incurred by
Executive in the performance of Executive's duties during the Term in accordance
with the Company's reimbursement policies as in effect from time to time.
(d) Funding of Rabbi Trust. Not later than 30 days following a Change
----------------------
in Control, the Company shall contribute to a "rabbi trust" an amount equal to
the amount that would be payable to the Executive upon a termination of
employment described in Section 7(b), under (i), (iii), (iv), (v), and (viii) of
such Section 7(b) (and the trustee of the rabbi trust shall be instructed to pay
such amounts (plus earnings thereon) to the Executive upon the Executive's
termination of employment, if the amounts due to the Executive hereunder are not
otherwise paid to the Executive by the Company).
6. Termination Due to Death or Disability.
Executive's employment and the Term shall terminate upon Executive's
death. The Company may terminate the employment of Executive as Chief Financial
Officer due to the Disability (as defined in Section 8(c)) of Executive. In the
event Executive's employment terminates due to Disability, the Term will
terminate at the expiration of the 30-day period set forth in Section 8(c),
absent the actions referred to therein being taken by Executive to return to
service and Executive's presentation to the Company of a certificate of good
health.
3
<PAGE>
Upon a termination of Executive's employment due to death or
Disability, all obligations of the Company and Executive under Sections 1
through 5 of this Agreement will immediately cease; provided, however, that
-------- -------
subject to the provisions of Section 12(i), the Company will pay Executive (or,
in the case of Executive's death, his beneficiaries or estate), and Executive
(or, in the case of Executive's death, his beneficiaries or estate) will be
entitled to receive, the following:
(i) The unpaid portion of annual base salary at the rate payable, in
accordance with Section 4(a) hereof, at the date of termination of
employment, pro rated through such date of termination;
(ii) All vested, nonforfeitable amounts owing or accrued at the date of
termination of employment under any compensation and benefit plans,
programs and arrangements set forth or referred to in Sections 4(b),
5(a) and 5(b) (including any earned and vested annual incentive
compensation) in which Executive theretofore participated, under the
terms and conditions of the plans, programs and arrangements (and
agreements and documents thereunder) pursuant to which such
compensation and benefits were granted;
(iii) In lieu of any annual incentive compensation under Section 4(b) for
the year in which Executive's employment terminated (unless otherwise
payable under (ii) above), an amount equal to the average annual
incentive compensation paid to Executive in the three years
immediately preceding the year of termination (or, if Executive was
not eligible to receive or did not receive such incentive
compensation for any year in such three-year period, the Executive's
target annual incentive compensation for such year shall be used to
calculate average annual incentive compensation) (the "Severance
Annual Incentive Amount"), multiplied by a fraction the numerator of
which is the number of days Executive was employed in the year of
termination and the denominator of which is the total number of days
in the year of termination; and
(iv) Reimbursement of reasonable business expenses and disbursements
incurred by Executive prior to such termination of employment, as
authorized under Section 5(c).
In addition, upon a termination of Executive's employment due to death or
Disability, stock options then held by Executive will be exercisable to the
extent and for such periods indicated in, and otherwise be governed by, the
plans and programs (and agreements and other documents thereunder) pursuant to
which such stock options were granted. Furthermore, if Executive's employment
terminates due to Disability, for the period extending from such termination
until Executive reaches age 65, Executive shall continue to participate in all
employee benefit plans, programs and arrangements under Section 5(b) providing
health, medical and life insurance benefits in which Executive was participating
immediately prior to termination and the terms of which allow Executive's
continued participation, as if Executive had continued in employment with the
Company during such period (except that additional years of service shall not be
credited
4
<PAGE>
as a result of such deemed continued participation following termination), or,
if such plans, programs or arrangements do not allow Executive's continued
participation, Executive shall receive a cash payment equivalent on an after-tax
basis to the value of the additional benefits Executive would have received
under such employee benefit plans, programs and arrangements in which Executive
was participating immediately prior to termination, as if Executive had received
credit under such plans, programs and arrangements for service and age with the
Company during such period following Executive's termination as provided in this
sentence, with such benefits payable by the Company at the same times and in the
same manner as such benefits would have been received by Executive under such
plans (it being understood that the value of any insurance-provided benefits
will be based on the premium cost to Executive, which shall not exceed the
highest risk premium charged by a carrier having an investment grade or better
credit rating). However, in the case of termination of Executive's employment
due to Disability, Executive must continue to comply with his covenants and
agreements set forth in Section 10 in order to continue receiving the
compensation and benefits set forth in the previous sentence. Amounts payable
under Sections 6(i), (ii), (iii) and (iv) above or in lieu of health, medical
and life insurance benefits pursuant to this paragraph will be paid as promptly
as practicable after termination of Executive's employment and in no event more
than 45 days after such termination; provided, however, that, to the extent that
-------- -------
the Company would not be entitled to deduct any such payments under Section
162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), such
payments shall be made at the earliest time that the payments would be
deductible by the Company without limitation under Section 162(m) (unless this
provision is waived by the Company).
7. Termination of Employment For Reasons Other Than Death or Disability.
(a) Termination by the Company for Cause and Termination by Executive
-----------------------------------------------------------------
Other Than For Good Reason. In accordance with the provisions of this Section
- --------------------------
7(a), the Company may terminate the employment of Executive as Chief Financial
Officer for Cause at any time prior to a Change in Control, and Executive may
terminate his employment as Chief Financial Officer voluntarily for reasons
other than Good Reason (as defined in Section 8(d)) at any time.
Upon a termination of Executive's employment by the Company for Cause
or by the Executive for reasons other than Good Reason, the Term will
immediately terminate, and all obligations of the Company and Executive under
Sections 1 through 5 of this Agreement will immediately cease; provided,
--------
however, that, subject to the provisions of Section 12(i), the Company shall pay
- -------
Executive, and Executive shall be entitled to receive, the following:
(i) The unpaid portion of annual base salary at the rate payable, in
accordance with Section 4(a) hereof, at the date of termination of
employment, pro rated through such date of termination;
(ii) All vested, nonforfeitable amounts owing or accrued at the date of
termination of employment under any compensation and benefit plans,
programs and arrangements set forth or referred to in Sections 4(b),
5(a) and 5(b) hereof (including any earned and vested annual incentive
compensation and long-term incentive award)
5
<PAGE>
in which Executive theretofore participated, under the terms and
conditions of the plans, programs and arrangements (and agreements
and documents thereunder) pursuant to which such compensation and
benefits were granted; and
(iii) Reimbursement of reasonable business expenses and disbursements
incurred by Executive prior to such termination of employment, as
authorized under Section 5(c).
Amounts payable under Section 7(a)(i), (ii) and (iii) will be paid as promptly
as practicable after termination of Executive's employment; provided, however,
-------- -------
that, to the extent that the Company would not be entitled to deduct any such
payments under Section 162(m) of the Code, such payments shall be made at the
earliest time that the payments would be deductible by the Company without
limitation under Section 162(m) (unless this provision is waived by the
Company).
(b) Termination by the Company Without Cause and Termination by
-----------------------------------------------------------
Executive for Good Reason. In accordance with the provisions of this Section
- -------------------------
7(b), the Company may terminate the employment of Executive without Cause,
including after a Change in Control, upon 90 days' written notice to Executive,
and Executive may terminate his employment with the Company for Good Reason upon
90 days' written notice to the Company; provided, however, that, if the basis
-------- -------
for such Good Reason is remediable, the Company shall have 30 days after receipt
of such notice to remedy the basis for such Good Reason. Notwithstanding the
foregoing, the Company may terminate Executive without Cause and without
providing 90 days' written notice to Executive if the Company pays Executive the
portion of his then-current annual base salary under Section 4(a) for such 90-
day period and credits Executive with service for 90 days for all purposes
hereunder.
Upon a termination of Executive's employment by the Company without
Cause, or termination of Executive's employment by the Executive for Good
Reason, the Term will immediately terminate and all obligations of the parties
under Sections 1 through 5 of this Agreement will immediately cease, except that
subject to the provisions of Section 12(i) the Company shall pay Executive, and
Executive shall be entitled to receive, the following:
(i) A lump sum cash payment in an amount equal to the product of (x) the
sum of (A) Executive's then-current annual base salary at the rate
payable under Section 4(a) immediately prior to termination plus (B)
the Severance Annual Incentive Amount multiplied by (y) the Severance
Multiplier. For purposes of this Section 7(b)(i), the "Severance
Multiplier" shall be one and one-quarter (1.25); provided, however,
-------- -------
that if the employment of Executive is terminated by the Company
without Cause or by Executive for Good Reason during the period
beginning 60 days prior to a Change in Control and ending two years
after such Change in Control, the "Severance Multiplier" shall be one
and three-quarters (1.75).
(ii) The unpaid portion of annual base salary at the rate payable, in
accordance with Section 4(a) hereof, at the date of termination of
employment, pro rated through such date of termination;
6
<PAGE>
(iii) All vested, nonforfeitable amounts owing or accrued at the date of
termination of employment under any compensation and benefit plans,
programs and arrangements set forth or referred to inc Sections 4(b),
5(a) and 5(b) hereof (including any vested and earned annual
incentive compensation) in which Executive theretofore participated
and all amounts not vested and nonforfeitable, but owing and accrued
at the date of termination of employment, under such benefit plans,
programs and arrangements, to the extent that such amounts would be
vested and nonforfeitable if such amounts become vested, under the
terms and conditions of the plans, programs and arrangements (and
agreements and documents thereunder) pursuant to which such
compensation and benefits were granted;
(iv) In lieu of any annual incentive compensation under Section 4(b) for
the year in which Executive's employment terminated (unless otherwise
payable under Section 7(b)(iii)), an amount equal to the Severance
Annual Incentive Amount, which, unless a termination occurs during
the period beginning 60 days prior to a Change in Control and ending
two years after a Change in Control, shall be multiplied by a
fraction, the numerator of which is the number of days Executive was
employed in the year of termination and the denominator of which is
the total number of days in the year of termination; and
(v) Reimbursement of reasonable business expenses and disbursements
incurred by Executive prior to such termination of employment, as
authorized under Section 5(c).
In addition, upon a termination of Executive's employment by the
Company without Cause, or termination of Executive's employment by the
Executive for Good Reason, stock options then held by Executive will
be exercisable to the extent and for such periods indicated in, and
otherwise be governed by, the plans and programs (and agreements and
other documents thereunder) pursuant to which such stock options were
granted. Furthermore, for a period of one (1) year after such
termination, Executive shall continue to participate in all employee
benefit plans, programs and arrangements under Section 5(c) providing
health, medical and life insurance benefits in which Executive was
participating immediately prior to termination and the terms of which
allow Executive's continued participation, as if Executive had
continued in employment with the Company during such period or, if
such plans, programs or arrangements do not allow Executive's
continued participation, a cash payment equivalent on an after-tax
basis to the value of the additional benefits Executive would have
received under such employee benefit plans, programs and arrangements
in which Executive was participating immediately prior to termination,
as if Executive had received credit under such plans, programs and
arrangements for service and age with the Company during such period
following Executive's termination, with such benefits payable by the
Company at the same times and in the same manner as such benefits
would have been received by Executive under such plans (it being
understood that the value of
7
<PAGE>
any insurance-provided benefits will be based on the premium cost to
Executive, which shall not exceed the highest risk premium charged by
a carrier having an investment grade or better credit rating). Amounts
payable under Sections 7(b)(i), (ii), (iii), (iv) and (v) above or in
lieu of health, medical and life insurance benefits pursuant to this
paragraph will be paid as promptly as practicable after termination of
Executive's employment, and in no event more than 45 days after such
termination; provided, however, that, if such termination is a
-------- -------
termination by the Company without Cause and prior to a Change in
Control, to the extent that the Company would not be entitled to
deduct any such payments under Section 162(m) of the Code, such
payments shall be made at the earliest time that the payments would be
deductible by the Company without limitation under Section 162(m)
(unless this provision is waived by the Company), but in no event
later than 12 months subsequent to the date of termination.
8. Definitions Relating to Termination Events.
(a) "Cause." For purposes of this Agreement, "Cause" shall mean
--------
Executive's gross misconduct (as defined below) or willful (as defined below)
and material breach of Section 10 of this Agreement. For purposes of this
definition, "gross misconduct" shall mean (A) a felony conviction in a court of
law under applicable federal or state laws which results in material damage to
the Company or its subsidiaries or materially impairs the value of the
Executive's services to the Company, or (B) willfully engaging in one or more
acts, or willfully omitting to act in accordance with duties hereunder, which
act or omission is demonstrably and materially damaging to the Company or its
subsidiaries, including acts and omissions which materially impair the ability
of the Company to continue its business in accordance with applicable
governmental and regulatory rules and regulations. For purposes of this
Agreement, an act or failure to act on Executive's part shall be considered
"willful" if it was done or omitted to be done by him not in good faith, and
shall not include any act or failure to act resulting from any incapacity of
Executive. Notwithstanding the foregoing, Executive may not be terminated for
Cause unless and until there shall have been delivered to him, within six months
after the Board (A) had knowledge of conduct or an event allegedly constituting
Cause and (B) had reason to believe that such conduct or event could be grounds
for Cause, a copy of a resolution duly adopted by a majority affirmative vote of
the membership of the Board (excluding Executive) (after giving Executive
reasonable notice specifying the nature of the grounds for such termination and
not less than 30 days to correct the acts or omissions complained of, if
correctable, and affording Executive the opportunity, together with his counsel,
to be heard before the Board) finding that, in the good faith opinion of the
Board, Executive was guilty of conduct set forth above in this Section 8(a).
(b) "Change in Control." A "Change in Control" shall be deemed to
--------------------
have occurred upon the happening of any of the following events:
(i) An acquisition by any individual, entity or group, within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), (a "Person") of beneficial ownership
(within the meaning of Rule 13d-3
8
<PAGE>
promulgated under the Exchange Act) of more than fifty percent (50%) of
either (1) the then outstanding shares of Common Stock of the Company (the
"Outstanding Common Stock") or (2) the combined voting power of the then
outstanding voting securities of the Company entitled to vote generally in
the election of directors (the "Outstanding Voting Securities"); excluding,
however, the following: (1) any acquisition directly from the Company,
other than an acquisition by virtue of the exercise of a conversion
privilege unless the security being so converted was itself acquired
directly from the Company, (2) any acquisition by the Company; (3) any
acquisition by Joseph Fox, Avi Fox or any of their affiliates, (4) any
acquisition by any employee benefit plan (or related trust) sponsored or
maintained by the Company or by any Company controlled by the Company; or
(5) any acquisition by any Person pursuant to a transaction which complies
with clauses (1), (2) and (3) of subsection (iii) of this Section 8(b); or
(ii) Within any period of 24 consecutive months, a change in the
composition of the Board such that the individuals who, immediately prior
to such period, constituted the Board (such Board shall be hereinafter
referred to as the "Incumbent Board") cease for any reason to constitute at
least a majority of the Board; provided, however, for purposes hereof, that
any individual who becomes a member of the Board during such period, whose
election, or nomination for election by the Company's stockholders, was
approved by a vote of at least a majority of those individuals who are
members of the Board and who were also members of the Incumbent Board (or
deemed to be such pursuant to this proviso) shall be considered as though
such individual were a member of the Incumbent Board; but, provided
further, that any such individual whose initial assumption of office occurs
as a result of either an actual or threatened election contest (as such
terms are used in Rule 14a-11 of Regulation 14A promulgated under the
Exchange Act) or other actual or threatened solicitation of proxies or
consents by or on behalf of a Person other than the Board shall not be so
considered as a member of the Incumbent Board; or
(iii) The approval by the stockholders of the Company of a
reorganization, merger or consolidation or sale or other disposition of all
or substantially all of the assets of the Company ("Corporate
Transaction"); excluding, however, such a Corporate Transaction pursuant to
which (1) all or substantially all of the individuals and entities who are
the beneficial owners, respectively, of the Outstanding Common Stock and
Outstanding Voting Securities immediately prior to such Corporate
Transaction will beneficially own, directly or indirectly, more than sixty
percent (60%) of, respectively, the outstanding shares of common stock, and
the combined voting power of the outstanding voting securities entitled to
vote generally in the election of directors, as the case may be, of the
Company resulting from such Corporate Transaction (including, without
limitation, a Company which as a result of such transaction owns the
Company or all or substantially all of the Company's assets, either
directly or through one or more subsidiaries) in substantially the same
proportions as their ownership, immediately prior to such Corporate
Transaction, of the Outstanding Common Stock and Outstanding Voting
Securities, as the case may be, (2) no Person (other than the Company or
any employee benefit plan (or related trust) sponsored or maintained by the
Company, by any Company controlled by the Company or by such Company
resulting from such Corporate Transaction) will
9
<PAGE>
beneficially own, directly or indirectly, more than twenty-five percent
(25%) of, respectively, the outstanding shares of common stock of the
Company resulting from such Corporate Transaction or the combined voting
power of the outstanding voting securities of such Company entitled to vote
generally in the election of directors, except to the extent that such
ownership existed with respect to the Company prior to the Corporate
Transaction, and (3) individuals who were members of the Board immediately
prior to the approval by the stockholders of the Company of such Corporate
Transaction will constitute at least a majority of the members of the board
of directors of the Company resulting from such Corporate Transaction; or
(iv) The approval by the stockholders of the Company of a complete
liquidation or dissolution of the Company, other than to a corporation
pursuant to a transaction which would comply with clauses (1), (2) and (3)
of subsection (iii) of this Section 1(b), assuming for this purpose that
such transaction were a Corporate Transaction.
(c) "Disability." "Disability" means the failure of Executive to
-------------
render and perform the services required of him under this Agreement, for a
total of 180 days of more during any consecutive 12 month period, because of any
physical or mental incapacity or disability as determined by a physician or
physicians selected by the Company and reasonably acceptable to Executive,
unless, within 30 days after Executive has received written notice from the
Company of a proposed termination due to such absence, Executive shall have
returned to the full performance of his duties hereunder and shall have
presented to the Company a written certificate of Executive's good health
prepared by a physician selected by the Company and reasonably acceptable to
Executive.
(d) "Good Reason." For purposes of this Agreement, "Good Reason"
--------------
shall mean, without Executive's prior written consent, (A) a material change,
adverse to Executive, in Executive's positions, titles or offices as set forth
in Section 3(a), status, rank, nature of responsibilities or authority within
the Company, including, without limitation, a change in the Company's reporting
structure whereby Executive is no longer reporting to the Company's Chairman of
the Board or a Co-Chairman of the Board, except in connection with the
termination of Executive's employment for Cause or Disability or as a result of
Executive's death, or as requested or consented to by Executive, (B) an
assignment of any duties to Executive which are inconsistent with his status,
duties, responsibilities and authorities under Section 3(a), (C) a decrease in
annual base salary or other compensation opportunities and maximums or benefits
provided under this Agreement, (D) any other failure by the Company to perform
any material obligation under, or breach by the Company of any material
provision of, this Agreement, (E) a relocation of the corporate offices of the
Company more than 35 miles from the latest location of such offices prior to the
date of a Change in Control, (F) any failure to secure the agreement of any
successor corporation or other entity to the Company to fully assume the
Company's obligations under this Agreement in a form reasonably acceptable to
Executive, and (G) any attempt by the Company to terminate Executive for Cause
which does not result in a valid termination for Cause, except in the case that
valid grounds for termination for Cause exist but are corrected as permitted
under Section 8(a).
10
<PAGE>
9. Excise Tax Gross-Up.
If it shall be determined that any payment or benefit received or to be
received by Executive under this Agreement or any other plan, arrangement or
agreement of the Company (all such payments and benefits a "Payment"), would be
subject to the excise tax imposed by Section 4999 of the Code (the "Excise
Tax"), then the Company shall pay to Executive an additional payment (a "Gross-
Up Payment") in an amount necessary to reimburse Executive, on an after-tax
basis, for the Excise Tax and for any federal, state and local income tax and
excise tax (including any interest and penalties imposed with respect to such
taxes) that may be imposed by reason of the Payment. For purposes of
determining the amount of any Gross-Up Payment, Executive shall be deemed to pay
federal, state and local income taxes at the highest applicable marginal rate of
taxation in the calendar year in which the Gross-Up Payment is to be made. All
determinations required to be made under this Section 9, including whether a
Gross-Up Payment is required and the amount of such Gross-Up Payment, shall be
made by a nationally known independent accounting firm regularly retained by the
Company (the "Accounting Firm") which shall provide detailed supporting
calculations both to the Company and Executive within 15 business days of the
request for such determination. Such request may be made by either party. The
Company shall pay the fees and expenses of the Accounting Firm in connection
with any determinations hereunder. The Gross-Up Payment shall be paid by the
Company within 10 days of the Accounting Firm's determination of the amount
thereof.
10. Executive Covenants.
(a) Executive's Acknowledgment. Executive agrees and acknowledges that in
--------------------------
order to assure the Company that the Company will retain its value as a going
concern, it is necessary that Executive undertake not to utilize his special
knowledge of the Company's business and his relationships with customers and
suppliers to compete with the Company. Executive further acknowledges that:
(i) Executive is one of a limited number of persons who has
developed the Company's business;
(ii) Executive has occupied a position of trust and confidence with
the Company prior to the date of this Agreement and, during such period and
Employee's employment under this Agreement, Employee has acquired and will
acquire an intimate knowledge of proprietary and confidential information
concerning the Company and its business;
(iii) the agreements and covenants contained in Sections 10(b), (c),
(d), (e), (f) and (g) are essential to protect the Company and the goodwill
of its business;
(iv) Executive's employment with the Company has special, unique and
extraordinary value to the Company, and the Company would be irreparably
damaged if Executive were to provide services to any person or entity or
otherwise act in violation of the provisions of this Agreement;
11
<PAGE>
(v) the scope and duration of the restrictive covenants in Section
10(b) are reasonably designed to protect a protected interest of the
Company and are not excessive in light of the circumstances; and
(vi) Executive has a means to support himself and his dependents other
than by engaging in conduct prohibited by the restrictive covenants in
Section 10(b), and the provisions of Sections 10(b) will not impair such
ability.
(b) Non-Competition; Non-Solicitation; Non-Interference. During the
---------------------------------------------------
Term and for a period of two years after the termination of Executive's
employment hereunder, Executive will not by himself or in conjunction with
others, directly or indirectly engage (either as owner, investor, partner,
member stockholder, employer, employee, consultant, advisor, manager or
director) in any business in the United States which, at the time of such
termination, is directly or indirectly in competition with a business then
conducted or proposed to be conducted by the Company or any of its subsidiaries;
provided, however, this the limitation shall not apply if Executive's employment
- -------- --------
is terminated as a result of a termination by the Company without Cause or a
termination by Executive for Good Reason. During the Term and for a period of
three years after the termination of Executive's employment hereunder, Executive
will not by himself or in conjunction with others, directly or indirectly (i)
induce any account holders of the Company or any of its subsidiaries with whom
Executive has had contacts or relationships, directly or indirectly, during and
within the scope of his employment with the Company, to curtail or cancel their
relationship with the Company or its subsidiaries; or (ii) induce, or attempt to
influence, any employee of the Company or any of its subsidiaries to terminate
their employment therewith. The provisions of the first sentence of this
Section 10(b) and clauses (ii) and (iii) of this Section 10(b) are separate and
distinct commitments independent of each of the other subparagraphs. It is
agreed that the ownership of not more than one percent of the equity securities
of any company having securities listed on an exchange or regularly traded in an
over-the-counter market shall not, of itself, be deemed inconsistent with the
first sentence of this Section 10(b).
(c) Non-Disclosure. Executive shall not, at any time during the Term
--------------
and thereafter (including following Executive's termination of employment for
any reason), disclose, use, transfer or sell, except in the course of employment
with, or providing other service to, the Company, any confidential or
proprietary information of the Company and its subsidiaries so long as such
information has not otherwise been publicly disclosed or is not otherwise in the
public domain, except as required by law or pursuant to legal process.
(d) Return of Company Materials Upon Termination. Executive
--------------------------------------------
acknowledges that all records and documents containing confidential or
proprietary information of the Company or its subsidiaries prepared by Executive
or coming into his possession by virtue of his employment by the Company are and
will remain the property of the Company and its subsidiaries. Upon termination
of his employment with the Company, Executive shall immediately return to the
Company all such items and all copies of such items, in his possession.
12
<PAGE>
(e) Cooperation With Regard to Litigation. Executive agrees to
-------------------------------------
cooperate with the Company, during the Term and thereafter (including following
Executive's termination of employment for any reason), by making himself
available to testify on behalf of the Company or any subsidiary or affiliate of
the Company, in any action, suit or proceeding, whether civil, criminal,
administrative or investigative, and to assist the Company, or any subsidiary or
affiliate of the Company, in any such action, suit or proceeding, by providing
information and meeting and consulting with the Board or its representatives or
counsel, or representatives or counsel to the Company or any subsidiary or
affiliate of the Company, as reasonably requested and at a time mutually
convenient to Executive and the Company. The Company agrees to reimburse the
Executive, on an after-tax basis, for all expenses actually incurred in
connection with his provision of testimony or assistance.
(f) Non-Disparagement. Executive shall not, at any time during the
-----------------
Term and thereafter, make statements or representations, or otherwise
communicate, directly or indirectly, in writing, orally or otherwise, or take
any action which may, directly or indirectly, disparage or be damaging to the
Company or any of its subsidiaries or affiliates or their respective officers,
directors, employees, advisors, businesses or reputations. Notwithstanding the
foregoing, nothing in this Agreement shall preclude Executive from making
truthful statements or disclosures that are required by applicable law,
regulation or legal process.
(g) Inventions. Executive acknowledges that all inventions,
----------
innovations, discoveries, improvements, developments, methods, know-how,
designs, analyses, drawings, reports and all similar or related information
(whether or not patentable) which (i) relate to the then current business or any
anticipated business of the Company, the Company's research and development or
the Company's existing or future services or products and (ii) which are
conceived, developed or made by Executive while employed by the Company ("Work
Product") belong to the Company. Executive shall promptly disclose such Work
Product to the Company and perform all actions reasonably requested by the
Company (whether during or after his period of employment with the Company) to
establish and confirm such ownership (including the execution of assignments,
consents, powers of attorney and other instruments).
(h) Release of Employment Claims. Executive agrees, as a condition to
----------------------------
receipt of any termination payments and benefits provided for in Sections 6 and
7 herein (other than salary earned through the date of termination), that he
will execute a general release agreement, in a form satisfactory to the Company,
releasing any and all claims arising out of Executive's employment (other than
enforcement of this Agreement).
(i) Forfeiture of Outstanding Options. The provisions of Sections 6
---------------------------------
and 7 notwithstanding, if Executive materially fails to substantially comply
with any obligation imposed under this Section 10, all options to purchase
capital stock of the Company granted by the Company and then held by Executive
or a transferee of Executive shall be immediately forfeited, and thereupon such
options shall be canceled. Notwithstanding the foregoing, Executive shall not
forfeit any option unless and until there shall have been delivered to him,
within six months after the Board (A) had knowledge of conduct or an event
allegedly constituting grounds for such forfeiture and (B) had reason to believe
that such conduct or event could be grounds for such
13
<PAGE>
forfeiture, a copy of a resolution duly adopted by a majority affirmative vote
of the membership of the Board (excluding Executive, if he is a director) at a
meeting of the Board called and held for such purpose (after giving Executive
reasonable notice specifying the nature of the grounds for such forfeiture, and
not less than 30 days to correct the acts or omissions complained of, if
correctable, and affording Executive the opportunity, together with his counsel,
to be heard before the Board) finding that, in the good faith opinion of the
Board, Executive has engaged and continues to engage in conduct set forth in
this Section 10(i) which constitutes grounds for forfeiture of Executive's
options. Any such forfeiture shall apply to such options notwithstanding any
term or provision of any option agreement.
(j) Remedies. Executive acknowledges that the agreements and
--------
covenants in Sections 10(b), (c), (d), (e) and (f) are reasonable and necessary
for the protection of the Company's business interests, that in the event of any
actual or threatened violation of the covenants contained in Sections 10(b),
(c), (d), (e) and (f), the Company will suffer irreparable injury, Company's
damages will be difficult to ascertain and the Company's remedy at law will be
inadequate. Employee accordingly agrees that in the event of any actual or
threatened breach by him of any of the covenants set forth in Sections 10(b),
(c), (d), (e) and (f), the Company shall be entitled to injunctive and other
equitable relief, including immediate temporary injunctive and other equitable
relief, without bond and without the necessity of showing actual monetary
damages, subject to hearing as soon thereafter as possible. Nothing contained
herein shall be construed as prohibiting the Company from pursuing any other
remedies available to it for such breach or threatened breach, including the
recovery of any damages which it is able to prove.
(k) Survival. The provisions of this Section 10 shall survive the
--------
termination or expiration of this Agreement in accordance with the terms hereof.
11. Governing Law; Disputes; Arbitration.
(a) Governing Law. This Agreement is governed by and is to be
-------------
construed, administered and enforced in accordance with the laws of the State of
Illinois, without regard to Illinois conflicts of law principles, except insofar
as the Delaware General Corporation Law and federal laws and regulations may be
applicable. If, under the governing law, any portion of this Agreement is at
any time deemed to be in conflict with any applicable statute, rule, regulation,
ordinance or other principle of law, such portion shall be deemed to be modified
or altered to the extent necessary to conform thereto or, if that is not
possible, to be omitted from this Agreement. The invalidity of any such portion
shall not affect the force, effect, and validity of the remaining portion
hereof. If any court determines that any provision of Section 10 is
unenforceable because of the duration or geographic scope of such provision, it
is the parties' intent that such court shall have the power to modify the
duration or geographic scope of such provision, as the case may be, to the
extent necessary to render the provision enforceable, and, in its modified form,
such provision shall be enforced.
14
<PAGE>
(b) Reimbursement of Expenses in Enforcing Rights. All reasonable
---------------------------------------------
costs and expenses (including reasonable fees and disbursements of counsel)
incurred by Executive in seeking to interpret this Agreement or enforce rights
pursuant to this Agreement shall be paid on behalf of or reimbursed to Executive
promptly by the Company, whether or not Executive is successful in asserting
such rights; provided, however, that no reimbursement shall be made of such
-------- -------
expenses relating to any unsuccessful assertion of rights if and to the extent
that Executive's assertion of such rights was in bad faith or frivolous, as
determined by independent counsel mutually acceptable to the Executive and the
Company.
(c) Arbitration. Any dispute or controversy arising under or in
-----------
connection with this Agreement shall be settled exclusively by arbitration in
Chicago, Illinois by a panel of three arbitrators in accordance with the rules
of the American Arbitration Association in effect at the time of submission to
arbitration. Judgment may be entered on the arbitrators' award in any court
having jurisdiction. For purposes of entering any judgment upon an award
rendered by the arbitrators, the Company and Executive hereby consent to the
jurisdiction of any or all of the following courts: (i) the United States
District Court for the Northern District of Illinois, (ii) any of the courts of
the State of Illinois, or (iii) any other court having jurisdiction. The
Company and Executive further agree that any service of process or notice
requirements in any such proceeding shall be satisfied if the rules of such
court relating thereto have been substantially satisfied. The Company and
Executive hereby waive, to the fullest extent permitted by applicable law, any
objection which they may now or hereafter have to such jurisdiction and any
defense of inconvenient forum. The Company and Executive hereby agree that a
judgment upon an award rendered by the arbitrators may be enforced in other
jurisdictions by suit on the judgment or in any other manner provided by law.
Subject to Section 11(b), the Company shall bear all costs and expenses arising
in connection with any arbitration proceeding pursuant to this Section 11.
Notwithstanding any provision in this Section 11, Executive shall be entitled to
seek specific performance of Executive's right to be paid during the pendency of
any dispute or controversy arising under or in connection with this Agreement.
(d) Interest on Unpaid Amounts. Any amounts that have become payable
--------------------------
pursuant to the terms of this Agreement or any decision by arbitrators or
judgment by a court of law pursuant to this Section 11 but which are not timely
paid shall bear interest at the prime rate in effect at the time such payment
first becomes payable, as quoted in The Wall Street Journal (Midwest edition).
12. Miscellaneous.
(a) Integration. This Agreement cancels and supersedes any and all
-----------
prior agreements and understandings between the parties hereto with respect to
the employment of Executive by the Company and its subsidiaries. This Agreement
constitutes the entire agreement among the parties with respect to the matters
herein provided, and no modification or waiver of any provision hereof shall be
effective unless in writing and signed by the parties hereto. Executive shall
not be entitled to any payment or benefit under this Agreement which duplicates
15
<PAGE>
a payment or benefit received or receivable by Executive under such prior
agreements and understandings or under any benefit or compensation plan of the
Company.
(b) Non-Transferability. Neither this Agreement nor the rights or
-------------------
obligations hereunder of the parties hereto shall be transferable or assignable
by Executive, except in accordance with the laws of descent and distribution or
as specified in Section 12(c). The Company may assign this Agreement and the
Company's rights and obligations hereunder, and shall assign this Agreement, to
any Successor (as hereinafter defined) which, by operation of law or otherwise,
continues to carry on substantially the business of the Company prior to the
event of succession, and the Company shall, as a condition of the succession,
require such Successor to agree to assume the Company's obligations under, and
be bound by, this Agreement. For purposes of this Agreement, "Successor" shall
mean any person that succeeds to, or has the practical ability to control
(either immediately or with the passage of time), the Company's business
directly, by merger or consolidation, or indirectly, by purchase of the
Company's voting securities or all or substantially all of its assets, or
otherwise.
(c) Beneficiaries. Executive shall be entitled to designate (and
-------------
change, to the extent permitted under applicable law) a beneficiary or
beneficiaries to receive any compensation or benefits payable hereunder
following Executive's death.
(d) Notices. Whenever under this Agreement it becomes necessary to
-------
give notice, such notice shall be in writing, signed by the party or parties
giving or making the same, and shall be deemed to have been duly given (i) upon
actual receipt (or refusal of receipt) if delivered personally; (ii) three
business days following deposit, if sent by certified or registered mail, return
receipt requested, postage prepaid; (iii) one business day following deposit
with a documented overnight delivery service or (iv) upon transmission, if sent
by facsimile (with confirmation receipt and followed by a copy sent by regular
mail), in each case to the appropriate address or number as set forth below or
at such other address as may be designated by such party by like notice:
If to the Company:
Web Street, Inc.
510 Lake Cook Road, 4/th/ Floor
Deerfield, Illinois 60015
Attention: Joseph J. Fox
Stuart A. Cohn
Telephone: 847/444-4700
Facsimile: 847/267-9295
16
<PAGE>
With a copy to:
Katten Muchin & Zavis
525 W. Monroe St., Suite 1600
Chicago, Illinois 60661
Attention: Mark D. Wood
Telephone: 312/902-5200
Facsimile: 312/902-1061
If to Executive:
Joseph A. Barr
738 South Mallard Drive
Palatine, Illinois 60067
Telephone: 847/776-2461
Facsimile: 847/776-2461
(e) Reformation. The invalidity of any portion of this Agreement
-----------
shall not be deemed to render the remainder of this Agreement invalid.
(f) Headings. The headings of this Agreement are for convenience of
--------
reference only and do not constitute a part hereof.
(g) No General Waivers. The failure of any party at any time to
------------------
require performance by any other party of any provision hereof or to resort to
any remedy provided herein or at law or in equity shall in no way affect the
right of such party to require such performance or to resort to such remedy at
any time thereafter, nor shall the waiver by any party of a breach of any of the
provisions hereof be deemed to be a waiver of any subsequent breach of such
provisions. No such waiver shall be effective unless in writing and signed by
the party against whom such waiver is sought to be enforced.
(h) No Obligation To Mitigate. Executive shall not be required to
-------------------------
seek other employment or otherwise to mitigate Executive's damages upon any
termination of employment; provided, however, that, to the extent Executive
-------- -------
receives from a subsequent employer health or other insurance benefits that are
substantially similar to the benefits referred to in Section 5(c) hereof, any
such benefits to be provided by the Company to Executive following the Term
shall be correspondingly reduced.
(i) Offsets; Withholding. The amounts required to be paid by the
--------------------
Company to Executive pursuant to this Agreement shall not be subject to offset
other than with respect to any amounts that are owed to the Company by Executive
due to his receipt of funds as a result of his fraudulent activity. The
foregoing and other provisions of this Agreement notwithstanding, all payments
to be made to Executive under this Agreement, including under Sections 6 and 7,
or otherwise by the Company will be subject to required withholding taxes and
other required deductions.
17
<PAGE>
(j) Successors and Assigns. This Agreement shall be binding upon and
----------------------
shall inure to the benefit of Executive, his heirs, executors, administrators
and beneficiaries, and shall be binding upon and inure to the benefit of the
Company and its successors and assigns.
13. Income Tax Treatment.
Executive and the Company acknowledge that it is the intention of the
Company to deduct all amounts paid by the Company to Executive pursuant to this
Agreement, including under Sections 6 and 7 as ordinary and necessary business
expenses for income tax purposes. Executive agrees and represents that he will
treat all such amounts as ordinary income for income tax purposes, and should he
report such amounts as other than ordinary income for income tax purposes, he
will indemnify and hold the Company harmless from and against any and all taxes,
penalties, interest, costs and expenses, including reasonable attorneys' and
accounting fees and costs, which are incurred by Company directly or indirectly
as a result thereof.
14. Key Man Life Insurance.
If the Company, in its sole discretion, desires to procure "key man"
insurance covering the life of Executive, Executive shall cooperate with the
Company in procuring such insurance and shall, at the request of the Company,
submit to such medical examinations, supply such information and execute such
documents as may be required by the insurance company to which the Company has
applied for insurance. Executive shall use his best efforts to qualify for the
standard premium category of such insurance company. Executive shall have no
interest whatsoever in any "key man" insurance policy procured by the Company.
18
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
WEB STREET, INC.
By: /s/ Stuart A. Cohn
--------------------------------
Name: Stuart A. Cohn
Title: Executive Vice President,
General Counsel
EXECUTIVE
/s/ Joseph A. Barr
-----------------------------------
Joseph A. Barr
Chief Financial Officer
19
<PAGE>
EXHIBIT 10.9
WEB STREET, INC.
________________________________________________________________________________
Employment Agreement for Stuart A. Cohn
________________________________________________________________________________
<PAGE>
WEB STREET, INC.
________________________________________________________________________________
Employment Agreement for Stuart A. Cohn
________________________________________________________________________________
Page
----
1. Employment............................................................ 1
2. Term.................................................................. 1
3. Offices and Duties.................................................... 2
4. Salary and Annual Incentive Compensation.............................. 2
5. Long-Term Compensation, Benefits and Expense Reimbursement............ 2
6. Termination Due to Death or Disability................................ 3
7. Termination of Employment For Reasons Other Than Death or Disability.. 5
8. Definitions Relating to Termination Events............................ 8
9. Excise Tax Gross-Up................................................... 11
10. Executive Covenants................................................... 11
11. Governing Law; Disputes; Arbitration.................................. 14
12. Miscellaneous......................................................... 16
13. Income Tax Treatment.................................................. 18
14. Key Man Life Insurance................................................ 18
<PAGE>
WEB STREET, INC.
________________________________________________________________________________
Employment Agreement for Stuart A. Cohn
________________________________________________________________________________
THIS EMPLOYMENT AGREEMENT (this "Agreement"), by and between WEB
STREET, INC., a Delaware corporation (the "Company"), and Stuart A. Cohn
("Executive"), is hereby entered into effective as of October 1, 1999 (the
"Effective Date").
W I T N E S S E T H
WHEREAS, Executive is currently an employee of the Company;
WHEREAS, the Company desires to continue to employ Executive in his
capacity as General Counsel in connection with the conduct of its business, and
Executive desires to accept such employment on the terms and conditions herein
set forth; and
WHEREAS, the Company and Executive desire to set forth the terms upon
which Executive shall be so employed, which terms replace that certain
Employment Agreement previously entered into between the Company and Executive.
NOW, THEREFORE, in consideration of the foregoing, the mutual
covenants contained herein, and other good and valuable consideration the
receipt and adequacy of which the Company and Executive each hereby acknowledge,
the Company and Executive hereby agree as follows:
1. Employment.
The Company hereby agrees to employ Executive as its General Counsel,
and Executive hereby agrees to accept such employment and serve in such
capacities, during the Term (as defined in Section 2) and upon the terms and
conditions set forth in this Agreement.
2. Term.
The term of employment of Executive under this Agreement (the "Term")
shall, unless this Agreement is terminated in accordance with Section 6 or 7, be
a three-year period initially commencing on the Effective Date which, at
September 30 of each year, shall automatically be extended by one year, unless
the Company notifies the Executive in writing prior to September 30 of such year
(the "Termination Notice Date") that the Term shall not be so extended and, in
such case, the Term shall terminate on the second anniversary of such
Termination Notice Date.
<PAGE>
3. Offices and Duties.
The provisions of this Section 3 will apply during the Term:
(a) Generally. Executive shall serve as the General Counsel of the
---------
Company. Executive shall have and perform such duties, responsibilities and
authorities as are customary for the General Counsel of a publicly held
corporation of the size, type, and nature of the Company as they may exist from
time to time and consistent with such position and status and as the proper
officers of the Company or the Company's Board of Directors (the "Board") shall
from time to time direct, but in no event shall such duties, responsibilities,
and authorities be reduced from those of Executive prior to the Effective Date.
Executive shall devote such business time and attention as is necessary to
appropriately and efficiently discharge his duties and responsibilities as set
forth herein.
(b) Place of Employment. Executive's principal place of employment
-------------------
shall be the current corporate offices of the Company in Deerfield, Illinois.
In no event shall the Executive's principal place of employment be relocated to
any location other than the greater metropolitan Chicago area, without his prior
written consent.
4. Salary and Annual Incentive Compensation.
As partial compensation for the services to be rendered hereunder by
Executive, the Company agrees to pay to Executive during the Term the
compensation set forth in this Section 4.
(a) Base Salary. The Company will pay to Executive during the Term a
-----------
base salary at the initial annual rate of $200,000, payable in cash in
accordance with the Company's usual payroll practices with respect to senior
executives. Executive's annual base salary shall be reviewed by the
Compensation Committee of the Board (the "Committee") at least once in each
calendar year and may be increased above, but may not be reduced below, the
then-current rate of such base salary.
(b) Annual Incentive Compensation. The Company will pay to Executive
-----------------------------
during the Term annual incentive compensation, if any, in amounts determined
each fiscal year by the Committee. Any such annual incentive compensation
payable to Executive shall be paid in accordance with the Company's usual
practices with respect to payment of incentive compensation to senior
executives.
5. Long-Term Compensation, Benefits and Expense Reimbursement
(a) Executive Compensation Plans. Executive shall be entitled during
----------------------------
the Term to participate, without discrimination or duplication, in all executive
compensation plans and programs intended for general participation by senior
executives of the Company, as presently in effect or as they may be modified or
added to by the Company from time to time, subject to the
2
<PAGE>
eligibility and other requirements of such plans and programs, including,
without limitation, the Company's 1999 Stock Incentive Plan, and any successors
to such plan, any other stock option plans, performance share plans, management
incentive plans, deferred compensation plans and supplemental retirement plans;
provided, however, that such plans and programs, in the aggregate, shall provide
- -------- -------
Executive with benefits and compensation and incentive award opportunities
substantially no less favorable than those provided by the Company to Executive
under such plans and programs as in effect on the Effective Date.
(b) Employee and Executive Benefit Plans. Executive shall be entitled
------------------------------------
during the Term to participate, without discrimination or duplication, in all
employee, executive benefit and special individual plans and programs of the
Company, as presently in effect or as they may be modified or added to by the
Company from time to time, to the extent such plans and programs are available
to other senior executives or employees of the Company, subject to the
eligibility and other requirements of such plans and programs, including,
without limitation, plans providing health and medical insurance, life
insurance, disability insurance and accidental death or dismemberment insurance,
and pension or other retirement plans, savings plans, vacation and time-off
programs, profit-sharing plans, stock purchase plans and stock ownership plans;
provided, however, that such plans and programs, in the aggregate, shall provide
- -------- -------
Executive with benefits and compensation and incentive award opportunities
substantially no less favorable than those provided by the Company to Executive
under such plans and programs as in effect on the Effective Date.
(c) Reimbursement of Expenses. The Company will promptly reimburse
-------------------------
Executive for all reasonable business expenses and disbursements incurred by
Executive in the performance of Executive's duties during the Term in accordance
with the Company's reimbursement policies as in effect from time to time.
(d) Funding of Rabbi Trust. Not later than 30 days following a Change
----------------------
in Control, the Company shall contribute to a "rabbi trust" an amount equal to
the amount that would be payable to the Executive upon a termination of
employment described in Section 7(b), under (i), (iii), (iv), (v), and (viii) of
such Section 7(b) (and the trustee of the rabbi trust shall be instructed to pay
such amounts (plus earnings thereon) to the Executive upon the Executive's
termination of employment, if the amounts due to the Executive hereunder are not
otherwise paid to the Executive by the Company).
6. Termination Due to Death or Disability.
Executive's employment and the Term shall terminate upon Executive's
death. The Company may terminate the employment of Executive as General Counsel
due to the Disability (as defined in Section 8(c)) of Executive. In the event
Executive's employment terminates due to Disability, the Term will terminate at
the expiration of the 30-day period set forth in Section 8(c), absent the
actions referred to therein being taken by Executive to return to service and
Executive's presentation to the Company of a certificate of good health.
3
<PAGE>
Upon a termination of Executive's employment due to death or
Disability, all obligations of the Company and Executive under Sections 1
through 5 of this Agreement will immediately cease; provided, however, that
-------- -------
subject to the provisions of Section 12(i), the Company will pay Executive (or,
in the case of Executive's death, his beneficiaries or estate), and Executive
(or, in the case of Executive's death, his beneficiaries or estate) will be
entitled to receive, the following:
(i) The unpaid portion of annual base salary at the rate payable, in
accordance with Section 4(a) hereof, at the date of termination of
employment, pro rated through such date of termination;
(ii) All vested, nonforfeitable amounts owing or accrued at the date of
termination of employment under any compensation and benefit plans,
programs and arrangements set forth or referred to in Sections 4(b),
5(a) and 5(b) (including any earned and vested annual incentive
compensation) in which Executive theretofore participated, under the
terms and conditions of the plans, programs and arrangements (and
agreements and documents thereunder) pursuant to which such
compensation and benefits were granted;
(iii) In lieu of any annual incentive compensation under Section 4(b) for
the year in which Executive's employment terminated (unless otherwise
payable under (ii) above), an amount equal to the average annual
incentive compensation paid to Executive in the three years
immediately preceding the year of termination (or, if Executive was
not eligible to receive or did not receive such incentive
compensation for any year in such three-year period, the Executive's
target annual incentive compensation for such year shall be used to
calculate average annual incentive compensation) (the "Severance
Annual Incentive Amount"), multiplied by a fraction the numerator of
which is the number of days Executive was employed in the year of
termination and the denominator of which is the total number of days
in the year of termination; and
(iv) Reimbursement of reasonable business expenses and disbursements
incurred by Executive prior to such termination of employment, as
authorized under Section 5(c).
In addition, upon a termination of Executive's employment due to death or
Disability, stock options then held by Executive will be exercisable to the
extent and for such periods indicated in, and otherwise be governed by, the
plans and programs (and agreements and other documents thereunder) pursuant to
which such stock options were granted. Furthermore, if Executive's employment
terminates due to Disability, for the period extending from such termination
until Executive reaches age 65, Executive shall continue to participate in all
employee benefit plans, programs and arrangements under Section 5(b) providing
health, medical and life insurance benefits in which Executive was participating
immediately prior to termination and the terms of which allow Executive's
continued participation, as if Executive had continued in employment with the
Company during such period (except that additional years of service shall not be
credited
4
<PAGE>
as a result of such deemed continued participation following termination), or,
if such plans, programs or arrangements do not allow Executive's continued
participation, Executive shall receive a cash payment equivalent on an after-tax
basis to the value of the additional benefits Executive would have received
under such employee benefit plans, programs and arrangements in which Executive
was participating immediately prior to termination, as if Executive had received
credit under such plans, programs and arrangements for service and age with the
Company during such period following Executive's termination as provided in this
sentence, with such benefits payable by the Company at the same times and in the
same manner as such benefits would have been received by Executive under such
plans (it being understood that the value of any insurance-provided benefits
will be based on the premium cost to Executive, which shall not exceed the
highest risk premium charged by a carrier having an investment grade or better
credit rating). However, in the case of termination of Executive's employment
due to Disability, Executive must continue to comply with his covenants and
agreements set forth in Section 10 in order to continue receiving the
compensation and benefits set forth in the previous sentence. Amounts payable
under Sections 6(i), (ii), (iii) and (iv) above or in lieu of health, medical
and life insurance benefits pursuant to this paragraph will be paid as promptly
as practicable after termination of Executive's employment and in no event more
than 45 days after such termination; provided, however, that, to the extent that
-------- -------
the Company would not be entitled to deduct any such payments under Section
162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), such
payments shall be made at the earliest time that the payments would be
deductible by the Company without limitation under Section 162(m) (unless this
provision is waived by the Company).
7. Termination of Employment For Reasons Other Than Death or Disability.
(a) Termination by the Company for Cause and Termination by Executive
-----------------------------------------------------------------
Other Than For Good Reason. In accordance with the provisions of this Section
- --------------------------
7(a), the Company may terminate the employment of Executive as General Counsel
for Cause at any time prior to a Change in Control, and Executive may terminate
his employment as General Counsel voluntarily for reasons other than Good Reason
(as defined in Section 8(d)) at any time.
Upon a termination of Executive's employment by the Company for Cause
or by the Executive for reasons other than Good Reason, the Term will
immediately terminate, and all obligations of the Company and Executive under
Sections 1 through 5 of this Agreement will immediately cease; provided,
--------
however, that, subject to the provisions of Section 12(i), the Company shall pay
- -------
Executive, and Executive shall be entitled to receive, the following:
(i) The unpaid portion of annual base salary at the rate payable, in
accordance with Section 4(a) hereof, at the date of termination of
employment, pro rated through such date of termination;
(ii) All vested, nonforfeitable amounts owing or accrued at the date of
termination of employment under any compensation and benefit plans,
programs and arrangements set forth or referred to in Sections 4(b),
5(a) and 5(b) hereof (including any earned and vested annual incentive
compensation and long-term incentive award)
5
<PAGE>
in which Executive theretofore participated, under the terms and
conditions of the plans, programs and arrangements (and agreements
and documents thereunder) pursuant to which such compensation and
benefits were granted; and
(iii) Reimbursement of reasonable business expenses and disbursements
incurred by Executive prior to such termination of employment, as
authorized under Section 5(c).
Amounts payable under Section 7(a)(i), (ii) and (iii) will be paid as promptly
as practicable after termination of Executive's employment; provided, however,
-------- -------
that, to the extent that the Company would not be entitled to deduct any such
payments under Section 162(m) of the Code, such payments shall be made at the
earliest time that the payments would be deductible by the Company without
limitation under Section 162(m) (unless this provision is waived by the
Company).
(b) Termination by the Company Without Cause and Termination by
-----------------------------------------------------------
Executive for Good Reason. In accordance with the provisions of this Section
- -------------------------
7(b), the Company may terminate the employment of Executive without Cause,
including after a Change in Control, upon 90 days' written notice to Executive,
and Executive may terminate his employment with the Company for Good Reason upon
90 days' written notice to the Company; provided, however, that, if the basis
-------- -------
for such Good Reason is remediable, the Company shall have 30 days after receipt
of such notice to remedy the basis for such Good Reason. Notwithstanding the
foregoing, the Company may terminate Executive without Cause and without
providing 90 days' written notice to Executive if the Company pays Executive the
portion of his then-current annual base salary under Section 4(a) for such 90-
day period and credits Executive with service for 90 days for all purposes
hereunder.
Upon a termination of Executive's employment by the Company without
Cause, or termination of Executive's employment by the Executive for Good
Reason, the Term will immediately terminate and all obligations of the parties
under Sections 1 through 5 of this Agreement will immediately cease, except that
subject to the provisions of Section 12(i) the Company shall pay Executive, and
Executive shall be entitled to receive, the following:
(i) A lump sum cash payment in an amount equal to the product of (x) the
sum of (A) Executive's then-current annual base salary at the rate
payable under Section 4(a) immediately prior to termination plus (B)
the Severance Annual Incentive Amount multiplied by (y) the Severance
Multiplier. For purposes of this Section 7(b)(i), the "Severance
Multiplier" shall be one and one-quarter (1.25); provided, however,
-------- -------
that if the employment of Executive is terminated by the Company
without Cause or by Executive for Good Reason during the period
beginning 60 days prior to a Change in Control and ending two years
after such Change in Control, the "Severance Multiplier" shall be one
and three-quarters (1.75).
(ii) The unpaid portion of annual base salary at the rate payable, in
accordance with Section 4(a) hereof, at the date of termination of
employment, pro rated through such date of termination;
6
<PAGE>
(iii) All vested, nonforfeitable amounts owing or accrued at the date of
termination of employment under any compensation and benefit plans,
programs and arrangements set forth or referred to inc Sections 4(b),
5(a) and 5(b) hereof (including any vested and earned annual
incentive compensation) in which Executive theretofore participated
and all amounts not vested and nonforfeitable, but owing and accrued
at the date of termination of employment, under such benefit plans,
programs and arrangements, to the extent that such amounts would be
vested and nonforfeitable if such amounts become vested, under the
terms and conditions of the plans, programs and arrangements (and
agreements and documents thereunder) pursuant to which such
compensation and benefits were granted;
(iv) In lieu of any annual incentive compensation under Section 4(b) for
the year in which Executive's employment terminated (unless otherwise
payable under Section 7(b)(iii)), an amount equal to the Severance
Annual Incentive Amount, which, unless a termination occurs during
the period beginning 60 days prior to a Change in Control and ending
two years after a Change in Control, shall be multiplied by a
fraction, the numerator of which is the number of days Executive was
employed in the year of termination and the denominator of which is
the total number of days in the year of termination; and
(v) Reimbursement of reasonable business expenses and disbursements
incurred by Executive prior to such termination of employment, as
authorized under Section 5(c).
In addition, upon a termination of Executive's employment by the
Company without Cause, or termination of Executive's employment by the
Executive for Good Reason, stock options then held by Executive will
be exercisable to the extent and for such periods indicated in, and
otherwise be governed by, the plans and programs (and agreements and
other documents thereunder) pursuant to which such stock options were
granted. Furthermore, for a period of one (1) year after such
termination, Executive shall continue to participate in all employee
benefit plans, programs and arrangements under Section 5(c) providing
health, medical and life insurance benefits in which Executive was
participating immediately prior to termination and the terms of which
allow Executive's continued participation, as if Executive had
continued in employment with the Company during such period or, if
such plans, programs or arrangements do not allow Executive's
continued participation, a cash payment equivalent on an after-tax
basis to the value of the additional benefits Executive would have
received under such employee benefit plans, programs and arrangements
in which Executive was participating immediately prior to termination,
as if Executive had received credit under such plans, programs and
arrangements for service and age with the Company during such period
following Executive's termination, with such benefits payable by the
Company at the same times and in the same manner as such benefits
would have been received by Executive under such plans (it being
understood that the value of
7
<PAGE>
any insurance-provided benefits will be based on the premium cost to
Executive, which shall not exceed the highest risk premium charged by
a carrier having an investment grade or better credit rating). Amounts
payable under Sections 7(b)(i), (ii), (iii), (iv) and (v) above or in
lieu of health, medical and life insurance benefits pursuant to this
paragraph will be paid as promptly as practicable after termination of
Executive's employment, and in no event more than 45 days after such
termination; provided, however, that, if such termination is a
-------- -------
termination by the Company without Cause and prior to a Change in
Control, to the extent that the Company would not be entitled to
deduct any such payments under Section 162(m) of the Code, such
payments shall be made at the earliest time that the payments would be
deductible by the Company without limitation under Section 162(m)
(unless this provision is waived by the Company), but in no event
later than 12 months subsequent to the date of termination.
8. Definitions Relating to Termination Events.
(a) "Cause." For purposes of this Agreement, "Cause" shall mean
--------
Executive's gross misconduct (as defined below) or willful (as defined below)
and material breach of Section 10 of this Agreement. For purposes of this
definition, "gross misconduct" shall mean (A) a felony conviction in a court of
law under applicable federal or state laws which results in material damage to
the Company or its subsidiaries or materially impairs the value of the
Executive's services to the Company, or (B) willfully engaging in one or more
acts, or willfully omitting to act in accordance with duties hereunder, which
act or omission is demonstrably and materially damaging to the Company or its
subsidiaries, including acts and omissions which materially impair the ability
of the Company to continue its business in accordance with applicable
governmental and regulatory rules and regulations. For purposes of this
Agreement, an act or failure to act on Executive's part shall be considered
"willful" if it was done or omitted to be done by him not in good faith, and
shall not include any act or failure to act resulting from any incapacity of
Executive. Notwithstanding the foregoing, Executive may not be terminated for
Cause unless and until there shall have been delivered to him, within six months
after the Board (A) had knowledge of conduct or an event allegedly constituting
Cause and (B) had reason to believe that such conduct or event could be grounds
for Cause, a copy of a resolution duly adopted by a majority affirmative vote of
the membership of the Board (excluding Executive) (after giving Executive
reasonable notice specifying the nature of the grounds for such termination and
not less than 30 days to correct the acts or omissions complained of, if
correctable, and affording Executive the opportunity, together with his counsel,
to be heard before the Board) finding that, in the good faith opinion of the
Board, Executive was guilty of conduct set forth above in this Section 8(a).
(b) "Change in Control." A "Change in Control" shall be deemed to
--------------------
have occurred upon the happening of any of the following events:
(i) An acquisition by any individual, entity or group, within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), (a "Person") of beneficial ownership
(within the meaning of Rule 13d-3
8
<PAGE>
promulgated under the Exchange Act) of more than fifty percent (50%) of
either (1) the then outstanding shares of Common Stock of the Company (the
"Outstanding Common Stock") or (2) the combined voting power of the then
outstanding voting securities of the Company entitled to vote generally in
the election of directors (the "Outstanding Voting Securities"); excluding,
however, the following: (1) any acquisition directly from the Company,
other than an acquisition by virtue of the exercise of a conversion
privilege unless the security being so converted was itself acquired
directly from the Company, (2) any acquisition by the Company; (3) any
acquisition by Joseph Fox, Avi Fox or any of their affiliates, (4) any
acquisition by any employee benefit plan (or related trust) sponsored or
maintained by the Company or by any Company controlled by the Company; or
(5) any acquisition by any Person pursuant to a transaction which complies
with clauses (1), (2) and (3) of subsection (iii) of this Section 8(b); or
(ii) Within any period of 24 consecutive months, a change in the
composition of the Board such that the individuals who, immediately prior
to such period, constituted the Board (such Board shall be hereinafter
referred to as the "Incumbent Board") cease for any reason to constitute at
least a majority of the Board; provided, however, for purposes hereof, that
any individual who becomes a member of the Board during such period, whose
election, or nomination for election by the Company's stockholders, was
approved by a vote of at least a majority of those individuals who are
members of the Board and who were also members of the Incumbent Board (or
deemed to be such pursuant to this proviso) shall be considered as though
such individual were a member of the Incumbent Board; but, provided
further, that any such individual whose initial assumption of office occurs
as a result of either an actual or threatened election contest (as such
terms are used in Rule 14a-11 of Regulation 14A promulgated under the
Exchange Act) or other actual or threatened solicitation of proxies or
consents by or on behalf of a Person other than the Board shall not be so
considered as a member of the Incumbent Board; or
(iii) The approval by the stockholders of the Company of a
reorganization, merger or consolidation or sale or other disposition of all
or substantially all of the assets of the Company ("Corporate
Transaction"); excluding, however, such a Corporate Transaction pursuant to
which (1) all or substantially all of the individuals and entities who are
the beneficial owners, respectively, of the Outstanding Common Stock and
Outstanding Voting Securities immediately prior to such Corporate
Transaction will beneficially own, directly or indirectly, more than sixty
percent (60%) of, respectively, the outstanding shares of common stock, and
the combined voting power of the outstanding voting securities entitled to
vote generally in the election of directors, as the case may be, of the
Company resulting from such Corporate Transaction (including, without
limitation, a Company which as a result of such transaction owns the
Company or all or substantially all of the Company's assets, either
directly or through one or more subsidiaries) in substantially the same
proportions as their ownership, immediately prior to such Corporate
Transaction, of the Outstanding Common Stock and Outstanding Voting
Securities, as the case may be, (2) no Person (other than the Company or
any employee benefit plan (or related trust) sponsored or maintained by the
Company, by any Company controlled by the Company or by such Company
resulting from such Corporate Transaction) will
9
<PAGE>
beneficially own, directly or indirectly, more than twenty-five percent
(25%) of, respectively, the outstanding shares of common stock of the
Company resulting from such Corporate Transaction or the combined voting
power of the outstanding voting securities of such Company entitled to vote
generally in the election of directors, except to the extent that such
ownership existed with respect to the Company prior to the Corporate
Transaction, and (3) individuals who were members of the Board immediately
prior to the approval by the stockholders of the Company of such Corporate
Transaction will constitute at least a majority of the members of the board
of directors of the Company resulting from such Corporate Transaction; or
(iv) The approval by the stockholders of the Company of a complete
liquidation or dissolution of the Company, other than to a corporation
pursuant to a transaction which would comply with clauses (1), (2) and (3)
of subsection (iii) of this Section 1(b), assuming for this purpose that
such transaction were a Corporate Transaction.
(c) "Disability." "Disability" means the failure of Executive to
-------------
render and perform the services required of him under this Agreement, for a
total of 180 days of more during any consecutive 12 month period, because of any
physical or mental incapacity or disability as determined by a physician or
physicians selected by the Company and reasonably acceptable to Executive,
unless, within 30 days after Executive has received written notice from the
Company of a proposed termination due to such absence, Executive shall have
returned to the full performance of his duties hereunder and shall have
presented to the Company a written certificate of Executive's good health
prepared by a physician selected by the Company and reasonably acceptable to
Executive.
(d) "Good Reason." For purposes of this Agreement, "Good Reason"
--------------
shall mean, without Executive's prior written consent, (A) a material change,
adverse to Executive, in Executive's positions, titles or offices as set forth
in Section 3(a), status, rank, nature of responsibilities or authority within
the Company, including, without limitation, a change in the Company's reporting
structure whereby Executive is no longer reporting to the Company's Chairman of
the Board or a Co-Chairman of the Board, except in connection with the
termination of Executive's employment for Cause or Disability or as a result of
Executive's death, or as requested or consented to by Executive, (B) an
assignment of any duties to Executive which are inconsistent with his status,
duties, responsibilities and authorities under Section 3(a), (C) a decrease in
annual base salary or other compensation opportunities and maximums or benefits
provided under this Agreement, (D) any other failure by the Company to perform
any material obligation under, or breach by the Company of any material
provision of, this Agreement, (E) a relocation of the corporate offices of the
Company more than 35 miles from the latest location of such offices prior to the
date of a Change in Control, (F) any failure to secure the agreement of any
successor corporation or other entity to the Company to fully assume the
Company's obligations under this Agreement in a form reasonably acceptable to
Executive, and (G) any attempt by the Company to terminate Executive for Cause
which does not result in a valid termination for Cause, except in the case that
valid grounds for termination for Cause exist but are corrected as permitted
under Section 8(a).
10
<PAGE>
9. Excise Tax Gross-Up.
If it shall be determined that any payment or benefit received or to be
received by Executive under this Agreement or any other plan, arrangement or
agreement of the Company (all such payments and benefits a "Payment"), would be
subject to the excise tax imposed by Section 4999 of the Code (the "Excise
Tax"), then the Company shall pay to Executive an additional payment (a "Gross-
Up Payment") in an amount necessary to reimburse Executive, on an after-tax
basis, for the Excise Tax and for any federal, state and local income tax and
excise tax (including any interest and penalties imposed with respect to such
taxes) that may be imposed by reason of the Payment. For purposes of
determining the amount of any Gross-Up Payment, Executive shall be deemed to pay
federal, state and local income taxes at the highest applicable marginal rate of
taxation in the calendar year in which the Gross-Up Payment is to be made. All
determinations required to be made under this Section 9, including whether a
Gross-Up Payment is required and the amount of such Gross-Up Payment, shall be
made by a nationally known independent accounting firm regularly retained by the
Company (the "Accounting Firm") which shall provide detailed supporting
calculations both to the Company and Executive within 15 business days of the
request for such determination. Such request may be made by either party. The
Company shall pay the fees and expenses of the Accounting Firm in connection
with any determinations hereunder. The Gross-Up Payment shall be paid by the
Company within 10 days of the Accounting Firm's determination of the amount
thereof.
10. Executive Covenants.
(a) Executive's Acknowledgment. Executive agrees and acknowledges that in
--------------------------
order to assure the Company that the Company will retain its value as a going
concern, it is necessary that Executive undertake not to utilize his special
knowledge of the Company's business and his relationships with customers and
suppliers to compete with the Company. Executive further acknowledges that:
(i) Executive is one of a limited number of persons who has
developed the Company's business;
(ii) Executive has occupied a position of trust and confidence with
the Company prior to the date of this Agreement and, during such period and
Employee's employment under this Agreement, Employee has acquired and will
acquire an intimate knowledge of proprietary and confidential information
concerning the Company and its business;
(iii) the agreements and covenants contained in Sections 10(b), (c),
(d), (e), (f) and (g) are essential to protect the Company and the goodwill
of its business;
(iv) Executive's employment with the Company has special, unique and
extraordinary value to the Company, and the Company would be irreparably
damaged if Executive were to provide services to any person or entity or
otherwise act in violation of the provisions of this Agreement;
11
<PAGE>
(v) the scope and duration of the restrictive covenants in Section
10(b) are reasonably designed to protect a protected interest of the
Company and are not excessive in light of the circumstances; and
(vi) Executive has a means to support himself and his dependents other
than by engaging in conduct prohibited by the restrictive covenants in
Section 10(b), and the provisions of Sections 10(b) will not impair such
ability.
(b) Non-Competition; Non-Solicitation; Non-Interference. During the
---------------------------------------------------
Term and for a period of two years after the termination of Executive's
employment hereunder, Executive will not by himself or in conjunction with
others, directly or indirectly engage (either as owner, investor, partner,
member stockholder, employer, employee, consultant, advisor, manager or
director) in any business in the United States which, at the time of such
termination, is directly or indirectly in competition with a business then
conducted or proposed to be conducted by the Company or any of its subsidiaries;
provided, however, this the limitation shall not apply if Executive's employment
- -------- --------
is terminated as a result of a termination by the Company without Cause or a
termination by Executive for Good Reason. During the Term and for a period of
three years after the termination of Executive's employment hereunder, Executive
will not by himself or in conjunction with others, directly or indirectly (i)
induce any account holders of the Company or any of its subsidiaries with whom
Executive has had contacts or relationships, directly or indirectly, during and
within the scope of his employment with the Company, to curtail or cancel their
relationship with the Company or its subsidiaries; or (ii) induce, or attempt to
influence, any employee of the Company or any of its subsidiaries to terminate
their employment therewith. The provisions of the first sentence of this
Section 10(b) and clauses (ii) and (iii) of this Section 10(b) are separate and
distinct commitments independent of each of the other subparagraphs. It is
agreed that the ownership of not more than one percent of the equity securities
of any company having securities listed on an exchange or regularly traded in an
over-the-counter market shall not, of itself, be deemed inconsistent with the
first sentence of this Section 10(b).
(c) Non-Disclosure. Executive shall not, at any time during the Term
--------------
and thereafter (including following Executive's termination of employment for
any reason), disclose, use, transfer or sell, except in the course of employment
with, or providing other service to, the Company, any confidential or
proprietary information of the Company and its subsidiaries so long as such
information has not otherwise been publicly disclosed or is not otherwise in the
public domain, except as required by law or pursuant to legal process.
(d) Return of Company Materials Upon Termination. Executive
--------------------------------------------
acknowledges that all records and documents containing confidential or
proprietary information of the Company or its subsidiaries prepared by Executive
or coming into his possession by virtue of his employment by the Company are and
will remain the property of the Company and its subsidiaries. Upon termination
of his employment with the Company, Executive shall immediately return to the
Company all such items and all copies of such items, in his possession.
(e) Cooperation With Regard to Litigation. Executive agrees to
-------------------------------------
cooperate with the Company, during the Term and thereafter (including following
Executive's termination of
12
<PAGE>
employment for any reason), by making himself available to testify on behalf of
the Company or any subsidiary or affiliate of the Company, in any action, suit
or proceeding, whether civil, criminal, administrative or investigative, and to
assist the Company, or any subsidiary or affiliate of the Company, in any such
action, suit or proceeding, by providing information and meeting and consulting
with the Board or its representatives or counsel, or representatives or counsel
to the Company or any subsidiary or affiliate of the Company, as reasonably
requested and at a time mutually convenient to Executive and the Company. The
Company agrees to reimburse the Executive, on an after-tax basis, for all
expenses actually incurred in connection with his provision of testimony or
assistance.
(f) Non-Disparagement. Executive shall not, at any time during the
-----------------
Term and thereafter, make statements or representations, or otherwise
communicate, directly or indirectly, in writing, orally or otherwise, or take
any action which may, directly or indirectly, disparage or be damaging to the
Company or any of its subsidiaries or affiliates or their respective officers,
directors, employees, advisors, businesses or reputations. Notwithstanding the
foregoing, nothing in this Agreement shall preclude Executive from making
truthful statements or disclosures that are required by applicable law,
regulation or legal process.
(g) Inventions. Executive acknowledges that all inventions,
----------
innovations, discoveries, improvements, developments, methods, know-how,
designs, analyses, drawings, reports and all similar or related information
(whether or not patentable) which (i) relate to the then current business or any
anticipated business of the Company, the Company's research and development or
the Company's existing or future services or products and (ii) which are
conceived, developed or made by Executive while employed by the Company ("Work
Product") belong to the Company. Executive shall promptly disclose such Work
Product to the Company and perform all actions reasonably requested by the
Company (whether during or after his period of employment with the Company) to
establish and confirm such ownership (including the execution of assignments,
consents, powers of attorney and other instruments).
(h) Release of Employment Claims. Executive agrees, as a condition to
----------------------------
receipt of any termination payments and benefits provided for in Sections 6 and
7 herein (other than salary earned through the date of termination), that he
will execute a general release agreement, in a form satisfactory to the Company,
releasing any and all claims arising out of Executive's employment (other than
enforcement of this Agreement).
(i) Forfeiture of Outstanding Options. The provisions of Sections 6
---------------------------------
and 7 notwithstanding, if Executive materially fails to substantially comply
with any obligation imposed under this Section 10, all options to purchase
capital stock of the Company granted by the Company and then held by Executive
or a transferee of Executive shall be immediately forfeited, and thereupon such
options shall be canceled. Notwithstanding the foregoing, Executive shall not
forfeit any option unless and until there shall have been delivered to him,
within six months after the Board (A) had knowledge of conduct or an event
allegedly constituting grounds for such forfeiture and (B) had reason to believe
that such conduct or event could be grounds for such forfeiture, a copy of a
resolution duly adopted by a majority affirmative vote of the membership of the
Board (excluding Executive, if he is a director) at a meeting of the Board
called and held
13
<PAGE>
for such purpose (after giving Executive reasonable notice specifying the nature
of the grounds for such forfeiture, and not less than 30 days to correct the
acts or omissions complained of, if correctable, and affording Executive the
opportunity, together with his counsel, to be heard before the Board) finding
that, in the good faith opinion of the Board, Executive has engaged and
continues to engage in conduct set forth in this Section 10(i) which constitutes
grounds for forfeiture of Executive's options. Any such forfeiture shall apply
to such options notwithstanding any term or provision of any option agreement.
(j) Remedies. Executive acknowledges that the agreements and
--------
covenants in Sections 10(b), (c), (d), (e) and (f) are reasonable and necessary
for the protection of the Company's business interests, that in the event of any
actual or threatened violation of the covenants contained in Sections 10(b),
(c), (d), (e) and (f), the Company will suffer irreparable injury, Company's
damages will be difficult to ascertain and the Company's remedy at law will be
inadequate. Employee accordingly agrees that in the event of any actual or
threatened breach by him of any of the covenants set forth in Sections 10(b),
(c), (d), (e) and (f), the Company shall be entitled to injunctive and other
equitable relief, including immediate temporary injunctive and other equitable
relief, without bond and without the necessity of showing actual monetary
damages, subject to hearing as soon thereafter as possible. Nothing contained
herein shall be construed as prohibiting the Company from pursuing any other
remedies available to it for such breach or threatened breach, including the
recovery of any damages which it is able to prove.
(k) Survival. The provisions of this Section 10 shall survive the
--------
termination or expiration of this Agreement in accordance with the terms hereof.
11. Governing Law; Disputes; Arbitration.
(a) Governing Law. This Agreement is governed by and is to be
-------------
construed, administered and enforced in accordance with the laws of the State of
Illinois, without regard to Illinois conflicts of law principles, except insofar
as the Delaware General Corporation Law and federal laws and regulations may be
applicable. If, under the governing law, any portion of this Agreement is at
any time deemed to be in conflict with any applicable statute, rule, regulation,
ordinance or other principle of law, such portion shall be deemed to be modified
or altered to the extent necessary to conform thereto or, if that is not
possible, to be omitted from this Agreement. The invalidity of any such portion
shall not affect the force, effect, and validity of the remaining portion
hereof. If any court determines that any provision of Section 10 is
unenforceable because of the duration or geographic scope of such provision, it
is the parties' intent that such court shall have the power to modify the
duration or geographic scope of such provision, as the case may be, to the
extent necessary to render the provision enforceable, and, in its modified form,
such provision shall be enforced.
(b) Reimbursement of Expenses in Enforcing Rights. All reasonable
---------------------------------------------
costs and expenses (including reasonable fees and disbursements of counsel)
incurred by Executive in seeking to interpret this Agreement or enforce rights
pursuant to this Agreement shall be paid on behalf of or reimbursed to Executive
promptly by the Company, whether or not Executive is successful in asserting
such rights; provided, however, that no reimbursement shall be made of
-------- -------
14
<PAGE>
such expenses relating to any unsuccessful assertion of rights if and to the
extent that Executive's assertion of such rights was in bad faith or frivolous,
as determined by independent counsel mutually acceptable to the Executive and
the Company.
(c) Arbitration. Any dispute or controversy arising under or in
-----------
connection with this Agreement shall be settled exclusively by arbitration in
Chicago, Illinois by a panel of three arbitrators in accordance with the rules
of the American Arbitration Association in effect at the time of submission to
arbitration. Judgment may be entered on the arbitrators' award in any court
having jurisdiction. For purposes of entering any judgment upon an award
rendered by the arbitrators, the Company and Executive hereby consent to the
jurisdiction of any or all of the following courts: (i) the United States
District Court for the Northern District of Illinois, (ii) any of the courts of
the State of Illinois, or (iii) any other court having jurisdiction. The
Company and Executive further agree that any service of process or notice
requirements in any such proceeding shall be satisfied if the rules of such
court relating thereto have been substantially satisfied. The Company and
Executive hereby waive, to the fullest extent permitted by applicable law, any
objection which they may now or hereafter have to such jurisdiction and any
defense of inconvenient forum. The Company and Executive hereby agree that a
judgment upon an award rendered by the arbitrators may be enforced in other
jurisdictions by suit on the judgment or in any other manner provided by law.
Subject to Section 11(b), the Company shall bear all costs and expenses arising
in connection with any arbitration proceeding pursuant to this Section 11.
Notwithstanding any provision in this Section 11, Executive shall be entitled to
seek specific performance of Executive's right to be paid during the pendency of
any dispute or controversy arising under or in connection with this Agreement.
(d) Interest on Unpaid Amounts. Any amounts that have become payable
--------------------------
pursuant to the terms of this Agreement or any decision by arbitrators or
judgment by a court of law pursuant to this Section 11 but which are not timely
paid shall bear interest at the prime rate in effect at the time such payment
first becomes payable, as quoted in The Wall Street Journal (Midwest edition).
12. Miscellaneous.
(a) Integration. This Agreement cancels and supersedes any and all
-----------
prior agreements and understandings between the parties hereto with respect to
the employment of Executive by the Company and its subsidiaries. This Agreement
constitutes the entire agreement among the parties with respect to the matters
herein provided, and no modification or waiver of any provision hereof shall be
effective unless in writing and signed by the parties hereto. Executive shall
not be entitled to any payment or benefit under this Agreement which duplicates
a payment or benefit received or receivable by Executive under such prior
agreements and understandings or under any benefit or compensation plan of the
Company.
(b) Non-Transferability. Neither this Agreement nor the rights or
-------------------
obligations hereunder of the parties hereto shall be transferable or assignable
by Executive, except in accordance with the laws of descent and distribution or
as specified in Section 12(c). The
15
<PAGE>
Company may assign this Agreement and the Company's rights and obligations
hereunder, and shall assign this Agreement, to any Successor (as hereinafter
defined) which, by operation of law or otherwise, continues to carry on
substantially the business of the Company prior to the event of succession, and
the Company shall, as a condition of the succession, require such Successor to
agree to assume the Company's obligations under, and be bound by, this
Agreement. For purposes of this Agreement, "Successor" shall mean any person
that succeeds to, or has the practical ability to control (either immediately or
with the passage of time), the Company's business directly, by merger or
consolidation, or indirectly, by purchase of the Company's voting securities or
all or substantially all of its assets, or otherwise.
(c) Beneficiaries. Executive shall be entitled to designate (and
-------------
change, to the extent permitted under applicable law) a beneficiary or
beneficiaries to receive any compensation or benefits payable hereunder
following Executive's death.
(d) Notices. Whenever under this Agreement it becomes necessary to
-------
give notice, such notice shall be in writing, signed by the party or parties
giving or making the same, and shall be deemed to have been duly given (i) upon
actual receipt (or refusal of receipt) if delivered personally; (ii) three
business days following deposit, if sent by certified or registered mail, return
receipt requested, postage prepaid; (iii) one business day following deposit
with a documented overnight delivery service or (iv) upon transmission, if sent
by facsimile (with confirmation receipt and followed by a copy sent by regular
mail), in each case to the appropriate address or number as set forth below or
at such other address as may be designated by such party by like notice:
If to the Company:
Web Street, Inc.
510 Lake Cook Road, 4/th/ Floor
Deerfield, Illinois 60015
Attention: Joseph J. Fox
Stuart A. Cohn
Telephone: 847/444-4700
Facsimile: 847/267-9295
With a copy to:
Katten Muchin & Zavis
525 W. Monroe St., Suite 1600
Chicago, Illinois 60661
Attention: Mark D. Wood
Telephone: 312/902-5200
Facsimile: 312/902-1061
16
<PAGE>
If to Executive:
Stuart A. Cohn
505 Provident Avenue
Winnetka, Illinois 60093
Telephone: 847/501-3611
Facsimile: 847/501-3613
(e) Reformation. The invalidity of any portion of this Agreement
-----------
shall not be deemed to render the remainder of this Agreement invalid.
(f) Headings. The headings of this Agreement are for convenience of
--------
reference only and do not constitute a part hereof.
(g) No General Waivers. The failure of any party at any time to
------------------
require performance by any other party of any provision hereof or to resort to
any remedy provided herein or at law or in equity shall in no way affect the
right of such party to require such performance or to resort to such remedy at
any time thereafter, nor shall the waiver by any party of a breach of any of the
provisions hereof be deemed to be a waiver of any subsequent breach of such
provisions. No such waiver shall be effective unless in writing and signed by
the party against whom such waiver is sought to be enforced.
(h) No Obligation To Mitigate. Executive shall not be required to
-------------------------
seek other employment or otherwise to mitigate Executive's damages upon any
termination of employment; provided, however, that, to the extent Executive
-------- -------
receives from a subsequent employer health or other insurance benefits that are
substantially similar to the benefits referred to in Section 5(c) hereof, any
such benefits to be provided by the Company to Executive following the Term
shall be correspondingly reduced.
(i) Offsets; Withholding. The amounts required to be paid by the
--------------------
Company to Executive pursuant to this Agreement shall not be subject to offset
other than with respect to any amounts that are owed to the Company by Executive
due to his receipt of funds as a result of his fraudulent activity. The
foregoing and other provisions of this Agreement notwithstanding, all payments
to be made to Executive under this Agreement, including under Sections 6 and 7,
or otherwise by the Company will be subject to required withholding taxes and
other required deductions.
(j) Successors and Assigns. This Agreement shall be binding upon and
----------------------
shall inure to the benefit of Executive, his heirs, executors, administrators
and beneficiaries, and shall be binding upon and inure to the benefit of the
Company and its successors and assigns.
13. Income Tax Treatment.
Executive and the Company acknowledge that it is the intention of the
Company to deduct all amounts paid by the Company to Executive pursuant to this
Agreement, including
17
<PAGE>
under Sections 6 and 7 as ordinary and necessary business expenses for income
tax purposes. Executive agrees and represents that he will treat all such
amounts as ordinary income for income tax purposes, and should he report such
amounts as other than ordinary income for income tax purposes, he will indemnify
and hold the Company harmless from and against any and all taxes, penalties,
interest, costs and expenses, including reasonable attorneys' and accounting
fees and costs, which are incurred by Company directly or indirectly as a result
thereof.
14. Key Man Life Insurance.
If the Company, in its sole discretion, desires to procure "key man"
insurance covering the life of Executive, Executive shall cooperate with the
Company in procuring such insurance and shall, at the request of the Company,
submit to such medical examinations, supply such information and execute such
documents as may be required by the insurance company to which the Company has
applied for insurance. Executive shall use his best efforts to qualify for the
standard premium category of such insurance company. Executive shall have no
interest whatsoever in any "key man" insurance policy procured by the Company.
18
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
WEB STREET, INC.
By: /s/ AUTHORIZED SIGNATORY
--------------------------------
EXECUTIVE
/s/ Stuart A. Cohn
-----------------------------------
Stuart A. Cohn
Executive Vice President, General
Counsel
<PAGE>
EXHIBIT 10.10
WEB STREET, INC.
________________________________________________________________________________
Employment Agreement for William J. Mania
________________________________________________________________________________
<PAGE>
WEB STREET, INC.
________________________________________________________________________________
Employment Agreement for William J. Mania
________________________________________________________________________________
Page
----
1. Employment............................................................ 1
2. Term.................................................................. 1
3. Offices and Duties.................................................... 2
4. Salary and Annual Incentive Compensation.............................. 2
5. Long-Term Compensation, Benefits and Expense Reimbursement............ 2
6. Termination Due to Death or Disability................................ 3
7. Termination of Employment For Reasons Other Than Death or Disability.. 5
8. Definitions Relating to Termination Events............................ 8
9. Excise Tax Gross-Up................................................... 11
10. Executive Covenants................................................... 11
11. Governing Law; Disputes; Arbitration.................................. 14
12. Miscellaneous......................................................... 16
13. Income Tax Treatment.................................................. 18
14. Key Man Life Insurance................................................ 18
<PAGE>
WEB STREET, INC.
________________________________________________________________________________
Employment Agreement for William J. Mania
________________________________________________________________________________
THIS EMPLOYMENT AGREEMENT (this "Agreement"), by and between WEB
STREET, INC., a Delaware corporation (the "Company"), and William J. Mania
("Executive"), is hereby entered into effective as of October 1, 1999 (the
"Effective Date").
W I T N E S S E T H
WHEREAS, Executive is currently an employee of the Company;
WHEREAS, the Company desires to continue to employ Executive in his
capacity as Chief Technology Officer in connection with the conduct of its
business, and Executive desires to accept such employment on the terms and
conditions herein set forth; and
WHEREAS, the Company and Executive desire to set forth the terms upon
which Executive shall be so employed, which terms that certain Employment
Agreement previously entered into between the Company and Executive.
NOW, THEREFORE, in consideration of the foregoing, the mutual
covenants contained herein, and other good and valuable consideration the
receipt and adequacy of which the Company and Executive each hereby acknowledge,
the Company and Executive hereby agree as follows:
1. Employment.
The Company hereby agrees to employ Executive as its Chief Technology
Officer, and Executive hereby agrees to accept such employment and serve in such
capacities, during the Term (as defined in Section 2) and upon the terms and
conditions set forth in this Agreement.
2. Term.
The term of employment of Executive under this Agreement (the "Term")
shall, unless this Agreement is terminated in accordance with Section 6 or 7, be
a three-year period initially commencing on the Effective Date which, at
September 30 of each year, shall automatically be extended by one year, unless
the Company notifies the Executive in writing prior to September 30 of such year
(the "Termination Notice Date") that the Term shall not be so extended and, in
such case, the Term shall terminate on the second anniversary of such
Termination Notice Date.
<PAGE>
3. Offices and Duties.
The provisions of this Section 3 will apply during the Term:
(a) Generally. Executive shall serve as the Chief Technology Officer
---------
of the Company. Executive shall have and perform such duties, responsibilities
and authorities as are customary for the Chief Technology Officer of a publicly
held corporation of the size, type, and nature of the Company as they may exist
from time to time and consistent with such position and status and as the proper
officers of the Company or the Company's Board of Directors (the "Board") shall
from time to time direct, but in no event shall such duties, responsibilities,
and authorities be reduced from those of Executive prior to the Effective Date.
Executive shall devote such business time and attention as is necessary to
appropriately and efficiently discharge his duties and responsibilities as set
forth herein.
(b) Place of Employment. Executive's principal place of employment
-------------------
shall be the current corporate offices of the Company in Deerfield, Illinois.
In no event shall the Executive's principal place of employment be relocated to
any location other than the greater metropolitan Chicago area, without his prior
written consent.
4. Salary and Annual Incentive Compensation.
As partial compensation for the services to be rendered hereunder by
Executive, the Company agrees to pay to Executive during the Term the
compensation set forth in this Section 4.
(a) Base Salary. The Company will pay to Executive during the Term a
-----------
base salary at the initial annual rate of $175,000, payable in cash in
accordance with the Company's usual payroll practices with respect to senior
executives. Executive's annual base salary shall be reviewed by the
Compensation Committee of the Board (the "Committee") at least once in each
calendar year and may be increased above, but may not be reduced below, the
then-current rate of such base salary.
(b) Annual Incentive Compensation. The Company will pay to Executive
-----------------------------
during the Term annual incentive compensation, if any, in amounts determined
each fiscal year by the Committee. Any such annual incentive compensation
payable to Executive shall be paid in accordance with the Company's usual
practices with respect to payment of incentive compensation to senior
executives.
5. Long-term Compensation, Benefits and Expense Reimbursement
(a) Executive Compensation Plans. Executive shall be entitled during
----------------------------
the Term to participate, without discrimination or duplication, in all executive
compensation plans and programs intended for general participation by senior
executives of the Company, as presently in
2
<PAGE>
effect or as they may be modified or added to by the Company from time to time,
subject to the eligibility and other requirements of such plans and programs,
including, without limitation, the Company's 1999 Stock Incentive Plan, and any
successors to such plan, any other stock option plans, performance share plans,
management incentive plans, deferred compensation plans and supplemental
retirement plans; provided, however, that such plans and programs, in the
-------- -------
aggregate, shall provide Executive with benefits and compensation and incentive
award opportunities substantially no less favorable than those provided by the
Company to Executive under such plans and programs as in effect on the Effective
Date.
(b) Employee and Executive Benefit Plans. Executive shall be entitled
------------------------------------
during the Term to participate, without discrimination or duplication, in all
employee, executive benefit and special individual plans and programs of the
Company, as presently in effect or as they may be modified or added to by the
Company from time to time, to the extent such plans and programs are available
to other senior executives or employees of the Company, subject to the
eligibility and other requirements of such plans and programs, including,
without limitation, plans providing health and medical insurance, life
insurance, disability insurance and accidental death or dismemberment insurance,
and pension or other retirement plans, savings plans, vacation and time-off
programs, profit-sharing plans, stock purchase plans and stock ownership plans;
provided, however, that such plans and programs, in the aggregate, shall provide
- -------- -------
Executive with benefits and compensation and incentive award opportunities
substantially no less favorable than those provided by the Company to Executive
under such plans and programs as in effect on the Effective Date.
(c) Reimbursement of Expenses. The Company will promptly reimburse
-------------------------
Executive for all reasonable business expenses and disbursements incurred by
Executive in the performance of Executive's duties during the Term in accordance
with the Company's reimbursement policies as in effect from time to time.
(d) Funding of Rabbi Trust. Not later than 30 days following a Change
----------------------
in Control, the Company shall contribute to a "rabbi trust" an amount equal to
the amount that would be payable to the Executive upon a termination of
employment described in Section 7(b), under (i), (iii), (iv), (v), and (viii) of
such Section 7(b) (and the trustee of the rabbi trust shall be instructed to pay
such amounts (plus earnings thereon) to the Executive upon the Executive's
termination of employment, if the amounts due to the Executive hereunder are not
otherwise paid to the Executive by the Company).
6. Termination Due to Death or Disability.
Executive's employment and the Term shall terminate upon Executive's
death. The Company may terminate the employment of Executive as Chief
Technology Officer due to the Disability (as defined in Section 8(c)) of
Executive. In the event Executive's employment terminates due to Disability,
the Term will terminate at the expiration of the 30-day period set forth in
Section 8(c), absent the actions referred to therein being taken by Executive to
return to service and Executive's presentation to the Company of a certificate
of good health.
3
<PAGE>
Upon a termination of Executive's employment due to death or
Disability, all obligations of the Company and Executive under Sections 1
through 5 of this Agreement will immediately cease; provided, however, that
-------- -------
subject to the provisions of Section 12(i), the Company will pay Executive (or,
in the case of Executive's death, his beneficiaries or estate), and Executive
(or, in the case of Executive's death, his beneficiaries or estate) will be
entitled to receive, the following:
(i) The unpaid portion of annual base salary at the rate payable, in
accordance with Section 4(a) hereof, at the date of termination of
employment, pro rated through such date of termination;
(ii) All vested, nonforfeitable amounts owing or accrued at the date of
termination of employment under any compensation and benefit plans,
programs and arrangements set forth or referred to in Sections 4(b),
5(a) and 5(b) (including any earned and vested annual incentive
compensation) in which Executive theretofore participated, under the
terms and conditions of the plans, programs and arrangements (and
agreements and documents thereunder) pursuant to which such
compensation and benefits were granted;
(iii) In lieu of any annual incentive compensation under Section 4(b) for
the year in which Executive's employment terminated (unless otherwise
payable under (ii) above), an amount equal to the average annual
incentive compensation paid to Executive in the three years
immediately preceding the year of termination (or, if Executive was
not eligible to receive or did not receive such incentive
compensation for any year in such three-year period, the Executive's
target annual incentive compensation for such year shall be used to
calculate average annual incentive compensation) (the "Severance
Annual Incentive Amount"), multiplied by a fraction the numerator of
which is the number of days Executive was employed in the year of
termination and the denominator of which is the total number of days
in the year of termination; and
(iv) Reimbursement of reasonable business expenses and disbursements
incurred by Executive prior to such termination of employment, as
authorized under Section 5(c).
In addition, upon a termination of Executive's employment due to death or
Disability, stock options then held by Executive will be exercisable to the
extent and for such periods indicated in, and otherwise be governed by, the
plans and programs (and agreements and other documents thereunder) pursuant to
which such stock options were granted. Furthermore, if Executive's employment
terminates due to Disability, for the period extending from such termination
until Executive reaches age 65, Executive shall continue to participate in all
employee benefit plans, programs and arrangements under Section 5(b) providing
health, medical and life insurance benefits in which Executive was participating
immediately prior to termination and the terms of which allow Executive's
continued participation, as if Executive had continued in employment with the
Company during such period (except that additional years of service shall not be
credited
4
<PAGE>
as a result of such deemed continued participation following termination), or,
if such plans, programs or arrangements do not allow Executive's continued
participation, Executive shall receive a cash payment equivalent on an after-tax
basis to the value of the additional benefits Executive would have received
under such employee benefit plans, programs and arrangements in which Executive
was participating immediately prior to termination, as if Executive had received
credit under such plans, programs and arrangements for service and age with the
Company during such period following Executive's termination as provided in this
sentence, with such benefits payable by the Company at the same times and in the
same manner as such benefits would have been received by Executive under such
plans (it being understood that the value of any insurance-provided benefits
will be based on the premium cost to Executive, which shall not exceed the
highest risk premium charged by a carrier having an investment grade or better
credit rating). However, in the case of termination of Executive's employment
due to Disability, Executive must continue to comply with his covenants and
agreements set forth in Section 10 in order to continue receiving the
compensation and benefits set forth in the previous sentence. Amounts payable
under Sections 6(i), (ii), (iii) and (iv) above or in lieu of health, medical
and life insurance benefits pursuant to this paragraph will be paid as promptly
as practicable after termination of Executive's employment and in no event more
than 45 days after such termination; provided, however, that, to the extent that
-------- -------
the Company would not be entitled to deduct any such payments under Section
162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), such
payments shall be made at the earliest time that the payments would be
deductible by the Company without limitation under Section 162(m) (unless this
provision is waived by the Company).
7. Termination of Employment for Reasons Other Than Death or Disability.
(a) Termination by the Company for Cause and Termination by Executive
-----------------------------------------------------------------
Other Than For Good Reason. In accordance with the provisions of this Section
- --------------------------
7(a), the Company may terminate the employment of Executive as Chief Technology
Officer for Cause at any time prior to a Change in Control, and Executive may
terminate his employment as Chief Technology Officer voluntarily for reasons
other than Good Reason (as defined in Section 8(d)) at any time.
Upon a termination of Executive's employment by the Company for Cause
or by the Executive for reasons other than Good Reason, the Term will
immediately terminate, and all obligations of the Company and Executive under
Sections 1 through 5 of this Agreement will immediately cease; provided,
--------
however, that, subject to the provisions of Section 12(i), the Company shall pay
- -------
Executive, and Executive shall be entitled to receive, the following:
(i) The unpaid portion of annual base salary at the rate payable, in
accordance with Section 4(a) hereof, at the date of termination of
employment, pro rated through such date of termination;
(ii) All vested, nonforfeitable amounts owing or accrued at the date of
termination of employment under any compensation and benefit plans,
programs and arrange ments set forth or referred to in Sections 4(b),
5(a) and 5(b) hereof (including any earned and vested annual incentive
compensation and long-term incentive award)
5
<PAGE>
in which Executive theretofore participated, under the terms and
conditions of the plans, programs and arrangements (and agreements
and documents thereunder) pursuant to which such compensation and
benefits were granted; and
(iii) Reimbursement of reasonable business expenses and disbursements
incurred by Executive prior to such termination of employment, as
authorized under Section 5(c).
Amounts payable under Section 7(a)(i), (ii) and (iii) will be paid as promptly
as practicable after termination of Executive's employment; provided, however,
-------- -------
that, to the extent that the Company would not be entitled to deduct any such
payments under Section 162(m) of the Code, such payments shall be made at the
earliest time that the payments would be deductible by the Company without
limitation under Section 162(m) (unless this provision is waived by the
Company).
(b) Termination by the Company Without Cause and Termination by
-----------------------------------------------------------
Executive for Good Reason. In accordance with the provisions of this Section
- -------------------------
7(b), the Company may terminate the employment of Executive without Cause,
including after a Change in Control, upon 90 days' written notice to Executive,
and Executive may terminate his employment with the Company for Good Reason upon
90 days' written notice to the Company; provided, however, that, if the basis
-------- -------
for such Good Reason is remediable, the Company shall have 30 days after receipt
of such notice to remedy the basis for such Good Reason. Notwithstanding the
foregoing, the Company may terminate Executive without Cause and without
providing 90 days' written notice to Executive if the Company pays Executive the
portion of his then-current annual base salary under Section 4(a) for such 90-
day period and credits Executive with service for 90 days for all purposes
hereunder.
Upon a termination of Executive's employment by the Company without
Cause, or termination of Executive's employment by the Executive for Good
Reason, the Term will immediately terminate and all obligations of the parties
under Sections 1 through 5 of this Agreement will immediately cease, except that
subject to the provisions of Section 12(i) the Company shall pay Executive, and
Executive shall be entitled to receive, the following:
(i) A lump sum cash payment in an amount equal to the product of (x) the
sum of (A) Executive's then-current annual base salary at the rate
payable under Section 4(a) immediately prior to termination plus (B)
the Severance Annual Incentive Amount multiplied by (y) the Severance
Multiplier. For purposes of this Section 7(b)(i), the "Severance
Multiplier" shall be one and one-quarter (1.25); provided, however,
-------- -------
that if the employment of Executive is terminated by the Company
without Cause or by Executive for Good Reason during the period
beginning 60 days prior to a Change in Control and ending two years
after such Change in Control, the "Severance Multiplier" shall be one
and three-quarters (1.75).
(ii) The unpaid portion of annual base salary at the rate payable, in
accordance with Section 4(a) hereof, at the date of termination of
employment, pro rated through such date of termination;
6
<PAGE>
(iii) All vested, nonforfeitable amounts owing or accrued at the date of
termination of employment under any compensation and benefit plans,
programs and arrangements set forth or referred to inc Sections 4(b),
5(a) and 5(b) hereof (including any vested and earned annual
incentive compensation) in which Executive theretofore participated
and all amounts not vested and nonforfeitable, but owing and accrued
at the date of termination of employment, under such benefit plans,
programs and arrangements, to the extent that such amounts would be
vested and nonforfeitable if such amounts become vested, under the
terms and conditions of the plans, programs and arrangements (and
agreements and documents thereunder) pursuant to which such
compensation and benefits were granted;
(iv) In lieu of any annual incentive compensation under Section 4(b) for
the year in which Executive's employment terminated (unless otherwise
payable under Section 7(b)(iii)), an amount equal to the Severance
Annual Incentive Amount, which, unless a termination occurs during
the period beginning 60 days prior to a Change in Control and ending
two years after a Change in Control, shall be multiplied by a
fraction, the numerator of which is the number of days Executive was
employed in the year of termination and the denominator of which is
the total number of days in the year of termination; and
(v) Reimbursement of reasonable business expenses and disbursements
incurred by Executive prior to such termination of employment, as
authorized under Section 5(c).
In addition, upon a termination of Executive's employment by the
Company without Cause, or termination of Executive's employment by the
Executive for Good Reason, stock options then held by Executive will
be exercisable to the extent and for such periods indicated in, and
otherwise be governed by, the plans and programs (and agreements and
other documents thereunder) pursuant to which such stock options were
granted. Furthermore, for a period of one (1) year after such
termination, Executive shall continue to participate in all employee
benefit plans, programs and arrangements under Section 5(c) providing
health, medical and life insurance benefits in which Executive was
participating immediately prior to termination and the terms of which
allow Executive's continued participation, as if Executive had
continued in employment with the Company during such period or, if
such plans, programs or arrangements do not allow Executive's
continued participation, a cash payment equivalent on an after-tax
basis to the value of the additional benefits Executive would have
received under such employee benefit plans, programs and arrangements
in which Executive was participating immediately prior to termination,
as if Executive had received credit under such plans, programs and
arrangements for service and age with the Company during such period
following Executive's termination, with such benefits payable by the
Company at the same times and in the same manner as such benefits
would have been received by Executive under such plans (it being
understood that the value of
7
<PAGE>
any insurance-provided benefits will be based on the premium cost to
Executive, which shall not exceed the highest risk premium charged by
a carrier having an investment grade or better credit rating). Amounts
payable under Sections 7(b)(i), (ii), (iii), (iv) and (v) above or in
lieu of health, medical and life insurance benefits pursuant to this
paragraph will be paid as promptly as practicable after termination of
Executive's employment, and in no event more than 45 days after such
termination; provided, however, that, if such termination is a
-------- -------
termination by the Company without Cause and prior to a Change in
Control, to the extent that the Company would not be entitled to
deduct any such payments under Section 162(m) of the Code, such
payments shall be made at the earliest time that the payments would be
deductible by the Company without limitation under Section 162(m)
(unless this provision is waived by the Company), but in no event
later than 12 months subsequent to the date of termination.
8. Definitions Relating to Termination Events.
(a) "Cause." For purposes of this Agreement, "Cause" shall mean
--------
Executive's gross misconduct (as defined below) or willful (as defined below)
and material breach of Section 10 of this Agreement. For purposes of this
definition, "gross misconduct" shall mean (A) a felony conviction in a court of
law under applicable federal or state laws which results in material damage to
the Company or its subsidiaries or materially impairs the value of the
Executive's services to the Company, or (B) willfully engaging in one or more
acts, or willfully omitting to act in accordance with duties hereunder, which
act or omission is demonstrably and materially damaging to the Company or its
subsidiaries, including acts and omissions which materially impair the ability
of the Company to continue its business in accordance with applicable
governmental and regulatory rules and regulations. For purposes of this
Agreement, an act or failure to act on Executive's part shall be considered
"willful" if it was done or omitted to be done by him not in good faith, and
shall not include any act or failure to act resulting from any incapacity of
Executive. Notwithstanding the foregoing, Executive may not be terminated for
Cause unless and until there shall have been delivered to him, within six months
after the Board (A) had knowledge of conduct or an event allegedly constituting
Cause and (B) had reason to believe that such conduct or event could be grounds
for Cause, a copy of a resolution duly adopted by a majority affirmative vote of
the membership of the Board (excluding Executive) (after giving Executive
reasonable notice specifying the nature of the grounds for such termination and
not less than 30 days to correct the acts or omissions complained of, if
correctable, and affording Executive the opportunity, together with his counsel,
to be heard before the Board) finding that, in the good faith opinion of the
Board, Executive was guilty of conduct set forth above in this Section 8(a).
(b) "Change in Control." A "Change in Control" shall be deemed to
--------------------
have occurred upon the happening of any of the following events:
(i) An acquisition by any individual, entity or group, within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), (a "Person") of beneficial ownership
(within the meaning of Rule 13d-3
8
<PAGE>
promulgated under the Exchange Act) of more than fifty percent (50%) of
either (1) the then outstanding shares of Common Stock of the Company (the
"Outstanding Common Stock") or (2) the combined voting power of the then
outstanding voting securities of the Company entitled to vote generally in
the election of directors (the "Outstanding Voting Securities"); excluding,
however, the following: (1) any acquisition directly from the Company,
other than an acquisition by virtue of the exercise of a conversion
privilege unless the security being so converted was itself acquired
directly from the Company, (2) any acquisition by the Company; (3) any
acquisition by Joseph Fox, Avi Fox or any of their affiliates, (4) any
acquisition by any employee benefit plan (or related trust) sponsored or
maintained by the Company or by any Company controlled by the Company; or
(5) any acquisition by any Person pursuant to a transaction which complies
with clauses (1), (2) and (3) of subsection (iii) of this Section 8(b); or
(ii) Within any period of 24 consecutive months, a change in the
composition of the Board such that the individuals who, immediately prior
to such period, constituted the Board (such Board shall be hereinafter
referred to as the "Incumbent Board") cease for any reason to constitute at
least a majority of the Board; provided, however, for purposes hereof, that
any individual who becomes a member of the Board during such period, whose
election, or nomination for election by the Company's stockholders, was
approved by a vote of at least a majority of those individuals who are
members of the Board and who were also members of the Incumbent Board (or
deemed to be such pursuant to this proviso) shall be considered as though
such individual were a member of the Incumbent Board; but, provided
further, that any such individual whose initial assumption of office occurs
as a result of either an actual or threatened election contest (as such
terms are used in Rule 14a-11 of Regulation 14A promulgated under the
Exchange Act) or other actual or threatened solicitation of proxies or
consents by or on behalf of a Person other than the Board shall not be so
considered as a member of the Incumbent Board; or
(iii) The approval by the stockholders of the Company of a
reorganization, merger or consolidation or sale or other disposition of all
or substantially all of the assets of the Company ("Corporate
Transaction"); excluding, however, such a Corporate Transaction pursuant to
which (1) all or substantially all of the individuals and entities who are
the beneficial owners, respectively, of the Outstanding Common Stock and
Outstanding Voting Securities immediately prior to such Corporate
Transaction will beneficially own, directly or indirectly, more than sixty
percent (60%) of, respectively, the outstanding shares of common stock, and
the combined voting power of the outstanding voting securities entitled to
vote generally in the election of directors, as the case may be, of the
Company resulting from such Corporate Transaction (including, without
limitation, a Company which as a result of such transaction owns the
Company or all or substantially all of the Company's assets, either
directly or through one or more subsidiaries) in substantially the same
proportions as their ownership, immediately prior to such Corporate
Transaction, of the Outstanding Common Stock and Outstanding Voting
Securities, as the case may be, (2) no Person (other than the Company or
any employee benefit plan (or related trust) sponsored or maintained by the
Company, by any Company controlled by the Company or by such Company
resulting from such Corporate Transaction) will
9
<PAGE>
beneficially own, directly or indirectly, more than twenty-five percent
(25%) of, respectively, the outstanding shares of common stock of the
Company resulting from such Corporate Transaction or the combined voting
power of the outstanding voting securities of such Company entitled to vote
generally in the election of directors, except to the extent that such
ownership existed with respect to the Company prior to the Corporate
Transaction, and (3) individuals who were members of the Board immediately
prior to the approval by the stockholders of the Company of such Corporate
Transaction will constitute at least a majority of the members of the board
of directors of the Company resulting from such Corporate Transaction; or
(iv) The approval by the stockholders of the Company of a complete
liquidation or dissolution of the Company, other than to a corporation
pursuant to a transaction which would comply with clauses (1), (2) and (3)
of subsection (iii) of this Section 1(b), assuming for this purpose that
such transaction were a Corporate Transaction.
(c) "Disability." "Disability" means the failure of Executive to
-------------
render and perform the services required of him under this Agreement, for a
total of 180 days of more during any consecutive 12 month period, because of any
physical or mental incapacity or disability as determined by a physician or
physicians selected by the Company and reasonably acceptable to Executive,
unless, within 30 days after Executive has received written notice from the
Company of a proposed termination due to such absence, Executive shall have
returned to the full performance of his duties hereunder and shall have
presented to the Company a written certificate of Executive's good health
prepared by a physician selected by the Company and reasonably acceptable to
Executive.
(d) "Good Reason." For purposes of this Agreement, "Good Reason"
--------------
shall mean, without Executive's prior written consent, (A) a material change,
adverse to Executive, in Executive's positions, titles or offices as set forth
in Section 3(a), status, rank, nature of responsibilities or authority within
the Company, except in connection with the termination of Executive's employment
for Cause or Disability or as a result of Executive's death, or as requested or
consented to by Executive, (B) an assignment of any duties to Executive which
are inconsistent with his status, duties, responsibilities and authorities under
Section 3(a), (C) a decrease in annual base salary or other compensation
opportunities and maximums or benefits provided under this Agreement, (D) any
other failure by the Company to perform any material obligation under, or breach
by the Company of any material provision of, this Agreement, (E) a relocation of
the corporate offices of the Company more than 35 miles from the latest location
of such offices prior to the date of a Change in Control, (F) any failure to
secure the agreement of any successor corporation or other entity to the Company
to fully assume the Company's obligations under this Agreement in a form
reasonably acceptable to Executive, and (G) any attempt by the Company to
terminate Executive for Cause which does not result in a valid termination for
Cause, except in the case that valid grounds for termination for Cause exist but
are corrected as permitted under Section 8(a).
10
<PAGE>
9. Excise Tax Gross-Up.
If it shall be determined that any payment or benefit received or to be
received by Executive under this Agreement or any other plan, arrangement or
agreement of the Company (all such payments and benefits a "Payment"), would be
subject to the excise tax imposed by Section 4999 of the Code (the "Excise
Tax"), then the Company shall pay to Executive an additional payment (a "Gross-
Up Payment") in an amount necessary to reimburse Executive, on an after-tax
basis, for the Excise Tax and for any federal, state and local income tax and
excise tax (including any interest and penalties imposed with respect to such
taxes) that may be imposed by reason of the Payment. For purposes of
determining the amount of any Gross-Up Payment, Executive shall be deemed to pay
federal, state and local income taxes at the highest applicable marginal rate of
taxation in the calendar year in which the Gross-Up Payment is to be made. All
determinations required to be made under this Section 9, including whether a
Gross-Up Payment is required and the amount of such Gross-Up Payment, shall be
made by a nationally known independent accounting firm regularly retained by the
Company (the "Accounting Firm") which shall provide detailed supporting
calculations both to the Company and Executive within 15 business days of the
request for such determination. Such request may be made by either party. The
Company shall pay the fees and expenses of the Accounting Firm in connection
with any determinations hereunder. The Gross-Up Payment shall be paid by the
Company within 10 days of the Accounting Firm's determination of the amount
thereof.
10. Executive Covenants.
(a) Executive's Acknowledgment. Executive agrees and acknowledges that in
--------------------------
order to assure the Company that the Company will retain its value as a going
concern, it is necessary that Executive undertake not to utilize his special
knowledge of the Company's business and his relationships with customers and
suppliers to compete with the Company. Executive further acknowledges that:
(i) Executive is one of a limited number of persons who has
developed the Company's business;
(ii) Executive has occupied a position of trust and confidence with
the Company prior to the date of this Agreement and, during such period and
Employee's employment under this Agreement, Employee has acquired and will
acquire an intimate knowledge of proprietary and confidential information
concerning the Company and its business;
(iii) the agreements and covenants contained in Sections 10(b), (c),
(d), (e), (f) and (g) are essential to protect the Company and the goodwill
of its business;
(iv) Executive's employment with the Company has special, unique and
extraordinary value to the Company, and the Company would be irreparably
damaged if Executive were to provide services to any person or entity or
otherwise act in violation of the provisions of this Agreement;
11
<PAGE>
(v) the scope and duration of the restrictive covenants in Section
10(b) are reasonably designed to protect a protected interest of the
Company and are not excessive in light of the circumstances; and
(vi) Executive has a means to support himself and his dependents other
than by engaging in conduct prohibited by the restrictive covenants in
Section 10(b), and the provisions of Sections 10(b) will not impair such
ability.
(b) Non-Competition; Non-Solicitation; Non-Interference. During the
---------------------------------------------------
Term and for a period of two years after the termination of Executive's
employment hereunder, Executive will not by himself or in conjunction with
others, directly or indirectly engage (either as owner, investor, partner,
member stockholder, employer, employee, consultant, advisor, manager or
director) in any business in the United States which, at the time of such
termination, is directly or indirectly in competition with a business then
conducted or proposed to be conducted by the Company or any of its subsidiaries;
provided, however, this the limitation shall not apply if Executive's employment
- -------- --------
is terminated as a result of a termination by the Company without Cause or a
termination by Executive for Good Reason. During the Term and for a period of
three years after the termination of Executive's employment hereunder, Executive
will not by himself or in conjunction with others, directly or indirectly (i)
induce any account holders of the Company or any of its subsidiaries with whom
Executive has had contacts or relationships, directly or indirectly, during and
within the scope of his employment with the Company, to curtail or cancel their
relationship with the Company or its subsidiaries; or (ii) induce, or attempt to
influence, any employee of the Company or any of its subsidiaries to terminate
their employment therewith. The provisions of the first sentence of this
Section 10(b) and clauses (ii) and (iii) of this Section 10(b) are separate and
distinct commitments independent of each of the other subparagraphs. It is
agreed that the ownership of not more than one percent of the equity securities
of any company having securities listed on an exchange or regularly traded in an
over-the-counter market shall not, of itself, be deemed inconsistent with the
first sentence of this Section 10(b).
(c) Non-Disclosure. Executive shall not, at any time during the Term
--------------
and thereafter (including following Executive's termination of employment for
any reason), disclose, use, transfer or sell, except in the course of employment
with, or providing other service to, the Company, any confidential or
proprietary information of the Company and its subsidiaries so long as such
information has not otherwise been publicly disclosed or is not otherwise in the
public domain, except as required by law or pursuant to legal process.
(d) Return of Company Materials Upon Termination. Executive
--------------------------------------------
acknowledges that all records and documents containing confidential or
proprietary information of the Company or its subsidiaries prepared by Executive
or coming into his possession by virtue of his employment by the Company are and
will remain the property of the Company and its subsidiaries. Upon termination
of his employment with the Company, Executive shall immediately return to the
Company all such items and all copies of such items, in his possession.
(e) Cooperation With Regard to Litigation. Executive agrees to
-------------------------------------
cooperate with the Company, during the Term and thereafter (including following
Executive's termination of
12
<PAGE>
employment for any reason), by making himself available to testify on behalf of
the Company or any subsidiary or affiliate of the Company, in any action, suit
or proceeding, whether civil, criminal, administrative or investigative, and to
assist the Company, or any subsidiary or affiliate of the Company, in any such
action, suit or proceeding, by providing information and meeting and consulting
with the Board or its representatives or counsel, or representatives or counsel
to the Company or any subsidiary or affiliate of the Company, as reasonably
requested and at a time mutually convenient to Executive and the Company. The
Company agrees to reimburse the Executive, on an after-tax basis, for all
expenses actually incurred in connection with his provision of testimony or
assistance.
(f) Non-Disparagement. Executive shall not, at any time during the
-----------------
Term and thereafter, make statements or representations, or otherwise
communicate, directly or indirectly, in writing, orally or otherwise, or take
any action which may, directly or indirectly, disparage or be damaging to the
Company or any of its subsidiaries or affiliates or their respective officers,
directors, employees, advisors, businesses or reputations. Notwithstanding the
foregoing, nothing in this Agreement shall preclude Executive from making
truthful statements or disclosures that are required by applicable law,
regulation or legal process.
(g) Inventions. Executive acknowledges that all inventions,
----------
innovations, discoveries, improvements, developments, methods, know-how,
designs, analyses, drawings, reports and all similar or related information
(whether or not patentable) which (i) relate to the then current business or any
anticipated business of the Company, the Company's research and development or
the Company's existing or future services or products and (ii) which are
conceived, developed or made by Executive while employed by the Company ("Work
Product") belong to the Company. Executive shall promptly disclose such Work
Product to the Company and perform all actions reasonably requested by the
Company (whether during or after his period of employment with the Company) to
establish and confirm such ownership (including the execution of assignments,
consents, powers of attorney and other instruments).
(h) Release of Employment Claims. Executive agrees, as a condition to
----------------------------
receipt of any termination payments and benefits provided for in Sections 6 and
7 herein (other than salary earned through the date of termination), that he
will execute a general release agreement, in a form satisfactory to the Company,
releasing any and all claims arising out of Executive's employment (other than
enforcement of this Agreement).
(i) Forfeiture of Outstanding Options. The provisions of Sections 6
---------------------------------
and 7 notwithstanding, if Executive materially fails to substantially comply
with any obligation imposed under this Section 10, all options to purchase
capital stock of the Company granted by the Company and then held by Executive
or a transferee of Executive shall be immediately forfeited, and thereupon such
options shall be canceled. Notwithstanding the foregoing, Executive shall not
forfeit any option unless and until there shall have been delivered to him,
within six months after the Board (A) had knowledge of conduct or an event
allegedly constituting grounds for such forfeiture and (B) had reason to believe
that such conduct or event could be grounds for such forfeiture, a copy of a
resolution duly adopted by a majority affirmative vote of the membership of the
Board (excluding Executive, if he is a director) at a meeting of the Board
called and held
13
<PAGE>
for such purpose (after giving Executive reasonable notice specifying the nature
of the grounds for such forfeiture, and not less than 30 days to correct the
acts or omissions complained of, if correctable, and affording Executive the
opportunity, together with his counsel, to be heard before the Board) finding
that, in the good faith opinion of the Board, Executive has engaged and
continues to engage in conduct set forth in this Section 10(i) which constitutes
grounds for forfeiture of Executive's options. Any such forfeiture shall apply
to such options notwithstanding any term or provision of any option agreement.
(j) Remedies. Executive acknowledges that the agreements and
--------
covenants in Sections 10(b), (c), (d), (e) and (f) are reasonable and necessary
for the protection of the Company's business interests, that in the event of any
actual or threatened violation of the covenants contained in Sections 10(b),
(c), (d), (e) and (f), the Company will suffer irreparable injury, Company's
damages will be difficult to ascertain and the Company's remedy at law will be
inadequate. Employee accordingly agrees that in the event of any actual or
threatened breach by him of any of the covenants set forth in Sections 10(b),
(c), (d), (e) and (f), the Company shall be entitled to injunctive and other
equitable relief, including immediate temporary injunctive and other equitable
relief, without bond and without the necessity of showing actual monetary
damages, subject to hearing as soon thereafter as possible. Nothing contained
herein shall be construed as prohibiting the Company from pursuing any other
remedies available to it for such breach or threatened breach, including the
recovery of any damages which it is able to prove.
(k) Survival. The provisions of this Section 10 shall survive the
--------
termination or expiration of this Agreement in accordance with the terms hereof.
11. Governing Law; Disputes; Arbitration.
(a) Governing Law. This Agreement is governed by and is to be
-------------
construed, administered and enforced in accordance with the laws of the State of
Illinois, without regard to Illinois conflicts of law principles, except insofar
as the Delaware General Corporation Law and federal laws and regulations may be
applicable. If, under the governing law, any portion of this Agreement is at
any time deemed to be in conflict with any applicable statute, rule, regulation,
ordinance or other principle of law, such portion shall be deemed to be modified
or altered to the extent necessary to conform thereto or, if that is not
possible, to be omitted from this Agreement. The invalidity of any such portion
shall not affect the force, effect, and validity of the remaining portion
hereof. If any court determines that any provision of Section 10 is
unenforceable because of the duration or geographic scope of such provision, it
is the parties' intent that such court shall have the power to modify the
duration or geographic scope of such provision, as the case may be, to the
extent necessary to render the provision enforceable, and, in its modified form,
such provision shall be enforced.
(b) Reimbursement of Expenses in Enforcing Rights. All reasonable
---------------------------------------------
costs and expenses (including reasonable fees and disbursements of counsel)
incurred by Executive in seeking to interpret this Agreement or enforce rights
pursuant to this Agreement shall be paid on behalf of or reimbursed to Executive
promptly by the Company, whether or not Executive is successful in asserting
such rights; provided, however, that no reimbursement shall be made of
-------- -------
14
<PAGE>
such expenses relating to any unsuccessful assertion of rights if and to the
extent that Executive's assertion of such rights was in bad faith or frivolous,
as determined by independent counsel mutually acceptable to the Executive and
the Company.
(c) Arbitration. Any dispute or controversy arising under or in
-----------
connection with this Agreement shall be settled exclusively by arbitration in
Chicago, Illinois by a panel of three arbitrators in accordance with the rules
of the American Arbitration Association in effect at the time of submission to
arbitration. Judgment may be entered on the arbitrators' award in any court
having jurisdiction. For purposes of entering any judgment upon an award
rendered by the arbitrators, the Company and Executive hereby consent to the
jurisdiction of any or all of the following courts: (i) the United States
District Court for the Northern District of Illinois, (ii) any of the courts of
the State of Illinois, or (iii) any other court having jurisdiction. The
Company and Executive further agree that any service of process or notice
requirements in any such proceeding shall be satisfied if the rules of such
court relating thereto have been substantially satisfied. The Company and
Executive hereby waive, to the fullest extent permitted by applicable law, any
objection which they may now or hereafter have to such jurisdiction and any
defense of inconvenient forum. The Company and Executive hereby agree that a
judgment upon an award rendered by the arbitrators may be enforced in other
jurisdictions by suit on the judgment or in any other manner provided by law.
Subject to Section 11(b), the Company shall bear all costs and expenses arising
in connection with any arbitration proceeding pursuant to this Section 11.
Notwithstanding any provision in this Section 11, Executive shall be entitled to
seek specific performance of Executive's right to be paid during the pendency of
any dispute or controversy arising under or in connection with this Agreement.
(d) Interest on Unpaid Amounts. Any amounts that have become payable
--------------------------
pursuant to the terms of this Agreement or any decision by arbitrators or
judgment by a court of law pursuant to this Section 11 but which are not timely
paid shall bear interest at the prime rate in effect at the time such payment
first becomes payable, as quoted in The Wall Street Journal (Midwest edition).
12. Miscellaneous.
(a) Integration. This Agreement cancels and supersedes any and all
-----------
prior agreements and understandings between the parties hereto with respect to
the employment of Executive by the Company and its subsidiaries. This Agreement
constitutes the entire agreement among the parties with respect to the matters
herein provided, and no modification or waiver of any provision hereof shall be
effective unless in writing and signed by the parties hereto. Executive shall
not be entitled to any payment or benefit under this Agreement which duplicates
a payment or benefit received or receivable by Executive under such prior
agreements and understandings or under any benefit or compensation plan of the
Company.
(b) Non-Transferability. Neither this Agreement nor the rights or
-------------------
obligations hereunder of the parties hereto shall be transferable or assignable
by Executive, except in accordance with the laws of descent and distribution or
as specified in Section 12(c). The
15
<PAGE>
Company may assign this Agreement and the Company's rights and obligations
hereunder, and shall assign this Agreement, to any Successor (as hereinafter
defined) which, by operation of law or otherwise, continues to carry on
substantially the business of the Company prior to the event of succession, and
the Company shall, as a condition of the succession, require such Successor to
agree to assume the Company's obligations under, and be bound by, this
Agreement. For purposes of this Agreement, "Successor" shall mean any person
that succeeds to, or has the practical ability to control (either immediately or
with the passage of time), the Company's business directly, by merger or
consolidation, or indirectly, by purchase of the Company's voting securities or
all or substantially all of its assets, or otherwise.
(c) Beneficiaries. Executive shall be entitled to designate (and
-------------
change, to the extent permitted under applicable law) a beneficiary or
beneficiaries to receive any compensation or benefits payable hereunder
following Executive's death.
(d) Notices. Whenever under this Agreement it becomes necessary to
-------
give notice, such notice shall be in writing, signed by the party or parties
giving or making the same, and shall be deemed to have been duly given (i) upon
actual receipt (or refusal of receipt) if delivered personally; (ii) three
business days following deposit, if sent by certified or registered mail, return
receipt requested, postage prepaid; (iii) one business day following deposit
with a documented overnight delivery service or (iv) upon transmission, if sent
by facsimile (with confirmation receipt and followed by a copy sent by regular
mail), in each case to the appropriate address or number as set forth below or
at such other address as may be designated by such party by like notice:
If to the Company:
Web Street, Inc.
510 Lake Cook Road, 4/th/ Floor
Deerfield, Illinois 60015
Attention: Joseph J. Fox
Stuart A. Cohn
Telephone: 847/444-4700
Facsimile: 847/267-9295
With a copy to:
Katten Muchin & Zavis
525 W. Monroe St., Suite 1600
Chicago, Illinois 60661
Attention: Mark D. Wood
Telephone: 312/902-5200
Facsimile: 312/902-1061
16
<PAGE>
If to Executive:
William J. Mania
1019 Hull Terrace
Evanston, Illinois 60202
Telephone: 847/733-8441
Facsimile:
(e) Reformation. The invalidity of any portion of this Agreement
-----------
shall not be deemed to render the remainder of this Agreement invalid.
(f) Headings. The headings of this Agreement are for convenience of
--------
reference only and do not constitute a part hereof.
(g) No General Waivers. The failure of any party at any time to
------------------
require performance by any other party of any provision hereof or to resort to
any remedy provided herein or at law or in equity shall in no way affect the
right of such party to require such performance or to resort to such remedy at
any time thereafter, nor shall the waiver by any party of a breach of any of the
provisions hereof be deemed to be a waiver of any subsequent breach of such
provisions. No such waiver shall be effective unless in writing and signed by
the party against whom such waiver is sought to be enforced.
(h) No Obligation To Mitigate. Executive shall not be required to
-------------------------
seek other employment or otherwise to mitigate Executive's damages upon any
termination of employment; provided, however, that, to the extent Executive
-------- -------
receives from a subsequent employer health or other insurance benefits that are
substantially similar to the benefits referred to in Section 5(c) hereof, any
such benefits to be provided by the Company to Executive following the Term
shall be correspondingly reduced.
(i) Offsets; Withholding. The amounts required to be paid by the
--------------------
Company to Executive pursuant to this Agreement shall not be subject to offset
other than with respect to any amounts that are owed to the Company by Executive
due to his receipt of funds as a result of his fraudulent activity. The
foregoing and other provisions of this Agreement notwithstanding, all payments
to be made to Executive under this Agreement, including under Sections 6 and 7,
or otherwise by the Company will be subject to required withholding taxes and
other required deductions.
(j) Successors and Assigns. This Agreement shall be binding upon and
----------------------
shall inure to the benefit of Executive, his heirs, executors, administrators
and beneficiaries, and shall be binding upon and inure to the benefit of the
Company and its successors and assigns.
17
<PAGE>
13. Income Tax Treatment.
Executive and the Company acknowledge that it is the intention of the
Company to deduct all amounts paid by the Company to Executive pursuant to this
Agreement, including under Sections 6 and 7 as ordinary and necessary business
expenses for income tax purposes. Executive agrees and represents that he will
treat all such amounts as ordinary income for income tax purposes, and should he
report such amounts as other than ordinary income for income tax purposes, he
will indemnify and hold the Company harmless from and against any and all taxes,
penalties, interest, costs and expenses, including reasonable attorneys' and
accounting fees and costs, which are incurred by Company directly or indirectly
as a result thereof.
14. Key Man Life Insurance.
If the Company, in its sole discretion, desires to procure "key man"
insurance covering the life of Executive, Executive shall cooperate with the
Company in procuring such insurance and shall, at the request of the Company,
submit to such medical examinations, supply such information and execute such
documents as may be required by the insurance company to which the Company has
applied for insurance. Executive shall use his best efforts to qualify for the
standard premium category of such insurance company. Executive shall have no
interest whatsoever in any "key man" insurance policy procured by the Company.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
WEB STREET, INC.
By: /s/ Stuart A. Cohn
-------------------------------------
Name: Stuart A. Cohn
Title: Executive Vice President,
General Counsel
EXECUTIVE
/s/ William J. Mania
----------------------------------------
William J. Mania
Chief Technology Officer
<PAGE>
EXHIBIT 10.11
WEB STREET, INC.
________________________________________________________________________________
Employment Agreement for D. Jonathan Rosenberg
________________________________________________________________________________
<PAGE>
WEB STREET, INC.
________________________________________________________________________________
Employment Agreement for D. Jonathan Rosenberg
________________________________________________________________________________
Page
----
1. Employment............................................................ 1
2. Term.................................................................. 1
3. Offices and Duties.................................................... 2
4. Salary and Annual Incentive Compensation.............................. 2
5. Long-Term Compensation, Benefits and Expense Reimbursement............ 2
6. Termination Due to Death or Disability................................ 3
7. Termination of Employment For Reasons Other Than Death or Disability.. 5
8. Definitions Relating to Termination Events............................ 8
9. Excise Tax Gross-Up................................................... 11
10. Executive Covenants................................................... 11
11. Governing Law; Disputes; Arbitration.................................. 14
12. Miscellaneous......................................................... 16
13. Income Tax Treatment.................................................. 18
14. Key Man Life Insurance................................................ 18
<PAGE>
WEB STREET, INC.
________________________________________________________________________________
Employment Agreement for D. Jonathan Rosenberg
________________________________________________________________________________
THIS EMPLOYMENT AGREEMENT (this "Agreement"), by and between WEB
STREET, INC., a Delaware corporation (the "Company"), and D. Jonathan Rosenberg
("Executive"), is hereby entered into effective as of October 1, 1999 (the
"Effective Date").
W I T N E S S E T H
WHEREAS, Executive is currently an employee of the Company;
WHEREAS, the Company desires to continue to employ Executive in his
capacity as Chief Operating Officer in connection with the conduct of its
business, and Executive desires to accept such employment on the terms and
conditions herein set forth; and
WHEREAS, the Company and Executive desire to set forth the terms upon
which Executive shall be so employed, which terms that certain Employment
Agreement previously entered into between the Company and Executive.
NOW, THEREFORE, in consideration of the foregoing, the mutual
covenants contained herein, and other good and valuable consideration the
receipt and adequacy of which the Company and Executive each hereby acknowledge,
the Company and Executive hereby agree as follows:
1. Employment.
The Company hereby agrees to employ Executive as its Chief Operating
Officer, and Executive hereby agrees to accept such employment and serve in such
capacities, during the Term (as defined in Section 2) and upon the terms and
conditions set forth in this Agreement.
2. Term.
The term of employment of Executive under this Agreement (the "Term")
shall, unless this Agreement is terminated in accordance with Section 6 or 7, be
a three-year period initially commencing on the Effective Date which, at
September 30 of each year, shall automatically be extended by one year, unless
the Company notifies the Executive in writing prior to September 30 of such year
(the "Termination Notice Date") that the Term shall not be so extended and, in
such case, the Term shall terminate on the second anniversary of such
Termination Notice Date.
<PAGE>
3. Offices and Duties.
The provisions of this Section 3 will apply during the Term:
(a) Generally. Executive shall serve as the Chief Operating Officer
---------
of the Company. Executive shall have and perform such duties, responsibilities
and authorities as are customary for the Chief Operating Officer of a publicly
held corporation of the size, type, and nature of the Company as they may exist
from time to time and consistent with such position and status and as the proper
officers of the Company or the Company's Board of Directors (the "Board") shall
from time to time direct, but in no event shall such duties, responsibilities,
and authorities be reduced from those of Executive prior to the Effective Date.
Executive shall devote such business time and attention as is necessary to
appropriately and efficiently discharge his duties and responsibilities as set
forth herein.
(b) Place of Employment. Executive's principal place of employment
-------------------
shall be the current corporate offices of the Company in Deerfield, Illinois.
In no event shall the Executive's principal place of employment be relocated to
any location other than the greater metropolitan Chicago area, without his prior
written consent.
4. Salary and Annual Incentive Compensation.
As partial compensation for the services to be rendered hereunder by
Executive, the Company agrees to pay to Executive during the Term the
compensation set forth in this Section 4.
(a) Base Salary. The Company will pay to Executive during the Term a
-----------
base salary at the initial annual rate of $150,000, payable in cash in
accordance with the Company's usual payroll practices with respect to senior
executives. Executive's annual base salary shall be reviewed by the
Compensation Committee of the Board (the "Committee") at least once in each
calendar year and may be increased above, but may not be reduced below, the
then-current rate of such base salary.
(b) Annual Incentive Compensation. The Company will pay to Executive
-----------------------------
during the Term annual incentive compensation, if any, in amounts determined
each fiscal year by the Committee. Any such annual incentive compensation
payable to Executive shall be paid in accordance with the Company's usual
practices with respect to payment of incentive compensation to senior
executives.
5. Long-Term Compensation, Benefits and Expense Reimbursement
(a) Executive Compensation Plans. Executive shall be entitled during
----------------------------
the Term to participate, without discrimination or duplication, in all executive
compensation plans and programs intended for general participation by senior
executives of the Company, as presently in effect or as they may be modified or
added to by the Company from time to time, subject to the
2
<PAGE>
eligibility and other requirements of such plans and programs, including,
without limitation, the Company's 1999 Stock Incentive Plan, and any successors
to such plan, any other stock option plans, performance share plans, management
incentive plans, deferred compensation plans and supplemental retirement plans;
provided, however, that such plans and programs, in the aggregate, shall provide
- -------- -------
Executive with benefits and compensation and incentive award opportunities
substantially no less favorable than those provided by the Company to Executive
under such plans and programs as in effect on the Effective Date.
(b) Employee and Executive Benefit Plans. Executive shall be entitled
------------------------------------
during the Term to participate, without discrimination or duplication, in all
employee, executive benefit and special individual plans and programs of the
Company, as presently in effect or as they may be modified or added to by the
Company from time to time, to the extent such plans and programs are available
to other senior executives or employees of the Company, subject to the
eligibility and other requirements of such plans and programs, including,
without limitation, plans providing health and medical insurance, life
insurance, disability insurance and accidental death or dismemberment insurance,
and pension or other retirement plans, savings plans, vacation and time-off
programs, profit-sharing plans, stock purchase plans and stock ownership plans;
provided, however, that such plans and programs, in the aggregate, shall provide
- -------- -------
Executive with benefits and compensation and incentive award opportunities
substantially no less favorable than those provided by the Company to Executive
under such plans and programs as in effect on the Effective Date.
(c) Reimbursement of Expenses. The Company will promptly reimburse
-------------------------
Executive for all reasonable business expenses and disbursements incurred by
Executive in the performance of Executive's duties during the Term in accordance
with the Company's reimbursement policies as in effect from time to time.
(d) Funding of Rabbi Trust. Not later than 30 days following a Change
----------------------
in Control, the Company shall contribute to a "rabbi trust" an amount equal to
the amount that would be payable to the Executive upon a termination of
employment described in Section 7(b), under (i), (iii), (iv), (v), and (viii) of
such Section 7(b) (and the trustee of the rabbi trust shall be instructed to pay
such amounts (plus earnings thereon) to the Executive upon the Executive's
termination of employment, if the amounts due to the Executive hereunder are not
otherwise paid to the Executive by the Company).
6. Termination Due to Death or Disability.
Executive's employment and the Term shall terminate upon Executive's
death. The Company may terminate the employment of Executive as Chief Operating
Officer due to the Disability (as defined in Section 8(c)) of Executive. In the
event Executive's employment terminates due to Disability, the Term will
terminate at the expiration of the 30-day period set forth in Section 8(c),
absent the actions referred to therein being taken by Executive to return to
service and Executive's presentation to the Company of a certificate of good
health.
3
<PAGE>
Upon a termination of Executive's employment due to death or
Disability, all obligations of the Company and Executive under Sections 1
through 5 of this Agreement will immediately cease; provided, however, that
-------- -------
subject to the provisions of Section 12(i), the Company will pay Executive (or,
in the case of Executive's death, his beneficiaries or estate), and Executive
(or, in the case of Executive's death, his beneficiaries or estate) will be
entitled to receive, the following:
(i) The unpaid portion of annual base salary at the rate payable, in
accordance with Section 4(a) hereof, at the date of termination of
employment, pro rated through such date of termination;
(ii) All vested, nonforfeitable amounts owing or accrued at the date of
termination of employment under any compensation and benefit plans,
programs and arrangements set forth or referred to in Sections 4(b),
5(a) and 5(b) (including any earned and vested annual incentive
compensation) in which Executive theretofore participated, under the
terms and conditions of the plans, programs and arrangements (and
agreements and documents thereunder) pursuant to which such
compensation and benefits were granted;
(iii) In lieu of any annual incentive compensation under Section 4(b) for
the year in which Executive's employment terminated (unless
otherwise payable under (ii) above), an amount equal to the average
annual incentive compensation paid to Executive in the three years
immediately preceding the year of termination (or, if Executive was
not eligible to receive or did not receive such incentive
compensation for any year in such three-year period, the Executive's
target annual incentive compensation for such year shall be used to
calculate average annual incentive compensation) (the "Severance
Annual Incentive Amount"), multiplied by a fraction the numerator of
which is the number of days Executive was employed in the year of
termination and the denominator of which is the total number of days
in the year of termination; and
(iv) Reimbursement of reasonable business expenses and disbursements
incurred by Executive prior to such termination of employment, as
authorized under Section 5(c).
In addition, upon a termination of Executive's employment due to death or
Disability, stock options then held by Executive will be exercisable to the
extent and for such periods indicated in, and otherwise be governed by, the
plans and programs (and agreements and other documents thereunder) pursuant to
which such stock options were granted. Furthermore, if Executive's employment
terminates due to Disability, for the period extending from such termination
until Executive reaches age 65, Executive shall continue to participate in all
employee benefit plans, programs and arrangements under Section 5(b) providing
health, medical and life insurance benefits in which Executive was participating
immediately prior to termination and the terms of which allow Executive's
continued participation, as if Executive had continued in employment with the
Company during such period (except that additional years of service shall not be
credited
4
<PAGE>
as a result of such deemed continued participation following termination), or,
if such plans, programs or arrangements do not allow Executive's continued
participation, Executive shall receive a cash payment equivalent on an after-tax
basis to the value of the additional benefits Executive would have received
under such employee benefit plans, programs and arrangements in which Executive
was participating immediately prior to termination, as if Executive had received
credit under such plans, programs and arrangements for service and age with the
Company during such period following Executive's termination as provided in this
sentence, with such benefits payable by the Company at the same times and in the
same manner as such benefits would have been received by Executive under such
plans (it being understood that the value of any insurance-provided benefits
will be based on the premium cost to Executive, which shall not exceed the
highest risk premium charged by a carrier having an investment grade or better
credit rating). However, in the case of termination of Executive's employment
due to Disability, Executive must continue to comply with his covenants and
agreements set forth in Section 10 in order to continue receiving the
compensation and benefits set forth in the previous sentence. Amounts payable
under Sections 6(i), (ii), (iii) and (iv) above or in lieu of health, medical
and life insurance benefits pursuant to this paragraph will be paid as promptly
as practicable after termination of Executive's employment and in no event more
than 45 days after such termination; provided, however, that, to the extent that
-------- -------
the Company would not be entitled to deduct any such payments under Section
162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), such
payments shall be made at the earliest time that the payments would be
deductible by the Company without limitation under Section 162(m) (unless this
provision is waived by the Company).
7. Termination of Employment For Reasons Other Than Death or Disability.
(a) Termination by the Company for Cause and Termination by Executive
-----------------------------------------------------------------
Other Than For Good Reason. In accordance with the provisions of this Section
- --------------------------
7(a), the Company may terminate the employment of Executive as Chief Operating
Officer for Cause at any time prior to a Change in Control, and Executive may
terminate his employment as Chief Operating Officer voluntarily for reasons
other than Good Reason (as defined in Section 8(d)) at any time.
Upon a termination of Executive's employment by the Company for Cause
or by the Executive for reasons other than Good Reason, the Term will
immediately terminate, and all obligations of the Company and Executive under
Sections 1 through 5 of this Agreement will immediately cease; provided,
--------
however, that, subject to the provisions of Section 12(i), the Company shall pay
- -------
Executive, and Executive shall be entitled to receive, the following:
(i) The unpaid portion of annual base salary at the rate payable, in
accordance with Section 4(a) hereof, at the date of termination of
employment, pro rated through such date of termination;
(ii) All vested, nonforfeitable amounts owing or accrued at the date of
termination of employment under any compensation and benefit plans,
programs and arrangements set forth or referred to in Sections 4(b),
5(a) and 5(b) hereof (including any earned and vested annual incentive
compensation and long-term incentive award)
5
<PAGE>
in which Executive theretofore participated, under the terms and
conditions of the plans, programs and arrangements (and agreements
and documents thereunder) pursuant to which such compensation and
benefits were granted; and
(iii) Reimbursement of reasonable business expenses and disbursements
incurred by Executive prior to such termination of employment, as
authorized under Section 5(c).
Amounts payable under Section 7(a)(i), (ii) and (iii) will be paid as promptly
as practicable after termination of Executive's employment; provided, however,
-------- -------
that, to the extent that the Company would not be entitled to deduct any such
payments under Section 162(m) of the Code, such payments shall be made at the
earliest time that the payments would be deductible by the Company without
limitation under Section 162(m) (unless this provision is waived by the
Company).
(b) Termination by the Company Without Cause and Termination by
-----------------------------------------------------------
Executive for Good Reason. In accordance with the provisions of this Section
- -------------------------
7(b), the Company may terminate the employment of Executive without Cause,
including after a Change in Control, upon 90 days' written notice to Executive,
and Executive may terminate his employment with the Company for Good Reason upon
90 days' written notice to the Company; provided, however, that, if the basis
-------- -------
for such Good Reason is remediable, the Company shall have 30 days after receipt
of such notice to remedy the basis for such Good Reason. Notwithstanding the
foregoing, the Company may terminate Executive without Cause and without
providing 90 days' written notice to Executive if the Company pays Executive the
portion of his then-current annual base salary under Section 4(a) for such 90-
day period and credits Executive with service for 90 days for all purposes
hereunder.
Upon a termination of Executive's employment by the Company without
Cause, or termination of Executive's employment by the Executive for Good
Reason, the Term will immediately terminate and all obligations of the parties
under Sections 1 through 5 of this Agreement will immediately cease, except that
subject to the provisions of Section 12(i) the Company shall pay Executive, and
Executive shall be entitled to receive, the following:
(i) A lump sum cash payment in an amount equal to the product of (x) the
sum of (A) Executive's then-current annual base salary at the rate
payable under Section 4(a) immediately prior to termination plus (B)
the Severance Annual Incentive Amount multiplied by (y) the Severance
Multiplier. For purposes of this Section 7(b)(i), the "Severance
Multiplier" shall be one and one-quarter (1.25); provided, however,
-------- -------
that if the employment of Executive is terminated by the Company
without Cause or by Executive for Good Reason during the period
beginning 60 days prior to a Change in Control and ending two years
after such Change in Control, the "Severance Multiplier" shall be one
and three-quarters (1.75).
(ii) The unpaid portion of annual base salary at the rate payable, in
accordance with Section 4(a) hereof, at the date of termination of
employment, pro rated through such date of termination;
6
<PAGE>
(iii) All vested, nonforfeitable amounts owing or accrued at the date of
termination of employment under any compensation and benefit plans,
programs and arrangements set forth or referred to inc Sections
4(b), 5(a) and 5(b) hereof (including any vested and earned annual
incentive compensation) in which Executive theretofore participated
and all amounts not vested and nonforfeitable, but owing and accrued
at the date of termination of employment, under such benefit plans,
programs and arrangements, to the extent that such amounts would be
vested and nonforfeitable if such amounts become vested, under the
terms and conditions of the plans, programs and arrangements (and
agreements and documents thereunder) pursuant to which such
compensation and benefits were granted;
(iv) In lieu of any annual incentive compensation under Section 4(b) for
the year in which Executive's employment terminated (unless
otherwise payable under Section 7(b)(iii)), an amount equal to the
Severance Annual Incentive Amount, which, unless a termination
occurs during the period beginning 60 days prior to a Change in
Control and ending two years after a Change in Control, shall be
multiplied by a fraction, the numerator of which is the number of
days Executive was employed in the year of termination and the
denominator of which is the total number of days in the year of
termination; and
(v) Reimbursement of reasonable business expenses and disbursements
incurred by Executive prior to such termination of employment, as
authorized under Section 5(c).
In addition, upon a termination of Executive's employment by
the Company without Cause, or termination of Executive's employment
by the Executive for Good Reason, stock options then held by
Executive will be exercisable to the extent and for such periods
indicated in, and otherwise be governed by, the plans and programs
(and agreements and other documents thereunder) pursuant to which
such stock options were granted. Furthermore, for a period of one
(1) year after such termination, Executive shall continue to
participate in all employee benefit plans, programs and arrangements
under Section 5(c) providing health, medical and life insurance
benefits in which Executive was participating immediately prior to
termination and the terms of which allow Executive's continued
participation, as if Executive had continued in employment with the
Company during such period or, if such plans, programs or
arrangements do not allow Executive's continued participation, a
cash payment equivalent on an after-tax basis to the value of the
additional benefits Executive would have received under such
employee benefit plans, programs and arrangements in which Executive
was participating immediately prior to termination, as if Executive
had received credit under such plans, programs and arrangements for
service and age with the Company during such period following
Executive's termination, with such benefits payable by the Company
at the same times and in the same manner as such benefits would have
been received by Executive under such plans (it being understood
that the value of
7
<PAGE>
any insurance-provided benefits will be based on the premium cost to
Executive, which shall not exceed the highest risk premium charged by
a carrier having an investment grade or better credit rating). Amounts
payable under Sections 7(b)(i), (ii), (iii), (iv) and (v) above or in
lieu of health, medical and life insurance benefits pursuant to this
paragraph will be paid as promptly as practicable after termination of
Executive's employment, and in no event more than 45 days after such
termination; provided, however, that, if such termination is a
-------- -------
termination by the Company without Cause and prior to a Change in
Control, to the extent that the Company would not be entitled to
deduct any such payments under Section 162(m) of the Code, such
payments shall be made at the earliest time that the payments would be
deductible by the Company without limitation under Section 162(m)
(unless this provision is waived by the Company), but in no event
later than 12 months subsequent to the date of termination.
8. Definitions Relating to Termination Events.
(a) "Cause." For purposes of this Agreement, "Cause" shall mean
--------
Executive's gross misconduct (as defined below) or willful (as defined below)
and material breach of Section 10 of this Agreement. For purposes of this
definition, "gross misconduct" shall mean (A) a felony conviction in a court of
law under applicable federal or state laws which results in material damage to
the Company or its subsidiaries or materially impairs the value of the
Executive's services to the Company, or (B) willfully engaging in one or more
acts, or willfully omitting to act in accordance with duties hereunder, which
act or omission is demonstrably and materially damaging to the Company or its
subsidiaries, including acts and omissions which materially impair the ability
of the Company to continue its business in accordance with applicable
governmental and regulatory rules and regulations. For purposes of this
Agreement, an act or failure to act on Executive's part shall be considered
"willful" if it was done or omitted to be done by him not in good faith, and
shall not include any act or failure to act resulting from any incapacity of
Executive. Notwithstanding the foregoing, Executive may not be terminated for
Cause unless and until there shall have been delivered to him, within six months
after the Board (A) had knowledge of conduct or an event allegedly constituting
Cause and (B) had reason to believe that such conduct or event could be grounds
for Cause, a copy of a resolution duly adopted by a majority affirmative vote of
the membership of the Board (excluding Executive) (after giving Executive
reasonable notice specifying the nature of the grounds for such termination and
not less than 30 days to correct the acts or omissions complained of, if
correctable, and affording Executive the opportunity, together with his counsel,
to be heard before the Board) finding that, in the good faith opinion of the
Board, Executive was guilty of conduct set forth above in this Section 8(a).
(b) "Change in Control." A "Change in Control" shall be deemed to
--------------------
have occurred upon the happening of any of the following events:
(i) An acquisition by any individual, entity or group, within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), (a "Person") of beneficial ownership
(within the meaning of Rule 13d-3
8
<PAGE>
promulgated under the Exchange Act) of more than fifty percent (50%) of
either (1) the then outstanding shares of Common Stock of the Company (the
"Outstanding Common Stock") or (2) the combined voting power of the then
outstanding voting securities of the Company entitled to vote generally in
the election of directors (the "Outstanding Voting Securities"); excluding,
however, the following: (1) any acquisition directly from the Company,
other than an acquisition by virtue of the exercise of a conversion
privilege unless the security being so converted was itself acquired
directly from the Company, (2) any acquisition by the Company; (3) any
acquisition by Joseph Fox, Avi Fox or any of their affiliates, (4) any
acquisition by any employee benefit plan (or related trust) sponsored or
maintained by the Company or by any Company controlled by the Company; or
(5) any acquisition by any Person pursuant to a transaction which complies
with clauses (1), (2) and (3) of subsection (iii) of this Section 8(b); or
(ii) Within any period of 24 consecutive months, a change in the
composition of the Board such that the individuals who, immediately prior
to such period, constituted the Board (such Board shall be hereinafter
referred to as the "Incumbent Board") cease for any reason to constitute at
least a majority of the Board; provided, however, for purposes hereof, that
any individual who becomes a member of the Board during such period, whose
election, or nomination for election by the Company's stockholders, was
approved by a vote of at least a majority of those individuals who are
members of the Board and who were also members of the Incumbent Board (or
deemed to be such pursuant to this proviso) shall be considered as though
such individual were a member of the Incumbent Board; but, provided
further, that any such individual whose initial assumption of office occurs
as a result of either an actual or threatened election contest (as such
terms are used in Rule 14a-11 of Regulation 14A promulgated under the
Exchange Act) or other actual or threatened solicitation of proxies or
consents by or on behalf of a Person other than the Board shall not be so
considered as a member of the Incumbent Board; or
(iii) The approval by the stockholders of the Company of a
reorganization, merger or consolidation or sale or other disposition of all
or substantially all of the assets of the Company ("Corporate
Transaction"); excluding, however, such a Corporate Transaction pursuant to
which (1) all or substantially all of the individuals and entities who are
the beneficial owners, respectively, of the Outstanding Common Stock and
Outstanding Voting Securities immediately prior to such Corporate
Transaction will beneficially own, directly or indirectly, more than sixty
percent (60%) of, respectively, the outstanding shares of common stock, and
the combined voting power of the outstanding voting securities entitled to
vote generally in the election of directors, as the case may be, of the
Company resulting from such Corporate Transaction (including, without
limitation, a Company which as a result of such transaction owns the
Company or all or substantially all of the Company's assets, either
directly or through one or more subsidiaries) in substantially the same
proportions as their ownership, immediately prior to such Corporate
Transaction, of the Outstanding Common Stock and Outstanding Voting
Securities, as the case may be, (2) no Person (other than the Company or
any employee benefit plan (or related trust) sponsored or maintained by the
Company, by any Company controlled by the Company or by such Company
resulting from such Corporate Transaction) will
9
<PAGE>
beneficially own, directly or indirectly, more than twenty-five percent
(25%) of, respectively, the outstanding shares of common stock of the
Company resulting from such Corporate Transaction or the combined voting
power of the outstanding voting securities of such Company entitled to vote
generally in the election of directors, except to the extent that such
ownership existed with respect to the Company prior to the Corporate
Transaction, and (3) individuals who were members of the Board immediately
prior to the approval by the stockholders of the Company of such Corporate
Transaction will constitute at least a majority of the members of the board
of directors of the Company resulting from such Corporate Transaction; or
(iv) The approval by the stockholders of the Company of a complete
liquidation or dissolution of the Company, other than to a corporation
pursuant to a transaction which would comply with clauses (1), (2) and (3)
of subsection (iii) of this Section 1(b), assuming for this purpose that
such transaction were a Corporate Transaction.
(c) "Disability." "Disability" means the failure of Executive to
-------------
render and perform the services required of him under this Agreement, for a
total of 180 days of more during any consecutive 12 month period, because of any
physical or mental incapacity or disability as determined by a physician or
physicians selected by the Company and reasonably acceptable to Executive,
unless, within 30 days after Executive has received written notice from the
Company of a proposed termination due to such absence, Executive shall have
returned to the full performance of his duties hereunder and shall have
presented to the Company a written certificate of Executive's good health
prepared by a physician selected by the Company and reasonably acceptable to
Executive.
(d) "Good Reason." For purposes of this Agreement, "Good Reason"
--------------
shall mean, without Executive's prior written consent, (A) a material change,
adverse to Executive, in Executive's positions, titles or offices as set forth
in Section 3(a), status, rank, nature of responsibilities or authority within
the Company, including, except in connection with the termination of Executive's
employment for Cause or Disability or as a result of Executive's death, or as
requested or consented to by Executive, (B) an assignment of any duties to
Executive which are inconsistent with his status, duties, responsibilities and
authorities under Section 3(a), (C) a decrease in annual base salary or other
compensation opportunities and maximums or benefits provided under this
Agreement, (D) any other failure by the Company to perform any material
obligation under, or breach by the Company of any material provision of, this
Agreement, (E) a relocation of the corporate offices of the Company more than 35
miles from the latest location of such offices prior to the date of a Change in
Control, (F) any failure to secure the agreement of any successor corporation or
other entity to the Company to fully assume the Company's obligations under this
Agreement in a form reasonably acceptable to Executive, and (G) any attempt by
the Company to terminate Executive for Cause which does not result in a valid
termination for Cause, except in the case that valid grounds for termination for
Cause exist but are corrected as permitted under Section 8(a).
10
<PAGE>
9. Excise Tax Gross-Up.
If it shall be determined that any payment or benefit received or to be
received by Executive under this Agreement or any other plan, arrangement or
agreement of the Company (all such payments and benefits a "Payment"), would be
subject to the excise tax imposed by Section 4999 of the Code (the "Excise
Tax"), then the Company shall pay to Executive an additional payment (a "Gross-
Up Payment") in an amount necessary to reimburse Executive, on an after-tax
basis, for the Excise Tax and for any federal, state and local income tax and
excise tax (including any interest and penalties imposed with respect to such
taxes) that may be imposed by reason of the Payment. For purposes of
determining the amount of any Gross-Up Payment, Executive shall be deemed to pay
federal, state and local income taxes at the highest applicable marginal rate of
taxation in the calendar year in which the Gross-Up Payment is to be made. All
determinations required to be made under this Section 9, including whether a
Gross-Up Payment is required and the amount of such Gross-Up Payment, shall be
made by a nationally known independent accounting firm regularly retained by the
Company (the "Accounting Firm") which shall provide detailed supporting
calculations both to the Company and Executive within 15 business days of the
request for such determination. Such request may be made by either party. The
Company shall pay the fees and expenses of the Accounting Firm in connection
with any determinations hereunder. The Gross-Up Payment shall be paid by the
Company within 10 days of the Accounting Firm's determination of the amount
thereof.
10. Executive Covenants.
(a) Executive's Acknowledgment. Executive agrees and acknowledges that in
--------------------------
order to assure the Company that the Company will retain its value as a going
concern, it is necessary that Executive undertake not to utilize his special
knowledge of the Company's business and his relationships with customers and
suppliers to compete with the Company. Executive further acknowledges that:
(i) Executive is one of a limited number of persons who has
developed the Company's business;
(ii) Executive has occupied a position of trust and confidence with
the Company prior to the date of this Agreement and, during such period and
Employee's employment under this Agreement, Employee has acquired and will
acquire an intimate knowledge of proprietary and confidential information
concerning the Company and its business;
(iii) the agreements and covenants contained in Sections 10(b), (c),
(d), (e), (f) and (g) are essential to protect the Company and the goodwill
of its business;
(iv) Executive's employment with the Company has special, unique and
extraordinary value to the Company, and the Company would be irreparably
damaged if Executive were to provide services to any person or entity or
otherwise act in violation of the provisions of this Agreement;
11
<PAGE>
(v) the scope and duration of the restrictive covenants in Section
10(b) are reasonably designed to protect a protected interest of the
Company and are not excessive in light of the circumstances; and
(vi) Executive has a means to support himself and his dependents other
than by engaging in conduct prohibited by the restrictive covenants in
Section 10(b), and the provisions of Sections 10(b) will not impair such
ability.
(b) Non-Competition; Non-Solicitation; Non-Interference. During the
---------------------------------------------------
Term and for a period of two years after the termination of Executive's
employment hereunder, Executive will not by himself or in conjunction with
others, directly or indirectly engage (either as owner, investor, partner,
member stockholder, employer, employee, consultant, advisor, manager or
director) in any business in the United States which, at the time of such
termination, is directly or indirectly in competition with a business then
conducted or proposed to be conducted by the Company or any of its subsidiaries;
provided, however, this the limitation shall not apply if Executive's employment
- -------- --------
is terminated as a result of a termination by the Company without Cause or a
termination by Executive for Good Reason. During the Term and for a period of
three years after the termination of Executive's employment hereunder, Executive
will not by himself or in conjunction with others, directly or indirectly (i)
induce any account holders of the Company or any of its subsidiaries with whom
Executive has had contacts or relationships, directly or indirectly, during and
within the scope of his employment with the Company, to curtail or cancel their
relationship with the Company or its subsidiaries; or (ii) induce, or attempt to
influence, any employee of the Company or any of its subsidiaries to terminate
their employment therewith. The provisions of the first sentence of this
Section 10(b) and clauses (ii) and (iii) of this Section 10(b) are separate and
distinct commitments independent of each of the other subparagraphs. It is
agreed that the ownership of not more than one percent of the equity securities
of any company having securities listed on an exchange or regularly traded in an
over-the-counter market shall not, of itself, be deemed inconsistent with the
first sentence of this Section 10(b).
(c) Non-Disclosure. Executive shall not, at any time during the Term
--------------
and thereafter (including following Executive's termination of employment for
any reason), disclose, use, transfer or sell, except in the course of employment
with, or providing other service to, the Company, any confidential or
proprietary information of the Company and its subsidiaries so long as such
information has not otherwise been publicly disclosed or is not otherwise in the
public domain, except as required by law or pursuant to legal process.
(d) Return of Company Materials Upon Termination. Executive
--------------------------------------------
acknowledges that all records and documents containing confidential or
proprietary information of the Company or its subsidiaries prepared by Executive
or coming into his possession by virtue of his employment by the Company are and
will remain the property of the Company and its subsidiaries. Upon termination
of his employment with the Company, Executive shall immediately return to the
Company all such items and all copies of such items, in his possession.
(e) Cooperation With Regard to Litigation. Executive agrees to
-------------------------------------
cooperate with the Company, during the Term and thereafter (including following
Executive's termination of
12
<PAGE>
employment for any reason), by making himself available to testify on behalf of
the Company or any subsidiary or affiliate of the Company, in any action, suit
or proceeding, whether civil, criminal, administrative or investigative, and to
assist the Company, or any subsidiary or affiliate of the Company, in any such
action, suit or proceeding, by providing information and meeting and consulting
with the Board or its representatives or counsel, or representatives or counsel
to the Company or any subsidiary or affiliate of the Company, as reasonably
requested and at a time mutually convenient to Executive and the Company. The
Company agrees to reimburse the Executive, on an after-tax basis, for all
expenses actually incurred in connection with his provision of testimony or
assistance.
(f) Non-Disparagement. Executive shall not, at any time during the
-----------------
Term and thereafter, make statements or representations, or otherwise
communicate, directly or indirectly, in writing, orally or otherwise, or take
any action which may, directly or indirectly, disparage or be damaging to the
Company or any of its subsidiaries or affiliates or their respective officers,
directors, employees, advisors, businesses or reputations. Notwithstanding the
foregoing, nothing in this Agreement shall preclude Executive from making
truthful statements or disclosures that are required by applicable law,
regulation or legal process.
(g) Inventions. Executive acknowledges that all inventions,
----------
innovations, discoveries, improvements, developments, methods, know-how,
designs, analyses, drawings, reports and all similar or related information
(whether or not patentable) which (i) relate to the then current business or any
anticipated business of the Company, the Company's research and development or
the Company's existing or future services or products and (ii) which are
conceived, developed or made by Executive while employed by the Company ("Work
Product") belong to the Company. Executive shall promptly disclose such Work
Product to the Company and perform all actions reasonably requested by the
Company (whether during or after his period of employment with the Company) to
establish and confirm such ownership (including the execution of assignments,
consents, powers of attorney and other instruments).
(h) Release of Employment Claims. Executive agrees, as a condition to
----------------------------
receipt of any termination payments and benefits provided for in Sections 6 and
7 herein (other than salary earned through the date of termination), that he
will execute a general release agreement, in a form satisfactory to the Company,
releasing any and all claims arising out of Executive's employment (other than
enforcement of this Agreement).
(i) Forfeiture of Outstanding Options. The provisions of Sections 6
---------------------------------
and 7 notwithstanding, if Executive materially fails to substantially comply
with any obligation imposed under this Section 10, all options to purchase
capital stock of the Company granted by the Company and then held by Executive
or a transferee of Executive shall be immediately forfeited, and thereupon such
options shall be canceled. Notwithstanding the foregoing, Executive shall not
forfeit any option unless and until there shall have been delivered to him,
within six months after the Board (A) had knowledge of conduct or an event
allegedly constituting grounds for such forfeiture and (B) had reason to believe
that such conduct or event could be grounds for such forfeiture, a copy of a
resolution duly adopted by a majority affirmative vote of the membership of the
Board (excluding Executive, if he is a director) at a meeting of the Board
called and held
13
<PAGE>
for such purpose (after giving Executive reasonable notice specifying the nature
of the grounds for such forfeiture, and not less than 30 days to correct the
acts or omissions complained of, if correctable, and affording Executive the
opportunity, together with his counsel, to be heard before the Board) finding
that, in the good faith opinion of the Board, Executive has engaged and
continues to engage in conduct set forth in this Section 10(i) which constitutes
grounds for forfeiture of Executive's options. Any such forfeiture shall apply
to such options notwithstanding any term or provision of any option agreement.
(j) Remedies. Executive acknowledges that the agreements and
--------
covenants in Sections 10(b), (c), (d), (e) and (f) are reasonable and necessary
for the protection of the Company's business interests, that in the event of any
actual or threatened violation of the covenants contained in Sections 10(b),
(c), (d), (e) and (f), the Company will suffer irreparable injury, Company's
damages will be difficult to ascertain and the Company's remedy at law will be
inadequate. Employee accordingly agrees that in the event of any actual or
threatened breach by him of any of the covenants set forth in Sections 10(b),
(c), (d), (e) and (f), the Company shall be entitled to injunctive and other
equitable relief, including immediate temporary injunctive and other equitable
relief, without bond and without the necessity of showing actual monetary
damages, subject to hearing as soon thereafter as possible. Nothing contained
herein shall be construed as prohibiting the Company from pursuing any other
remedies available to it for such breach or threatened breach, including the
recovery of any damages which it is able to prove.
(k) Survival. The provisions of this Section 10 shall survive the
--------
termination or expiration of this Agreement in accordance with the terms hereof.
11. Governing Law; Disputes; Arbitration.
(a) Governing Law. This Agreement is governed by and is to be
-------------
construed, administered and enforced in accordance with the laws of the State of
Illinois, without regard to Illinois conflicts of law principles, except insofar
as the Delaware General Corporation Law and federal laws and regulations may be
applicable. If, under the governing law, any portion of this Agreement is at
any time deemed to be in conflict with any applicable statute, rule, regulation,
ordinance or other principle of law, such portion shall be deemed to be modified
or altered to the extent necessary to conform thereto or, if that is not
possible, to be omitted from this Agreement. The invalidity of any such portion
shall not affect the force, effect, and validity of the remaining portion
hereof. If any court determines that any provision of Section 10 is
unenforceable because of the duration or geographic scope of such provision, it
is the parties' intent that such court shall have the power to modify the
duration or geographic scope of such provision, as the case may be, to the
extent necessary to render the provision enforceable, and, in its modified form,
such provision shall be enforced.
(b) Reimbursement of Expenses in Enforcing Rights. All reasonable
---------------------------------------------
costs and expenses (including reasonable fees and disbursements of counsel)
incurred by Executive in seeking to interpret this Agreement or enforce rights
pursuant to this Agreement shall be paid on behalf of or reimbursed to Executive
promptly by the Company, whether or not Executive is successful in asserting
such rights; provided, however, that no reimbursement shall be made of
-------- -------
14
<PAGE>
such expenses relating to any unsuccessful assertion of rights if and to the
extent that Executive's assertion of such rights was in bad faith or frivolous,
as determined by independent counsel mutually acceptable to the Executive and
the Company.
(c) Arbitration. Any dispute or controversy arising under or in
-----------
connection with this Agreement shall be settled exclusively by arbitration in
Chicago, Illinois by a panel of three arbitrators in accordance with the rules
of the American Arbitration Association in effect at the time of submission to
arbitration. Judgment may be entered on the arbitrators' award in any court
having jurisdiction. For purposes of entering any judgment upon an award
rendered by the arbitrators, the Company and Executive hereby consent to the
jurisdiction of any or all of the following courts: (i) the United States
District Court for the Northern District of Illinois, (ii) any of the courts of
the State of Illinois, or (iii) any other court having jurisdiction. The
Company and Executive further agree that any service of process or notice
requirements in any such proceeding shall be satisfied if the rules of such
court relating thereto have been substantially satisfied. The Company and
Executive hereby waive, to the fullest extent permitted by applicable law, any
objection which they may now or hereafter have to such jurisdiction and any
defense of inconvenient forum. The Company and Executive hereby agree that a
judgment upon an award rendered by the arbitrators may be enforced in other
jurisdictions by suit on the judgment or in any other manner provided by law.
Subject to Section 11(b), the Company shall bear all costs and expenses arising
in connection with any arbitration proceeding pursuant to this Section 11.
Notwithstanding any provision in this Section 11, Executive shall be entitled to
seek specific performance of Executive's right to be paid during the pendency of
any dispute or controversy arising under or in connection with this Agreement.
(d) Interest on Unpaid Amounts. Any amounts that have become payable
--------------------------
pursuant to the terms of this Agreement or any decision by arbitrators or
judgment by a court of law pursuant to this Section 11 but which are not timely
paid shall bear interest at the prime rate in effect at the time such payment
first becomes payable, as quoted in The Wall Street Journal (Midwest edition).
12. Miscellaneous.
(a) Integration. This Agreement cancels and supersedes any and all
-----------
prior agreements and understandings between the parties hereto with respect to
the employment of Executive by the Company and its subsidiaries. This Agreement
constitutes the entire agreement among the parties with respect to the matters
herein provided, and no modification or waiver of any provision hereof shall be
effective unless in writing and signed by the parties hereto. Executive shall
not be entitled to any payment or benefit under this Agreement which duplicates
a payment or benefit received or receivable by Executive under such prior
agreements and understandings or under any benefit or compensation plan of the
Company.
(b) Non-Transferability. Neither this Agreement nor the rights or
-------------------
obligations hereunder of the parties hereto shall be transferable or assignable
by Executive, except in accordance with the laws of descent and distribution or
as specified in Section 12(c). The
15
<PAGE>
Company may assign this Agreement and the Company's rights and obligations
hereunder, and shall assign this Agreement, to any Successor (as hereinafter
defined) which, by operation of law or otherwise, continues to carry on
substantially the business of the Company prior to the event of succession, and
the Company shall, as a condition of the succession, require such Successor to
agree to assume the Company's obligations under, and be bound by, this
Agreement. For purposes of this Agreement, "Successor" shall mean any person
that succeeds to, or has the practical ability to control (either immediately or
with the passage of time), the Company's business directly, by merger or
consolidation, or indirectly, by purchase of the Company's voting securities or
all or substantially all of its assets, or otherwise.
(c) Beneficiaries. Executive shall be entitled to designate (and
-------------
change, to the extent permitted under applicable law) a beneficiary or
beneficiaries to receive any compensation or benefits payable hereunder
following Executive's death.
(d) Notices. Whenever under this Agreement it becomes necessary to
-------
give notice, such notice shall be in writing, signed by the party or parties
giving or making the same, and shall be deemed to have been duly given (i) upon
actual receipt (or refusal of receipt) if delivered personally; (ii) three
business days following deposit, if sent by certified or registered mail, return
receipt requested, postage prepaid; (iii) one business day following deposit
with a documented overnight delivery service or (iv) upon transmission, if sent
by facsimile (with confirmation receipt and followed by a copy sent by regular
mail), in each case to the appropriate address or number as set forth below or
at such other address as may be designated by such party by like notice:
If to the Company:
Web Street, Inc.
510 Lake Cook Road, 4/th/ Floor
Deerfield, Illinois 60015
Attention: Joseph J. Fox
Stuart A. Cohn
Telephone: 847/444-4700
Facsimile: 847/267-9295
With a copy to:
Katten Muchin & Zavis
525 W. Monroe St., Suite 1600
Chicago, Illinois 60661
Attention: Mark D. Wood
Telephone: 312/902-5200
Facsimile: 312/902-1061
16
<PAGE>
If to Executive:
D. Jonathan Rosenberg
One Villa Verde #103
Buffalo Grove, Illinois 60689
Telephone: 847/398-0569
(e) Reformation. The invalidity of any portion of this Agreement
-----------
shall not be deemed to render the remainder of this Agreement invalid.
(f) Headings. The headings of this Agreement are for convenience of
--------
reference only and do not constitute a part hereof.
(g) No General Waivers. The failure of any party at any time to
------------------
require performance by any other party of any provision hereof or to resort to
any remedy provided herein or at law or in equity shall in no way affect the
right of such party to require such performance or to resort to such remedy at
any time thereafter, nor shall the waiver by any party of a breach of any of the
provisions hereof be deemed to be a waiver of any subsequent breach of such
provisions. No such waiver shall be effective unless in writing and signed by
the party against whom such waiver is sought to be enforced.
(h) No Obligation To Mitigate. Executive shall not be required to
-------------------------
seek other employment or otherwise to mitigate Executive's damages upon any
termination of employment; provided, however, that, to the extent Executive
-------- -------
receives from a subsequent employer health or other insurance benefits that are
substantially similar to the benefits referred to in Section 5(c) hereof, any
such benefits to be provided by the Company to Executive following the Term
shall be correspondingly reduced.
(i) Offsets; Withholding. The amounts required to be paid by the
--------------------
Company to Executive pursuant to this Agreement shall not be subject to offset
other than with respect to any amounts that are owed to the Company by Executive
due to his receipt of funds as a result of his fraudulent activity. The
foregoing and other provisions of this Agreement notwithstanding, all payments
to be made to Executive under this Agreement, including under Sections 6 and 7,
or otherwise by the Company will be subject to required withholding taxes and
other required deductions.
(j) Successors and Assigns. This Agreement shall be binding upon and
----------------------
shall inure to the benefit of Executive, his heirs, executors, administrators
and beneficiaries, and shall be binding upon and inure to the benefit of the
Company and its successors and assigns.
13. Income Tax Treatment.
Executive and the Company acknowledge that it is the intention of the
Company to deduct all amounts paid by the Company to Executive pursuant to this
Agreement, including
17
<PAGE>
under Sections 6 and 7 as ordinary and necessary business expenses for income
tax purposes. Executive agrees and represents that he will treat all such
amounts as ordinary income for income tax purposes, and should he report such
amounts as other than ordinary income for income tax purposes, he will indemnify
and hold the Company harmless from and against any and all taxes, penalties,
interest, costs and expenses, including reasonable attorneys' and accounting
fees and costs, which are incurred by Company directly or indirectly as a result
thereof.
14. Key Man Life Insurance.
If the Company, in its sole discretion, desires to procure "key man"
insurance covering the life of Executive, Executive shall cooperate with the
Company in procuring such insurance and shall, at the request of the Company,
submit to such medical examinations, supply such information and execute such
documents as may be required by the insurance company to which the Company has
applied for insurance. Executive shall use his best efforts to qualify for the
standard premium category of such insurance company. Executive shall have no
interest whatsoever in any "key man" insurance policy procured by the Company.
18
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
WEB STREET, INC.
By: /s/ Stuart A. Cohn
--------------------------------
Name: Stuart A. Cohn
Title: Executive Vice President,
General Counsel
EXECUTIVE
/s/ D. Jonathan Rosenberg
-----------------------------------
D. Jonathan Rosenberg
Chief Operating Officer
<PAGE>
January 28, 2000
[LETTERHEAD OF FLEET SECURITIES, INC.]
VIA AIRBORNE
Mr. Joseph Fox
President
WebStreet Securities, Inc.
510 Lake Cook Road
Deerfield, IL 60015
Dear Mr. Fox:
We write in reference to Stuart A. Cohn's letter dated January 7, 2000 to
Mr.Pascal J. Mercurio wherein Mr. Cohn advised of WebStreet Securities, Inc.'s
intention not to renew the Clearing Agreement dated April 10, 1997 between our
two organizations (the "Clearing Agreement").
Please be advised that pursuant to Mr. Cohn's letter the Clearing Agreement
will terminate on April 30, 2000. We strongly suggest that you make alternative
clearing arrangements as soon as possible so that the conversion of accounts can
be accomplished without undue delay.
However, as you were advised telephonically and in a meeting on January 18,
2000, in the event your accounts are not transferred by the April 30th deadline,
we are willing to provide clearing services on a month-to-month basis with the
following changes to the current pricing:
1. Ticket charges will be $8.75 for each equity trade and $9.75 for each
option trade plus the schedule amounts for options reflected in the
Clearing Agreement under the section entitled "Fees and Compensation".
2. All rebates for OTC or listed orders, regardless of where executed,
will be based on the amount that the market maker or exchange
executing the order pays for order flow and WebStreet will receive
only that amount.
<PAGE>
In all other respects, the terms and conditions in the Clearing Agreement,
including all amendments, will govern the provision of our services on and after
May 1, 2000 and until the conversion of accounts has been completed.
Please indicate WebStreet's acceptance of the above by signing and
returning the original and one copy of this letter to the undersigned at your
earliest convenience but in any event no later than February 7, 2000. The other
copy is for your records. We are also willing to negotiate a new one-year
clearing agreement based on the proposal we provided during the January 18, 2000
meeting but your agreement to the terms and conditions outlined in this letter
do not relate in any way, and will not include, any aspects of our proposal for
a one-year agreement.
Very truly yours,
/s/ Charlie Seigel
--------------
CS:cw
/s/ Joseph Fox
- -----------------
ACCEPTED and AGREED TO:
WEBSTREET SECURITIES, INC.
By: Joseph Fox
----------
Name: Joseph Fox
----------
Title: President
---------
Date: 2/07/00
-------
<PAGE>
BUSINESS LOAN AGREEMENT
================================================================================
Borrower: Web Street, Inc. Lender: LASALLE BANK NATIONAL
(TIN: 36-4212401) ASSOCIATION
510 Lake Cook Road 135 South LaSalle Street
Deerfield, Il 60015 Chicago, Il 60603
================================================================================
THIS BUSINESS LOAN AGREEMENT BETWEEN WEB STREET, INC. ("BORROWER") AND LASALLE
BANK NATIONAL ASSOCIATION ("LENDER") IS MADE AND EXECUTED ON THE FOLLOWING TERMS
AND CONDITIONS. BORROWER HAS RECEIVED PRIOR COMMERCIAL LOANS FROM LENDER OR HAS
APPLIED TO LENDER FOR A COMMERCIAL LOAN OR LOANS AND OTHER FINANCIAL
ACCOMMODATIONS, INCLUDING THOSE WHICH MAY BE DESCRIBED ON ANY EXHIBIT OR
SCHEDULE ATTACHED TO THIS AGREEMENT. ALL SUCH LOANS AND FINANCIAL
ACCOMMODATIONS, TOGETHER WITH ALL FUTURE LOANS AND FINANCIAL ACCOMMODATIONS FROM
LENDER TO BORROWER, ARE REFERRED TO IN THIS AGREEMENT INDIVIDUALLY AS THE "LOAN"
AND COLLECTIVELY AS THE "LOANS." BORROWER UNDERSTANDS AND AGREES THAT: (A) IN
GRANTING, RENEWING, OR EXTENDING ANY LOAN, LENDER IS RELYING UPON BORROWER'S
REPRESENTATIONS, WARRANTIES, AND AGREEMENTS, AS SET FORTH IN THIS AGREEMENT; (B)
THE GRANTING, RENEWING, OR EXTENDING OF ANY LOAN BY LENDER AT ALL TIMES SHALL BE
SUBJECT TO LENDER'S SOLE JUDGMENT AND DISCRETION; AND (C) ALL SUCH LOANS SHALL
BE AND SHALL REMAIN SUBJECT TO THE FOLLOWING TERMS AND CONDITIONS OF THIS
AGREEMENT.
TERM. This Agreement shall be effective as of MARCH 7, 2000, and shall continue
thereafter until all Indebtedness of Borrower to Lender has been performed in
full and the parties terminate this Agreement in writing.
DEFINITIONS. The following words shall have the following meanings when used in
this Agreement. Terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code. All references
to dollar amounts shall mean amounts in lawful money of the United States of
America.
AGREEMENT. The word "Agreement" means this Business Loan Agreement, as
this Business Loan Agreement may be amended or modified from time to time,
together with all exhibits and schedules attached to this Business Loan
Agreement from time to time.
BORROWER. The word "Borrower" means Web Street, Inc. The word "Borrower"
also includes, as applicable, all subsidiaries and affiliates of Borrower
as provided below in the paragraph titled "Subsidiaries and Affiliates."
CERCLA. The word "CERCLA" means the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, as amended.
CASH FLOW. The words "Cash Flow" mean net income after taxes, and
exclusive of extraordinary gains and income, plus depreciation and
amortization.
COLLATERAL. The word "Collateral" means and includes without limitation
all property and assets granted as collateral security for a Loan, whether
real or personal property, whether granted directly or indirectly, whether
granted now or in the future, and whether granted in the form of a security
interest, mortgage, deed of trust, assignment, pledge, chattel mortgage,
chattel trust, factor's lien, equipment trust, conditional sale, trust
receipt, lien, charge, lien or title retention contract, lease or
consignment intended as a security device, or any other security or lien
interest whatsoever, whether created by law, contract, or otherwise.
DEBT. The word "Debt" means all of Borrower's liabilities excluding
Subordinated Debt.
ERISA. The word "ERISA" means the Employee Retirement Income Security
Act of 1974, as amended.
EVENT OF DEFAULT. The words "Event of Default" mean and include without
limitation any of the Events of Default set forth below in the section
titled "EVENTS OF DEFAULT."
GRANTOR. The word "Grantor" means and includes without limitation each and
all of the persons or entities granting a Security Interest in any
Collateral for the Indebtedness, including without limitation all Borrowers
granting such a Security Interest.
GUARANTOR. The word "Guarantor" means and includes without limitation each
and all of the guarantors, sureties, and accommodation parties in
connection with any Indebtedness.
INDEBTEDNESS. The word "Indebtedness" means and includes without
limitation all Loans, together with all other obligations, debts and
liabilities of Borrower to Lender, or any one or more of them, as well as
all claims by Lender against Borrower, or any one or more of them; whether
now or hereafter existing, voluntary or involuntary, due or not due,
absolute or contingent, liquidated or unliquidated; whether Borrower may be
liable individually or jointly with others; whether Borrower may be
obligated as a guarantor, surety, or otherwise; whether recovery upon such
Indebtedness may be or hereafter may become barred by any statute of
limitations; and whether such Indebtedness may be or hereafter may become
otherwise unenforceable.
LENDER. The word "Lender" means LASALLE BANK NATIONAL ASSOCIATION, its
successors and assigns.
LIQUID ASSETS. The words "Liquid Assets" mean Borrower's cash on hand plus
Borrower's readily marketable securities.
LOAN. The word "Loan" or "Loans" means and includes without limitation any
and all commercial loans and financial accommodations from Lender to
Borrower, whether now or hereafter existing, and however evidenced,
including without limitation those loans and financial accommodations
described herein or described on any exhibit or schedule attached to this
Agreement from time to time.
NOTE. The word "Note" means and includes without limitation Borrower's
promissory note or notes, if any, evidencing Borrower's Loan obligations in
favor of Lender, as well as any substitute, replacement or refinancing note
or notes therefor.
PERMITTED LIENS. The words "Permitted Liens" mean: (a) liens and security
interests securing Indebtedness owed by Borrower to Lender; (b) liens for
taxes, assessments, or similar charges either not yet due or being
contested in good faith; (c) liens of materialmen, mechanics, warehousemen,
or carriers, or other like liens arising in the ordinary course of business
and securing obligations which are not yet delinquent; (d) purchase money
liens or purchase money security interests upon or in any property acquired
or held by Borrower in the ordinary course of business to secure
indebtedness outstanding on the date of this Agreement or permitted to be
incurred under the paragraph of this Agreement titled "Indebtedness and
Liens"; (e) liens and security interests which, as of the date of this
Agreement, have been disclosed to and approved by the Lender in writing;
and (f) those liens and security interests which in the aggregate
constitute an immaterial and insignificant monetary amount with respect to
the net value of Borrower's assets.
RELATED DOCUMENTS. The words "Related Documents" mean and include without
limitation all promissory notes, credit agreements, loan agreements,
environmental agreements, guaranties, security agreements, mortgages, deeds
of trust, and all other instruments, agreements and documents, whether now
or hereafter existing, executed in connection with the Indebtedness.
SECURITY AGREEMENT. The words "Security Agreement" mean and include
without limitation any agreements, promises, covenants, arrangements,
understandings or other agreements, whether created by law, contract, or
otherwise, evidencing, governing, representing, or creating a Security
Interest.
SECURITY INTEREST. The words "Security Interest" mean and include without
limitation any type of collateral security, whether in the form of a lien,
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03-07-2000 BUSINESS LOAN AGREEMENT Page 2
Loan No (Continued)
================================================================================
charge, mortgage, deed of trust, assignment, pledge, chattel mortgage,
chattel trust, factor's lien, equipment trust, conditional sale, trust
receipt, lien or title retention contract, lease or consignment intended as
a security device, or any other security or lien interest whatsoever,
whether created by law, contract, or otherwise.
SARA. The word "SARA" means th Superfund Amendments and
Reauthorization Act of 1986 as now or hereafter amended.
SUBORDINATED DEBT. The words "Subordinated Debt" mean indebtedness and
liabilities of Borrower which have been subordinated by written agreement
to indebtedness owed by Borrower to Lender in form and substance acceptable
to Lender.
TANGIBLE NET WORTH. The words "Tangible Net Worth" mean Borrower's total
assets excluding all intangible assets (i.e., goodwill, trademarks,
patents, copyrights, organizational expenses, and similar intangible items,
but including leaseholds and leasehold improvements) less total Debt.
WORKING CAPITAL. The words "Working Capital" mean Borrower's current
assets, excluding prepaid expenses, less Borrower's current liabilities.
CONDITIONS PRECEDENT TO EACH ADVANCE. Lender's obligation to make the initial
Loan Advance and each subsequent Loan Advance under this Agreement shall be
subject to the fulfillment to Lender's satisfaction of all of the conditions set
forth in this Agreement and in the Related Documents.
LOAN DOCUMENTS. Borrower shall provide to Lender in form satisfactory to
Lender the following documents for the Loan: (a) the Note, (b) Security
Agreements granting to Lender security interests in the Collateral, (c)
Financing Statements perfecting Lender's Security Interests; (d) evidence
of insurance as required below; and (e) any other documents required under
this Agreement or by Lender or its counsel.
BORROWER'S AUTHORIZATION. Borrower shall have provided in form and
substance satisfactory to Lender properly certified resolutions, duly
authorizing the execution and delivery of this Agreement, the Note and the
Related Documents, and such other authorizations and other documents and
instruments as Lender or its counsel, in their sole discretion, may
require.
PAYMENT OF FEES AND EXPENSES. Borrower shall have paid to Lender all fees,
charges, and other expenses which are then due and payable as specified in
this Agreement or any Related Document.
REPRESENTATIONS AND WARRANTIES. The representations and warranties set
forth in this Agreement, in the Related Documents, and in any document or
certificate delivered to Lender under this Agreement are true and correct.
NO EVENT OF DEFAULT. There shall not exist at the time of any advance a
condition which would constitute an Event of Default under this Agreement.
REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as
of the date of this Agreement, as of the date of each disbursement of Loan
proceeds, as of the date of any renewal, extension or modification of any Loan,
and at all times any Indebtedness exists:
ORGANIZATION. Borrower is a corporation which is duly organized, validly
existing, and in good standing under the laws of the State of Delaware and
is validly existing and in good standing in all states in which Borrower is
doing business. Borrower has the full power and authority to own its
properties and to transact the businesses in which it is presently engaged
or presently proposes to engage. Borrower also is duly qualified as a
foreign corporation and is in good standing in all states in which the
failure to so qualify would have a material adverse effect on its
businesses or financial condition.
AUTHORIZATION. The execution, delivery, and performance of this Agreement
and all Related Documents by Borrower, to the extent to be executed,
delivered or performed by Borrower, have been duly authorized by all
necessary action by Borrower; do not require the consent or approval of any
other person, regulatory authority or governmental body; and do not
conflict with, result in a violation of, or constitute a default under (a)
any provision of its articles of incorporation or organization, or bylaws,
or any agreement or other instrument binding upon Borrower or (b) any law,
governmental regulation, court decree, or order applicable to Borrower.
FINANCIAL INFORMATION. Each financial statement of Borrower supplied to
Lender truly and completely disclosed Borrower's financial condition as of
the date of the statement, and there has been no material adverse change in
Borrower's financial condition subsequent to the date of the most recent
financial statement supplied to Lender. Borrower has no material contingent
obligations except as disclosed in such financial statements.
LEGAL EFFECT. This Agreement constitutes, and any instrument or agreement
required hereunder to be given by Borrower when delivered will constitute,
legal, valid and binding obligations of Borrower enforceable against
Borrower in accordance with their respective terms.
PROPERTIES. Except as contemplated by this Agreement or as previously
disclosed in Borrower's financial statements or in writing to Lender and as
accepted by Lender, and except for property tax liens for taxes not
presently due and payable, Borrower owns and has good title to all of
Borrower's properties free and clear of all Security Interests, and has not
executed any security documents or financing statements relating to such
properties. All of Borrower's properties are titled in Borrower's legal
name, and Borrower has not used, or filed a financing statement under, any
other name for at least the last five (5) years.
HAZARDOUS SUBSTANCES. The terms "hazardous waste," "hazardous substance,"
"disposal," "release," and "threatened release," as used in this Agreement,
shall have the same meanings as set forth in the "CERCLA," "SARA," the
Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq.,
the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et
seq., or other applicable state or Federal laws, rules, or regulations
adopted pursuant to any of the foregoing. Except as disclosed to and
acknowledged by Lender in writing, Borrower represents and warrants that:
(a) During the period of Borrower's ownership of the properties, there has
been no use, generation, manufacture, storage, treatment, disposal, release
or threatened release of any hazardous waste or substance by any person on,
under, about or from any of the properties. (b) Borrower has no knowledge
of, or reason to believe that there has been (i) any use, generation,
manufacture, storage, treatment, disposal, release, or threatened release
of any hazardous waste or substance on, under, about or from the properties
by any prior owners or occupants of any of the properties, or (ii) any
actual or threatened litigation or claims of any kind by any person
relating to such matters. (c) Neither Borrower nor any tenant, contractor,
agent or other authorized user of any of the properties shall use,
generate, manufacture, store, treat, dispose of, or release any hazardous
waste or substance on, under, about or from any of the properties; and any
such activity shall be conducted in compliance with all applicable federal,
state, and local laws, regulations, and ordinances, including without
limitation those laws, regulations and ordinances described above. Borrower
authorizes Lender and its agents to enter upon the properties to make such
inspections and tests as Lender may deem appropriate to determine
compliance of the properties with this section of the Agreement. Any
inspections or tests made by Lender shall be at Borrower's expense and for
Lender's purposes only and shall not be construed to create any
responsibility or liability on the part of Lender to Borrower or to any
other person. The representations and warranties contained herein are based
on Borrower's due diligence in investigating the properties for hazardous
waste and hazardous substances. Borrower hereby (a) releases and waives any
future claims against Lender for indemnity or contribution in the event
Borrower becomes liable for cleanup or other costs under any such laws, and
(b) agrees to indemnify and hold harmless Lender against any and all
claims, losses, liabilities, damages, penalties, and expenses which Lender
may directly or indirectly sustain or suffer resulting from a breach of
this section of the Agreement or as a consequence of any use, generation,
manufacture, storage, disposal, release or threatened release of a
hazardous waste or substance on the properties. The provisions of this
section of the Agreement, including the obligation to indemnify, shall
survive the payment of the Indebtedness and the termination or expiration
of this Agreement and shall not be affected by Lender's acquisition of any
interest in any of the properties, whether by foreclosure or otherwise.
LITIGATION AND CLAIMS. No litigation, claim, investigation, administrative
proceeding or similar action (including those for unpaid taxes) against
<PAGE>
03-07-2000 BUSINESS LOAN AGREEMENT Page 3
Loan No (Continued)
================================================================================
Borrower is pending or threatened, and no other event has occurred which
may materially adversely affect Borrower's financial condition or
properties, other than litigation, claims, or other events, if any, that
have been disclosed to and acknowledged by Lender in writing.
TAXES. To the best of Borrower's knowledge, all tax returns and reports of
Borrower that are or were required to be filed, have been filed, and all
taxes, assessments and other governmental charges have been paid in full,
except those presently being or to be contested by Borrower in good faith
in the ordinary course of business and for which adequate reserves have
been provided.
LIEN PRIORITY. Unless otherwise previously disclosed to Lender in writing,
Borrower has not entered into or granted any Security Agreements, or
permitted the filing or attachment of any Security Interests on or
affecting any of the Collateral directly or indirectly securing repayment
of Borrower's Loan and Note, that would be prior or that may in any way be
superior to Lender's Security Interests and rights in and to such
Collateral.
BINDING EFFECT. This Agreement, the Note, all Security Agreements directly
or indirectly securing repayment of Borrower's Loan and Note and all of the
Related Documents are binding upon Borrower as well as upon Borrower's
successors, representatives and assigns, and are legally enforceable in
accordance with their respective terms.
COMMERCIAL PURPOSES. Borrower intends to use the Loan proceeds solely for
business or commercial related purposes.
EMPLOYEE BENEFIT PLANS. Each employee benefit plan as to which Borrower
may have any liability complies in all material respects with all
applicable requirements of law and regulations, and (i) no Reportable Event
nor Prohibited Transaction (as defined in ERISA) has occurred with respect
to any such plan, (ii) Borrower has not withdrawn from any such plan or
initiated steps to do so, (iii) no steps have been taken to terminate any
such plan, and (iv) there are no unfunded liabilities other than those
previously disclosed to Lender in writing.
LOCATION OF BORROWER'S OFFICES AND RECORDS. Borrower's place of business,
or Borrower's Chief executive office, if Borrower has more than one place
of business, is located at 510 Lake Cook Road, Deerfield, IL 60015. Unless
Borrower has designated otherwise in writing this location is also the
office or offices where Borrower keeps its records concerning the
Collateral.
INFORMATION. All information heretofore or contemporaneously herewith
furnished by Borrower to Lender for the purposes of or in connection with
this Agreement or any transaction contemplated hereby is, and all
information hereafter furnished by or on behalf of Borrower to Lender will
be, true and accurate in every material respect on the date as of which
such information is dated or certified; and none of such information is or
will be incomplete by omitting to state any material fact necessary to make
such information not misleading.
SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Borrower understands and
agrees that Lender, without independent investigation, is relying upon the
above representations and warranties in extending Loan Advances to
Borrower. Borrower further agrees that the foregoing representations and
warranties shall be continuing in nature and shall remain in full force and
effect until such time as Borrower's Indebtedness shall be paid in full, or
until this Agreement shall be terminated in the manner provided above,
whichever is the last to occur.
AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, while
this Agreement is in effect, Borrower will:
DEPOSIT ACCOUNTS. Maintain with Lender compensating balances of available
collected funds with an average daily balance, calculated monthly, in an
amount not less than $500,000.00.
LITIGATION. Promptly inform Lender in writing of (a) all material adverse
changes in Borrower's financial condition, and (b) all existing and all
threatened litigation, claims, investigations, administrative proceedings
or similar actions affecting Borrower or any Guarantor which could
materially affect the financial condition of Borrower or the financial
condition of any Guarantor.
FINANCIAL RECORDS. Maintain its books and records in accordance with
generally accepted accounting principles, applied on a consistent basis,
and permit Lender to examine and audit Borrower's books and records at all
reasonable times.
ADDITIONAL INFORMATION. Furnish such additional information and
statements, lists of assets and liabilities, agings of receivables and
payables, inventory schedules, budgets, forecasts, tax returns, and other
reports with respect to Borrower's financial condition and business
operations as Lender may request from time to time.
FINANCIAL COVENANTS AND RATIOS. Comply with the following covenants and
ratios:
TANGIBLE NET WORTH. Maintain a minimum Tangible Net Worth of not less
than $2,500,000.00.
NET WORTH RATIO. Maintain a ratio of Total Liabilities to Tangible
Net Worth of less than 1.50 TO 1.00.
The following provisions shall apply for purposes of determining compliance
with the foregoing financial covenants and ratios: ALL COVENANTS AND RATIOS
TO BE MEASURED QUARTERLY. Except as provided above, all computations made
to determine compliance with the requirements contained in this paragraph
shall be made in accordance with generally accepted accounting principles,
applied on a consistent basis, and certified by Borrower as being true and
correct.
INSURANCE. Maintain fire and other risk insurance, public liability
insurance, and such other insurance as Lender may require with respect to
Borrower's properties and operations, in form, amounts, coverages and with
insurance companies reasonably acceptable to Lender. Borrower, upon request
of Lender, will deliver to Lender from time to time the policies or
certificates of insurance in form satisfactory to Lender, including
stipulations that coverages will not be canceled or diminished without at
least ten (10) days' prior written notice to Lender. Each insurance policy
also shall include an endorsement providing that coverage in favor of
Lender will not be impaired in any way by any act, omission or default of
Borrower or any other person. In connection with all policies covering
assets in which Lender holds or is offered a security interest for the
Loans, Borrower will provide Lender with such loss payable or other
endorsements as Lender may require.
INSURANCE REPORTS. Furnish to Lender, upon request of Lender, reports on
each existing insurance policy showing such information as Lender may
reasonably request, including without limitation the following: (a) the
name of the insurer; (b) the risks insured; (c) the amount of the policy;
(d) the properties insured; (e) the then current property values on the
basis of which insurance has been obtained, and the manner of determining
those values; and (f) the expiration date of the policy. In addition, upon
request of Lender (however not more often than annually), Borrower will
have an independent appraiser satisfactory to Lender determine, as
applicable, the actual cash value or replacement cost of any Collateral.
The cost of such appraisal shall be paid by Borrower.
OTHER AGREEMENTS. Comply with all terms and conditions of all other
agreements, whether now or hereafter existing, between Borrower and any
other party and notify Lender immediately in writing of any default in
connection with any other such agreements.
LOAN PROCEEDS. Use all Loan proceeds solely for Borrower's business
operations, unless specifically consented to the contrary by Lender in
writing.
TAXES, CHARGES AND LIENS. Pay and discharge when due all of its
indebtedness and obligations, including without limitation all assessments,
taxes, governmental charges, levies and liens, of every kind and nature,
imposed upon Borrower or its properties, income, or profits, prior to the
date on which penalties would attach, and all lawful claims that, if
unpaid, might become a lien or charge upon any of Borrower's properties,
income, or profits. Provided however, Borrower will not be required to pay
and discharge any such assessment, tax, charge, levy, lien or claim so long
as (a) the legality of the same shall be contested in good faith by
appropriate proceedings and (b) Borrower shall have established on its
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03-07-2000 BUSINESS LOAN AGREEMENT Page 4
Loan No (Continued)
================================================================================
books adequate reserves with respect to such contested assessment, tax,
charge, levy, lien, or claim in accordance with generally accepted
accounting practices. Borrower, upon demand of Lender, will furnish to
Lender evidence of payment of the assessments, taxes, charges, levies,
liens and claims and will authorize the appropriate governmental official
to deliver to Lender at any time a written statement of any assessments,
taxes, charges, levies, liens and claims against Borrower's properties,
income, or profits.
PERFORMANCE. Perform and comply with all terms, conditions, and provisions
set forth in this Agreement and in the Related Documents in a timely
manner, and promptly notify Lender if Borrower learns of the occurrence of
any event which constitutes an Event of Default under this Agreement or
under any of the Related Documents.
OPERATIONS. Maintain executive and management personnel with substantially
the same qualifications and experience as the present executive and
management personnel; provide written notice to Lender of any change in
executive and management personnel; conduct its business affairs in a
reasonable and prudent manner and in compliance with all applicable
federal, state and municipal laws, ordinances, rules and regulations
respecting its properties, charters, businesses and operations, including
without limitation, compliance with the Americans With Disabilities Act and
with all minimum funding standards and other requirements of ERISA and
other laws applicable to Borrower's employee benefit plans.
INSPECTION. Permit employees or agents of Lender at any reasonable time to
inspect any and all Collateral for the Loan or Loans and Borrower's other
properties and to examine or audit Borrower's books, accounts, and records
and to make copies and memoranda of Borrower's books, accounts, and
records. If Borrower now or at any time hereafter maintains any records
(including without limitation computer generated records and computer
software programs for the generation of such records) in the possession of
a third party, Borrower, upon request of Lender, shall notify such party to
permit Lender free access to such records at all reasonable times and to
provide Lender with copies of any records it may request, all at Borrower's
expense.
COMPLIANCE CERTIFICATE. Unless waived in writing by Lender, provide Lender
at least annually and at the time of each disbursement of Loan proceeds
with a certificate executed by Borrower's chief financial officer, or other
officer or person acceptable to Lender, certifying that the representations
and warranties set forth in this Agreement are true and correct as of the
date of the certificate and further certifying that, as of the date of the
certificate, no Event of Default exists under this Agreement.
ENVIRONMENTAL COMPLIANCE AND REPORTS. Borrower shall comply in all
respects with all environmental protection federal, state and local laws,
statutes, regulations and ordinances; not cause or permit to exist, as a
result of an intentional or unintentional action or omission on its part or
on the part of any third party, on property owned and/or occupied by
Borrower, any environmental activity where damage may result to the
environment, unless such environmental activity is pursuant to and in
compliance with the conditions of a permit issued by the appropriate
federal, state or local governmental authorities; shall furnish to Lender
promptly and in any event within thirty (30) days after receipt thereof a
copy of any notice, summons, lien, citation, directive, letter or other
communication from any governmental agency or instrumentality concerning
any intentional or unintentional action or omission on Borrower's part in
connection with any environmental activity whether or not there is damage
to the environment and/or other natural resources.
ADDITIONAL ASSURANCES. Make, execute and deliver to Lender such promissory
notes, mortgages, deeds of trust, security agreements, financing
statements, instruments, documents and other agreements as Lender or its
attorneys may reasonably request to evidence and secure the Loans and to
perfect all Security Interests.
RECOVERY OF ADDITIONAL COSTS. If the imposition of or any change in any law,
rule, regulation or guideline, or the interpretation or application of any
thereof by any court or administrative or governmental authority (including any
request or policy not having the force of law) shall impose, modify or make
applicable any taxes (except U.S. federal, state or local income or franchise
taxes imposed on Lender), reserve requirements, capital adequacy requirements or
other obligations which would (a) increase the cost to Lender for extending or
maintaining the credit facilities to which this Agreement relates, (b) reduce
the amounts payable to Lender under this Agreement or the Related Documents, or
(c) reduce the rate of return on Lender's capital as a consequence of Lender's
obligations with respect to the credit facilities to which this Agreement
relates, then Borrower agrees to pay Lender such additional amounts as will
compensate Lender therefor, within five (5) days after Lender's written demand
for such payment, which demand shall be accompanied by an explanation of such
imposition or charge and a calculation in reasonable detail of the additional
amounts payable by Borrower, which explanation and calculations shall be
conclusive in the absence of manifest error.
NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this
Agreement is in effect, Borrower shall not, without the prior written consent of
Lender:
INDEBTEDNESS AND LIENS. (a) Except for trade debt incurred in the normal
course of business and indebtedness to Lender contemplated by this
Agreement, create, incur or assume indebtedness for borrowed money,
including capital leases, (b) except as allowed as a Permitted Lien, sell,
transfer, mortgage, assign, pledge, lease, grant a security interest in, or
encumber any of Borrower's assets, or (c) sell with recourse any of
Borrower's accounts, except to Lender.
CONTINUITY OF OPERATIONS. (a) Engage in any business activities
substantially different than those in which Borrower is presently engaged,
(b) cease operations, liquidate, merge, transfer, acquire or consolidate
with any other entity, change ownership, change its name, dissolve or
transfer or sell Collateral out of the ordinary course of business, (c) pay
any dividends on Borrower's stock (other than dividends payable in its
stock), provided, however that notwithstanding the foregoing, but only so
long as no Event of Default has occurred and is continuing or would result
from the payment of dividends, if Borrower is a "Subchapter S Corporation"
(as defined in the Internal Revenue Code of 1986, as amended), Borrower may
pay cash dividends on its stock to its shareholders from time to time in
amounts necessary to enable the shareholders to pay income taxes and make
estimated income tax payments to satisfy their liabilities under federal
and state law which arise solely from their status as Shareholders of a
Subchapter S Corporation because of their ownership of shares of stock of
Borrower, or (d) purchase or retire any of Borrower's outstanding shares or
alter or amend Borrower's capital structure.
LOANS, ACQUISITIONS AND GUARANTIES. (a) Loan, invest in or advance money
or assets, (b) purchase, create or acquire any interest in any other
enterprise or entity, or (c) incur any obligation as surety or guarantor
other than in the ordinary course of business.
CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to
Borrower, whether under this Agreement or under any other agreement, Lender
shall have no obligation to make Loan Advances or to disburse Loan proceeds if:
(a) Borrower or any Guarantor is in default under the terms of this Agreement or
any of the Related Documents or any other agreement that Borrower or any
Guarantor has with Lender; (b) Borrower or any Guarantor becomes insolvent,
files a petition in bankruptcy or similar proceedings, or is adjudged a
bankrupt; (c) there occurs a material adverse change in Borrower's financial
condition, in the financial condition of any Guarantor, or in the value of any
Collateral securing any Loan; (d) any Guarantor seeks, claims or otherwise
attempts to limit, modify or revoke such Guarantor's guaranty of the Loan or any
other loan with Lender; or (e) Lender in good faith deems itself insecure, even
though no Event of Default shall have occurred.
READING OF THE DOCUMENTS. In the event of an inconsistency in the related
documents, the more restrictive provision(s) will control. The related documents
are to read as a whole, i.e., there may be provisions in some documents that are
not in others.
DEFINITION OF TERMS. The terms "Account", "Account Receivable", "Account
Debtor", "Chattel Paper", "Grantor", "Document", "General Intangibles", and
"Instrument", are defined by the Uniform Commercial Code as enacted by the State
of Illinois ("Illinois UCC").
LETTERS OF CREDIT. This Note may be used for direct advances or Letters of
Credit. Each Letter of Credit requested by the Borrower shall be
<PAGE>
03-07-2000 BUSINESS LOAN AGREEMENT Page 5
Loan No (Continued)
================================================================================
subject to the terms and conditions of the Lender's standard Letter of Credit
application, which application is incorporated herein by this reference. The
amount available to the Borrower under the Note shall be reduced by the face
amount of all Letters of Credit issued and outstanding hereunder. All Letters of
Credit issued hereunder shall have an expiry date no later than 180 days after
the maturity of this Note. Borrower and Lender agree that each draw under any
Letter of Credit shall constitute, and shall be repaid by, a direct advance
under the Note on the date of such draw. Each Letter of Credit requested by the
Borrower hereunder shall be issued by Lender only after Lender has received a
fully executed Letter of Credit application on the Lender's standard form. The
Lender is authorized to rely on telephonic or telegraphic requests which the
Lender believes, in its good faith judgment, to emanate from a properly
authorized representative of the Borrower, whether or not that is in fact the
case.
CLEAN UP PROVISION. Notwithstanding the foregoing, or anything else herein to
the contrary, all advances under this Note must be paid to a zero ($0.00)
balance for thirty (30) consecutive days at one (1) time prior to maturity of
the obligation hereunder.
ADDITIONAL FINANCIAL COVENANTS. Borrower convenants and agrees with Lender that
while this Agreement is in effect, Borrower will keep a minimum liquidity of
five hundred thousand ($500,000.00) at all times (cash on deposit in LaSalle
Bank, N.A.), and any change in the ownership of Joseph Fox or Avi Fox
representing more than a 25% decrease of their individual ownership position as
of the date of the loan documents without prior consent of Lender.
REPORTING COVENANTS. Borrower covenants and agrees with Lender that, while this
Agreement is in effect, Borrower and Web Street Securities, Inc. will provide
Annual Audited Financial Statements within 90 days of each fiscal year end, and
Quarterly Compiled Financial Statements within 30 days of each quarter end.
RIGHT OF SETOFF. Borrower grants to Lender a contractual security interest in,
and hereby assigns, conveys, delivers, pledges, and transfers to Lender all
Borrower's right, title and interest in and to, Borrower's accounts with Lender
(whether checking, savings, or some other account), including without limitation
all accounts held jointly with someone else and all accounts Borrower may open
in the future, excluding however all IRA and Keogh accounts, and all trust
accounts for which the grant of a security interest would be prohibited by law.
Borrower authorizes Lender, to the extent permitted by applicable law, to charge
or setoff all sums owing on the Indebtedness against any and all such accounts,
and, at Lender's option, to administratively freeze all such accounts to allow
Lender to protect Lender's charge and setoff rights provided on this paragraph.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement:
DEFAULT ON INDEBTEDNESS. Failure of Borrower to make any payment when due
on the Loans.
OTHER DEFAULTS. Failure of Borrower or any Grantor to comply with or to
perform when due any other term, obligation, covenant or condition
contained in this Agreement or in any of the Related Documents, or failure
of Borrower to comply with or to perform any other term, obligation,
covenant or condition contained in any other agreement between Lender and
Borrower.
DEFAULT IN FAVOR OF THIRD PARTIES. Should Borrower or any Grantor default
under any loan, extension of credit, security agreement, purchase or sales
agreement, or any other agreement, in favor of any other creditor or person
that may materially affect any of Borrower's property or Borrower's or any
Grantor's ability to repay the Loans or perform their respective
obligations under this Agreement or any of the Related Documents.
FALSE STATEMENTS. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Borrower or any Grantor under this
Agreement or the Related Documents is false or misleading in any material
respect at the time made or furnished, or becomes false or misleading at
any time thereafter.
DEFECTIVE COLLATERALIZATION. This Agreement or any of the Related
Documents ceases to be in full force and effect (including failure of any
Security Agreement to create a valid and perfected Security Interest) at
any time and for any reason.
INSOLVENCY. The dissolution or termination of Borrower's existence as a
going business, the insolvency of Borrower, the appointment of a receiver
for any part of Borrower's property, any assignment for the benefit of
creditors, any type of creditor workout, or the commencement of any
proceeding under any bankruptcy or insolvency laws by or against Borrower.
CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help,
repossession or any other method, by any creditor of Borrower, any creditor
of any Grantor against any collateral securing the Indebtedness, or by any
governmental agency. This includes a garnishment, attachment, or levy on or
of any of Borrower's accounts, including deposit accounts, with Lender.
EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs with
respect to any Guarantor of any of the Indebtedness or any Guarantor dies
or becomes incompetent, or revokes or disputes the validity of, or
liability under, any Guaranty of the Indebtedness.
ADVERSE CHANGE. A material adverse change occurs in Borrower's financial
condition, or Lender believes the prospect of payment or performance of the
Indebtedness is impaired.
INSECURITY. Lender, in good faith, deems itself insecure.
EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except
where otherwise provided in this Agreement or the Related Documents, all
commitments and obligations of Lender under this Agreement or the Related
Documents or any other agreement immediately will terminate (including any
obligation to make Loan Advances or disbursements), and, at Lender's option, all
Indebtedness immediately will become due and payable, all without notice of any
kind to Borrower, except that in the case of an Event of Default of the type
described in the "Insolvency" subsection above, such acceleration shall be
automatic and not optional. In addition, Lender shall have all the rights and
remedies provided in the Related Documents or available at law, in equity, or
otherwise. Except as may be prohibited by applicable law, all of Lender's rights
and remedies shall be cumulative and may be exercised singularly or
concurrently. Election by Lender to pursue any remedy shall not exclude pursuit
of any other remedy, and an election to make expenditures or to take action to
perform an obligation of Borrower or of any Grantor shall not affect Lender's
right to declare a default and to exercise its rights and remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement:
AMENDMENTS. This Agreement, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as to the
matters set forth in this Agreement. No alteration of or amendment to this
Agreement shall be effective unless given in writing and signed by the
party or parties sought to be charged or bound by the alteration or
amendment.
APPLICABLE LAW. THIS AGREEMENT HAS BEEN DELIVERED TO LENDER AND ACCEPTED
BY LENDER IN THE STATE OF ILLINOIS. IF THERE IS A LAWSUIT, BORROWER AGREES
UPON LENDER'S REQUEST TO SUBMIT TO THE JURISDICTION OF THE COURTS OF COOK
COUNTY, THE STATE OF ILLINOIS. LENDER AND BORROWER HEREBY WAIVE THE RIGHT
TO ANY JURY TRIAL IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM BROUGHT BY
EITHER LENDER OR BORROWER AGAINST THE OTHER. THIS AGREEMENT SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
ILLINOIS.
CAPTION HEADINGS. Caption headings in this Agreement are for convenience
purposes only and are not to be used to interpret or define the provisions
of this Agreement.
<PAGE>
03-07-2000 BUSINESS LOAN AGREEMENT Page 6
Loan No (Continued)
================================================================================
MULTIPLE PARTIES; CORPORATE AUTHORITY. All obligations of Borrower under
this Agreement shall be joint and several, and all references to Borrower
shall mean each and every Borrower. This means that each of the persons
signing below is responsible for ALL obligations in this Agreement.
CONSENT TO LOAN PARTICIPATION. Borrower agrees and consents to Lender's
sale or transfer, whether now or later, of one or more participation
interests in the Loans to one or more purchasers, whether related or
unrelated to Lender. Lender may provide, without any limitation whatsoever,
to any one or more purchasers, or potential purchasers, any information or
knowledge Lender may have about Borrower or about any other matter relating
to the Loan, and Borrower hereby waives any rights to privacy it may have
with respect to such matters. Borrower additionally waives any and all
notices of sale of participation interests, as well as all notices of any
repurchase of such participation interests. Borrower also agrees that the
purchasers of any such participation interests will be considered as the
absolute owners of such interests in the Loans and will have all the rights
granted under the participation agreement or agreements governing the sale
of such participation interests. Borrower further waives all rights of
offset or counterclaim that it may have now or later against Lender or
against any purchaser of such a participation interest and unconditionally
agrees that either Lender or such purchaser may enforce Borrower's
obligation under the Loans irrespective of the failure or insolvency of any
holder of any interest in the Loans. Borrower further agrees that the
purchaser of any such participation interests may enforce its interests
irrespective of any personal claims or defenses that Borrower may have
against Lender.
COSTS AND EXPENSES. Borrower agrees to pay upon demand all of Lender's
expenses, including without limitation attorneys' fees, incurred in
connection with the preparation, execution, enforcement, modification and
collection of this Agreement or in connection with the Loans made pursuant
to this Agreement. Lender may pay someone else to help collect the Loans
and to enforce this Agreement, and Borrower will pay that amount. This
includes, subject to any limits under applicable law, Lender's attorneys'
fees and Lender's legal expenses, whether or not there is a lawsuit,
including attorneys' fees for bankruptcy proceedings (including efforts to
modify or vacate any automatic stay or injunction), appeals, and any
anticipated post-judgment collection services. Borrower also will pay any
court costs, in addition to all other sums provided by law.
NOTICES. All notices required to be given under this Agreement shall be
given in writing, may be sent by telefacsimile (unless otherwise required
by law), and shall be effective when actually delivered or when deposited
with a nationally recognized overnight courier or deposited in the United
States mail, first class, postage prepaid, addressed to the party to whom
the notice is to be given at the address shown above. Any party may change
its address for notices under this Agreement by giving formal written
notice to the other parties, specifying that the purpose of the notice is
to change the party's address. To the extent permitted by applicable law,
if there is more than one Borrower, notice to any Borrower will constitute
notice to all Borrowers. For notice purposes, Borrower will keep Lender
informed at all times of Borrower's current address(es).
SEVERABILITY. If a court of competent jurisdiction finds any provision of
this Agreement to be invalid or unenforceable as to any person or
circumstance, such finding shall not render that provision invalid or
unenforceable as to any other persons or circumstances. If feasible, any
such offending provision shall be deemed to be modified to be within the
limits of enforceability or validity; however, if the offending provision
cannot be so modified, it shall be stricken and all other provisions of
this Agreement in all other respects shall remain valid and enforceable.
SUBSIDIARIES AND AFFILIATES OF BORROWER. To the extent the context of any
provisions of this Agreement makes it appropriate, including without
limitation any representation, warranty or covenant, the word "Borrower" as
used herein shall include all subsidiaries and affiliates of Borrower.
Notwithstanding the foregoing however, under no circumstances shall this
Agreement be construed to require Lender to make any Loan or other
financial accommodation to any subsidiary or affiliate of Borrower.
SUCCESSORS AND ASSIGNS. All covenants and agreements contained by or on
behalf of Borrower shall bind its successors and assigns and shall inure to
the benefit of Lender, its successors and assigns. Borrower shall not,
however, have the right to assign its rights under this Agreement or any
interest therein, without the prior written consent of Lender.
SURVIVAL. All warranties, representations, and covenants made by Borrower
in this Agreement or in any certificate or other instrument delivered by
Borrower to Lender under this Agreement shall be considered to have been
relied upon by Lender and will survive the making of the Loan and delivery
to Lender of the Related Documents, regardless of any investigation made by
Lender or on Lender's behalf.
TIME IS OF THE ESSENCE. Time is of the essence in the performance of this
Agreement.
WAIVER. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender. No
delay or omission on the part of Lender in exercising any right shall
operate as a waiver of such right or any other right. A waiver by Lender of
a provision of this Agreement shall not prejudice or constitute a waiver of
Lender's right otherwise to demand strict compliance with that provision or
any other provision of this Agreement. No prior waiver by Lender, nor any
course of dealing between Lender and Borrower, or between Lender and any
Grantor, shall constitute a waiver of any of Lender's rights or of any
obligations of Borrower or of any Grantor as to any future transactions.
Whenever the consent of Lender is required under this Agreement, the
granting of such consent by Lender in any instance shall not constitute
continuing consent in subsequent instances where such consent is required,
and in all cases such consent may be granted or withheld in the sole
discretion of Lender.
<PAGE>
03-07-2000 BUSINESS LOAN AGREEMENT Page 7
Loan No (Continued)
================================================================================
BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS BUSINESS LOAN
AGREEMENT, AND BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AS OF MARCH
7, 2000.
BORROWER:
WEB STREET, INC.
BY: /s/ JOSEPH FOX BY: /s/ AVI FOX
---------------------------- -------------------------------
JOSEPH FOX, CEO/CO-CHAIRMAN AVI FOX, PRESIDENT/CO-CHAIRMAN
LENDER:
LASALLE BANK NATIONAL ASSOCIATION
BY:
----------------------------
AUTHORIZED OFFICER
<PAGE>
PROMISSORY NOTE
================================================================================
Borrower: Web Street, Inc. Lender: LASALLE BANK NATIONAL
(TIN: 36-4212401) ASSOCIATION
510 Lake Cook Road 135 South LaSalle Street
Deerfield, Il 60015 Chicago, Il 60603
================================================================================
PRINCIPAL AMOUNT: $750,000.00 INITIAL RATE: 9.750% DATE OF NOTE: MARCH 7, 2000
PROMISE TO PAY. WEB STREET, INC. ("BORROWER") PROMISES TO PAY TO LASALLE BANK
NATIONAL ASSOCIATION ("LENDER"), OR ORDER, IN LAWFUL MONEY OF THE UNITED STATES
OF AMERICA, THE PRINCIPAL AMOUNT OF SEVEN HUNDRED FIFTY THOUSAND & 00/100
DOLLARS ($750,000.00) OR SO MUCH AS MAY BE OUTSTANDING, TOGETHER WITH INTEREST
ON THE UNPAID OUTSTANDING PRINCIPAL BALANCE OF EACH ADVANCE. INTEREST SHALL BE
CALCULATED FROM THE DATE OF EACH ADVANCE UNTIL REPAYMENT OF EACH ADVANCE.
PAYMENT. BORROWER WILL PAY THIS LOAN IN ONE PAYMENT OF ALL OUTSTANDING
PRINCIPAL PLUS ALL ACCRUED UNPAID INTEREST ON APRIL 30, 2001. IN ADDITION,
BORROWER WILL PAY REGULAR MONTHLY PAYMENTS OF ACCRUED UNPAID INTEREST BEGINNING
APRIL 7, 2000, AND ALL SUBSEQUENT INTEREST PAYMENTS ARE DUE ON THE SAME DAY OF
EACH MONTH AFTER THAT. The annual interest rate for this Note is computed on a
365/360 basis; that is, by applying the ratio of the annual interest rate over a
year of 360 days, multiplied by the outstanding principal balance, multiplied by
the actual number of days the principal balance is outstanding. Borrower will
pay Lender at Lender's address shown above or at such other place as Lender may
designate in writing. Unless otherwise agreed or required by applicable law,
payments will be applied first to accrued unpaid interest, then to principal,
and any remaining amount to any unpaid collection costs and late charges.
VARIABLE INTEREST RATE. The interest rate on this Note is subject to change
from time to time based on changes in an index which is Lender's Prime Rate (the
"Index"). This is the rate Lender charges, or would charge, on 90-day unsecured
loans to the most creditworthy corporate customers. This rate may or may not be
the lowest rate available from Lender at any given time. Lender will tell
Borrower the current Index rate upon Borrower's request. Borrower understands
that Lender may make loans based on other rates as well. The interest rate
change will not occur more often than each day. THE INDEX CURRENTLY IS 8.750%
PER ANNUM. THE INTEREST RATE TO BE APPLIED TO THE UNPAID PRINCIPAL BALANCE OF
THIS NOTE WILL BE AT A RATE OF 1.000 PERCENTAGE POINT OVER THE INDEX, RESULTING
IN AN INITIAL RATE OF 9.750% PER ANNUM. NOTICE: Under no circumstances will the
interest rate on this Note be more than the maximum rate allowed by applicable
law.
PREPAYMENT. Borrower may pay without penalty all or a portion of the amount
owed earlier than it is due. Early payments will not, unless agreed to by Lender
in writing, relieve Borrower of Borrower's obligation to continue to make
payments of accrued unpaid interest. Rather, they will reduce the principal
balance due.
LATE CHARGE. If a payment is 10 DAYS OR MORE LATE, Borrower will be charged
5.000% OF THE REGULARLY SCHEDULED PAYMENT.
DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment when due. (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower fails to comply with or to perform when
due any other term, obligation, covenant, or condition contained in this Note or
any agreement related to this Note, or in any other agreement or loan Borrower
has with Lender. (c) Borrower defaults under any loan, extension of credit,
security agreement, purchase or sales agreement, or any other agreement, in
favor of any other creditor or person that may materially affect any of
Borrower's property or Borrower's ability to repay this Note or perform
Borrower's obligations under this Note or any of the Related Documents. (d) Any
representation or statement made or furnished to Lender by Borrower or on
Borrower's behalf is false or misleading in any material respect either now or
at the time made or furnished. (e) Borrower becomes insolvent, a receiver is
appointed for any part of Borrower's property, Borrower makes an assignment for
the benefit of creditors, or any proceeding is commenced either by Borrower or
against Borrower under any bankruptcy or insolvency laws. (f) Any creditor tries
to take any of Borrower's property on or in which Lender has a lien or security
interest. This includes a garnishment of any of Borrower's accounts, including
deposit accounts, with Lender. (g) Any guarantor dies or any of the other events
described in this default section occurs with respect to any guarantor of this
Note. (h) A material adverse change occurs in Borrower's financial condition, or
Lender believes the prospect of payment or performance of the Indebtedness is
impaired. (I) Lender in good faith deems itself insecure.
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance on this Note and all accrued unpaid interest immediately due, without
notice, and then Borrower will pay that amount. Upon default, including failure
to pay upon final maturity, Lender, at its option, may also, if permitted under
applicable law, increase the variable interest rate on this Note to 15.000% per
annum. The interest rate will not exceed the maximum rate permitted by
applicable law. Lender may hire or pay someone else to help collect this Note if
Borrower does not pay. Borrower also will pay Lender that amount. This includes,
subject to any limits under applicable law, Lender's attorneys' fees and
Lender's legal expenses whether or not there is a lawsuit, including attorneys'
fees and legal expenses for bankruptcy proceedings (including efforts to modify
or vacate any automatic stay or injunction), appeals, and any anticipated
post-judgment collection services. If not prohibited by applicable law, Borrower
also will pay any court costs, in addition to all other sums provided by law.
THIS NOTE HAS BEEN DELIVERED TO LENDER AND ACCEPTED BY LENDER IN THE STATE OF
ILLINOIS. IF THERE IS A LAWSUIT, BORROWER AGREES UPON LENDER'S REQUEST TO SUBMIT
TO THE JURISDICTION OF THE COURTS OF COOK COUNTY, THE STATE OF ILLINOIS. LENDER
AND BORROWER HEREBY WAIVE THE RIGHT TO ANY JURY TRIAL IN ANY ACTION, PROCEEDING,
OR COUNTERCLAIM BROUGHT BY EITHER LENDER OR BORROWER AGAINST THE OTHER. THIS
NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE
OF ILLINOIS.
DISHONORED ITEM FEE. Borrower will pay a fee to Lender of $20.00 if Borrower
makes a payment on Borrower's loan and the check or preauthorized charge with
which Borrower pays is later dishonored.
RIGHT OF SETOFF. Borrower grants to Lender a contractual security interest in,
and hereby assigns, conveys, delivers, pledges, and transfers to Lender all
Borrower's right, title and interest in and to, Borrower's accounts with Lender
(whether checking, savings, or some other account), including without limitation
all accounts held jointly with someone else and all accounts Borrower may open
in the future, excluding however all IRA and Keogh accounts, and all trust
accounts for which the grant of a security interest would be prohibited by law.
Borrower authorizes Lender, to the extent permitted by applicable law, to charge
or setoff all sums owing on this Note against any and all such accounts, and, at
Lender's option, to administratively freeze all such accounts to allow Lender to
protect Lender's charge and setoff rights provided on this paragraph.
LINE OF CREDIT. This Note evidences a revolving line of credit. Advances under
this Note may be requested orally by Borrower or by an authorized person. Lender
may, but need not, require that all oral requests be confirmed in writing. All
communications, instructions, or directions by telephone or otherwise to Lender
are to be directed to Lender's office shown above. The following party or
parties are authorized to request advances under the line of credit until Lender
receives from Borrower at Lender's address shown above written notice of
revocation of their authority: AVI FOX, PRESIDENT/CO-CHAIRMAN; JOSEPH FOX,
CEO/CO-CHAIRMAN; AND JOSEPH BARR, CFO. Borrower agrees to be liable for all sums
either: (a) advanced in accordance with the instructions of an authorized person
or (b) credited to any of Borrower's accounts with Lender. The unpaid principal
balance owing on this Note at any time may be evidenced by endorsements on this
Note or by Lender's internal records, including daily computer print-outs.
Lender will have no obligation to advance funds under this Note if: (a) Borrower
or any guarantor is in default under the terms of this Note or any agreement
that Borrower or any guarantor has with Lender, including any agreement made in
connection with the signing of this Note; (b) Borrower or any guarantor ceases
doing business or is insolvent; (c) any guarantor seeks, claims or otherwise
attempts to limit, modify or revoke such guarantor's guarantee of this Note or
any other loan with Lender; (d) Borrower has applied funds provided pursuant to
this Note for purposes other than those authorized by Lender; or (e) Lender in
good faith deems itself insecure under this Note or any other agreement between
Lender and Borrower.
<PAGE>
03-07-2000 PROMISSORY NOTE Page 2
Loan No (Continued)
================================================================================
LETTERS OF CREDIT. This Note may be used for direct advances or Letters of
Credit. Each Letter of Credit requested by the Borrower shall be subject to the
terms and conditions of the Lender's standard Letter of Credit application,
which application is incorporated herein by this reference. The amount available
to the Borrower under the Note shall be reduced by the face amount of all
Letters of Credit issued and outstanding hereunder. All Letters of Credit issued
hereunder shall have an expiry date no later than 180 days after the maturity of
this Note. Borrower and Lender agree that each draw under any Letter of Credit
shall constitute, and shall be repaid by, a direct advance under the Note on the
date of such draw. Each Letter of Credit requested by the Borrower hereunder
shall be issued by Lender only after Lender has received a fully executed Letter
of Credit application on the Lender's standard form. The Lender is authorized to
rely on telephonic or telegraphic requests which the Lender believes, in its
good faith judgement, to emanate from a properly authorized representative of
the Borrower, whether or not that is in fact the case.
GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its rights or
remedies under this Note without losing them. Borrower and any other person who
signs, guarantees or endorses this Note, to the extent allowed by law, waive
presentment, demand for payment, protest and notice of dishonor. Upon any change
in the terms of this Note, and unless otherwise expressly stated in writing, no
party who signs this Note, whether as maker, guarantor, accommodation maker or
endorser, shall be released from liability. All such parties agree that Lender
may renew or extend (repeatedly and for any length of time) this loan, or
release any party or guarantor or collateral; or impair, fail to realize upon or
perfect Lender's security interest in the collateral; and take any other action
deemed necessary by Lender without the consent of or notice to anyone. All such
parties also agree that Lender may modify this loan without the consent of or
notice to anyone other than the party with whom the modification is made.
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF
THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO
THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE.
BORROWER:
WEB STREET, INC.
BY:/s/ JOSEPH FOX BY: /s/ AVI FOX
---------------------------- -------------------------------
JOSEPH FOX, CEO/CO-CHAIRMAN AVI FOX, PRESIDENT/CO-CHAIRMAN
<PAGE>
DISBURSEMENT REQUEST AND AUTHORIZATION
================================================================================
Borrower: Web Street, Inc. Lender: LASALLE BANK NATIONAL
(TIN: 36-4212401) ASSOCIATION
510 Lake Cook Road 135 South LaSalle Street
Deerfield, Il 60015 Chicago, Il 60603
================================================================================
LOAN TYPE. This is a Variable Rate (1.000% over LaSalle Bank National
Association's Prime Rate in effect from time to time, making an initial rate of
9.750%), Revolving Line of Credit Loan to a Corporation for $750,000.00 due on
April 30, 2001.
PRIMARY PURPOSE OF LOAN. The primary purpose of this loan is for:
|_| PERSONAL, FAMILY, OR HOUSEHOLD PURPOSES OR PERSONAL INVESTMENT.
|X| BUSINESS.
SPECIFIC PURPOSE. The specific purpose of this loan is: To support letters of
credit and short term working capital needs.
DISBURSEMENT INSTRUCTIONS. Borrower understands that no loan proceeds will be
disbursed until all of Lender's conditions for making the loan have been
satisfied. Please disburse the loan proceeds of $750,000.00 as follows:
UNDISBURSED FUNDS: $750,000.00
-----------
NOTE PRINCIPAL: $750,000.00
LIEN RELEASE FEES. In addition to all other charges, Borrower agrees, to the
extent not prohibited by law, to pay all governmental fees for release of
Lender's security interests in collateral securing this loan. Borrower will pay
these fees at the time the lien or liens are released. The estimated amount of
these future lien release fees is $100.00.
FINANCIAL CONDITION. BY SIGNING THIS AUTHORIZATION, BORROWER REPRESENTS AND
WARRANTS TO LENDER THAT THE INFORMATION PROVIDED ABOVE IS TRUE AND CORRECT AND
THAT THERE HAS BEEN NO MATERIAL ADVERSE CHANGE IN BORROWER'S FINANCIAL CONDITION
AS DISCLOSED IN BORROWER'S MOST RECENT FINANCIAL STATEMENT TO LENDER. THIS
AUTHORIZATION IS DATED MARCH 7, 2000.
BORROWER:
WEB STREET, INC.
BY: /s/ JOSEPH FOX BY: /s/ AVI FOX
---------------------------- -------------------------------
JOSEPH FOX, CEO/CO-CHAIRMAN AVI FOX, PRESIDENT/CO-CHAIRMAN
<PAGE>
CORPORATE RESOLUTION TO BORROW
================================================================================
Borrower: Web Street, Inc. Lender: LASALLE BANK NATIONAL
(TIN: 36-4212401) ASSOCIATION
510 Lake Cook Road 135 South LaSalle Street
Deerfield, Il 60015 Chicago, Il 60603
================================================================================
I, THE UNDERSIGNED SECRETARY OR ASSISTANT SECRETARY OF WEB STREET, INC. (THE
"CORPORATION"), HEREBY CERTIFY that the Corporation is organized and existing
under and by virtue of the laws of the State of Delaware as a corporation for
profit, with its principal office at 510 Lake Cook Road, Deerfield, IL 60015,
and is duly authorized to transact business in the State of Illinois.
I FURTHER CERTIFY that at a meeting of the Directors of the Corporation, duly
called and held ON SEPTEMBER 21, 1999, at which a quorum was present and voting,
or by other duly authorized corporate action in lieu of a meeting, the following
resolutions were adopted:
BE IT RESOLVED, that ANY TWO (2) of the following named officers, employees, or
agents of this Corporation, whose actual signatures are shown below:
NAMES POSITIONS ACTUAL SIGNATURES
- ----- --------- -----------------
Joseph Fox CEO/Co-Chairman /s/ Joseph Fox
---------------------------------
Avi Fox President/Co-Chairman /s/ Avi Fox
---------------------------------
acting for and on behalf of the Corporation and as its act and deed be, and they
hereby are, authorized and empowered:
BORROW MONEY. To borrow from time to time from LASALLE BANK NATIONAL
ASSOCIATION ("Lender"), on such terms as may be agreed upon between the
Corporation and Lender, such sum or sums of money as in their judgment
should be borrowed, without limitation.
EXECUTE NOTES. To execute and deliver to Lender the promissory note or
notes, or other evidence of credit accommodations of the Corporation, on
Lender's forms, at such rates of interest and on such terms as may be
agreed upon, evidencing the sums of money so borrowed or any indebtedness
of the Corporation to Lender, and also to execute and deliver to Lender one
or more renewals, extensions, modifications, refinancings, consolidations,
or substitutions for one or more of the notes, any portion of the notes, or
any other evidence of credit accommodations.
GRANT SECURITY. To mortgage, pledge, transfer, endorse, hypothecate, or
otherwise encumber and deliver to Lender, as security for the payment of
any loans or credit accommodations so obtained, any promissory notes so
executed (including any amendments to or modifications, renewals, and
extensions of such promissory notes), or any other or further indebtedness
of the Corporation to Lender at any time owing, however the same may be
evidenced, any property now or hereafter belonging to the Corporation or in
which the Corporation now or hereafter may have an interest, including
without limitation all real property and all personal property (tangible or
intangible) of the Corporation. Such property may be mortgaged, pledged,
transferred, endorsed, hypothecated, or encumbered at the time such loans
are obtained or such indebtedness is incurred, or at any other time or
times, and may be either in addition to or in lieu of any property
theretofore mortgaged, pledged, transferred, endorsed, hypothecated, or
encumbered.
EXECUTE SECURITY DOCUMENTS. To execute and deliver to Lender the forms of
mortgage, deed of trust, pledge agreement, hypothecation agreement, and
other security agreements and financing statements which may be submitted
by Lender, and which shall evidence the terms and conditions under and
pursuant to which such liens and encumbrances, or any of them, are given;
and also to execute and deliver to Lender any other written instruments,
any chattel paper, or any other collateral, of any kind or nature, which
they may in their discretion deem reasonably necessary or proper in
connection with or pertaining to the giving of the liens and encumbrances.
Notwithstanding the foregoing, any one of the above authorized persons may
execute, deliver, or record financing statements.
NEGOTIATE ITEMS. To draw, endorse, and discount with Lender all drafts,
trade acceptances, promissory notes, or other evidences of indebtedness
payable to or belonging to the Corporation in which the Corporation may
have an interest, and either to receive cash for the same or to cause such
proceeds to be credited to the account of the Corporation with Lender, or
to cause such other disposition of the proceeds derived therefrom as they
may deem advisable.
FURTHER ACTS. In the case of lines of credit, to designate additional or
alternate individuals as being authorized to request advances thereunder,
and in all cases, to do and perform such other acts and things, to pay any
and all fees and costs, and to execute and deliver such other documents and
agreements, INCLUDING AGREEMENTS WAIVING THE RIGHT TO A TRIAL BY JURY, as
they may in their discretion deem reasonably necessary or proper in order
to carry into effect the provisions of these Resolutions. The following
person or persons currently are authorized to request advances and
authorize payments under the line of credit until Lender receives written
notice of revocation of their authority: Avi Fox, President/Co-Chairman;
Joseph Fox, CEO/Co-Chairman; and Joseph Barr, CFO.
BE IT FURTHER RESOLVED, that any and all acts authorized pursuant to these
Resolutions and performed prior to the passage of these Resolutions are hereby
ratified and approved, that these Resolutions shall remain in full force and
effect and Lender may rely on these Resolutions until written notice of their
revocation shall have been delivered to and received by Lender. Any such notice
shall not affect any of the Corporation's agreements or commitments in effect at
the time notice is given.
BE IT FURTHER RESOLVED, that the Corporation will notify Lender in writing at
Lender's address shown above (or such other addresses as Lender may designate
from time to time) prior to any (a) change in the name of the Corporation, (b)
change in the assumed business name(s) of the Corporation, (c) change in the
management of the Corporation, (d) change in the authorized signer(s), (e)
conversion of the Corporation to a new or different type of business entity, or
(f) change in any other aspect of the Corporation that directly or indirectly
relates to any agreements between the Corporation and Lender. No change in the
name of the Corporation will take effect until after Lender has been notified.
I FURTHER CERTIFY that the officers, employees, and agents named above are duly
elected, appointed, or employed by or for the Corporation, as the case may be,
and occupy the positions set opposite their respective names; that the foregoing
Resolutions now stand of record on the books of the Corporation; and that the
Resolutions are in full force and effect and have not been modified or revoked
in any manner whatsoever.
<PAGE>
03-07-2000 CORPORATE RESOLUTION TO BORROW Page 2
Loan No (Continued)
================================================================================
IN TESTIMONY WHEREOF, I HAVE HEREUNTO SET MY HAND AND AFFIXED THE SEAL OF THE
CORPORATION ON MARCH 7, 2000 AND ATTEST THAT THE SIGNATURES SET OPPOSITE THE
NAMES LISTED ABOVE ARE THEIR GENUINE SIGNATURES.
CERTIFIED TO AND ATTESTED BY:
CORPORATE /s/ Joseph Fox
---------------------------------
SEAL /s/ Joseph Barr
---------------------------------
NOTE: In case the Secretary or other certifying officer is designated by the
foregoing resolutions as one of the signing officers, it is advisable to have
this certificate signed by a second Officer or Director of the Corporation.
<PAGE>
Accountants and Grant Thornton
Management Consultants
Grant Thornton LLP
The US Member Firm of
Grant Thornton International
March 28, 2000
Securities and Exchange Commission
Washington, D.C. 20549
RE: Web Street, Inc. (Formerly Web Street Securities, Inc.)
Dear Sir or Madam:
We have read Ite 9 of the Form 10-K of Web Street, Inc. dated March 30, 2000 and
agree with the statements contained therein.
Very truly yours,
/s/ Grant Thornton LLP
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
BALANCE SHEET/STATEMENT OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 DEC-31-1999
<CASH> 1,579,639 39,189,362
<RECEIVABLES> 1,696,577 2,755,596
<SECURITIES-RESALE> 0 0
<SECURITIES-BORROWED> 0 0
<INSTRUMENTS-OWNED> 0 0
<PP&E> 886,223 3,994,411
<TOTAL-ASSETS> 4,495,624 47,790,903
<SHORT-TERM> 0 0
<PAYABLES> 1,823,400 2,705,228
<REPOS-SOLD> 0 0
<SECURITIES-LOANED> 0 0
<INSTRUMENTS-SOLD> 0 0
<LONG-TERM> 0 0
0 0
31,125 0
<COMMON> 189,563 256,604
<OTHER-SE> 306,048 42,706,356
<TOTAL-LIABILITY-AND-EQUITY> 4,495,624 47,790,903
<TRADING-REVENUE> 7,350,246 23,471,194
<INTEREST-DIVIDENDS> 162,912 876,938
<COMMISSIONS> 0 0
<INVESTMENT-BANKING-REVENUES> 0 0
<FEE-REVENUE> 377,775 1,123,453
<INTEREST-EXPENSE> 0 0
<COMPENSATION> 1,375,203 2,725,779
<INCOME-PRETAX> (11,818,450) (6,763,497)
<INCOME-PRE-EXTRAORDINARY> (11,818,450) (6,763,497)
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (11,818,450) (6,763,497)
<EPS-BASIC> (0.71) (0.32)
<EPS-DILUTED> (0.71) (0.32)
</TABLE>
