<PAGE>
As filed with the Securities and Exchange Commission on November 22, 1999
Registration No. 333-
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
E*TRADE GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)
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<S> <C> <C>
Delaware 6211 94-2844166
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
4500 Bohannon Drive, Menlo Park, California 94025, (650) 331-6000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Christos M. Cotsakos, Chairman of the Board and Chief Executive Officer
4500 Bohannon Drive, Menlo Park, California 94025, (650) 331-6000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
----------------
Copies to:
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<S> <C>
J. Michael Shepherd, Esq. Stuart G. Stein, Esq.
Curtis L. Mo, Esq. Steven A. Museles, Esq.
Brobeck, Phleger & Harrison LLP Hogan & Hartson L.L.P.
Two Embarcadero Place 555 Thirteenth Street, N.W.
2200 Geng Road Washington, D.C. 20204
Palo Alto, CA 94303 Telephone: (202) 637-5600
Telephone: (650) 424-0160 Facsimile: (202) 637-5910
Facsimile: (650) 496-2885
</TABLE>
----------------
Commencement of proposed sale to the public: As soon as practicable after
the effective date of this Registration Statement.
If any of the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [_]
CALCULATION OF REGISTRATION FEE
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<CAPTION>
Proposed
Proposed Maximum
Title of each class of Maximum Aggregate Amount of
Securities to be Amount to be Offering Price Offering Price Registration
Registered Registered (1) Per Share (2) (2) Fee (3)
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<S> <C> <C> <C> <C>
Common Stock, $0.01 par
value per share....... 35,641,068 shares $35.94 $1,280,939,984 $356,101.31
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</TABLE>
(1) Represents the number of shares of Common Stock of the Registrant expected
to be issued to former stockholders of Telebanc Financial Corporation
pursuant to the merger described herein.
(2) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rules 457(c) and 457(f) under the Securities
Act as $35.94 (the average of the high and low sale prices per share of
E*TRADE Common Stock as reported on the Nasdaq National Market System on
November 19, 1999) multiplied by 35,641,068 (the number of shares being
registered).
(3) Pursuant to Rule 457(b), the registration fee is offset by the fee of
$320,400 previously paid in connection with the filing with the Commission
of the preliminary proxy materials relating to the transactions described
in this registration statement on June 25, 1999.
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<PAGE>
[TELEBANC LETTERHEAD]
Dear Telebanc Stockholders:
I am writing to you today about the proposed merger of Telebanc Financial
Corporation with E*TRADE Group, Inc. The board of directors of Telebanc and
E*TRADE have each approved a merger agreement. Under the merger agreement,
E*TRADE will acquire Telebanc. We believe the combined company will be able to
create more stockholder value than the companies can achieve individually.
In the merger, you will receive 1.05 shares of E*TRADE common stock for each
share of Telebanc common stock you own. E*TRADE common stock is traded on the
Nasdaq National Market under the trading symbol "EGRP," and closed at $35.66
per share on November 19, 1999. The merger is described more fully in this
proxy statement/prospectus. The merger is intended to qualify as a tax-free
reorganization.
Your Board of Directors has determined that the terms and conditions of the
merger are advisable and fair to you and in your best interests, and
unanimously recommends that you approve and adopt the merger agreement and the
merger.
This proxy statement/prospectus provides you with detailed information
concerning E*TRADE and the merger. Please give all of the information contained
in the proxy statement/prospectus your careful attention. In particular, you
should carefully consider the discussion in the section entitled "Risk Factors"
beginning on page 7 of this proxy statement/prospectus.
YOUR VOTE IS VERY IMPORTANT. To vote your shares, you may use the enclosed
proxy card or attend the special stockholders meeting. To approve the merger
agreement, you MUST vote "FOR" the proposal by following the instructions
stated on the enclosed proxy card. If you do not vote at all, it will, in
effect, count as a vote against the proposal. We urge you to vote FOR this
proposal, a necessary step in the merger of Telebanc and E*TRADE.
Sincerely,
/s/ Mitchell H. Caplan
---------------------------
Mitchell H. Caplan
President and Chief Executive
Officer
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THIS TRANSACTION OR THE SECURITIES OF
E*TRADE TO BE ISSUED IN THE MERGER, OR DETERMINED IF THIS PROXY
STATEMENT/PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
This proxy statement/prospectus is dated November 22, 1999, and was first
mailed to Telebanc stockholders on or about , 1999.
<PAGE>
TELEBANC FINANCIAL CORPORATION
1111 North Highland Street
Arlington, VA 22201
(703) 247-3700
----------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON DECEMBER 28, 1999
----------------
We will hold a special meeting of stockholders of Telebanc Financial
Corporation at 2:00 p.m. Eastern Standard Time, on December 28, 1999 at
Telebanc headquarters for the following purposes:
1. To consider and vote upon a proposal to approve and adopt the
agreement and plan of merger and reorganization by and among E*TRADE Group,
Inc., Turbo Acquisition Corp. and Telebanc Financial Corporation. Under
such merger agreement, each outstanding share of Telebanc common stock will
be converted into the right to receive 1.05 shares of E*TRADE common stock.
In addition, each outstanding option to purchase shares of Telebanc common
stock will be assumed by E*TRADE and converted into an option to purchase
shares of E*TRADE common stock, as more fully described in this proxy
statement/prospectus.
2. To adjourn the special meeting to another time, place or both, if
necessary, to solicit additional votes for approval of the merger agreement
and the merger.
Telebanc's Board of Directors has determined that the merger is advisable
and fair to you and in your best interests, and unanimously recommends that
you vote to approve and adopt the merger agreement and the merger.
We describe these items of business more fully in the proxy
statement/prospectus, which we urge you to read carefully.
Only Telebanc stockholders of record at the close of business on November
18, 1999 are entitled to notice of and to vote at the special meeting or any
adjournment or postponement of the special meeting. Approval of the merger
agreement will require the affirmative vote of the holders of Telebanc common
stock representing two-thirds of the outstanding shares of Telebanc common
stock entitled to vote at the special meeting.
TO ASSURE THAT YOUR SHARES ARE REPRESENTED AT THE SPECIAL MEETING, YOU
ARE URGED TO COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND MAIL IT PROMPTLY
IN THE POSTAGE-PAID ENVELOPE PROVIDED, WHETHER OR NOT YOU PLAN TO ATTEND THE
SPECIAL MEETING IN PERSON. YOU MAY REVOKE YOUR PROXY IN THE MANNER DESCRIBED
IN THE ACCOMPANYING PROXY STATEMENT/PROSPECTUS AT ANY TIME BEFORE IT HAS BEEN
VOTED AT THE SPECIAL MEETING. YOU MAY ATTEND THE SPECIAL MEETING AND VOTE IN
PERSON EVEN IF YOU HAVE RETURNED A PROXY.
By Order of the Board of Directors
/s/ David A. Smilow
--------------------------
David A. Smilow
Chairman of the Board
Arlington, Virginia
November 22, 1999
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: What will I receive in the merger?
A: If the merger is completed, you will receive 1.05 shares of E*TRADE common
stock for each share of Telebanc common stock you own. E*TRADE will not
issue fractional shares of common stock. You will receive cash based on the
market price of E*TRADE common stock instead of a fractional share.
The number of shares of E*TRADE common stock to be issued for each share of
Telebanc common stock is fixed and will not be adjusted based upon changes
in the value of E*TRADE common stock. As a result, the value of the E*TRADE
common stock you receive in the merger will not be determined at the time
you vote on the merger and will go up or down as the market price of
E*TRADE common stock goes up or down. Neither party can terminate the
merger agreement based solely on changes in the value of E*TRADE common
stock prior to the closing of the merger.
Q: When do you expect to complete the merger?
A: We hope to complete the merger by year-end 1999. However, the merger is
subject to various closing conditions, including approval by the Office of
Thrift Supervision of E*TRADE's application to acquire control of Telebanc.
No assurances can be given that we will obtain the necessary approval. In
addition, in order to complete the merger by year-end 1999, we will need the
Office of Thrift Supervision to act on E*TRADE's application on a schedule
faster than their standard processing timetable. As a result, it is possible
that we may not be able to complete the merger prior to December 31, 1999.
After December 31, 1999, either E*TRADE or Telebanc may terminate the merger
agreement.
Q: Should I send in my stock certificates now?
A: No. If we complete the merger, E*TRADE will send instructions to you
explaining how to exchange your shares of Telebanc common stock for the
appropriate number of shares of E*TRADE common stock.
Q: How do I vote?
A: Mail your signed proxy card in the enclosed return envelope as soon as
possible so that your shares may be represented at the special stockholders
meeting. If your shares are held in "street name" by your broker, your
broker will vote your shares only if you provide instructions on how to
vote. You should follow the directions provided by your broker regarding how
to instruct your broker to vote your shares. Without instructions, your
shares will not be voted at the special meeting, which will have the same
effect as voting against approval of the merger agreement and the merger.
Q: How can I change my vote after I have mailed my proxy?
A: You may change your vote by delivering a signed notice of revocation or a
later-dated, signed proxy card to Telebanc's corporate secretary before the
stockholders meeting, or by attending the stockholders meeting and voting in
person.
Q: Who can I call with questions?
A: If you have any questions about the merger, please call Telebanc Investor
Relations at (703) 247-3700.
<PAGE>
TABLE OF CONTENTS
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Page
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<S> <C>
SUMMARY OF THE PROXY STATEMENT/PROSPECTUS................................. 1
RISK FACTORS.............................................................. 7
E*TRADE GROUP, INC. SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA....... 11
TELEBANC FINANCIAL CORPORATION SELECTED HISTORICAL CONSOLIDATED FINANCIAL
DATA..................................................................... 12
SELECTED UNAUDITED PRO FORMA COMBINED CONSOLIDATED FINANCIAL DATA......... 13
COMPARATIVE PER SHARE DATA................................................ 15
MARKET PRICE AND DIVIDEND INFORMATION..................................... 17
THE SPECIAL MEETING....................................................... 19
Proxy Statement/Prospectus.............................................. 19
Date, Time and Place of the Special Meeting............................. 19
Matters to be Considered at the Special Meeting......................... 19
Record Date and Shares Entitled to Vote................................. 19
Voting of Proxies....................................................... 19
Vote Required........................................................... 20
Quorum; Abstentions and Broker Non-Votes................................ 20
Solicitation of Proxies and Expenses.................................... 20
No Appraisal Rights..................................................... 20
THE MERGER................................................................ 21
Background of the Merger................................................ 21
Reasons for the Merger.................................................. 23
Recommendation of Telebanc's Board of Directors......................... 26
Opinion of Financial Advisor to Telebanc................................ 27
Interests of Certain Telebanc Directors, Officers and Affiliates in the
Merger................................................................. 37
Regulatory Approvals.................................................... 38
Regulatory Matters Following the Merger................................. 40
Certain Federal Income Tax Considerations............................... 41
Accounting Treatment.................................................... 42
No Appraisal Rights..................................................... 42
Listing of E*TRADE Common Stock to be Issued in the Merger.............. 42
Restrictions on Sale of Shares By Affiliates of Telebanc and E*TRADE.... 42
Operations Following the Merger......................................... 43
THE MERGER AGREEMENT AND RELATED AGREEMENTS............................... 44
The Merger.............................................................. 44
Effective Time.......................................................... 44
Directors and Officers of Telebanc After the Merger..................... 44
Conversion of Shares in the Merger...................................... 44
Telebanc Stock Option and Employee Stock Ownership Plans................ 44
No Fractional Shares.................................................... 45
The Exchange Agent...................................................... 45
Exchange of Telebanc Stock Certificates for E*TRADE Stock Certificates.. 45
Distributions with Respect to Unexchanged Shares........................ 45
Representations and Warranties.......................................... 46
Telebanc's Conduct of Business before Completion of the Merger.......... 47
E*TRADE's Conduct of Business before Completion of the Merger........... 49
</TABLE>
i
<PAGE>
TABLE OF CONTENTS--(Continued)
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<CAPTION>
Page
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<S> <C>
No Solicitation of Transactions........................................ 49
Director and Officer Indemnification and Insurance..................... 50
Conditions to the Merger............................................... 50
Termination of the Merger Agreement.................................... 52
Payment of Fees and Expenses........................................... 53
Extension, Waiver and Amendment of the Merger Agreement................ 54
Related Agreements..................................................... 54
PRO FORMA COMBINED FINANCIAL STATEMENTS.................................. 58
COMPARISON OF RIGHTS OF HOLDERS OF TELEBANC COMMON STOCK AND E*TRADE
COMMON STOCK............................................................ 63
Classes of Common Stock of Telebanc and E*TRADE........................ 63
Classified Board of Directors.......................................... 63
Number of Directors.................................................... 63
Removal of Directors................................................... 63
Filling Vacancies on the Board of Directors............................ 64
Limits on Stockholder Action by Written Consent........................ 64
Ability to Call Special Meetings....................................... 64
Advance Notice Provisions for Stockholder Nominations and Proposals.... 64
Preferred Stock........................................................ 66
Amendment of Certificate of Incorporation.............................. 66
Amendment of Bylaws.................................................... 67
Business Combinations and State Anti-Takeover Statutes................. 68
Limitation of Liability of Directors................................... 68
Indemnification of Directors and Officers.............................. 69
EXPERTS.................................................................. 70
LEGAL MATTERS............................................................ 70
WHERE YOU CAN FIND MORE INFORMATION...................................... 70
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE.......................... 71
APPENDICES
A--Agreement and Plan of Merger and Reorganization....................... A-1
B--Stock Option Agreement................................................ B-1
C--Form of Stockholder Agreement......................................... C-1
D--Opinion of Goldman, Sachs & Co., financial advisor to Telebanc........ D-1
</TABLE>
ii
<PAGE>
SUMMARY OF THE PROXY STATEMENT/PROSPECTUS
The following summary highlights selected information from this proxy
statement/prospectus and may not contain all of the information that is
important to you. You should carefully read this entire document and the other
documents we refer to for a more complete understanding of the merger. In
particular, you should read the documents attached as appendices to this proxy
statement/prospectus, including the merger agreement, the stock option
agreement, the form of stockholder agreement and the opinion of Goldman, Sachs
& Co., financial advisor to Telebanc. In addition, we incorporate by reference
important business and financial information about E*TRADE and Telebanc into
this proxy statement/prospectus. You may obtain the information incorporated by
reference into this proxy statement/prospectus without charge by following the
instructions in the section entitled "Where You Can Find More Information" on
page 70 of this proxy statement/prospectus.
All share information reflects E*TRADE's two-for-one stock splits effective
February 1999 and May 1999 and Telebanc's two-for-one stock split effective
June 1999.
The Companies
TELEBANC FINANCIAL CORPORATION
1111 North Highland Street
Arlington, Virginia 22201
(703) 247-3700
http://www.telebank.com
Telebanc Financial Corporation is a savings and loan holding company that
provides high value financial products and services over the Internet and
telephone. Telebanc offers a wide range of FDIC-insured and other banking
products and services with significantly higher rates and lower fees than
traditional banks with brick-and-mortar branches. While Telebanc has been
providing branchless banking for ten years using electronic delivery channels,
with the advent of the Internet it has positioned itself to exploit the
Internet's low cost distribution, increased functionality and broader reach.
Currently, approximately 80% of Telebanc's customer contacts occur over the
Internet. Customers can deposit funds using direct deposit, wire or U.S. mail,
and can withdraw cash from over 507,000 automated teller machines on the Cirrus
and MAC networks worldwide.
E*TRADE GROUP, INC.
4500 Bohannon Drive
Menlo Park, California 94025
(650) 331-6000
http://www.etrade.com
E*TRADE Group, Inc., through its wholly-owned subsidiary, E*TRADE
Securities, Inc., is a leading provider of online investing services and has
established a popular, branded destination Web site for self-directed
investors. E*TRADE offers automated order placement and execution, along with a
suite of products and services that can be personalized, including portfolio
tracking, Java-based charting and quote applications, real-time market
commentary and analysis, news, financial online community and other information
services. E*TRADE provides these services 24 hours a day, seven days a week by
means of the Internet, touch-tone telephone (including interactive voice
recognition), online service providers (America Online, CompuServe, and
Microsoft Network), and direct modem access. E*TRADE's proprietary transaction-
enabling technology supports highly automated, easy-to-use and cost-effective
services that empower its customers to take greater control of their investment
decisions and financial transactions. Further, E*TRADE believes that its
technology can be adapted to provide transaction-enabling services related to
other aspects of electronic commerce.
1
<PAGE>
Summary of the Merger (See Page 21)
Telebanc and E*TRADE have entered into a merger agreement which contains the
terms and conditions of the proposed merger of the companies. Under the merger
agreement, if the merger is approved, Telebanc will become a wholly owned
subsidiary of E*TRADE. As a stockholder of Telebanc, you will become a
stockholder of E*TRADE following the merger.
The Merger Consideration Will Be 1.05 Shares of E*TRADE Common Stock for Each
Share of Telebanc Common Stock
In the merger you will receive 1.05 shares of E*TRADE common stock for each
share of Telebanc common stock you own. In addition, each outstanding option to
purchase shares of Telebanc common stock will be assumed by E*TRADE and
converted into an option to purchase shares of E*TRADE common stock.
The Merger is Intended to Qualify as a Tax-Free Reorganization (See Page 41)
Telebanc and E*TRADE intend that the merger will qualify as a tax-free
reorganization for United States federal income tax purposes. If the merger
qualifies as a tax-free reorganization, you will generally not recognize gain
or loss for United States federal income tax purposes upon the receipt of
E*TRADE common stock in the merger, except for taxes payable because of cash
received by you instead of a fractional share. It is a condition to completion
of the merger that we receive legal opinions to the effect that the merger
constitutes a reorganization within the meaning of the Internal Revenue Code.
Restrictions on the Ability to Sell E*TRADE Stock (See Page 43)
All shares of E*TRADE common stock received by you in connection with the
merger will be freely transferable unless you are considered an "affiliate" of
either of Telebanc or E*TRADE for purposes of the Securities Act of 1933.
Shares of E*TRADE common stock held by affiliates may only be sold pursuant to
a registration statement or exemption from registration under the Securities
Act.
You Are Not Entitled to Dissenters' or Appraisal Rights (See Page 42)
Under Delaware law, you are not entitled to dissenters' or appraisal rights
in the merger.
Approval Required by Two-Thirds of the Outstanding Telebanc Common Stock Shares
(See Page 20)
The holders of two-thirds of the outstanding shares of Telebanc common stock
must approve the merger agreement and the merger. You are entitled to cast one
vote per share of Telebanc common stock you owned at the close of business on
November 18, 1999. On such record date, 33,943,874 shares of Telebanc common
stock were outstanding and entitled to vote. Under a stockholder agreement in
the form attached as Appendix C, Telebanc stockholders owning approximately
9.5% of Telebanc's common stock outstanding as of May 28, 1999 and 9.4% of
Telebanc's common stock outstanding as of November 18, 1999 have agreed to vote
all of their shares of Telebanc common stock for approval and adoption of the
merger agreement and the merger.
E*TRADE stockholders are not required to approve the merger agreement and
will not vote on the merger.
Telebanc's Board of Directors Recommends the Merger to the Telebanc
Stockholders (See Page 26)
After careful consideration, Telebanc's board of directors has determined
that the terms and conditions of the merger are advisable and fair to, and in
the best interests of, Telebanc and its stockholders and unanimously recommends
that you vote FOR approval and adoption of the merger agreement and the merger.
2
<PAGE>
Telebanc's Financial Advisor Opined that the Consideration is Fair to Telebanc
Stockholders (See Page 27)
Goldman, Sachs & Co. has issued a written opinion, dated November 19, 1999,
to the Board of Directors of Telebanc that, as of such date, the exchange ratio
of 1.05 shares of common stock of E*TRADE Group, Inc. to be received for each
share of common stock of Telebanc, pursuant to the merger agreement, was fair
from a financial point of view to the holders of outstanding shares of
Telebanc. We have attached a copy of the Goldman Sachs opinion, dated November
19, 1999, as Appendix D. You should read the Goldman Sachs opinion completely
to understand the assumptions made, matters considered and limitations of the
review undertaken by Goldman Sachs in providing the opinion. The opinion of
Goldman Sachs does not constitute a recommendation as to how any Telebanc
stockholder should vote on the merger agreement.
The full text of the written opinion of Goldman Sachs, dated November 19,
1999, which sets forth assumptions made, matters considered and limitations on
the review undertaken in connection with the opinion, is attached as Appendix
D. You should read the whole opinion.
Interests of Telebanc Executive Officers and Directors in the Merger (See Page
37)
When considering the recommendation of Telebanc's board of directors, you
should be aware that some Telebanc directors and executive officers have
interests in the merger that are different from, or in addition to, yours. As a
result, these directors and executive officers may be more likely to vote to
approve the merger than Telebanc stockholders generally.
Options granted by Telebanc under Telebanc's 1997 Stock Option Plan and
Telebanc's 1998 Stock Incentive Plan, each as amended, provide for the
acceleration of vesting of outstanding options in the event of a change in
control of Telebanc or an involuntary termination following a change in
control. Unvested stock options to acquire approximately 956,000 shares of
Telebanc common stock granted to executive officers and directors of Telebanc
will vest upon completion of the merger in accordance with these provisions.
Telebanc's executive officers have entered into management continuity
agreements with E*TRADE that will become effective upon completion of the
merger. Furthermore, E*TRADE has agreed to indemnify each present and former
Telebanc officer and director against liabilities arising out of the fact that
such person is or was a director or officer and to use commercially reasonable
efforts to provide officers' and directors' liability insurance to cover any
such liabilities for the next four years.
Fees and Expenses Applicable if the Merger Agreement is Terminated (See Page
52)
Telebanc has agreed to pay E*TRADE a termination fee of $54 million and/or
reimburse E*TRADE for its out-of-pocket expenses incurred in connection with
the merger if the merger agreement is terminated under circumstances which are
described on page 53 under the heading "Payment of Fees and Expenses."
E*TRADE Required Telebanc to Enter Into a Stock Option Agreement Which may
Discourage Parties who are Interested in Acquiring a Stake in Telebanc
In connection with the execution of the merger agreement, Telebanc granted
E*TRADE a stock option to purchase up to 6,739,762 shares of Telebanc common
stock at $46.725 per share. This share number represents approximately 19.99%
of the shares of Telebanc common stock outstanding on May 28, 1999 on a pro
forma basis, or approximately 16.66% after issuance of the shares of Telebanc
common stock subject to the option.
3
<PAGE>
The option is not currently exercisable, and E*TRADE may exercise the option
only if the merger agreement is terminated in circumstances in which the
termination fee is payable or upon the occurrence of a trigger event or
takeover proposal by a third party which obligates Telebanc to pay the
termination fee. Otherwise, the option will terminate and may not be exercised
by E*TRADE.
E*TRADE required Telebanc to grant the stock option as a prerequisite to
entering into the merger agreement. The stock option, the termination fee and
the nonsolicitation provisions of the merger agreement may discourage third
parties who are interested in acquiring a significant stake in Telebanc, and
these provisions are intended by E*TRADE to increase the likelihood that the
merger will be completed. You are urged to read the stock option agreement in
its entirety.
E*TRADE and Telebanc Intend to Account for the Merger as a Pooling-of-Interests
(See Page 42)
We intend to account for the merger as a pooling-of-interests, which means
that Telebanc and E*TRADE will be treated as if they had previously been
combined for accounting and financial reporting purposes. It is a condition to
completion of the merger that E*TRADE receive letters from its and Telebanc's
independent auditors confirming that the merger can properly be accounted for
as a pooling-of-interests, although this condition may be waived. Under the
pooling-of-interests method of accounting, each of our historical recorded
assets and liabilities will be carried forward to the combined company at their
recorded amounts. In addition, the operating results of the combined company
will include both of our operating results for the entire fiscal year in which
the merger is completed and our historical reported operating results for prior
periods will be combined and restated as the operating results of the combined
company.
Conditions that Must be Satisfied for the Merger to Occur (See Page 50)
Our respective obligations to complete the merger are subject to the prior
satisfaction or waiver of conditions specified in the merger agreement. If
either of us waives any condition, Telebanc will consider the facts and
circumstances at that time and make a determination as to whether a
resolicitation of proxies from Telebanc stockholders is appropriate. The
following conditions, among others, must be satisfied or waived before the
completion of the merger:
. the merger agreement must be approved by Telebanc's stockholders;
. all necessary approvals, waivers and consents from governmental entities
and self-regulatory organizations must be obtained without any non-
customary condition or restriction or any condition or restriction that
could have a material adverse effect on us;
. no law, rule, injunction or order preventing completion of the merger or
restricting E*TRADE's operation of Telebanc after the merger may be
pending or in effect;
. the representations and warranties of the respective parties in the
merger agreement must remain materially true and correct;
. each of us must perform and comply with our respective covenants and
obligations in the merger agreement;
. we must each receive an opinion of our respective tax counsel to the
effect that the merger will qualify as a reorganization;
. E*TRADE must receive letters from its and Telebanc's independent
auditors confirming that pooling- of-interests accounting is appropriate
for the merger;
. Telebanc must obtain the consent or approval of those persons whose
consent or approval is required in connection with the merger under its
material contracts;
4
<PAGE>
. no event, change, condition or effect that is or could reasonably be
expected to be materially adverse to Telebanc and its subsidiaries,
taken as a whole, may occur; and
. E*TRADE must file an application with the Nasdaq National Market for the
listing of the shares of E*TRADE common stock to be issued in the
merger.
Certain Circumstances Under Which the Merger may be Terminated Before
Completion (See Page 52)
The merger agreement may be terminated under certain circumstances at any
time before the completion of the merger, as summarized below:
. the merger agreement may be terminated by mutual consent of the parties;
or
. the merger agreement may also be terminated by either of the parties if
the conditions to completion of the merger would not be satisfied
because of either (A) a breach of a covenant or agreement in the merger
agreement by the other party or (B) a breach of a representation or
warranty of the other party in the merger agreement, either of which is
not cured within ten business days of written notice of such breach.
In addition, the merger agreement may be terminated by either of us under
any of the following circumstances:
. if the merger is not completed, without the fault of the terminating
party, by December 31, 1999;
. if a final court order prohibiting the merger is issued and is not
appealable; or
. if the Telebanc stockholders do not approve the merger agreement and the
merger at the special meeting.
Furthermore, the merger agreement may be terminated by E*TRADE if any of the
following occur:
. Telebanc's board of directors withdraws or modifies in a manner adverse
to E*TRADE its recommendation as to the merger agreement or the merger,
or resolves to do so;
. Telebanc fails to comply with the nonsolicitation provisions contained
in the merger agreement, which are discussed in more detail on page 49;
. Telebanc fails to comply with the stock option agreement;
. Telebanc's board of directors recommends, endorses, accepts or agrees to
a takeover proposal (including a proposal to acquire 20% or more of the
outstanding capital stock, or a significant portion of the assets, of
Telebanc or any of its subsidiaries) by a third party, or resolves to do
so; or
. a third party acquires securities, or commences a tender or exchange
offer or other public initiative to acquire securities, representing 20%
or more of the voting power of Telebanc, or a third party makes a
takeover proposal as described above, and in either event, within five
business days, Telebanc's board of directors does not reconfirm its
approval and recommendation of the merger agreement and the merger and
does not reject such third party "trigger event" or takeover proposal.
We Must Obtain Regulatory Approval to Complete the Merger (See Page 38)
The merger cannot be completed unless and until E*TRADE receives the
approval of the Office of Thrift Supervision to acquire control of Telebanc and
its subsidiary, Telebank, and thereby become a savings and loan holding
company. The Office of Thrift Supervision has raised issues with the
application that need to be resolved before the agency can take action.
Therefore, there can be no assurance that the Office of Thrift
5
<PAGE>
Supervision's approval will be obtained or as to the date of such approval.
However, under the standard timelines contained in the agency's application
processing regulations, approval of the merger would not be received prior to
December 31, 1999, the date after which either party may terminate the merger
agreement. Neither party has determined the course of action it would pursue in
the event that the merger cannot be completed by December 31, 1999.
Telebanc Financial Corporation's wholly owned subsidiary, Telebanc Capital
Markets, Inc., a broker-dealer registered with the Securities and Exchange
Commission pursuant to Section 15(a) of the Securities Exchange Act and a
member of the National Association of Securities Dealers, Inc., filed a written
notice of the proposed change in its equity ownership and application for
continuance in membership with the National Association of Securities Dealers.
On September 20, 1999, the National Association of Securities Dealers granted
the application for Telebanc Capital Markets to engage in the business which is
set forth in the membership agreement which Telebanc filed with the National
Association of Securities Dealers. Telebanc Capital Markets also will file
appropriate notices with applicable state securities regulators and other self-
regulatory organizations of which it is a member.
Upon consummation of the merger, Telebanc Insurance Services, Inc., an
insurance agency domiciled and licensed in the Commonwealth of Virginia, will
notify the Virginia Bureau of Insurance of the change in the indirect control
of Telebanc Insurance Services, Inc. Telebanc Insurance Services, Inc. also
will file appropriate notices with applicable state insurance regulators in
states where it conducts an insurance agency business.
Telebanc Has Agreed to Not Engage in Certain Types of Solicitation (See Page
49)
Until the merger is completed or the merger agreement is terminated,
Telebanc has generally agreed not to directly or indirectly take any of the
following actions:
. solicit, initiate, encourage or agree to any takeover proposal,
including a proposal to acquire 20% or more of the outstanding capital
stock, or a significant portion of the assets, of Telebanc or any of its
subsidiaries by a third party; or
. engage in negotiations with, or disclose any nonpublic information
relating to Telebanc or any of its subsidiaries to, or afford access to
the properties, books or records of Telebanc or any of its subsidiaries
to, any person that has advised Telebanc that it may be considering
making, or that has made, such a takeover proposal.
This Document Contains Trademarks
This document contains trademarks of E*TRADE and Telebanc and may contain
trademarks of others.
6
<PAGE>
RISK FACTORS
By voting in favor of the merger, you will be choosing to invest in E*TRADE
common stock. An investment in E*TRADE common stock involves a high degree of
risk. In addition to the other information contained in or incorporated by
reference into this proxy statement/prospectus, you should carefully consider
the following risk factors in deciding whether to vote for the merger. If any
of the following risks actually occur, the business and prospects of E*TRADE or
Telebanc may be seriously harmed. In such case, the trading price of E*TRADE
common stock would decline, and you may lose all or part of your investment.
This proxy statement/prospectus and the documents incorporated by reference
into this proxy statement/prospectus contain forward-looking statements within
the "safe harbor" provisions of the Private Securities Litigation Reform Act of
1995 with respect to E*TRADE's and Telebanc's financial condition, results of
operations and business and on the expected impact of the merger on E*TRADE's
financial performance. Words such as "anticipates," "expects," "intends,"
"plans," "believes," "seeks," "estimates" and similar expressions indicate
forward-looking statements. These forward-looking statements are not guarantees
of future performance and are subject to risks and uncertainties that could
cause actual results to differ materially from the results contemplated by the
forward-looking statements. In evaluating the merger, you should carefully
consider the discussion of risks and uncertainties described below and in the
documents incorporated by reference into this proxy statement/prospectus.
YOU WILL RECEIVE A FIXED NUMBER OF SHARES OF E*TRADE COMMON STOCK DESPITE
CHANGES IN THE MARKET VALUE OF TELEBANC COMMON STOCK OR E*TRADE COMMON STOCK.
Upon completion of the merger, each share of Telebanc common stock will be
exchanged for 1.05 shares of E*TRADE common stock. There will be no adjustment
for changes in the market price of either Telebanc common stock or E*TRADE
common stock. Telebanc and E*TRADE are not permitted to terminate the merger
agreement or "walk away" from the merger, unless specified conditions under the
merger agreement are not fulfilled or the merger does not occur on or prior to
December 31, 1999. Telebanc is not permitted to resolicit the vote of its
stockholders solely because of changes in the market price of E*TRADE common
stock. Accordingly, the specific dollar value of E*TRADE common stock to be
received by you upon completion of the merger will depend on the market value
of E*TRADE common stock at the time of completion of the merger and may
decrease from the date you submit your proxy. The share price of E*TRADE common
stock is by nature subject to the general price fluctuations in the market for
publicly traded equity securities and has experienced significant volatility.
We urge you to obtain recent market quotations for E*TRADE common stock and
Telebanc common stock. We cannot predict or give any assurances as to the
market price of E*TRADE common stock at any time before or after the completion
of the merger.
ALTHOUGH E*TRADE AND TELEBANC EXPECT THAT THE MERGER WILL RESULT IN BENEFITS,
THOSE BENEFITS MAY NOT BE REALIZED.
E*TRADE and Telebanc entered into the merger agreement with the expectation
that the merger will result in significant benefits. Achieving the benefits of
the merger will depend in part on the integration of the technology, operations
and personnel of the two companies in a timely and efficient manner so as to
minimize the risk that the merger will result in the loss of customers or key
employees or the continued diversion of the attention of management.
E*TRADE and Telebanc will need to overcome significant issues to realize any
benefits or synergies from the merger. Telebanc is a savings and loan holding
company that offers banking products and services over the Internet and through
other electronic media. E*TRADE provides online investing services, and has
virtually no experience in Telebanc's highly regulated markets. Furthermore,
the principal offices of Telebanc are located on the East Coast in Arlington,
Virginia while the principal offices of E*TRADE are located on the West Coast
in Menlo Park, California, and there are currently no plans to relocate either
of these principal offices. For the
7
<PAGE>
merger to be successful, E*TRADE and Telebanc will have to successfully
integrate Telebanc's products, services, personnel and operations with
E*TRADE's products, services, personnel and operations. This integration will
involve considerable technology and execution risk and may or may not be
successful. We cannot offer any assurances that E*TRADE and Telebanc can be
successfully integrated or that any of the anticipated benefits will be
realized.
In addition, the attention and effort devoted to the integration of the two
companies will significantly divert management's attention from other important
issues, and could seriously harm the combined company.
THE MERGER COULD ADVERSELY AFFECT COMBINED FINANCIAL RESULTS.
If the benefits of the merger do not exceed the costs associated with the
merger, including any dilution to E*TRADE's stockholders resulting from the
issuance of shares in the merger, E*TRADE's financial results, including
earnings per share, could be adversely affected. Specifically, the combined
company expects to record a one-time charge of approximately $30 million
related to the merger during the quarter in which the merger is completed.
THE MARKET PRICE OF E*TRADE COMMON STOCK MAY DECLINE AS A RESULT OF THE MERGER.
The market price of E*TRADE common stock may decline as a result of the
merger if:
. the integration of E*TRADE and Telebanc is unsuccessful;
. we do not achieve the perceived benefits of the merger as rapidly or to
the extent anticipated by financial or industry analysts; or
. the effect of the merger on our financial results is not consistent with
the expectations of financial or industry analysts.
FAILURE OF THE MERGER TO QUALIFY AS A POOLING-OF-INTERESTS WOULD NEGATIVELY
AFFECT COMBINED FINANCIAL RESULTS.
The failure of the merger to qualify for pooling-of-interests accounting
treatment for financial reporting purposes for any reason would materially and
adversely affect E*TRADE's reported earnings and, likely, the price of
E*TRADE's common stock. The availability of pooling-of-interests accounting
treatment for the merger depends upon circumstances and events occurring after
the completion of the merger. For example, there must be no significant changes
in the business of the combined company, including significant dispositions of
assets, for a period of two years following the effective time of the merger.
E*TRADE DOES NOT HAVE EXPERIENCE WITH BEING REGULATED AS A SAVINGS AND LOAN
HOLDING COMPANY. THIS INEXPERIENCE COULD NEGATIVELY AFFECT BOTH E*TRADE AND
TELEBANC, AND THIS REGULATION COULD NEGATIVELY AFFECT E*TRADE'S SECURITIES
BUSINESS.
E*TRADE is currently not regulated as a savings and loan holding company or
bank holding company, and does not control any FDIC-insured institution.
Savings banks such as Telebank are subject to extensive regulation of their
activities and investments, their capitalization, their risk management
policies and procedures, and their relationships with affiliated companies.
Under recently adopted federal legislation, upon acquiring control of Telebank
and becoming a savings and loan holding company, E*Trade would be limited to
activities that are financial in nature and certain real estate-related
activities. In addition, as a condition to approving the merger, the Office of
Thrift Supervision may impose restrictions on the integration of the Telebank
banking and E*TRADE securities brokerage businesses, and may require prior
approval of any future material changes to Telebank's business plans. These
regulations and conditions could have the effect of constraining E*TRADE in
pursuing future business opportunities following the merger. These regulations
and conditions, and E*TRADE's inexperience with them, could also affect
E*TRADE's ability to realize synergies from the merger, and could negatively
affect both E*TRADE and Telebank following the merger.
8
<PAGE>
TELEBANC OFFICERS AND DIRECTORS HAVE CONFLICTS OF INTEREST THAT MAY INFLUENCE
THEM TO SUPPORT OR APPROVE THE MERGER.
The directors and officers of Telebanc participate in arrangements and have
continuing indemnification against liabilities that provide them with interests
in the merger that are different from, or in addition to, yours.
Options granted by Telebanc under Telebanc's 1997 Stock Option Plan and
Telebanc's 1998 Stock Incentive Plan, each as amended, may provide for the
acceleration of vesting of outstanding options in the event of a change in
control of Telebanc or an involuntary termination following a change in
control. Assuming the merger occurs by December 31, 1999, Telebanc's officers
and directors will hold options to purchase approximately 1,690,000 shares of
Telebanc common stock that will automatically become vested in connection with
the merger or will vest upon an involuntary termination following a merger.
Nine executive officers have entered into management continuity agreements
with E*TRADE that will become effective upon completion of the merger.
Furthermore, E*TRADE has agreed to indemnify each present and former Telebanc
officer and director against liabilities arising out of the fact that such
person is or was a director or officer and to use commercially reasonable
efforts to provide officers' and directors' liability insurance to cover any
such liabilities for the next four years.
Telebanc stockholders should consider whether these interests may have
influenced these directors and officers to support or recommend the merger.
FAILURE TO COMPLETE THE MERGER COULD NEGATIVELY IMPACT TELEBANC'S STOCK PRICE
AND FUTURE BUSINESS AND OPERATIONS.
If the merger is not completed, Telebanc may be subject to a number of
material risks, including the following:
. Telebanc may be required to pay E*TRADE a termination fee of $54
million;
. the stock option granted to E*TRADE by Telebanc may become exercisable
under certain circumstances;
. the price of Telebanc common stock may decline to the extent that the
current market price of Telebanc common stock reflects a market
assumption that the merger will be completed; and
. costs related to the merger, such as legal, accounting and financial
advisor fees, must be paid even if the merger is not completed.
In addition, Telebanc customers and suppliers may, in response to the
announcement of the merger, delay or defer decisions concerning Telebanc. Any
delay or deferral in those decisions by Telebanc customers or suppliers could
have a material adverse effect on Telebanc's business, regardless of whether or
not the merger is ultimately completed. Similarly, current and prospective
Telebanc employees may experience uncertainty about their future role with
E*TRADE until E*TRADE's strategies with regard to Telebanc are announced or
executed. This may adversely affect Telebanc's ability to attract and retain
key management, sales, marketing and technical personnel.
Further, if the merger is terminated and Telebanc's board of directors
determines to seek another merger or business combination, there can be no
assurance that it will be able to find a partner willing to pay an equivalent
or more attractive price than that which would be paid in the merger. In
addition, while the merger agreement is in effect and subject to certain
limited exceptions described on page 49 of this proxy statement/prospectus,
Telebanc is prohibited from soliciting, initiating or encouraging or entering
into certain extraordinary transactions, such as a merger, sale of assets or
other business combination, with any party other than E*TRADE. Furthermore, if
the merger agreement is terminated and E*TRADE exercises its option to purchase
Telebanc common stock, Telebanc may not be able to account for future
transactions as a pooling-of- interests.
9
<PAGE>
E*TRADE MUST MANAGE THE INTEGRATION OF ACQUIRED COMPANIES SUCCESSFULLY TO
ACHIEVE DESIRED RESULTS
In addition to the pending transaction with Telebanc, E*TRADE recently
acquired TIR (Holdings) Limited and expects to enter into additional business
combinations and acquisitions. Acquisition transactions are accompanied by a
number of risks, including:
. the difficulty of assimilating the operations and personnel of the
acquired companies;
. the potential disruption of its ongoing business and distraction of
management;
. the difficulty of incorporating acquired technology and rights into its
products and services;
. unanticipated expenses related to technology integration;
. the maintenance of uniform standards, controls, procedures and policies;
. the impairment of relationships with employees and customers as a result
of any integration of new management personnel; and
. potential unknown liabilities associated with acquired businesses.
The combined company may not be successful in addressing these risks or any
other problems encountered in business combinations and acquisitions. In
addition, the transactions and the time and effort to integrate operations and
personnel of acquired companies place a significant strain on the management,
financial and operational resources of E*TRADE, and divert attention from
important issues. Failure of E*TRADE to successfully address the risks of
engaging in these transactions or to properly integrate operations and
personnel of acquired companies may seriously harm its business and prospects,
or result in loss of key personnel.
10
<PAGE>
E*TRADE GROUP, INC.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following selected historical consolidated financial data of E*TRADE
have been derived from its consolidated annual financial statements and related
notes that are incorporated herein by reference. All selected historical
consolidated financial data of E*TRADE contained herein should be read in
conjunction with E*TRADE's consolidated financial statements and the related
notes and E*TRADE's "Management's Discussion and Analysis of Financial
Condition and Results of Operations" that are incorporated herein by reference.
All prior amounts presented have been restated to reflect the acquisition of
ClearStation, Inc. in April 1999 and TIR (Holdings) Limited in August 1999,
which were accounted for as poolings-of-interests (see Note 16 of the
Consolidated Financial Statements incorporated herein by reference).
<TABLE>
<CAPTION>
Fiscal Year Ended September 30,
--------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- --------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of
Operations Data:
Gross revenues......... $ 694,769 $ 375,785 $ 249,254 $144,254 $109,248
Net revenues........... 621,402 335,756 234,128 141,803 108,961
Operating income
(loss)................ (132,402) 2,913 30,269 4,213 9,632
Net income (loss)...... (54,438) 1,927 19,193 4,166 7,333
Income (loss) per
share*:
Basic................. $ (0.23) $ 0.01 $ 0.14 $ 0.05 $ 0.11
Diluted............... $ (0.23) $ 0.01 $ 0.13 $ 0.03 $ 0.07
Shares used in
computation of income
(loss)
per share*:
Basic................. 235,926 173,906 133,572 80,554 68,467
Diluted............... 235,926 185,479 147,833 121,863 111,427
Consolidated Balance
Sheet Data:
Cash and equivalents... $ 85,734 $ 47,776 $ 47,141 $ 40,138 $ 30,397
Investment securities.. 189,145 502,534 191,958 35,563 560
Brokerage receivable--
net................... 2,912,581 1,365,247 838,646 253,274 61,988
Total assets........... 3,926,980 2,066,286 1,148,114 397,169 107,212
Long-term obligations.. -- 3,000 3,000 3,000 --
Shareowners' equity.... 913,667 734,410 303,694 89,785 27,908
</TABLE>
- --------
* Reflects the two-for-one stock splits effective February 1999 and May 1999.
11
<PAGE>
TELEBANC FINANCIAL CORPORATION
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following selected historical consolidated financial data of Telebanc
have been derived from its consolidated annual and interim financial statements
and related notes that are incorporated herein by reference. The results of
operations for the nine month period ended September 30, 1999 are not
necessarily indicative of the results to be expected for the entire year. All
selected historical consolidated financial data of Telebanc contained herein
should be read in conjunction with Telebanc's historical consolidated financial
statements and the related notes and Telebanc's "Management's Discussion and
Analysis of Financial Condition and Results of Operations" that are
incorporated herein by reference.
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Fiscal Year Ended December 31,
------------------ -------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
---------- ------- ---------- ---------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Gross revenues......... $ 163,075 $69,385 $ 107,143 $ 64,532 $ 48,830 $ 44,288 $ 22,383
Net revenues........... 46,482 17,028 25,933 17,548 13,096 10,620 4,378
Operating income....... 6,518 2,238 4,191 7,684 4,259 4,810 709
Income before
cumulative effect of
accounting change and
extraordinary loss.... 4,145 720 1,375 4,217 2,552 2,720 540
Net income............. 1,691 720 1,375 4,217 2,552 2,720 540
Income (loss) per share
before cumulative
effect of accounting
change and
extraordinary loss*:
Basic................. $ 0.12 $ (0.11) $ (0.05) $ 0.42 $ 0.31 $ 0.33 $ 0.08
Diluted............... $ 0.11 $ (0.11) $ (0.05) $ 0.28 $ 0.29 $ 0.33 $ 0.08
Income (loss) per
share*:
Basic................. $ 0.04 $ (0.11) $ (0.05) $ 0.42 $ 0.31 $ 0.33 $ 0.08
Diluted............... $ 0.04 $ (0.11) $ (0.05) $ 0.28 $ 0.29 $ 0.33 $ 0.08
Shares used in
computation of income
(loss) per share*:
Basic................. 30,134 12,628 15,680 8,766 8,198 8,198 6,996
Diluted............... 34,451 12,628 15,680 14,822 8,812 8,208 6,996
Consolidated Balance
Sheet Data:
Cash and equivalents... $ 40,067 $ 25,941 $ 92,156 $ 3,259 $ 8,965 $ 6,078
Investment securities.. 178,622 220,699 91,237 78,826 40,058 12,444
Mortgage-backed
securities............ 1,426,053 1,012,163 319,203 184,743 234,385 236,464
Loans receivable, net.. 2,154,509 904,854 540,704 351,821 248,492 154,742
Total assets........... 3,981,244 2,283,341 1,100,352 647,965 553,943 427,292
Long-term obligations.. 30,584 65,240 39,186 16,586 16,496 16,390
Shareowners' equity.... 505,634 113,435 45,824 24,658 21,565 17,028
</TABLE>
- --------
*Reflects the two-for-one stock split effective June 1999.
12
<PAGE>
SELECTED UNAUDITED PRO FORMA COMBINED CONSOLIDATED FINANCIAL DATA
The selected unaudited pro forma combined consolidated financial data give
effect to the proposed mergers of E*TRADE and Telebanc on a pooling-of-
interests basis. The E*TRADE and Telebanc unaudited pro forma combined balance
sheet data assume that the merger of E*TRADE and Telebanc took place on
September 30, 1999, 1998 and 1997, and combine the E*TRADE consolidated balance
sheets as of September 30, 1999, 1998 and 1997 with Telebanc's consolidated
balance sheets as of September 30, 1999 and December 31, 1998 and 1997,
respectively. The E*TRADE and Telebanc unaudited pro forma combined
consolidated statements of operations data assume that the merger of E*TRADE
and Telebanc took place as of the beginning of the periods presented and
combine E*TRADE's consolidated statements of operations for the years ended
September 30, 1999, 1998 and 1997, with Telebanc's consolidated statements of
operations for the twelve months ended September 30, 1999, and the years ended
December 31, 1998 and 1997, respectively. The E*TRADE and Telebanc selected
unaudited pro forma combined consolidated financial data are based on the
respective historical consolidated financial statements and related notes,
which are incorporated by reference in this Form S-4. This presentation is
consistent with the years expected to be combined after the date of the closing
of the merger. Fiscal year 1999 includes the results of Telebanc for the twelve
months ended September 30, 1999 and fiscal year 1998 includes the results of
Telebanc for the year ended December 31, 1998. The results of operations for
the quarter ended December 31, 1998 of Telebanc (gross revenues of $37,758,000,
net revenues of $8,905,000 and net income of $655,000), are included in both
fiscal year 1999 and 1998.
The selected unaudited pro forma combined consolidated financial data are
presented for illustrative purposes only and are not necessarily indicative of
the combined financial position or results of operations of future periods or
the results that actually would have been realized had the entities been a
single entity during these periods. The selected unaudited pro forma combined
consolidated financial data as of and for the years ended September 30, 1999,
1998 and 1997, are derived from the pro forma combined financial statements
included elsewhere herein and should be read in conjunction with those
statements and the related notes. See "Pro Forma Combined Financial
Statements."
The classification of certain items of E*TRADE and Telebanc has been changed
in the accompanying pro forma combined consolidated financial data to reflect
the classifications expected to be used by the combined company.
13
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year
---------------------------------
1999 1998 1997
---------- ---------- ----------
(in thousands, except per share
data)
<S> <C> <C> <C> <C>
Combined Consolidated Statement of
Operations Data:
Gross revenues........................... $ 895,602 $ 482,928 $ 313,786
Net revenues............................. 676,789 361,689 251,676
Operation income (loss).................. (123,747) 7,104 37,953
Income (loss) before cumulative effect of
accounting change and extraordinary
loss.................................... (49,638) 3,302 23,410
Net income (loss)........................ (52,092) 3,302 23,410
Income (loss) per share before cumulative
effect of accounting change and
extraordinary loss:
Basic................................... $ (0.19) $ 0.00 $ 0.16
Diluted................................. $ (0.19) $ 0.00 $ 0.14
Income (loss) per share:
Basic................................... $ (0.20) $ 0.00 $ 0.16
Diluted................................. $ (0.20) $ 0.00 $ 0.14
Shares used in computation of income
(loss) per share:
Basic................................... 266,036 190,370 142,776
Diluted................................. 266,036 208,224 163,396
Combined Consolidated Balance Sheet Data:
Cash and equivalents..................... $ 125,801 $ 73,717 $ 139,297
Investment securities.................... 367,767 723,233 283,195
Brokerage receivable--net................ 2,912,581 1,365,247 838,646
Mortgage-backed securities............... 1,426,053 1,012,163 319,203
Loans receivable, net.................... 2,154,509 904,854 540,704
Total assets............................. 7,908,224 4,349,627 2,248,466
Long-term obligations.................... 30,584 68,240 42,186
Shareowners' equity...................... 1,389,301* 847,845 349,518
</TABLE>
- --------
* Reflects the one-time estimated costs of $30 million associated with the
merger.
14
<PAGE>
COMPARATIVE PER SHARE DATA
In the following table, we provide you with historical per share data and
combined per share data on an unaudited pro forma basis after giving effect to
the merger on a pooling-of-interests basis, assuming that 1.05 shares of
E*TRADE common stock are issued in exchange for each share of Telebanc common
stock. This data should be read along with the selected historical consolidated
financial data and the unaudited pro forma condensed combined financial
statements included in this proxy statement/prospectus and the historical
consolidated financial statements of E*TRADE and Telebanc and the related notes
thereto that are incorporated herein by reference. The pro forma information is
presented for illustrative purposes only. You should not rely on the pro forma
financial information as an indication of the combined financial position or
results of operations for future periods or the results that actually would
have been realized had the entities been a single entity during the periods
presented.
<TABLE>
<CAPTION>
Fiscal Year Ended
September 30,
-------------------
1999 1998 1997
------ ----- -----
<S> <C> <C> <C> <C>
E*TRADE Historical:
Income (loss) per share--basic........................... $(0.23) $0.01 $0.14
Income (loss) per share--diluted......................... (0.23) 0.01 0.13
Book value per share..................................... 3.81 3.18 1.85
<CAPTION>
Fiscal Year Ended
December 31,
Nine Months Ended -------------------
September 30, 1999 1998 1997 1996
------------------ ------ ----- -----
<S> <C> <C> <C> <C>
Telebanc Historical:
Income (loss) per share before
cumulative effect of accounting
change and extraordinary loss--
basic................................ $ 0.12 $(0.05) $0.42 $0.31
Income (loss) per share before
cumulative effect of accounting
change and extraordinary loss--
diluted.............................. 0.11 (0.05) 0.28 0.29
Income (loss) per share--basic........ 0.04 (0.05) 0.42 0.31
Income (loss) per share--diluted...... 0.04 (0.05) 0.28 0.29
Book value per share.................. 15.03 4.65 5.14 3.01
<CAPTION>
Fiscal Year
-------------------
1999 1998 1997
------ ----- -----
<S> <C> <C> <C> <C>
Pro Forma Combined Income (Loss) Per Share Before
Cumulative Effect of Accounting Change and Extraordinary
Loss:
Per E*TRADE share--basic (1)............................. $(0.19) $0.00 $0.16
Per E*TRADE share--diluted (1)........................... (0.19) 0.00 0.14
Per equivalent Telebanc share--basic (2)................. (0.20) 0.01 0.17
Per equivalent Telebanc share--diluted (2)............... (0.20) 0.00 0.15
<CAPTION>
Fiscal Year
-------------------
1999 1998 1997
------ ----- -----
<S> <C> <C> <C> <C>
Pro Forma Combined Income (Loss) Per Share:
Per E*TRADE share--basic (1)............................. $(0.20) $0.00 $0.16
Per E*TRADE share--diluted (1)........................... (0.20) 0.00 0.14
Per equivalent Telebanc share--basic (2)................. (0.21) 0.01 0.17
Per equivalent Telebanc share--diluted (2)............... (0.21) 0.00 0.15
Pro Forma Combined Book Value Per Share: (3)(4)
Per E*TRADE share........................................ $ 5.05
Per equivalent Telebanc share............................ 5.30
</TABLE>
15
<PAGE>
- --------
(1) The unaudited pro forma combined per share information combines financial
information of E*TRADE for the fiscal years ended September 30, 1999, 1998
and 1997 with the financial information of Telebanc for the twelve months
ended September 30, 1999, and the years ended December 31, 1998 and 1997,
respectively. This information also assumes the merger occurred as of the
beginning of the earliest period presented and was accounted for as a
pooling-of-interests.
(2) The unaudited equivalent Telebanc pro forma per share amounts are
calculated by multiplying the E*TRADE combined pro forma per share amounts
by the share exchange ratio of 1.05 E*TRADE shares for each outstanding
share of Telebanc common stock.
(3) Historical book value per share is computed by dividing shareowners' equity
by the number of shares of common stock outstanding at the end of each
period. Pro forma book value per share is computed by dividing pro forma
shareowners' equity by the pro forma number of shares of common stock
outstanding at the end of the period less amounts attributable to preferred
shareowners.
(4) E*TRADE and Telebanc estimate that they will incur merger-related expenses,
consisting primarily of transaction costs for investment banker fees,
attorneys, accountants, financial printing and other related charges of
approximately $30 million. The pro forma combined consolidated balance
sheet data give effect to such expenses as if they had been incurred as of
September 30, 1999, but the pro forma combined consolidated statement of
operations does not give effect to such expenses.
16
<PAGE>
MARKET PRICE AND DIVIDEND INFORMATION
E*TRADE Market Price Data
E*TRADE's common stock is traded on the Nasdaq National Market under the
symbol "EGRP." The following table shows the range of high and low sale prices
of E*TRADE's common stock as reported by the Nasdaq National Market for the
periods indicated, adjusted to reflect the 2-for-1 stock splits effective in
February 1999 and May 1999, and based on E*TRADE's fiscal year end of September
30.
<TABLE>
<CAPTION>
High Low
------- -------
<S> <C> <C>
Fiscal 1998
First Quarter............................................. $ 11.94 $ 4.34
Second Quarter............................................ 6.97 4.69
Third Quarter............................................. 7.03 4.94
Fourth Quarter............................................ 8.81 3.91
Fiscal 1999
First Quarter............................................. $ 16.25 $ 2.50
Second Quarter............................................ 33.22 12.74
Third Quarter............................................. 72.25 29.38
Fourth Quarter............................................ 42.63 21.31
Fiscal 2000
First Quarter (through November 19, 1999)................. $ 40.00 $ 21.63
</TABLE>
Telebanc Market Price Data
Telebanc's common stock has traded on the Nasdaq National Market under the
symbol "TBFC" since July 1998. The following table shows the range of high and
low sale prices of Telebanc's common stock as reported by the Nasdaq National
Market for the periods indicated, adjusted to reflect the 2-for-1 stock split
effective June 1999, and based on Telebanc's fiscal year end of December 31.
<TABLE>
<CAPTION>
High Low
------ ------
<S> <C> <C>
Fiscal 1998
Third Quarter (beginning July 22, 1998).................... $12.94 $ 5.94
Fourth Quarter............................................. 18.19 3.94
Fiscal 1999
First Quarter.............................................. $44.28 $15.00
Second Quarter............................................. 75.88 27.63
Third Quarter.............................................. 40.00 20.31
Fourth Quarter (through November 19, 1999)................. 39.19 21.00
</TABLE>
Dividend Information
E*TRADE and Telebanc have never paid any cash dividends on their common
stock, and both anticipate that they will continue to retain any earnings for
the foreseeable future for use in the operation of their respective businesses.
Recent Closing Prices
As of May 28, 1999, the last trading day before announcement of the proposed
merger, the closing prices per share of E*TRADE common stock and Telebanc
common stock on the Nasdaq National Market were $44.50 and $33.25 (adjusted to
reflect Telebanc's two-for-one stock split effective June 1999), respectively.
On November 19, 1999, the latest practicable trading day before the printing of
this proxy statement/prospectus, the closing prices per share of E*TRADE common
stock and Telebanc common stock on the Nasdaq National Market were $35.66 and
$34.50, respectively.
17
<PAGE>
Because the market price of E*TRADE common stock fluctuates, the market
value of the shares of E*TRADE common stock that holders of Telebanc common
stock will receive in the merger may increase or decrease prior to and
following the merger. Stockholders are urged to obtain current market
quotations for E*TRADE common stock and Telebanc common stock. No assurance can
be given as to the future prices or markets for E*TRADE common stock or
Telebanc common stock.
Number of Stockholders
As of November 18, 1999, there were approximately 91 stockholders of record
who held shares of Telebanc common stock, as shown on the records of Telebanc's
transfer agent for such shares.
18
<PAGE>
THE SPECIAL MEETING
Proxy Statement/Prospectus
This proxy statement/prospectus is furnished in connection with the
solicitation of proxies from the holders of Telebanc common stock by the
Telebanc board of directors for use at a special meeting of Telebanc
stockholders.
This proxy statement/prospectus is first being furnished to Telebanc
stockholders on or about November , 1999.
Date, Time and Place of the Special Meeting
The special meeting will be held on December 28, 1999 at 2:00 p.m., local
time, at the Telebanc headquarters.
Matters to be Considered at the Special Meeting
At the special meeting and any adjournment or postponement of the special
meeting, Telebanc stockholders will be asked to consider and vote upon
proposals:
. to approve and adopt the merger agreement and the merger;
. to grant the Telebanc board of directors discretionary authority to
adjourn the special meeting to solicit additional votes for approval of
the merger agreement and the merger; and
. to transact such other business as may properly come before the special
meeting.
Record Date and Shares Entitled to Vote
Telebanc's board of directors has fixed the close of business on November
18, 1999, as the record date for determination of Telebanc stockholders
entitled to notice of and to vote at the special meeting. As of the close of
business on November 18, 1999, there were 33,943,874 shares of Telebanc common
stock outstanding and entitled to vote, held of record by approximately 91
stockholders. Two-thirds, or 22,629,250 of these shares, present in person or
represented by proxy, will be necessary to approve the merger agreement and the
merger. If that two-thirds is not present, it is expected that the special
meeting will be adjourned or postponed to solicit additional proxies. Each
Telebanc stockholder is entitled to one vote for each share of Telebanc common
stock held as of the record date.
Voting of Proxies
You are requested to complete, date and sign the accompanying proxy and
promptly return it in the accompanying envelope or otherwise mail it to
Telebanc. If your shares are held in "street name" by your broker, your broker
will vote your shares only if you provide instructions on how to vote. Your
broker will provide you directions regarding how to instruct your broker to
vote your shares. All properly executed proxies received by Telebanc prior to
the vote at the special meeting, and that are not revoked, will be voted in
accordance with the instructions indicated on the proxies or, if no direction
is indicated, to approve the merger agreement. Telebanc's Board of Directors
does not presently intend to bring any other business before the special
meeting and, so far as is known to Telebanc's Board of Directors, no other
matters are to be brought before the special meeting. As to any business that
may properly come before the special meeting, however, it is intended that
proxies, in the form enclosed, will be voted in respect thereof in accordance
with the judgment of the persons voting such proxies.
You may revoke your proxy at any time prior to its use by delivering to the
Secretary of Telebanc a signed notice of revocation or a later-dated, signed
proxy, or by attending the special meeting and voting in person. Attendance at
the special meeting does not in itself constitute the revocation of a proxy.
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<PAGE>
Vote Required
Approval of the merger agreement by Telebanc stockholders is required by the
Delaware General Corporation Law and Telebanc's certificate of incorporation.
This approval requires the affirmative vote of the holders of two-thirds of the
shares of Telebanc common stock outstanding and entitled to vote at the special
meeting. Eleven stockholders of Telebanc have entered into a stockholder
agreement and have delivered irrevocable proxies obligating them to vote in
favor of the merger agreement and the merger. As of November 18, 1999, these
stockholders, constituting all executive officers and directors of Telebanc, as
a group beneficially owned 4,260,982 shares (exclusive of any shares issuable
upon the exercise of options) of Telebanc common stock (constituting
approximately 12.6% of the shares of Telebanc common stock outstanding as of
the record date). As of the record date and the date of this proxy
statement/prospectus, E*TRADE owns no shares of Telebanc common stock.
Quorum; Abstentions and Broker Non-Votes
The required quorum for the transaction of business at the special meeting
is a majority of the shares of Telebanc common stock issued and outstanding on
the record date. Abstentions and broker non-votes each will be included in
determining the number of shares present and voting at the meeting for the
purpose of determining the presence of a quorum. Because approval of the merger
agreement and the merger requires the affirmative vote of two-thirds of the
outstanding shares of Telebanc common stock entitled to vote, abstentions and
broker non-votes will have the same effect as votes against the merger
agreement and the merger. In addition, the failure of a Telebanc stockholder to
return a proxy or vote in person will have the effect of a vote against the
approval of the merger agreement. The actions proposed in this proxy
statement/prospectus are not matters that can be voted on by brokers holding
shares for beneficial owners without the owners' specific instructions.
Accordingly, you are urged to return the enclosed proxy card marked to indicate
your vote.
Solicitation of Proxies and Expenses
E*TRADE and Telebanc will share the cost of solicitation of proxies from you
by D. F. King, estimated to be $30,000 plus reasonable out-of-pocket expenses.
In addition to solicitation by mail, the directors, officers and employees of
Telebanc may solicit proxies from stockholders by telephone, facsimile or in
person without additional remuneration. Following the original mailing of the
proxies and other soliciting materials, Telebanc will request brokers,
custodians, nominees and other record holders to forward copies of the proxy
and other soliciting materials to persons for whom they hold shares of Telebanc
common stock and to request authority for the exercise of proxies. In such
cases, Telebanc, upon the request of the record holders, will reimburse such
holders for their reasonable expenses.
No Appraisal Rights
You are not entitled to exercise dissenter's or appraisal rights as a result
of the merger or to demand cash payment for your shares under Delaware law.
THE MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING ARE OF GREAT IMPORTANCE
TO THE STOCKHOLDERS OF TELEBANC. ACCORDINGLY, YOU ARE URGED TO READ AND
CAREFULLY CONSIDER THE INFORMATION PRESENTED IN THIS PROXY
STATEMENT/PROSPECTUS, AND TO COMPLETE, DATE, SIGN AND PROMPTLY RETURN THE
ENCLOSED PROXY IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
STOCKHOLDERS SHOULD NOT SEND ANY STOCK CERTIFICATES WITH THEIR PROXY CARDS.
A transmittal form with instructions for the surrender of certificates for
Telebanc common stock will be mailed to you as soon as practicable after
completion of the merger. For more information regarding the procedures for
exchanging your Telebanc stock certificates for E*TRADE stock certificates, see
the section entitled "Exchange of Telebanc Stock Certificates for E*TRADE Stock
Certificates" on page 45 of this proxy statement/prospectus.
20
<PAGE>
THE MERGER
This section of the proxy statement/prospectus describes material aspects of
the proposed merger, including the merger agreement and the stock option
agreement. While we believe that the description covers the material terms of
the merger and the related transactions, this summary may not contain all of
the information that is important to you. You should read this entire document
and the other documents we refer to carefully for a more complete understanding
of the merger.
The following discussion of the background of the merger and the parties'
reasons for the merger and the potential benefits that could result from the
merger contains forward-looking statements which involve risks and
uncertainties. Readers are cautioned not to place undue reliance on these
forward-looking statements. The actual results of E*TRADE could differ
materially from those anticipated in these forward-looking statements as a
result of many factors, including those described under "Risk Factors" and in
the documents incorporated by reference in this proxy statement/prospectus.
Background of the Merger
From time to time during 1998 and early 1999, Telebanc and E*TRADE engaged
in preliminary discussions concerning potential strategic relationships between
the companies. These discussions were exploratory in nature and did not
progress beyond the discussion stage.
In February 1999, as Telebanc was preparing to file its registration
statement for a public offering of its common stock, E*TRADE inquired about
making a strategic investment in shares of Telebanc common stock. Because of
the timing of the upcoming public offering and related regulatory issues, the
parties decided not to move forward with the proposed investment by E*TRADE in
Telebanc.
On April 12, 1999, David Smilow, the Chairman of Telebanc, met with Kathy
Levinson, the President and Chief Operating Officer of E*TRADE, to discuss
possible joint product strategies. They tentatively scheduled further meetings
for Mitchell H. Caplan, the President and Chief Executive Officer of Telebanc,
to meet with E*TRADE senior management. On May 13, 1999, Messrs. Caplan and
Smilow met with Ms. Levinson and marketing officers of E*TRADE at its offices
in Palo Alto, California, to continue discussions on potential joint product
strategies.
On May 17, 1999, Mr. Caplan contacted Ms. Levinson to discuss a potential
strategic transaction between the two companies. They agreed to a dinner
meeting in the San Francisco area to conduct the discussions.
On May 24, 1999, Christos M. Cotsakos, the Chairman of the Board and Chief
Executive Officer of E*TRADE, Ms. Levinson and Thomas A. Bevilacqua, the
Executive Vice President of Corporate Development and Strategic Investments and
General Counsel of E*TRADE, met for dinner in Palo Alto with Messrs. Caplan and
Smilow. Mr. Cotsakos indicated that E*TRADE was preliminarily interested in a
potential business combination with Telebanc. The representatives of the two
companies engaged in a discussion of potential structures and valuations and
the merits of a business combination, and agreed to pursue further discussions
concerning a potential transaction structured as a tax-free stock-for-stock
swap, accounted for as a pooling-of-interests. While preliminary terms of the
proposed acquisition were discussed, no agreement was reached on an exchange
ratio or other principal terms. At the conclusion of this meeting, Telebanc
agreed to terminate any continuing discussions with third parties regarding a
sale of Telebanc and not to solicit or initiate any discussions with any third
party regarding a sale for a specified period of time. The parties also agreed
to begin due diligence and move forward in negotiating a transaction to be
announced the following Tuesday, June 1, 1999.
Following the meeting, Mr. Cotsakos briefed members of E*TRADE's board of
directors as to the discussions regarding Telebanc, and the directors
encouraged him to proceed with negotiating a transaction within specified
parameters. In addition, Mr. Bevilacqua contacted E*TRADE's outside counsel,
Brobeck,
21
<PAGE>
Phleger & Harrison LLP, to begin preparations for due diligence and negotiation
of definitive documentation for the proposed business combination.
On May 25, 1999, E*TRADE formally engaged BancBoston Robertson Stephens Inc.
to provide it with strategic investment banking services. On several occasions
prior to this date, BancBoston Robertson Stephens met with E*TRADE's senior
management and E*TRADE's board of directors to discuss the online banking
industry generally and to discuss Telebanc and other comparable banking
companies in detail. On May 25, 1999, Telebanc formally engaged Goldman, Sachs
& Co. to provide similar advisory services.
On the morning of May 25, 1999, members of management of E*TRADE met with
Mr. Caplan and other members of Telebanc management in Palo Alto to begin
preparations for due diligence, negotiation of definitive documentation, and
other matters related to the proposed business combination. At that meeting,
E*TRADE representatives requested further financial and business information
regarding Telebanc as well as information relating to potential synergies
between Telebanc and E*TRADE. Following the meeting, certain members of
management of E*TRADE and the Telebanc group met in Washington D.C. to continue
working on the transaction.
On the morning of May 26, 1999, Telebanc's directors, senior management and
legal advisors met. At the meeting, members of Telebanc senior management
reviewed events surrounding the potential strategic merger with E*TRADE. Mr.
Caplan reviewed in detail the nature and extent of discussions he and other
members of Telebanc's senior management had with E*TRADE management team
members. He detailed the likely structure of the potential merger, stating that
it would likely be a stock-for-stock merger, accounted for as a pooling-of-
interests. He stated that Telebanc had retained Goldman Sachs as its financial
advisor in connection with the potential merger. Telebanc's legal advisors from
the firm of Hogan & Hartson L.L.P. then explained in detail the board's
fiduciary duties and the procedures that would be followed in connection with
the potential merger, and stressed to all present the need to keep all
information and discussions concerning the potential merger confidential. The
Telebanc directors then discussed in detail the potential merger's strategic
and business attributes to Telebanc and its stockholders. These discussions
included possible terms of the proposed merger, as well as matters related to
operations and plans on a post-merger basis. At the conclusion of the meeting,
each Telebanc director expressed the view that it was in the best long-term
interest of Telebanc and its stockholders for management and Telebanc's
financial and legal advisors to continue discussions and other activities
regarding the potential merger.
On May 26, 1999, E*TRADE and Telebanc executed a mutual non-disclosure
agreement. During that day, Mr. Caplan and other members of Telebanc
management, together with Telebanc's outside legal advisors, met with Mr.
Bevilacqua, Leonard C. Purkis, the Executive Vice President and Chief Financial
Officer of E*TRADE, and other members of E*TRADE management, together with
representatives of E*TRADE's outside legal advisors, to conduct due diligence
reviews of Telebanc. Telebanc also delivered requested due diligence materials
for review by E*TRADE.
On May 27, 1999, E*TRADE's representatives delivered a draft merger
agreement and related definitive documentation to Telebanc and its outside
advisors. During that afternoon, representatives of Telebanc and Goldman Sachs
met with representatives of E*TRADE to conduct a due diligence discussion of
E*TRADE's business and affairs. In the evening, Mr. Bevilacqua contacted Mr.
Caplan at home by telephone to discuss a potential exchange ratio for the
merger. After several telephone conversations among representatives of the
parties and separate discussions with the parties' respective financial and
legal advisors, Mr. Cotsakos contacted Mr. Caplan directly and they agreed on
an exchange ratio of 1.05 shares of E*TRADE common stock for each share of
Telebanc common stock.
On the afternoon of May 28, 1999, E*TRADE's board of directors met with
senior management of E*TRADE and its legal, financial and accounting advisors
at a special telephonic meeting to discuss the status of the negotiations with
Telebanc and the directors' comments on the terms of the merger. At this
meeting, E*TRADE management reviewed the terms of the transaction and presented
its views on the combination, and
22
<PAGE>
representatives of BancBoston Robertson Stephens reviewed the financial terms
of the transaction. Following these presentations, the board engaged in full
discussion of the terms of the proposed transaction and its advisability. At
the conclusion of the meeting, E*TRADE's board of directors approved the merger
and the terms of the merger agreement, and authorized management to proceed
with the final negotiation and execution of definitive merger documents.
From May 28 to May 31, 1999, E*TRADE and Telebanc, together with their
respective legal, financial and accounting advisors, conducted further due
diligence reviews and negotiated the terms of the definitive merger agreement,
stock option agreement, stockholder agreements and other documentation
providing for the merger. Members of Telebanc management engaged separate
outside legal counsel to assist them in negotiating management continuity
agreements with E*TRADE.
On the afternoon of May 28, 1999, Telebanc's board of directors, senior
management, and legal and financial advisors held a special telephonic meeting.
At the meeting, they discussed the status of the negotiations with E*TRADE.
Telebanc's senior management personnel and legal advisors reviewed the terms of
the draft merger agreement and other draft merger documents. Representatives of
Goldman Sachs & Co. provided a detailed description of E*TRADE's business and
operations. Specifically, they discussed E*TRADE's revenues, growth, and other
financial and business related information and answered questions from the
Telebanc directors. At the conclusion of the meeting, Telebanc's board of
directors authorized management to proceed with the negotiation of the merger
documents.
On the evening of May 31, 1999, the parties resolved outstanding details on
the definitive documents and Telebanc's board of directors met with senior
management of Telebanc and its legal, financial and accounting advisors in a
special meeting to discuss the status of final negotiations with E*TRADE and
the directors' comments on the draft of the merger agreement. Goldman Sachs
presented its final analysis of various information to serve as the basis for
evaluating the exchange ratio and orally informed Telebanc's board of directors
of its opinion, subsequently confirmed in writing, that the exchange ratio was
fair, from a financial point of view, to Telebanc's stockholders. Goldman Sachs
also responded to questions raised by members of Telebanc's board of directors
regarding its analysis and opinion. Following this presentation, the board
engaged in a full discussion of the terms of the proposed merger and the
analysis and opinion of Goldman Sachs. Telebanc's board of directors concluded
that the merger agreement was fair to Telebanc's stockholders and that the
proposed merger was in the best interests of Telebanc and its stockholders.
Accordingly, Telebanc's board of directors unanimously approved the merger and
the merger agreement and related documents and authorized management to proceed
with the execution of the merger documents.
Following the Telebanc board meeting, E*TRADE and Telebanc executed and
delivered the merger agreement, the stock option agreement, and related
agreements and documents. E*TRADE and certain stockholders of Telebanc executed
and delivered the stockholder agreement and those stockholders also executed
and delivered a proxy to E*TRADE to vote in favor of approval and adoption of
the merger agreement and the merger. The merger was jointly announced by
E*TRADE and Telebanc on the morning of June 1, 1999.
Reasons for the Merger
E*TRADE's Reasons for the Merger
In concluding that the merger is in the best interests of E*TRADE and its
stockholders, E*TRADE's board of directors identified several potential
benefits of the merger that it believes will contribute to the success of the
combined company. These potential benefits include, among others, the
following:
. the merger will enable E*TRADE to become a competitive and immediate
participant in the online banking market, thereby broadening its product
portfolio and creating a leading end-to-end, "one-stop-shop" financial
portal for managing personal finances and services online;
23
<PAGE>
. the merger will position E*TRADE to obtain new online brokerage accounts
while increasing the retention rate of old accounts by providing
Telebanc's online banking services;
. the merger will provide E*TRADE with access to important products and
services, including higher interest bearing deposits and checking;
. the merger may result in revenue synergies by leveraging E*TRADE's
customer assets with Telebanc's financial products;
. the merger will permit E*TRADE to respond to the current and prospective
business environment in which it operates, the competitive environment
for online brokerages and the possibility that some competitors will
soon be able to offer integrated financial services (such as stock
trading, checking, deposit-taking and mortgages); and
. the senior executive officers of Telebanc, who it is anticipated will
remain with Telebanc after the merger, have a proven record in
establishing and building a successful business, managing the business
and regulatory aspects of a savings and loan and insurance holding
company, and retaining and supporting teams of talented employees, and
their continued presence permits E*TRADE to avoid the intense
competition for qualified personnel in Telebanc's industry.
In its evaluation of the merger, E*TRADE's board of directors reviewed
several factors, including the following:
. historical information concerning E*TRADE's and Telebanc's respective
businesses, financial performance and condition, operations, technology
and management, including reports concerning results of operations
during the most recent fiscal year and fiscal quarter for each company
filed with the Securities and Exchange Commission;
. E*TRADE's management's view of the financial condition, results of
operations and businesses of E*TRADE and Telebanc before and after
giving effect to the merger and the E*TRADE board of directors'
determination of the merger's effect on stockholder value;
. current financial market conditions and historical market prices,
volatility and trading information;
. the consideration you will receive in the merger in light of comparable
merger transactions;
. the belief that the terms of the merger agreement and the stock option
agreement are reasonable;
. the impact of the merger on E*TRADE's customers and employees;
. reports from management, legal, financial and accounting advisors as to
the results of the due diligence investigation of Telebanc; and
. the expectation that the merger will be accounted for as a pooling-of-
interests.
E*TRADE's board of directors also identified and considered a number of
potentially negative factors in its deliberations concerning the merger,
including the following:
. the risk that the potential benefits of the merger may not be realized
fully;
. the effects of becoming subject to the laws and regulations applicable
to savings and loan and insurance holding companies, including the
supervision and examination of the Office of Thrift Supervision and
state regulators;
. the risk that rising interest rates could adversely affect Telebanc's
operations and profitability;
. the possibility that the expected growth of online banking might not be
realized;
24
<PAGE>
. the possibility that the merger may not be consummated, even if approved
by Telebanc's stockholders;
. the effect of the public announcement of the merger on Telebanc's
revenues;
. the risk of management and employee disruption associated with the
merger, including the risk that despite the efforts of the combined
company, key technical, sales and management personnel might not remain
employed by the combined company;
. the risk that the merger could adversely affect E*TRADE's relationship
with certain of its customers and strategic partners; and
. other applicable risks described in this proxy statement/prospectus
under the heading "Risk Factors."
E*TRADE's board of directors concluded, however, that on balance the
potential benefits to E*TRADE and its stockholders from the merger outweigh the
risks associated with the merger. E*TRADE's board of directors does not intend
the foregoing discussion of information and factors that it considered to be
exhaustive, but believes the discussion to include the material factors that it
considered. In view of the complexity and wide variety of information and
factors, both positive and negative, that it considered in connection with its
evaluation of the merger, E*TRADE's board of directors did not find it
practicable to quantify or otherwise assign relative or specific weights to the
specific factors that it considered in reaching its determination.
Telebanc's Reasons for the Merger
The Telebanc board of directors has unanimously approved the merger
agreement and determined that the merger is advisable and fair to, and in the
best interests of, Telebanc and its stockholders and unanimously recommends
that the holders of shares of Telebanc common stock vote FOR the approval of
the merger agreement and the merger.
The Telebanc board of directors' decision to approve the merger agreement
was based primarily on:
. historical information concerning our respective businesses, financial
performance and condition, operations and management, including reports
concerning results of operations during the most recent fiscal year and
fiscal quarter for each of us filed with the SEC;
. Telebanc management's view of the financial condition, results of
operations and businesses of both of our companies before and after
giving effect to the merger;
. current financial market conditions and historical market prices,
volatility and trading information;
. the consideration you will receive in the merger in light of comparable
merger transactions;
. the board's belief that the merger consideration to be paid by E*TRADE
is fair to you from a financial point of view;
. the opinion by Goldman Sachs to the effect that, as of May 31, 1999, the
exchange ratio was fair, from a financial point of view, to you;
. the belief that the terms of the merger agreement and the stock option
agreement are reasonable;
. the impact of the merger on Telebanc's customers and employees;
. reports from management, legal, financial and accounting advisors as to
the results of the due diligence investigation of E*TRADE; and
. the expectation that the merger will be accounted for as a pooling-of-
interests.
25
<PAGE>
The Telebanc board of directors identified a number of benefits for
Telebanc's stockholders, employees and customers that could result from the
merger. These potential benefits include:
. the potential for synergies and revenue growth by cross-selling
Telebanc's online banking services to the combined customer base;
. the merger will permit Telebanc to respond to the current and
prospective business environment in which it operates, the competitive
environment for online financial institutions and the possibility that
some competitors will soon be able to offer integrated financial
services;
. the continuing participation of Telebanc's executive officers and other
employees after the merger; and
. the merger's impact on Telebanc's depositors and customers in terms of
the wider range of products and services that will be available from a
strong and sound combined company.
In addition, the Telebanc board of directors noted that the merger is
expected to be accounted for as a pooling-of-interests and that no goodwill is
expected to be created on the books of the combined company as a result
thereof.
The Telebanc board of directors also identified and considered a number of
potentially negative factors in its deliberations concerning the merger,
including, but not limited to:
. the risk that the potential benefits of the merger may not be realized
fully;
. the possibility that the merger may not be consummated, even if approved
by Telebanc's stockholders;
. the risk of management and employee disruption associated with the
merger, including the risk that despite the efforts of the combined
company, key technical, sales and management personnel might not remain
employed by the combined company;
. the possibility that the expected growth of online brokerage services
might not be realized;
. the risk that the merger could adversely affect Telebanc's relationship
with certain of its customers and strategic partners; and
. other applicable risks described in this proxy statement/prospectus
under the heading "Risk Factors".
The Telebanc board of directors believes that on balance the potential
benefits of the merger outweigh these risks.
The foregoing discussion of the information and factors considered by the
Telebanc board of directors is not intended to be exhaustive but is believed to
include all material factors considered by the Telebanc board of directors. In
view of the variety of factors considered in connection with its evaluation of
the merger, the Telebanc board of directors did not find it practicable to and
did not quantify or otherwise assign relative weight to the specific factors
considered in reaching its determination. In addition, individual members of
the Telebanc board of directors may have given different weight to different
factors.
In light of the size and diversity of the marketplace and the competitive
positions of both E*TRADE and Telebanc, the Telebanc board of directors has
concluded that the merger represents a highly effective current and long-term
strategy for Telebanc.
Recommendation of Telebanc's Board of Directors
FOR THE REASONS DISCUSSED ABOVE, THE TELEBANC BOARD OF DIRECTORS HAS
UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND DETERMINED THAT THE MERGER IS
ADVISABLE AND FAIR TO, AND IN THE BEST INTERESTS OF, TELEBANC AND ITS
STOCKHOLDERS AND UNANIMOUSLY RECOMMENDS THAT TELEBANC STOCKHOLDERS VOTE FOR
APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE MERGER.
26
<PAGE>
In considering the recommendation of the Telebanc board of directors with
respect to the merger agreement, you should be aware that certain directors and
officers of Telebanc have interests in the merger that are different from, or
are in addition to, the interests of Telebanc stockholders generally. Please
see the section entitled "Interests of Certain Telebanc Directors, Officers and
Affiliates in the Merger" on page 37 of this proxy statement/prospectus.
Opinion of Financial Advisor to Telebanc
On May 31, 1999, Goldman Sachs delivered their oral opinion to the board of
directors of Telebanc that, as of such date, the exchange ratio of 1.05 shares
of common stock (after giving effect to the June 8, 1999 2-for-1 stock split of
Telebanc common stock) of E*TRADE Group, Inc. to be received for each share of
common stock of Telebanc, pursuant to the merger agreement, was fair from a
financial point of view to the holders of the outstanding shares of Telebanc.
Goldman Sachs confirmed their oral opinion by delivery of their written opinion
dated May 31, 1999. Goldman Sachs also has issued a written opinion, dated
November 19, 1999 to the board of directors of Telebanc, that, as of such date,
the exchange ratio of 1.05 shares (after giving effect to the 2-for-1 Telebanc
stock split) of common stock of E*TRADE to be received for each share of common
stock of Telebanc, pursuant to the merger agreement, was fair from a financial
point of view to the holders of outstanding shares of Telebanc.
The full text of the written opinion of Goldman Sachs, dated November 19,
1999, which sets forth assumptions made, matters considered and limitations on
the review undertaken in connection with the opinion is attached as Appendix D
and is incorporated by reference in this document. You should read the whole
opinion.
In connection with their opinions, Goldman Sachs reviewed, among other
things:
. the merger agreement;
. Annual Reports to Stockholders and Annual Reports on Form 10-K of
Telebanc for the four years ended December 31, 1998 and of E*TRADE for
the three years ended September 30, 1998;
. interim reports to stockholders and Quarterly Reports on Form 10-Q of
Telebanc and E*TRADE;
. other communications from Telebanc and E*TRADE to their respective
stockholders; and
. internal financial analyses and forecasts for Telebanc and E*TRADE
prepared by their respective managements.
Goldman Sachs also held discussions with members of the senior management of
Telebanc and E*TRADE regarding the strategic rationale for, and the potential
benefits of, the transaction contemplated by the merger agreement and the past
and current business operations, financial condition and future prospects of
their respective companies. In addition, Goldman Sachs:
. reviewed the reported price and trading activity for Telebanc and
E*TRADE shares;
. compared certain financial and stock market information for Telebanc and
E*TRADE with similar information for certain other companies the
securities of which are publicly traded;
. reviewed the financial terms of certain recent business combinations
involving Internet companies specifically and in other industries
generally; and
. performed such other studies and analyses as Goldman Sachs considered
appropriate.
Goldman Sachs relied upon the accuracy and completeness of all of the
financial and other information reviewed by Goldman Sachs and assumed such
accuracy and completeness for purposes of rendering their opinion. In that
regard, Goldman Sachs assumed, with the consent of Telebanc's Board of
Directors, that the internal financial forecasts prepared by the management of
E*TRADE were reasonably prepared on a basis
27
<PAGE>
reflecting the best available judgments and estimates of E*TRADE and that such
forecasts will be realized in the amounts and time periods contemplated
thereby. Goldman Sachs did not make an independent evaluation or appraisal of
the assets and liabilities of Telebanc or E*TRADE or any of their respective
subsidiaries and were not furnished with any such evaluation or appraisal.
Goldman Sachs assumed, with the consent of Telebanc's board of directors, that
the transaction contemplated by the merger agreement will be accounted for as a
pooling-of-interests under generally accepted accounting principles. Goldman
Sachs also assumed that all material governmental, regulatory or other consents
and approvals necessary for the consummation of the transaction contemplated by
the merger agreement will be obtained without any adverse effect on Telebanc or
E*TRADE or on the contemplated benefits of the transaction contemplated by the
merger agreement. Goldman Sachs was not requested to solicit, and did not
solicit, interest from other parties with respect to an acquisition of or other
business combination with Telebanc.
The advisory services and opinion of Goldman Sachs referred to in this proxy
statement/prospectus were provided for the information and assistance of the
board of directors of Telebanc in connection with its consideration of the
transaction contemplated by the merger agreement and the opinion does not
constitute a recommendation as to how any stockholder should vote with respect
to such transaction.
The following is a summary of the material financial analyses used by
Goldman Sachs in connection with providing its oral opinion to Telebanc's board
of directors on May 31, 1999. Since the Goldman Sachs analyses were presented
to Telebanc's Board prior to Telebanc's 2-for-1 stock split which took place on
June 21, 1999, the effect of the stock split was not taken into account for
purposes of that Goldman Sachs opinion. Because the stock split was not then
taken into account, the exchange ratio reads 2.1 instead of 1.05 throughout the
following summary and other Telebanc per share information has not been
adjusted.
The following summaries of financial analyses include information presented
in tabular format. You should read these tables together with the text of each
summary.
(1) Review of E*TRADE's business data and public market performance
Goldman Sachs reviewed selected business and financial data regarding
E*TRADE and ran a comparison of its product pricing and offerings with nine
other online brokers. Goldman Sachs also compared the number of online
customers (as of the end of 1998), trading market share (as of the end of
1998), the stated commission and the average annual trades per customer of
E*TRADE with similar data for:
. Charles Schwab
. TD Waterhouse (The Toronto Dominion Bank)
. Datek
. Fidelity
. Ameritrade
. DLJ Direct (Donaldson, Lufkin & Jenrette, Inc.)
. Discover (Morgan Stanley Dean Witter)
. SureTrade (Fleet Financial Group, Inc.)
The results are summarized as follows:
<TABLE>
<CAPTION>
Average Annual
Number of Trading Market Stated Trades per
Customers Share Commission Customer
----------------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
E*TRADE......... 544,000 13% $ 14.95 21.7
Range........... 100,000-2,200,000 4-21% 7.95-29.95 5.3-36.2
</TABLE>
28
<PAGE>
Goldman Sachs compared E*TRADE's level of "home and work reach" with similar
data from the top ten groups of Internet sites. These groups of Internet sites
show "home and work reach" ranging from 65.9% to 17.4%. E*TRADE's "home and
work reach" is 2.6%. Goldman Sachs also compared the level of "home and work
reach" for E*TRADE with similar data for selected online brokers. "Home and
work reach" for the selected online brokers ranged from 0.4% to 2.5%.
Goldman Sachs also compared the average time spent per person per month on
E*TRADE's web site with similar information for the ten most widely accessed
web sites (as measured in terms of average time spent per person per month).
The average time spent per person per month on E*TRADE is 66.5 minutes. The
average for the top ten web sites is 104.2 minutes; the range for these web
sites runs from 160.8 minutes to 73.8 minutes.
The analysis also showed that over 2.5% of total online users access
E*TRADE's web site. The percentage of total online users accessing other
selected online brokers ranges from 0.4% to 2.5%.
Goldman Sachs reviewed selected financial information for E*TRADE, some of
which has been estimated for future periods (throughout this section of this
document, estimated information is denoted with an "E"). A summary of this
information is presented below:
<TABLE>
<CAPTION>
Year Ending September 3 Months Ended Year Ending
30, March 31, September 30,
------------------------ 1999, ------------------
($ in millions) 1996 1997 1998 Annualized 1999E(a) 2000E(a)
--------------- ------ ------- ------- -------------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net revenues............ $ 62.5 $ 156.4 $ 245.3 $ 506.6 $ 533.2 $ 771.2
Net income.............. $ 1.2 $ 15.0 $ (1.8) $ 23.1 $ (43.3) $ 36.9
EPS (diluted)........... $ 0.01 $ 0.10 $ (0.01) $ 0.10 $ (0.19) $ 0.15
Average daily
transactions........... 6,100 16,400 27,600 70,492 72,386 102,133
Pre-marketing margin.... 18% 34% 28% 29% 27% 32%
Customer assets......... $2,600 $ 7,700 $11,200 $21,000 $29,100 $ 42,600
</TABLE>
- --------
(a) Source: Goldman Sachs Equity Research
Goldman Sachs reviewed selected earnings per share (EPS) estimates, price
targets and recommendations of 14 securities analysts. Of these analysts, 3
rated E*TRADE "Strong Buy", 8 "Buy" and 3 "Hold".
Goldman Sachs also reviewed estimates of revenues, marketing expenses, net
income and accounts from selected investment banks including, in addition to
Goldman Sachs itself, ABN AMRO Inc., BancBoston Robertson Stephens Inc.,
Hambrecht & Quist Inc., Lehman Brothers, Inc. and Pacific Crest Securities.
Their estimates are summarized below:
<TABLE>
<CAPTION>
Marketing
Revenues Expenses Net Income Accounts
----------------- ----------------- ---------------- -----------------------
1999E 2000E 1999E 2000E 1999E 2000E 1999E 2000E
-------- -------- -------- -------- --------- ----- ----------- -----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Goldman Sachs........... $ 533 $ 771 $ 252 $ 185 $ (43) $ 37 1,418 2,297
Range(a)................ 400-591 554-814 159-251 171-200 (73)-(41) 6-41 1,071-1,336 1,655-2,032
Median(b)............... 528 748 251 181 (56) 37 1,335 2,003
</TABLE>
- --------
(a) Excluding Goldman Sachs
(b) Including Goldman Sachs
29
<PAGE>
Goldman Sachs also reviewed E*TRADE's shareholder profile. E*TRADE's
shareholders generally fall in the following categories:
<TABLE>
<S> <C>
Institutional Investors.............................................. 31.5%
SOFTBANK............................................................. 27.5%
Retail Investors..................................................... 32.0%
Officers and Directors............................................... 9.0%
</TABLE>
Three institutional investors who own 5.9% of Telebanc's shares also own 4.4%
of E*TRADE.
An analysis of recent average daily trading volumes and prices for Telebanc
and E*TRADE showed the following results:
<TABLE>
<CAPTION>
Average Daily Trading Volume
-----------------------------------------------------------------
4/12-5/29 Since One
5/29/99 5 Day 10 Day 35 Day 60 Day 90 Day 1/1/99 Year
------- ------ ------ --------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Telebanc Common Stock
Average per share
trading price.......... $66.50 $64.99 $70.26 $92.18 $81.66 $69.15 $64.58 $36.28
% of Primary Shares
Outstanding............ 2.3% 5.1% 6.6% 7.6% 5.3% 4.0% 3.5% 1.9%
E*TRADE Common Stock
Average per share
trading price.......... $44.50 $45.26 $50.13 $52.54 $43.88 $37.52 $35.08 $17.36
% of Primary Shares
Outstanding............ 2.5% 4.4% 4.0% 7.0% 5.7% 5.9% 6.4% 4.1%
</TABLE>
(2) Overview of Telebanc
Goldman Sachs reviewed Telebanc's selected business and financial data,
stock price and trading volume history. A comparison with selected Internet
related companies show that E*TRADE and Telebanc generally performed in line
with their competitors. On the basis of an indexed price of $100 per share a
year ago, an indexed price per share of E*TRADE and Telebanc would have been in
the $700-800 range on May 28, 1999. On the same basis, it would have been
approximately $1,200 for Ameritrade and approximately $500 for both Schwab and
Netbank, on May 28, 1999. On the same basis, Goldman Sachs' Internet Index
would have been approximately $400 on May 28, 1999.
Goldman Sachs also reviewed selected research analyst reports and their
respective recommendations. Of these reports, three rated Telebanc "Strong
Buy", one "Buy" and one "Sell". Goldman Sachs compared Telebanc's management
estimates for selected financial data with estimates of Goldman Sachs, Merrill
Lynch, BancBoston Robertson Stephens, First Security Van Kasper and Legg Mason.
The results of this analysis are summarized below:
<TABLE>
<CAPTION>
Marketing
Revenues Expenses Net Income Deposits Assets
------------- ----------- ----------- ----------------------- -----------------------
($ in millions) 1999E 2000E 1999E 2000E 1999E 2000E 1999E 2000E 1999E 2000E
- --------------- ----- ------- ----- ----- ----- ----- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Telebanc Management..... $ 71 $ 132 $ 21 $ 46 $ 7 $ 23 $ 2,246 $ 4,483 $ 4,679 $ 9,537
Goldman Sachs........... 72 131 21 46 6 14 2,209 4,346 4,978 9,438
Other Investment Banks:
Range(a)................ 51-65 105-129 20-21 45-47 4-5 9-13 2,101-2,150 4,255-4,300 4,285-4,436 7,763-9,104
Median(b)............... 64 126 21 46 4 13 2,146 4,295 4,424 9,000
</TABLE>
- --------
(a) Excluding Goldman Sachs
(b) Including Goldman Sachs
30
<PAGE>
Goldman Sachs reviewed selected financial information for Telebanc, a
summary of which is presented below:
<TABLE>
<CAPTION>
Year Ending December 3 Months ended Year Ending
31, March 31, December 31,
----------------------- 1999, -----------------
($ in millions) 1996 1997 1998 Annualized 1999E(a) 2000E(a)
--------------- ------- ------- ------- -------------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net revenues(b)......... $ 12.8 $ 16.4 $ 26.5 $ 50.1 $ 68.6 $ 126.3
Operating profit........ 3.7 6.9 4.4 14.2 12.9 26.9
EPS (diluted)........... 0.58 0.57 0.13 0.36 0.33 0.70
Net loans receivable.... 351.8 540.7 904.9 1,151.0 2,339.5 4,435.8
Deposit accounts........ 16,506 21,817 50,835 57,946 98,281 209,205
</TABLE>
- --------
(a) Sources: Goldman Sachs Equity Research
(b) After provisions for loan losses.
Goldman Sachs also reviewed Telebanc's shareholder profile. Telebanc's
shareholders generally fall in the following categories:
<TABLE>
<S> <C>
Institutional Investors.............................................. 49.4%
Officers and Directors............................................... 11.5%
Retail Investors..................................................... 27.8%
Others............................................................... 11.3%
</TABLE>
(3) Selected Companies Analysis
Goldman Sachs reviewed and compared selected financial information, ratios
and public market multiples relating to Telebanc and E*TRADE to corresponding
information for eight other publicly traded companies providing financial
services over the Internet:
<TABLE>
<CAPTION>
Online Online Other E-
bank Online Brokers Lender financial
------ -------------- -------- --------------
<S> <C> <C> <C>
Net.B@nk Charles Schwab NextCard Intuit
Ameritrade CheckFree
DLJ Direct Security First
</TABLE>
Goldman Sachs' analyses for these selected companies compared the following
to the results of Telebanc and E*TRADE, using the closing prices of the
selected shares on May 28, 1999:
. Market capitalization, which is the market value of common equity;
. Share price, as a multiple of earnings, pre-marketing earnings, book
value and assets;
. LTM revenues, which are the revenues for the most recently reported
twelve-month period as of May 28, 1999;
. Enterprise value as a multiple of revenues. Enterprise value is defined
as market capitalization plus net debt if net debt; and
. Revenue Growth between 1997 and 1998 and between 1998 and 1999 estimated
data.
<TABLE>
<CAPTION>
Price/Pre-
Mkt. Enterprise
Price/Earnings Earnings(a) Value/Revenues
---------------- ------------ ------------------
($ in millions) 1999E 2000E 1999E 2000E LTM 1999E 2000E
- --------------- ------- ------- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
E*TRADE.................... N.M. 203.6x 98.4x 64.5x 34.9x 17.7x 13.5x
Telebanc................... 204.6x 94.7x 66.4x 28.7x 25.4x 17.8x 9.7x
Median--Online Banks(b).... 227.7x 118.4x 123.6x 63.9x 85.1x 37.9x 21.2x
Median--Online Brokers(c).. 211.3x 185.2x 85.4x 56.6x 30.0x 17.8x 13.2x
Nextcard................... N.M. N.M. N.M. N.M. 867.4 46.9x 30.8x
Median--Other E-Financial.. 132.9x 137.1x 64.5x 50.9x 9.9x 9.6x 7.4x
Median--Selected
Portals/Media(d).......... 370.0x 208.8x 171.7x 125.9x 57.4x 36.3x 21.6x
</TABLE>
31
<PAGE>
- --------
(a) Assuming a 35% tax rate.
(b) Including Telebanc
(c) Including E*TRADE
(d) Portals/Media composite: America Online, GeoCities, iVillage, Yahoo! and
ZDNet.
Goldman Sachs also compared the stock price performance of Telebanc and
E*TRADE to the performance of other Internet companies and selected composite
indexes:
<TABLE>
<CAPTION>
% Change Through May 28, 1999
---------------------------------------
December 31, April 12, 52-Week 52-Week
1998 1999 Low High
------------ --------- ------- -------
<S> <C> <C> <C> <C>
Telebanc......................... 95.6% (38.1)% 744.4% (56.2)%
E*TRADE.......................... 280.5 (7.3) 1,680.0 (38.4)
Online Bank:
Net.B@nk....................... 365.0 (19.3) 1,091.3 (48.6)
Online Brokers:
Charles Schwab................. 87.8 (0.8) 470.3 (31.9)
Ameritrade..................... 469.4 (37.0) 1,494.4 (52.4)
Other E-Financial:
Intuit......................... 12.2 (22.4) 138.0 (26.5)
CheckFree...................... 101.3 (8.6) 718.5 (31.9)
Security First................. 151.6 (31.5) 741.1 (51.6)
Selected Composites:
S&P 500........................ 5.9 (4.2) 41.0 (5.4)
S&P Bank Composite............. (2.0) (8.5) 29.3 (16.9)
NASDAQ......................... 12.7 (4.9) 82.0 (7.7)
Russell 2000................... 4.0 6.4 44.4 (6.1)
Goldman Sachs Internet Index... 46.0 (25.1) 388.9 (29.0)
</TABLE>
(4) Transaction Multiple Analysis
Goldman Sachs calculated, for selected periods ending on May 28, 1999:
. the ratios of the average market price of E*TRADE shares to the average
market price of Telebanc shares and
. the difference between the price offered by E*TRADE for Telebanc shares
on the basis of a 2.1 exchange ratio (Telebanc effected its 2-for-1
stock split after the date of this analysis, on June 21, 1999) and the
average market price of Telebanc shares.
The results are shown below:
<TABLE>
<CAPTION>
Premium to
Average on
the Basis
Average of a 2.1
Exchange Exchange
Period Ratio Ratio
------ -------- ----------
<S> <C> <C>
1-Day.................................................... 1.49 40.5%
5-Day Average............................................ 1.38 52.2
10-Day Average........................................... 1.46 44.0
15-Day Average........................................... 1.54 36.4
20-Day Average........................................... 1.61 30.4
25-Day Average........................................... 1.69 24.0
30-Day Average........................................... 1.73 21.6
60-Day Average........................................... 1.88 11.7
90-Day Average........................................... 1.85 13.3
</TABLE>
32
<PAGE>
The same 2.1 exchange ratio also showed the following estimated multiples of
Telebanc revenues, pre-marketing earnings and net income as of May 28, 1999:
<TABLE>
<CAPTION>
Multiple
--------
<S> <C>
Multiple of Revenues
1999E.......................................................... 25.2x
2000E.......................................................... 13.8x
Multiple of Pre-Marketing Earnings
1999E.......................................................... 94.2x
2000E.......................................................... 40.7x
Multiple of Net Income
1999E.......................................................... 313.3x
2000E.......................................................... 125.3x
</TABLE>
- --------
Source of estimates: Goldman Sachs Equity Research
(5) Analysis of the Merger
Goldman Sachs performed an analysis of the accretion/dilution in earnings
per share for E*TRADE common stock expected to result from the merger and
prepared pro forma selected financial information.
On the basis of the 2.1 exchange ratio (as in effect on May 28, 1999), and
assuming that the closing of the merger occurs at June 30, 1999 and that no
synergies will result from the transaction, accretion/dilution in earnings per
share of E*TRADE for years 1999-2001 were estimated as follows:
<TABLE>
<CAPTION>
Accretion/(Dilution)
----------------------------
Pre-
Marketing Earnings
Revenues Earnings Per Share
-------- --------- ---------
<S> <C> <C> <C>
1999.......................................... (5.5)% (4.6)% (23.1)%
2000.......................................... (3.3)% 4.5 % 11.1 %
2001.......................................... 0.2 % 8.6 % 14.3 %
</TABLE>
Also, assuming that the closing occurs at June 30, 1999, Goldman Sachs
prepared estimated pro forma financial information for the combined company, a
summary of which is presented below:
<TABLE>
<CAPTION>
Pro Forma
-----------------------------
($ in millions) 1998 1999E 2000E
--------------- -------- -------- ---------
<S> <C> <C> <C>
Income Statement:
Net revenues................................ $ 267.5 $ 591.0 $ 884.0
% Growth.................................. 121 % 50%
Pre-marketing earnings...................... $ 48.9 $ 134.8 $ 193.6
% Growth.................................. 176 % 44%
Net income $ 0.4 $ (39.1) $ 48.8
Balance Sheet:
Assets...................................... $3,936.6 $8,465.5 $13,712.6
Equity...................................... 831.4 1,152.5 1,501.3
Other Statistics:
Customer accounts ('000s)................... 591.0 1,498.3 2,479.0
</TABLE>
33
<PAGE>
(6) Review of Selected Transactions Involving Internet Companies
Goldman Sachs reviewed six acquisitions involving Internet companies since
September 1998. Goldman Sachs' analyses of these selected transactions included
the following information:
. aggregate consideration;
. aggregate consideration as a multiple of the target's revenue for the
year of the transaction and the first and second full years following
the transaction; and
. premium paid over the trading price of the shares the day before the
announcement and the date which is 30-day before the announcement and,
finally, over the highest price of the preceding 52 weeks.
The results of this analysis are summarized below:
<TABLE>
<CAPTION>
Revenue Multiple Premium Paid
------------------------------- ------------------------
First Second Before Announcement
Fiscal Fiscal ------------------------
LTM Year Year 1 day 30 days
---------- ---------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Range........... 2.3-253.8x 2.1-149.2x 0.6-80.4x (4.2)-67.4% (10.5)-212.3%
Median.......... 26.8x 18.8x 13.2x 52.0% 60.7%
</TABLE>
(7) Contribution Analysis
Goldman Sachs reviewed financial information for 1998 and Goldman Sachs
Equity Research estimates for 1999 and 2000 concerning Telebanc, E*TRADE and
the combined company. The analysis indicated that holders of Telebanc common
stock would receive 14% of the outstanding common equity of the combined
company. It also indicated the following contributions by Telebanc and E*TRADE
to the combined company:
<TABLE>
<CAPTION>
Telebanc E*TRADE
-------- -------
<S> <C> <C>
Market capitalization(a).................................. 10.4% 89.6%
Assets(b)................................................. 47.4 52.6
Cash and investments(b)................................... 75.4 24.6
Tangible common equity(b)................................. 33.9 66.1
Net revenues(c)
1998A................................................... 8.3% 91.7%
1999E................................................... 9.8 90.2
2000E................................................... 12.8 87.2
Marketing expenditures(c)
1998A................................................... 4.7% 95.3%
1999E................................................... 5.8 94.2
2000E................................................... 16.9 83.1
Pre-marketing earnings(c)
1998A................................................... 6.9% 93.1%
1999E................................................... 10.6 89.4
2000E................................................... 18.7 81.3
Net income(c)
1998A................................................... NM NM
1999E................................................... NM NM
2000E................................................... 24.1% 75.9%
</TABLE>
- --------
(a) Fully diluted market capitalization as of May 28, 1999
(b) Data as of March 31, 1999 (Pro forma for Telebanc secondary offering)
(c) Source: Goldman Sachs Equity Research
34
<PAGE>
Goldman Sachs utilized substantially the same types of analyses in preparing
their opinion, dated November 19, 1999 (a complete copy of which appears in
Appendix D), as the analyses summarized above. In connection with such opinion,
Goldman Sachs updated certain of the data used in those analyses, including the
following:
<TABLE>
<CAPTION>
% Change Through November 17,
1999
----------------------------------
52- 52-
December 31, May 28, Week Week
1998 1999(a) Low High
------------ ------- ----- -----
<S> <C> <C> <C> <C>
Telebanc................................... 93.8% (0.9)% 279.1% (56.6)%
E*TRADE.................................... 198.7% (21.5)% 581.7% (51.6)%
Online Bank:
Net.B@nk................................. 231.4 (28.7) 350.0 (63.4)
Online Brokers:
Charles Schwab........................... 49.3 (20.5) 141.9 (45.9)
Ameritrade............................... 417.9 (9.1) 873.9 (56.7)
TD Waterhouse............................ N.A. N.A. 68.3 (29.4)
DLJ Direct............................... N.A. (58.3) 42.8 (60.7)
Online Lenders:
E-LOAN................................... N.A. N.A. 60.2 (62.4)
NextCard................................. N.A. 11.7 74.8 (37.1)
Online Insurance:
Insweb................................... N.A. N.A. 57.1% (46.9)%
Selected Composites:
S&P Bank Composite....................... 2.8 2.6 24.7 (5.9)
NASDAQ................................... 49.1 32.3 85.1 (1.7)
GS Internet Index........................ 64.7 12.8 175.3 (19.9)
</TABLE>
- --------
(a) Represents closing price one trading day prior to announcement of
Telebanc/E*TRADE merger.
In addition, in connection with providing the opinion, dated November 19,
1999, Goldman Sachs compared the enterprise value multiple to 1999 and 2000
estimated revenues and the multiple of market value to estimated 1999 and 2000
forward pre-marketing, pre-tax earnings for each of Telebanc and Net.B@nk for
the period January 1, 1999 to May 28, 1999 (the last trading day before entry
into the merger agreement). For that period, Telebanc's average, high, low and
last enterprise value to 1999 revenue multiple ("last" meaning the multiple
measured on May 28, 1999), expressed as a percentage of Net.B@nk's average,
high, low and last enterprise value to 1999 revenue multiple was 46.9%, 67.8%,
23.6% and 47.9%, respectively. Based on Net.B@nk's November 17, 1999 enterprise
value to 1999 estimated revenue multiple of 39.2x, the average, high, low and
last percentage would result in multiples of 18.4x, 26.6x, 9.3x and 18.8x,
respectively. This compares to the multiple of 1999 revenues represented by the
merger consideration, as of November 17, 1999, of 19.8x. For the January 1-to-
May 28 period, Telebanc's average, high, low and last multiple of enterprise
value to 2000 revenue, expressed as a percentage of Net.B@nk's average, high,
low and last enterprise value to 2000 revenue multiple, was 52.2%, 81.9%, 20.7%
and 50.2%, respectively. Based on Net.B@nk's November 17, 1999 enterprise value
to 2000 estimated revenue multiple of 19.1x, the average, high, low and last
percentage would result in multiples of 10.0x, 15.6x, 4.0x and 9.6x,
respectively. This compares to the November 17, 1999 merger consideration 2000
revenue multiple of 10.8x. For the January 1-to-May 28 period, Telebanc's
average, high, low and last market value to 1999 pre-marketing pre-tax earnings
multiple, expressed as a percentage of Net.B@nk's average, high, low and last
market value to 1999 pre-marketing pre-tax earnings multiple, was 61.7%, 86.8%,
29.6% and 71.9%, respectively. Based on Net.B@nk's November 17, 1999 market
value to 1999 estimated pre-marketing pre-tax multiple of 106.5x, the average,
high, low and last percentage would result in multiples of 65.7x, 92.4x, 31.5x
and 76.6x, respectively. This compares to the
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November 17, 1999 merger consideration 1999 pre-marketing pre-tax earnings
multiple of 74.1x. For the period of January 1 to May 28, Telebanc's average,
high, low and last market value to 2000 pre-marketing pre-tax earnings
multiple, expressed as a percentage of Net.B@nk's average, high, low and last
market value to 2000 pre-marketing pre-tax earnings multiple, was 56.2%, 85.9%,
24.8% and 53.6%, respectively. Based on Net.B@nk's November 17, 1999 market
value to 2000 estimate pre-marketing pre-tax multiple of 49.5x, the average,
high, low and last percentage would result in multiples of 27.8x, 42.5x, 12.3x
and 26.5x, respectively. This compares to the November 17, 1999 2000 pre-
marketing pre-tax earnings multiple represented by the merger consideration of
32.0x.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analyses or of the summary set forth above, without considering
the analyses as a whole, could create an incomplete view of the processes
underlying Goldman Sachs' opinion. In arriving at its fairness determination,
Goldman Sachs considered the results of all such analyses. No company or
transaction used in the above analyses as a comparison is directly comparable
to Telebanc or E*TRADE or the contemplated transaction.
The analyses were prepared for purposes of providing an opinion to
Telebanc's board of directors as to the fairness of the exchange ratio from a
financial point of view to the holders of Telebanc shares. The analyses do not
purport to be appraisals or necessarily reflect the prices at which businesses
or securities actually may be sold. Analyses based upon forecasts of future
results are not necessarily indicative of actual future results, which may be
significantly more or less favorable than suggested by such analyses. Because
such analyses are inherently subject to uncertainty, being based upon numerous
factors or events beyond the control of the parties or their respective
advisors, none of Telebanc, E*TRADE, Goldman Sachs or any other person assumes
responsibility if future results are materially different from those forecast.
As described above, Goldman Sachs' opinion to Telebanc's board was one of
many factors taken into consideration by Telebanc's board in making its
determination to approve the merger. The foregoing summary does not purport to
be a complete description of the analyses performed by Goldman Sachs. You
should read the whole written opinion of Goldman Sachs attached as Appendix D.
Goldman Sachs, as part of its investment banking business, is continually
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private placements
and valuations for estate, corporate and other purposes. Goldman Sachs is
familiar with Telebanc, having provided investment banking services to Telebanc
from time to time, including having acted as lead managing underwriter of a
public offering of 4,370,000 shares in April 1999 and having acted as its
financial advisor in connection with, and having participated in the
negotiations leading to, the merger agreement. Goldman Sachs provides a full
range of financial advisory and securities services and, in the course of its
normal trading activities, may from time to time effect transactions and hold
securities, including derivative securities, of Telebanc or E*TRADE for its own
account and for the accounts of customers. Goldman Sachs has provided
investment banking services to E*TRADE from time to time and may provide
investment banking services to E*TRADE in the future.
Pursuant to a letter agreement dated May 23, 1999, Telebanc engaged Goldman
Sachs to act as its exclusive financial advisor in connection with a possible
sale of all or a portion of Telebanc. Pursuant to the terms of that letter,
Telebanc agreed to pay Goldman Sachs a fee which is based on the actual outcome
of the merger. If the merger is consummated, a transaction fee of 0.85% of the
total consideration will be paid, provided that the minimum transaction fee
shall be $12.5 million and that the maximum transaction fee shall be $18.5
million. Telebanc has agreed to pay such amount in cash upon consummation of
the transaction. Telebanc also has agreed to reimburse Goldman Sachs for their
reasonable out-of-pocket expenses, including attorneys' fees, and to indemnify
Goldman Sachs against certain liabilities, including certain liabilities under
the federal securities laws regardless of whether the merger is consummated.
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Interests of Certain Telebanc Directors, Officers and Affiliates in the Merger
In considering the recommendation of the Telebanc board of directors you
should be aware that certain officers and directors of Telebanc have interests
in the merger which are different from, or in addition to, yours. The Telebanc
board of directors was aware of these potential conflicts and considered them.
Assuming the merger occurs on December 31, 1999, options to purchase
approximately 2,540,000 shares of Telebanc common stock, at exercise prices
ranging from $7.25 to $16.75 per share will automatically become vested in
connection with the merger or will vest upon an involuntary termination
following a merger. As of May 28, 1999, options to purchase a total of
3,883,616 shares of Telebanc common stock, at exercise prices ranging from
$1.375 to $16.344 per share were held by directors and executive officers of
Telebanc. Assuming the merger occurs on December 31, 1999, Telebanc's officers
and directors will hold options to purchase approximately 1,690,000 shares of
Telebanc common stock, at exercise prices ranging from $2.219 to $15.544 per
share that will automatically become vested in connection with the merger or
will vest upon an involuntary termination following a merger.
Upon completion of the merger or upon involuntary termination following a
merger, the vesting under stock options held by all of the officers and
directors of Telebanc will accelerate as shown below:
<TABLE>
<CAPTION>
Options
Name Accelerated
---- -----------
<S> <C>
Ross C. Atkinson................................................. 64,000
Mitchell H. Caplan............................................... 480,000
Stephen G. Dervenis.............................................. 30,000
Arlen W. Gelbard................................................. 46,000
Laurence P. Greenberg............................................ 174,756
Dean C. Kehler................................................... 24,000
Marcia Myerberg.................................................. 16,000
Michael R. Opshal................................................ 107,504
Steven F. Piaker................................................. 24,000
Aileen Lopez Pugh................................................ 151,500
David A. Smilow.................................................. 480,000
Sang-Hee Yi...................................................... 91,752
</TABLE>
The acceleration of the vesting of options upon the merger or upon
involuntary termination following a merger, together with any other payments
contingent upon or made in connection with the merger may, result in "excess
parachute payments" as defined in Section 280G of the Internal Revenue Code.
Excess parachute payments are not deductible in accordance with Section 280G.
As a result, E*TRADE will not be entitled to a tax deduction for the amounts
determined to be excess parachute payments. The amount of the lost deduction
will depend upon the value of the shares at the time of the merger, the number
of option shares being accelerated, the date the merger occurs and an interest
rate calculated by the Internal Revenue Service.
In addition, a number of Telebanc employees have entered into management
continuity agreements with E*TRADE. These management continuity agreements
provide the terms of the employee's employment with E*TRADE.
If E*TRADE terminates the employment of certain individuals, including
Mitchell H. Caplan, Ross C. Atkinson, Stephen G. Dervenis, Arlen W. Gelbard,
Laurence P. Greenberg, Sang Jin Han, Sang-Hee Yi, David P. Lau or Aileen Lopez
Pugh "Without Cause," or, if such individuals otherwise terminate their
employment with E*TRADE for "Good Reason," within 12 months after the closing
date, then E*TRADE will provide severance payments of up to six months' base
salary to such individuals.
For purposes of these severance benefits, "Without Cause" means the
individual's termination for any reason other than: (i) material failure to
perform the duties of his or her position after receipt of a written warning
specifying the performance problem and a period of not less than 30 days in
which to cure;
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(ii) engaging in misconduct as set out in the E*TRADE Code of Conduct; (iii)
conviction of a felony; (iv) any act of fraud against, or the misappropriation
of property belonging to E*TRADE or any of its employees; or (v) a material
breach of the management continuity agreement or of any confidentiality or
proprietary information agreement with E*TRADE.
For purposes of this section a resignation for "Good Reason" shall mean a
resignation within 30 days after any of the following events: (i) relocation of
the individual's principal place of employment by more than 35 miles from the
individual's current office; or (ii) a substantial reduction in the
individual's base salary, title, compensation, duties or benefits.
For more information relating to the management continuity agreements,
please see the section called "Management Continuity Agreements" under the
caption "Related Agreements" on page 54 of this proxy statement/prospectus.
The merger agreement provides that E*TRADE will, from and after the
effective time, and will cause Telebanc to, indemnify the present and former
officers, directors and employees and agents of Telebanc in respect of acts or
omissions occurring on or prior to the effective time, in each case to the full
extent such corporation is permitted under the Telebanc certificate of
incorporation or the Telebanc bylaws or any indemnification agreement to which
Telebanc is a party, in each case as in effect on the date of the merger
agreement. See "The Merger Agreement--Director and Officer Indemnification and
Insurance."
Regulatory Approvals
To complete the merger, E*TRADE must receive the approval of the Office of
Thrift Supervision to become a savings and loan holding company. E*TRADE and
Telebanc have agreed to cooperate and use their reasonable best efforts to
obtain all required regulatory approvals.
E*TRADE has filed with the Office of Thrift Supervision an application for
approval to acquire Telebanc and Telebank, and thereby to become a savings and
loan holding company. In reviewing the application, the Office of Thrift
Supervision is required to consider:
. the financial and managerial resources and future prospects of E*TRADE,
Telebanc and Telebank;
. the effect of the acquisition on Telebank;
. any risk posed to the federal deposit insurance fund;
. the competitive effects of the transaction; and
. the convenience and needs of the community to be served by Telebank.
Consideration of the managerial resources of E*TRADE, Telebanc and Telebank
entails a consideration of the competence, experience, and integrity of the
officers, directors and controlling shareholders of E*TRADE, Telebanc and
Telebank. In deciding whether to approve the application, the Office of Thrift
Supervision will also consider Telebank's record of performance under the
Community Reinvestment Act of 1977 in meeting the credit needs of the
communities it serves, including low- and moderate-income neighborhoods. The
Office of Thrift Supervision will also consider:
. the performance of E*TRADE and Telebanc's information systems;
. their readiness for processing date information related to the Year
2000; and
. the effect of the merger, if any, on such readiness.
As a result of SOFTBANK Corporation's ownership of more than 10% of
E*TRADE's outstanding common stock (through its wholly-owned subsidiary
SOFTBANK America, Inc.), SOFTBANK is presumed to control E*TRADE under the
Office of Thrift Supervision's regulations, subject to the opportunity to rebut
this
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presumption by obtaining the Office of Thrift Supervision's acceptance of a
rebuttal submission. This submission must set forth the facts and circumstances
which support the contention that no control relationship exists, and generally
must include a written agreement between the submitter (in this case, SOFTBANK)
and the Office of Thrift Supervision. SOFTBANK America has filed with the
Office of Thrift Supervision a submission and agreement seeking to rebut the
regulatory presumption of control. The Office of Thrift Supervision staff has
indicated, however, that the existence of a joint venture between E*TRADE and
SOFTBANK in Japan, along with several instances in which E*TRADE has an
investment in or contractual relationship with a company that is also a
SOFTBANK investee, may lead the Office of Thrift Supervision to deny the
rebuttal of control. E*TRADE and SOFTBANK have made a presentation to the
Office of Thrift Supervision of facts and circumstances which suggest that
these relationships are not indicative of control of E*TRADE by SOFTBANK, but
no assurance can be given that the Office of Thrift Supervision will accept
SOFTBANK America's rebuttal filing.
The Office of Thrift Supervision could also take the view that the
presumption of control by SOFTBANK is conclusive and not rebuttable if, at the
time of completion of the Telebanc transaction, SOFTBANK's $400 million
investment in E*TRADE represents more than 25% of E*TRADE's shareowners'
equity. Depending on the amount of E*TRADE's shareowners' equity at the time,
this view could require SOFTBANK America to sell a small portion of its
interest in E*TRADE in order to avoid the conclusive presumption of control. If
SOFTBANK does not rebut the presumption of control, it would be required to
obtain the approval of the Office of Thrift Supervision to become a savings and
loan holding company prior to completion of the merger. SOFTBANK, however, has
indicated to E*TRADE that it is not willing to become a savings and loan
holding company. As a result, if the Office of Thrift Supervision does not
accept a rebuttal of control from SOFTBANK America, regulatory approval of the
merger would not be obtainable, and the merger could not be completed. Even if
SOFTBANK does rebut the presumption of control, the Office of Thrift
Supervision's further consideration of this issue could delay its processing of
E*TRADE's application.
As part of the review process under the Community Reinvestment Act, it is
not unusual for the Office of Thrift Supervision to receive protests and other
adverse comments from community groups and others. Telebank currently has a
"satisfactory" Community Reinvestment Act rating from the Office of Thrift
Supervision. The regulations of the Office of Thrift Supervision require
publication of notice of, and an opportunity for public comment with respect
to, the application filed in connection with the merger. E*TRADE is aware of
one community group that has filed comment letters with the Office of Thrift
Supervision opposing E*TRADE's application to acquire Telebanc and requesting
that the Office of Thrift Supervision hold an informal meeting with E*TRADE and
the commenter regarding the application. To the best of E*TRADE's knowledge, as
of November 18, 1999, the Office of Thrift Supervision has not ruled on the
request for an informal meeting. The community group's comment letters
challenge, among other things, Telebanc's designation as a "wholesale bank"
under the Community Reinvestment Act and Telebanc's designation of Arlington
County as its current service area for purposes of that Act. These comments
could prolong the period during which the merger is subject to review by the
Office of Thrift Supervision.
Based on the issues raised by the Office of Thrift Supervision, there can be
no assurance that the Office of Thrift Supervision's approval will be granted
or as to what conditions the Office of Thrift Supervision may impose on its
grant of approval. If the Office of Thrift Supervision grants its approval,
there can be no assurance as to the date of the approval, including whether the
approval will be received prior to December 31, 1999, the date after which
either party may terminate the Merger Agreement. Under the Office of Thrift
Supervision's standard processing guidelines, even if the SOFTBANK and
Community Reinvestment Act issues are resolved promptly and E*TRADE's
application is deemed complete, the application would not be approved until
after December 31, 1999. Neither party has determined the course of action it
would pursue in the event that the merger cannot be completed by December 31,
1999.
Telebanc Financial Corporation's wholly owned subsidiary, Telebanc Capital
Markets, Inc., a broker-dealer registered with the Securities and Exchange
Commission pursuant to Section 15(a) of the Securities Exchange Act and a
member of the National Association of Securities Dealers, filed a written
notice of the
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proposed change in its equity ownership and application for continuance in
membership with the National Association of Securities Dealers. As of September
20, 1999, the National Association of Securities Dealers granted the
application for Telebanc Capital Markets to engage in the business which is set
forth in the Membership agreement which was filed with the National Association
of Securities Dealers on or about October 13, 1999. Telebanc Capital Markets
also will file appropriate notices with applicable state securities regulators
and other self-regulatory organizations of which it is a member.
Upon consummation of the merger, Telebanc Insurance Services, Inc., an
insurance agency domiciled and licensed in the Commonwealth of Virginia will
notify the Virginia Bureau of Insurance of the change in the indirect control
of Telebanc Insurance Services, Inc. Telebanc Insurance Services, Inc. also
will file appropriate notices with applicable state insurance regulators in
states where it conducts an insurance agency business.
Neither Telebanc nor E*TRADE is aware of any other material governmental or
regulatory approval required for completion of the merger, other than
compliance with applicable corporate law of Delaware.
Regulatory Matters Following the Merger
If and when the transaction is approved by the Office of Thrift Supervision
and completed, E*TRADE, like Telebanc, would become a savings and loan holding
company. E*TRADE is currently not subject to regulation as a savings and loan
holding company or bank holding company and does not control any FDIC-insured
institution. As a savings and loan holding company, E*TRADE would be required
to register with the Office of Thrift Supervision and file periodic reports,
and would be subject to examination by the Office of Thrift Supervision.
E*TRADE would also be limited in its ability to invest in other savings and
loan holding companies, and to enter into transactions with Telebank. Under
financial modernization legislation recently enacted into law, E*TRADE's
activities would also be restricted to activities that are financial in nature
and certain real-estate related activities. E*TRADE believes that all of its
existing activities and investments qualify as financial in nature and
therefore the legislation will not have a material impact on its application to
acquire control of Telebanc, but the Office of Thrift Supervision and other
banking agencies have not yet issued regulations or otherwise interpreted the
new statute. Under the new legislation, E*TRADE will be constrained in pursuing
future new activities to a greater degree than either E*TRADE or Telebanc are
currently restricted or that Telebanc would be restricted if the merger did not
take place.
In addition to regulation of E*TRADE and Telebanc as savings and loan
holding companies, Federal savings banks such as Telebank are subject to
extensive regulation of their activities and investments, their capitalization,
their risk management policies and procedures, and their relationship with
affiliated companies. In addition, as a condition to approving the merger, the
Office of Thrift Supervision may impose restrictions on the integration of the
Telebank banking and E*TRADE securities brokerage businesses, and may require
prior approval of any future material changes to Telebank's business plans.
Telebank is currently, and following its acquisition by E*TRADE would
remain, subject to the Community Reinvestment Act. Under the Community
Reinvestment Act, Telebank must help meet the credit needs of the communities
it serves, including low- and moderate-income neighborhoods. Even though
Telebank obtains deposits on a nationwide basis primarily over the internet and
through the U.S. mail, its current service area for purposes of the Community
Reinvestment Act is the Arlington County, Virginia market, where Telebank's
home office is located. The Office of Thrift Supervision is expected to issue
in the future guidance on the application of the Community Reinvestment Act to
a depository institution which conducts business over the internet. This
guidance may affect the way in which Telebank seeks to meet its obligations
under the Community Reinvestment Act.
Telebank is currently classified as a "wholesale bank" for purposes of the
Community Reinvestment Act. Satisfaction of a wholesale bank's responsibilities
under the Community Reinvestment Act is measured by various criteria,
including:
. the number and amount of community development loans, qualified
investments and community development services; and
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. the innovativeness or complexity of those loans, investments and
services.
If Telebank were to provide new types of lending services, it could lose its
classification as a wholesale bank. If it were to lose such classification,
Telebank's Community Reinvestment Act evaluation would depend to a far greater
degree on the extent to which it makes loans in its service area to low- and
moderate-income individuals and in low- and moderate-income neighborhoods. As a
result, the Community Reinvestment Act may constrain Telebank's and E*TRADE's
ability to expand into new businesses that involve lending to retail customers.
Certain Federal Income Tax Considerations
The following discussion describes the material federal income tax
considerations relevant to the exchange of shares of Telebanc common stock for
E*TRADE common stock pursuant to the merger that are generally applicable to
holders of Telebanc common stock. This discussion is based on currently
existing provisions of the Internal Revenue Code, existing and proposed
treasury regulations thereunder and current administrative rulings and court
decisions, all of which are subject to change. Any such change, which may or
may not be retroactive, could alter the tax consequences to Telebanc
stockholders as described herein.
Telebanc stockholders should be aware that this discussion does not deal
with all federal income tax considerations that may be relevant to particular
Telebanc stockholders in light of their particular circumstances, such as
stockholders who are dealers in securities, who are subject to the alternative
minimum tax provisions of the Internal Revenue Code, who are foreign persons,
who do not hold their Telebanc common stock as capital assets, or who acquired
their shares in connection with stock option or stock purchase plans or in
other compensatory transactions. In addition, the following discussion does not
address the tax consequences of the merger under foreign, state or local tax
laws, the tax consequences of transactions effectuated prior or subsequent to,
or concurrently with, the merger (whether or not any such transactions are
undertaken in connection with the merger), including without limitation any
transaction in which shares of Telebanc common stock are acquired or shares of
E*TRADE common stock are disposed of, or the tax consequences of the assumption
by E*TRADE of the Telebanc Options or the tax consequences of any receipt of
rights to acquire E*TRADE common stock. Accordingly, TELEBANC STOCKHOLDERS ARE
URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES TO
THEM OF THE MERGER, INCLUDING THE APPLICABLE FEDERAL, STATE, LOCAL AND FOREIGN
TAX CONSEQUENCES.
The merger is intended to constitute a reorganization within the meaning of
the Internal Revenue Code. Provided that the merger does so qualify as a
reorganization, then, subject to the limitations and qualifications referred to
herein, the merger will generally result in the following federal income tax
consequences to the Telebanc stockholders:
. No gain or loss will be recognized by holders of Telebanc common stock
solely upon their receipt of E*TRADE common stock in exchange for
Telebanc common stock in the merger (except to the extent of cash
received in lieu of a fractional share of E*TRADE common stock).
. The aggregate tax basis of the E*TRADE common stock received by Telebanc
stockholders in the merger (reduced by any tax basis attributable to
fractional shares deemed to be disposed of) will be the same as the
aggregate tax basis of the Telebanc common stock surrendered in exchange
therefor.
. The holding period of the E*TRADE common stock received by each Telebanc
stockholder in the merger will include the period for which the Telebanc
common stock surrendered in exchange therefor was considered to be held,
provided that the Telebanc common stock so surrendered is held as a
capital asset at the time of the merger.
. Cash payments received by holders of Telebanc common stock in lieu of a
fractional share will be treated as if such fractional share of E*TRADE
common stock had been issued in the merger and then redeemed by E*TRADE.
A Telebanc stockholder receiving such cash will recognize gain or loss,
upon such payment, measured by the difference, if any, between the amount
of cash received and the basis in such fractional share.
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The parties have not and will not request a ruling from the Internal Revenue
Service as to the tax consequences of the merger. The consummation of the
merger is conditioned on the receipt by E*TRADE of an opinion from Brobeck,
Phleger & Harrison LLP and the receipt by Telebanc of an opinion from Hogan &
Hartson L.L.P. to the effect that the merger will constitute a reorganization
within the meaning of the Internal Revenue Code. Telebanc stockholders should
be aware that the tax opinions do not bind the Internal Revenue Service and the
Internal Revenue Service is therefore not precluded from successfully asserting
a contrary opinion. The tax opinions will be subject to certain assumptions and
qualifications, including but not limited to the truth and accuracy of certain
representations made by E*TRADE and Telebanc.
A successful Internal Revenue Service challenge to the reorganization status
of the merger would result in Telebanc stockholders recognizing taxable gain or
loss with respect to each share of common stock of Telebanc surrendered equal
to the difference between the stockholder's basis in such share and the fair
market value, as of the Effective Time, of the E*TRADE common stock received in
exchange therefor. In such event, a stockholder's aggregate basis in the
E*TRADE common stock so received would equal its fair market value, and the
stockholder's holding period for such stock would begin the day after the
merger.
Accounting Treatment
We intend to account for the merger as a pooling-of-interests, which means
that Telebanc and E*TRADE will be treated as if they had previously been
combined for accounting and financial reporting purposes. It is a condition to
completion of the merger that E*TRADE be advised by Deloitte & Touche LLP,
E*TRADE's independent auditors, and Arthur Andersen LLP, Telebanc's independent
auditors, that, based on material representations by E*TRADE and Telebanc, the
transactions contemplated by the merger agreement can properly be accounted for
as a pooling-of-interests business combination, although this condition may be
waived by E*TRADE. Under the pooling-of-interests method of accounting, each of
the parties' historical recorded assets and liabilities will be carried forward
to the combined company at their recorded amounts. In addition, the operating
results of the combined company will include both parties' operating results
for the entire fiscal year in which the merger is completed and the parties'
historical reported operating results for prior periods will be combined and
restated as the operating results of the combined company.
No Appraisal Rights
You are not entitled to exercise dissenter's or appraisal rights as a result
of the merger or to demand cash payment for your shares under Delaware law.
Listing of E*TRADE Common Stock to be Issued in the Merger
It is a condition to the closing of the merger that application for the
shares of E*TRADE common stock to be issued in the merger and the shares of
E*TRADE common stock to be reserved for issuance in connection with the
assumption of outstanding Telebanc stock options for quotation on the Nasdaq
National Market be filed.
Restrictions on Sale of Shares By Affiliates of Telebanc and E*TRADE
The shares of E*TRADE common stock to be issued in connection with the
merger will be registered under the Securities Act of 1933 and will be freely
transferable under the Securities Act, except for shares of E*TRADE common
stock issued to any person who is deemed to be an affiliate of either of us at
the time of the special meeting. Persons who may be deemed to be affiliates
include individuals or entities that control, are controlled by, or are under
common control of either of us and may include some of our officers and
directors, as well as our principal stockholders. Affiliates may not sell their
shares of E*TRADE common stock acquired in connection with the merger except
pursuant to:
. an effective registration statement under the Securities Act covering
the resale of those shares;
. an exemption under paragraph (d) of Rule 145 under the Securities Act;
or
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. another applicable exemption under the Securities Act.
E*TRADE's registration statement on Form S-4, of which this proxy
statement/prospectus forms a part, does not cover the resale of shares of
E*TRADE common stock to be received by affiliates in the merger.
Operations Following the Merger
Following the merger, Telebanc will continue its operations as a wholly
owned subsidiary of E*TRADE. Upon consummation of the merger, the members of
Telebanc's Board of Directors will be changed to include representatives of
both E*TRADE and Telebanc management, as well as two independent directors. The
membership of the E*TRADE Board of Directors will remain unchanged as a result
of the merger. The stockholders of Telebanc will become stockholders of
E*TRADE, and their rights as stockholders will be governed by the E*TRADE
Certificate of Incorporation and the E*TRADE Bylaws and the laws of the State
of Delaware.
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THE MERGER AGREEMENT
AND RELATED AGREEMENTS
The following is a brief summary of the material provisions of the merger
agreement, a copy of which is attached as Appendix A to this document and
incorporated in this proxy statement/prospectus by reference. We urge you to
read the merger agreement in its entirety for a more complete description of
the Merger. If there is any discrepancy between the terms of the merger
agreement and the following summary, the merger agreement will control.
The Merger
Following the approval and adoption of the merger agreement and the merger
by the stockholders of Telebanc and the satisfaction or waiver of the other
conditions to the merger, including the receipt of all required regulatory
approvals, waivers and consents, Telebanc will merge with Turbo Acquisition
Corp., a newly formed, wholly owned subsidiary of E*TRADE, with Telebanc
continuing as the surviving corporation and as a wholly owned subsidiary of
E*TRADE.
Effective Time
As soon as practicable on or after the closing of the merger, the parties
will cause the merger to become effective by filing a certificate of merger
with the Delaware Secretary of State. We are working towards completing the
merger as soon as possible. We hope to complete the merger by year-end 1999.
However, the merger is subject to various closing conditions, including
approval by the Office of Thrift Supervision of E*TRADE's application to
acquire control of Telebanc. No assurances can be given that we will obtain the
necessary approval. In addition, in order to complete the merger by year-end
1999, we will need the Office of Thrift Supervision to act on E*TRADE's
application on a schedule faster than their standard processing timetable. As a
result, it is possible that we may not be able to complete the merger prior to
December 31, 1999. After December 31, 1999, either E*TRADE or Telebanc may
terminate the merger agreement.
Directors and Officers of Telebanc After the Merger
At the effective time of the merger, the directors of the merger subsidiary
will become the new directors of Telebanc, and the officers of Telebanc will
remain the officers of Telebanc.
Conversion of Shares in the Merger
At the effective time, each outstanding share of Telebanc common stock will
be automatically canceled and converted into the right to 1.05 shares of
E*TRADE common stock. The number of shares of E*TRADE common stock issuable in
the merger will be proportionately adjusted for any additional future stock
split, stock dividend or similar event with respect to Telebanc common stock or
E*TRADE common stock effected between the date of this proxy
statement/prospectus and the completion of the merger.
Telebanc Stock Option and Employee Stock Ownership Plans
At the effective time, E*TRADE will assume each outstanding option to
purchase shares of Telebanc common stock under Telebanc's 1994 Stock Option
Plan, 1997 Stock Option Plan and 1998 Stock Incentive Plan, as amended, and all
options to purchase Telebanc common stock then outstanding under these plans or
under option agreements. Each Telebanc stock option will be assumed by E*TRADE,
under the same terms and conditions that were applicable to the option
immediately prior to the effective time, except that:
. each Telebanc stock option will be exercisable for shares of E*TRADE
common stock, and the number of shares of E*TRADE common stock issuable
upon exercise of any given option will be determined by multiplying 1.05
by the number of shares of Telebanc common stock underlying the option,
rounded down to the nearest whole number;
. the per share exercise price of any given option will be determined by
dividing the exercise price of the option immediately prior to the
effective time by 1.05 rounded up to the nearest whole cent; and
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. all options outstanding under the 1997 Stock Option Plan and 1998 Stock
Incentive Plan will vest in full at the effective time.
The parties intend for the Telebanc stock options assumed by E*TRADE to
qualify to the maximum extent possible as incentive stock options to the extent
the stock options qualified as incentive stock options prior to the effective
time. E*TRADE has agreed to file a registration statement on Form S-8 for the
shares of E*TRADE common stock issuable with respect to the assumed Telebanc
stock options as soon as practicable (and in any event within 20 business days)
after the effective time, and E*TRADE intends to maintain the effectiveness of
the registration statement for so long as any Telebanc stock options remain
outstanding.
At the effective time, each outstanding share of Telebanc common stock
contained in the Telebanc sponsored Employee Stock Ownership Plan will be
automatically canceled and converted into the right to receive 1.05 shares of
E*TRADE common stock. The Employee Stock Ownership Plan's eligibility provision
will be amended to restrict participation in the Employee Stock Ownership Plan
to those individuals employed prior to the effective time.
No Fractional Shares
No fractional shares of E*TRADE common stock will be issued in the merger.
Instead you will receive an amount of cash, in lieu of a fraction of a share of
E*TRADE common stock equal to the product of the fraction multiplied by the
average of the closing price for a share of E*TRADE common stock on the Nasdaq
National Market on the five most recent trading days ending on the last full
trading day prior to the effective time.
The Exchange Agent
Prior to the effective time, E*TRADE is required to deposit with a bond or
trust company certificates representing the shares of E*TRADE common stock to
be exchanged for shares of Telebanc common stock, and cash to pay for
fractional shares and any dividends or distributions to which holders of
Telebanc common stock may be entitled to receive under the merger agreement.
Exchange of Telebanc Stock Certificates for E*TRADE Stock Certificates
When the merger is completed, the exchange agent will mail to you a letter
of transmittal and instructions for use in surrendering your Telebanc stock
certificates in exchange for E*TRADE stock certificates. When you deliver your
Telebanc stock certificates to the exchange agent along with a properly
executed letter of transmittal and any other required documents, your Telebanc
stock certificates will be cancelled and you will receive E*TRADE stock
certificates representing the number of full shares of E*TRADE common stock to
which you are entitled under the merger agreement and cash in lieu of
fractional shares.
YOU SHOULD NOT SUBMIT YOUR STOCK CERTIFICATES FOR EXCHANGE UNTIL YOU
HAVE RECEIVED THE LETTER OF TRANSMITTAL AND INSTRUCTIONS REFERRED TO
ABOVE.
Distributions with Respect to Unexchanged Shares
E*TRADE will only issue an E*TRADE stock certificate or a check in lieu of a
fractional share in a name other than the name in which a surrendered Telebanc
stock certificate is registered if you present the exchange agent with all
documents required to show and effect the unrecorded transfer of ownership and
show that you paid any applicable stock transfer taxes.
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You are not entitled to receive any dividends or other distributions on
E*TRADE common stock with a record date after the merger is completed until you
have surrendered your Telebanc stock certificates in exchange for E*TRADE stock
certificates.
If there is any dividend or other distribution on E*TRADE common stock with
a record date after the merger and a payment date prior to the date you
surrender your Telebanc stock certificates in exchange for E*TRADE stock
certificates, you will receive it with respect to the whole shares of E*TRADE
common stock issued to you promptly after they are issued. If there is any
dividend or other distribution on E*TRADE common stock with a record date after
the merger and a payment date after the date you surrender your Telebanc stock
certificates in exchange for E*TRADE stock certificates, you will receive it
with respect to the whole shares of E*TRADE common stock issued to you promptly
after the payment date.
Representations and Warranties
We each made a number of representations and warranties in the merger
agreement regarding authority to enter into the merger agreement, and to
consummate the other transactions contemplated by the merger agreement and with
regard to aspects of our business, financial condition, structure and other
facts pertinent to the merger.
The representations given by Telebanc cover the following topics as they
relate to Telebanc and its subsidiaries:
. organization, qualification to do business and power;
. capitalization;
. authorization of the merger and the transaction agreements;
. filings and reports with the Securities and Exchange Commission;
. financial statements;
. changes in Telebanc's business since December 31, 1998;
. undisclosed liabilities;
. litigation involving Telebanc;
. restrictions on Telebanc's business;
. the possession of and compliance with permits required to conduct
Telebanc's business;
. title to the properties Telebanc owns and leases;
. intellectual property;
. environmental laws;
. taxes;
. employee benefit plans;
. matters relating to Telebanc's employees;
. the effect of the merger on obligations of Telebanc;
. material contracts and obligations;
. transactions with interested parties;
. insurance;
. compliance with applicable laws, rules and regulations of governmental
entities and self regulatory organizations;
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. Telebanc's banking business, investment securities and credit interests;
. the effect of the Year 2000 on Telebanc's business, products and
services;
. Telebanc's financial advisors;
. Telebanc's affiliates;
. the inapplicability of state anti-takeover statutes to the merger;
. the treatment of the merger as a pooling-of-interests and as a tax-free
reorganization;
. Telebanc's brokers' and finders' fees in connection with the merger; and
. information supplied by Telebanc.
The representations given by E*TRADE cover the following topics as they
relate to E*TRADE, Turbo Acquisition Corp. and their respective subsidiaries:
. organization, qualification to do business and power;
. capitalization;
. authorization of the merger;
. filings and reports with the Securities and Exchange Commission;
. financial statements;
. undisclosed liabilities;
. litigation;
. compliance with applicable laws, rules and regulations of governmental
entities and self regulatory organizations;
. the effect of the Year 2000 on E*TRADE's business, products and
services;
. the treatment of the merger as a tax-free reorganization;
. E*TRADE's brokers' and finders' fees in connection with the merger; and
. information supplied by E*TRADE and Turbo Acquisition Corp.
The representations and warranties in the merger agreement are complicated
and not easily summarized. We urge you to carefully read the articles in the
merger agreement entitled "Representations and Warranties of Company" and
"Representations and Warranties of Parent."
Telebanc's Conduct of Business before Completion of the Merger
Telebanc agreed that until the completion of the merger or unless E*TRADE
consents in writing, Telebanc and its subsidiaries will pay their taxes and
will operate their businesses in the same manner as past practices and in good
faith with the goal of:
. preserving intact their assets and current business organizations;
. keeping available the services of their current executive officers and
key employees; and
. maintaining their material contracts and preserving their relationships
with:
. customers;
. suppliers;
. distributors;
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. licensors;
. licensees; and
. others having business dealings with them.
Telebanc and E*TRADE also agreed to promptly notify each other of any event
which would harm each other or their subsidiaries' business or of any
occurrence not in the usual course of business. Telebanc also agreed that until
the completion of the merger or unless E*TRADE consents in writing, Telebanc
and its subsidiaries will conduct their business in compliance with specific
restrictions relating to the following:
. modification of Telebanc's certificate of incorporation or bylaws;
. the issuance of dividends or other distributions;
. the granting or modification of any stock options;
. entrance into or modification of material contracts;
. the issuance and redemption of securities, except for limited issuances
of securities in connection with the exercise of outstanding stock
options under Telebanc's stock option plans or outstanding warrants to
acquire Telebanc's securities;
. the transfer of Telebanc's intellectual property;
. the granting of exclusive rights to its products or technology;
. the disposition of any properties or assets that are material to
Telebanc's business other than in the ordinary course;
. the incurrence of indebtedness or comparable obligations other than in
the ordinary course;
. the cancellation, release, assignment or modification of indebtedness
owed to them in the ordinary course;
. entrance into operating leases;
. the payment of obligations over a specified amount and other than in the
ordinary course;
. capital expenditures over a specified amount and other than in the
ordinary course;
. insurance;
. employees and employee benefits;
. severance arrangements;
. commencement of any lawsuit;
. the acquisition of assets or other entities;
. tax elections and liabilities other than in the ordinary course;
. the revaluation of Telebanc's assets other than in the ordinary course;
. accounting policies and procedures;
. Telebanc's Year 2000 compliance plan;
. risk management other than as required by applicable law or rule,
regulation or directive of a governmental entity;
. loans or advances other than in accordance with lending policies in
effect when the merger agreement was signed;
. credit for Telebanc affiliates over a specified amount;
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. domain names;
. representations, warranties, covenants and conditions in the merger
agreement; and
. other actions that would materially adversely delay or materially
adversely impair the ability of Telebanc to complete the merger.
The agreements related to the conduct of Telebanc's business in the merger
agreement are complicated and not easily summarized. We urge you to carefully
read the article in the merger agreement entitled "Conduct Prior to the
Effective Time."
E*TRADE's Conduct of Business before Completion of the Merger
E*TRADE agreed that until the completion of the merger or unless Telebanc
consents in writing, E*TRADE will conduct its business in compliance with
specific restrictions relating to the following:
. representations, warranties, covenants and conditions in the merger
agreement; and
. other actions that would materially adversely delay or materially
adversely impair the ability of E*TRADE to complete the merger.
No Solicitation of Transactions
Until the merger is completed or the merger agreement is terminated,
Telebanc has agreed not to directly or indirectly take any of the following
actions:
. solicit, initiate, encourage or agree to any takeover proposal; or
. engage in negotiations with, or disclose any nonpublic information
relating to Telebanc or any of its subsidiaries to, or afford access to
the properties, books or records of Telebanc or any of its subsidiaries
to, any person that has advised Telebanc that it may be considering
making, or that has made, a takeover proposal.
However, the Telebanc board of directors is not prohibited from taking and
disclosing to Telebanc's stockholders a position with respect to an unsolicited
tender offer pursuant to Rules 14d-9 and 14e-2 promulgated under the Exchange
Act.
Telebanc has agreed to provide E*TRADE with detailed information about any
takeover proposal it receives.
Telebanc may engage in any of these acts otherwise prohibited, other than
solicitation, initiation or encouragement of any takeover proposal, if:
. the Telebanc board of directors believes in good faith after written
advice from its financial advisor that a particular proposal concerning
an extraordinary transaction of the nature specified in the merger
agreement, such as a merger or a sale of significant assets, will result
in a transaction more favorable than the merger with E*TRADE to the
Telebanc stockholders from a financial point of view; and
. the Telebanc board of directors determines in good faith after advice
from outside legal counsel that the failure to engage in the prohibited
negotiations or discussions or provide non-public information is
inconsistent with the fiduciary duties of the board under applicable
law.
In the case of agreeing to or endorsing any takeover proposal or withdrawing
its recommendation of the merger, Telebanc must also provide E*TRADE with at
least five days prior written notice of taking such an action.
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A takeover proposal is:
. any offer or proposal for, or any indication of interest in, a merger or
other business combination involving Telebanc or any of its
subsidiaries; or
. the acquisition of 20% or more of the outstanding shares of capital
stock of Telebanc or any of its subsidiaries; or
. the sale or transfer of any significant portion of the assets of
Telebanc or any of its subsidiaries, other than the merger.
Director and Officer Indemnification and Insurance
The merger agreement provides that E*TRADE will, after the completion of the
merger, indemnify, defend and hold harmless the present and former officers and
directors of Telebanc in respect of acts or omissions occurring on or prior to
the completion of the merger, in each case to the fullest extent such
corporation is permitted, the Telebanc restated certificate of incorporation or
the Telebanc amended and restated bylaws or any indemnification agreement to
which Telebanc is a party, in each case as in effect on May 31, 1999.
The merger agreement also provides that, for four years after the completion
of the merger, E*TRADE will cause Telebanc to use commercially reasonable
efforts to cause to be maintained for the benefit of Telebanc's current
directors and officers and other persons covered by Telebanc's current
directors' and officers' liability insurance with respect to all matters
occurring on or prior to the completion of the merger, directors and officers
liability insurance on terms substantially equivalent to the Telebanc
directors' and officers' liability insurance policy in effect on the date of
the merger agreement, but not to pay premiums in excess of 150% of the annual
amount Telebanc paid for such insurance in its last full fiscal year.
Conditions to the Merger
Our respective obligations to complete the merger and the other transactions
contemplated by the merger agreement are subject to the satisfaction or waiver
of each of the following conditions before completion of the merger:
. the merger agreement must be approved by the holders of two-thirds of
the outstanding shares of Telebanc common stock;
. no law, statute, rule, regulation or order is enacted or issued which
has the effect of making the merger illegal or otherwise prohibiting
completion of the merger;
. the application with the Nasdaq National Market for the listing of the
shares of E*TRADE common stock to be issued in the merger must be filed;
and
. E*TRADE must be advised in writing by its independent auditors, Deloitte
& Touche, LLP and Telebanc's independent auditors, Arthur Andersen LLP,
that they concur with E*TRADE that the transactions contemplated by the
merger agreement, if completed, can properly be accounted for as a
pooling of interests.
Telebanc's obligations to complete the merger and the other transactions
contemplated by the merger agreement are subject to the satisfaction or waiver
of each of the following additional conditions before completion of the merger:
. E*TRADE's representations and warranties must be true and correct when
made and as of the closing of the merger;
. E*TRADE and Turbo Acquisition Corp. shall have complied in all material
respects with all covenants, obligations and conditions of the merger
agreement required to be performed and complied with by them;
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. Telebanc must have been provided with a certificate executed on behalf
of E*TRADE that all representations are true and correct and that all
obligations have been complied with;
. all necessary approvals, waivers and consents from governmental
authorities and self-regulatory organizations must be obtained,
including approvals, waivers and consents under the:
. Home Owners Loan Act;
. Securities Act;
. Securities Exchange Act;
. National Association of Securities Dealers, Inc. constitution and
rules; and
. state securities laws.
. Telebanc must have received the opinion of its tax counsel, Hogan &
Hartson L.L.P. to the effect that the merger will qualify as a
reorganization within the meaning of Section 368(a) of the Internal
Revenue Code.
E*TRADE's and Turbo Acquisition Corp.'s obligations to complete the merger
and the other transactions contemplated by the merger agreement are subject to
the satisfaction or waiver of each of the following additional conditions
before completion of the merger:
. Telebanc's representations and warranties must be true and correct when
made and as of the closing of the merger;
. Telebanc must have complied in all material respects with all covenants,
obligations and conditions of the merger agreement required to be
performed and complied with by it;
. E*TRADE must have been provided with a certificate executed on behalf of
Telebanc that all representations are true and correct and that all
obligations have been complied with;
. All necessary approvals, waivers and consents from governmental entities
and self-regulatory organizations must be obtained, without undue
restriction and a materially adverse effect on E*TRADE or Telebanc,
including approvals, waivers and consents under the:
. Home Owners Loan Act;
. Securities Act;
. Securities Exchange Act;
. National Association of Securities Dealers, Inc. constitution and
rules; and
. state securities laws.
. all approvals in connection with the merger under Telebanc's material
contracts and obligations must be obtained;
. no injunctions or restraints shall have been imposed preventing
E*TRADE's conduct or operation of Telebanc's business following the
merger;
. no event, change, condition or effect that is or could reasonably be
expected to be materially adverse to the condition, business,
properties, assets, liabilities, operations or results of operations of
Telebanc and its subsidiaries, taken as a whole, occurs;
. certain employees of Telebanc must not have terminated their full-time
employment with Telebanc; and
. E*TRADE shall have received the opinion of its tax counsel, Brobeck,
Phleger & Harrison LLP to the effect that the merger will qualify as a
reorganization within the meaning of Section 368(a) of the Internal
Revenue Code.
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Termination of the Merger Agreement
At any time prior to the completion of the merger, the merger agreement may
be terminated:
. by mutual written consent of E*TRADE and Telebanc.
. by either E*TRADE or Telebanc, if:
. without fault of the terminating party, the closing does not occur
on or before December 31, 1999 or a later date which is agreed upon
in writing by E*TRADE and Telebanc;
. any permanent injunction or other order of a court or other
competent authority preventing the consummation of the merger has
become final and nonappealable; or
. if any required approval of the stockholders of Telebanc is not
obtained by reason of the failure to obtain the required vote upon a
vote held at a duly held meeting of stockholders or at any
adjournment of such meeting.
. by E*TRADE, if:
. Telebanc breaches any of its representations, warranties or
obligations, such breach is not cured within ten business days of
receipt by Telebanc of written notice of such breach, and E*TRADE is
not at that time in material breach of the merger agreement;
. the Telebanc board of directors withdraws or modifies its
recommendation of the merger agreement or the merger in a manner
adverse to E*TRADE or resolves to do so;
. Telebanc solicits, initiates, encourages or agrees to any takeover
proposal or engages in any negotiations with, or discloses any
nonpublic information relating to Telebanc or any of its
subsidiaries, or affords access to the properties, books or records
of Telebanc to any person that has advised Telebanc that it may be
considering making, or that has made, a takeover proposal;
. Telebanc fails to comply with the stock option agreement;
. the Telebanc board of directors recommends, endorses, accepts or
agrees to a takeover proposal or resolves to do so;
. Telebanc does not take all necessary action to have its stockholder
meeting by the forty-fifth day after the date of this
prospectus/proxy statement;
. if a trigger event (as defined below) or takeover proposal (as
defined below) occurs and the board of directors of Telebanc in
connection with such event or proposal, does not within five
business days of such occurrence:
. reconfirm its approval and recommendation of the merger agreement
and the transactions contemplated by the merger agreement; and
. reject such takeover proposal or trigger event.
. by Telebanc, if E*TRADE breaches any of its representations, warranties
or obligations, such breach is not cured within ten business days
following receipt by E*TRADE of written notice of such breach, and
Telebanc is not at that time in material breach of the merger agreement.
A takeover proposal is:
. any offer or proposal for, or any indication of interest in, a merger or
other business combination involving Telebanc or any of its
subsidiaries;
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. the acquisition of 20% or more of the outstanding shares of capital
stock of Telebanc or any of its subsidiaries; or
. the sale or transfer of any significant portion of the assets of
Telebanc or any of its subsidiaries, other than the merger.
A trigger event occurs if any person acquires securities representing 20% or
more of the voting power of Telebanc Securities, or
. any person acquires securities,
. commences a tender or exchange offer,
. commences an open market purchase program, or
. commences any other publicly announced initiative
which results in such a person and its affiliates beneficially owning
securities representing 20% or more of the voting power of Telebanc.
Payment of Fees and Expenses
Whether or not the merger is consummated, all costs and expenses incurred in
connection with the merger agreement and the merger will be paid by the party
incurring the expense except that expenses incurred in connection with printing
the proxy statement/prospectus and the registration statement, registration and
filing fees incurred in connection with the proxy statement/prospectus, the
registration statement and the listing of additional shares and filing fees,
costs and expenses, associated with compliance with applicable state securities
laws and Office of Thrift Supervision and National Association of Securities
Dealers requirements in connection with the merger shall be shared equally.
If the merger agreement is terminated because:
. a trigger event or takeover proposal occurs and the board of directors
of Telebanc does not within five business days of such occurrence
reconfirm its approval and recommendation of the merger agreement and
the transactions contemplated by the merger agreement and reject such
takeover proposal or trigger event;
. Telebanc solicits, initiates, encourages or agrees to a takeover
proposal or engages in any negotiations with, or discloses any nonpublic
information relating to Telebanc or any of its subsidiaries, or affords
access to the properties, books or records of Telebanc to any person
that has advised Telebanc that it may be considering making, or that has
made, a takeover proposal in violation of the non-solicitation
provisions contained in the merger agreement;
. the Telebanc board of directors recommends, endorses, accepts or agrees
to a takeover proposal or resolves to do so;
. the Telebanc board of directors withdraws or modifies its recommendation
of the merger agreement or the merger in a manner adverse to E*TRADE or
resolves to do so;
. Telebanc fails to comply with the stock option agreement;
. any required approval of the stockholders of Telebanc is not obtained by
reason of the failure to obtain the required vote upon a vote held at a
duly held meeting of stockholders and prior to the meeting there was a
trigger event or takeover proposal with respect to Telebanc; or
. Telebanc has breached its representations, warranties or obligations
under the merger agreement, Telebanc has failed to timely call its
stockholders' meeting or the merger shall not have been timely
consummated and prior to such event a trigger event or takeover proposal
that has not been rejected by Telebanc or withdrawn shall have occurred;
then Telebanc will pay E*TRADE the termination fee of $54,000,000 and will
reimburse E*TRADE for all out-of-pocket costs and expenses incurred by E*TRADE
in connection with the merger agreement and the
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transactions contemplated by the merger agreement, including reasonable fees
and expenses of its advisors, accountants and legal counsel.
If the merger agreement is terminated because:
. without fault of the terminating party, the closing does not occur on or
before December 31, 1999 or a later date which is agreed upon in writing
by E*TRADE and Telebanc and there is a trigger event or a takeover
proposal with respect to Telebanc; or
. Telebanc breaches any of its representations, warranties or obligations,
such breach is not cured within ten business days of receipt by Telebanc
of written notice of such breach, and E*TRADE is not at that time in
material breach of the merger agreement;
then Telebanc will reimburse E*TRADE for all out-of-pocket costs and expenses
incurred by E*TRADE in connection with the merger agreement and the
transactions contemplated by the merger agreement, including reasonable fees
and expenses of its advisors, accountants and legal counsel and, in addition,
if, prior to the termination:
. Telebanc enters into a definite agreement or letter of intent with
respect to a takeover proposal;
. a takeover proposal is completed; or
. a trigger event results in a person, a group of persons or persons
acting in concert beneficially owning 40% or more of the voting power of
Telebanc;
within nine months of the later of the termination of the merger agreement or
the payment of the expenses described above, then Telebanc will also pay
E*TRADE the termination fee of $54,000,000.
Extension, Waiver and Amendment of the Merger Agreement
We may amend the merger agreement before completion of the merger. However,
after the Telebanc stockholders adopt the merger agreement, no change will be
made:
. to the number of shares of E*TRADE common stock for which Telebanc
common stock will be converted; or
. to any of the terms and conditions of the merger agreement if the change
would harm the holders of Telebanc common stock or Turbo Acquisition
Corp. common stock.
Either of us may, in writing, extend the other's time for the performance of
any of the obligations or other acts under the merger agreement, waive any
inaccuracies in the other's representations and warranties and waive compliance
by the other with any of the agreements or conditions contained in the merger
agreement.
Related Agreements
Stockholder Agreement
In connection with the merger, Mitchell H. Caplan, David A. Smilow and Carol
Lynton, Aileen Lopez Pugh, Laurence P. Greenberg, Stephen G. Dervenis, David R.
DeCamp, Dean C. Kehler, Marcia Meyerberg, Steven F. Piaker, Mark Rollinson and
Michael M. Lynton have entered into a stockholder agreement with E*TRADE. The
terms of the stockholder agreement provide (i) that the stockholders will not
transfer or sell any shares of Telebanc common stock beneficially owned by
them, or any new shares of Telebanc stock they may acquire, at any time prior
to the earlier of the effective time of the merger and the termination of the
merger agreement (unless the person to whom the shares are sold agrees to be
bound by the stockholder agreement), and (ii) that the stockholders will vote
all shares of Telebanc common stock beneficially owned by them, or any new
shares of Telebanc stock they may acquire, in favor of the approval of the
merger agreement
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and the merger. As of June 8, 1999, the Telebanc stockholders who entered into
the stockholder agreement collectively held approximately 1,605,945 shares of
Telebanc common stock which represented approximately 9.5% of the outstanding
Telebanc common stock. As of November 18, 1999, those stockholders collectively
held approximately 3,200,000 shares of Telebanc common stock which represented
approximately 9.4% of the outstanding Telebanc common stock. None of the
stockholders who are parties to the stockholder agreement was paid additional
consideration in connection with the stockholder agreement.
Management Continuity Agreements
E*TRADE has entered into management continuity agreements with 11 employees
of Telebanc, including Mitchell H. Caplan, Ross C. Atkinson, Stephen G.
Dervenis, Arlin W. Gelbard, Laurence P. Greenberg, Sang Jin Han, Sang-Hee C.
Yi, David P. Lau and Aileen Lopez Pugh. The management continuity agreements
are contingent upon the occurrence of the closing of the merger and will become
effective upon the merger. The employees have agreed to remain with E*TRADE for
a period of 12 months from the closing of the merger unless E*TRADE terminates
them, or they resign for Good Reason, earlier. If the employee's employment is
terminated "Without Cause" or if the employee resigns from employment for "Good
Reason" prior to the end of the 12-month period, then E*TRADE will continue to
pay the employee's base salary for a period of up to six months as severance
payments. If the employee resigns without Good Reason or the employment is
terminated for Cause prior to the end of the 12-month period, then the employee
will be paid all salary and benefits through the date of termination of
employment, but nothing else.
For purposes of these severance benefits, "Without Cause" shall mean the
individual's termination for any reason other than: (i) material failure to
perform the duties of his or her position after receipt of a written warning
specifying the performance problem and a period of not less than thirty (30)
days in which to cure; (ii) engaging in misconduct as set out in the E*TRADE
Code of Conduct; (iii) conviction of a felony; (iv) any act of fraud against,
or the misappropriation of property belonging to E*TRADE or any of its
employees; or (v) a material breach of the management continuity agreement or
of any confidentiality or proprietary information agreement with E*TRADE.
For purposes of this section a resignation for "Good Reason" shall mean a
resignation within thirty (30) days after any of the following events: (i)
relocation of the individual's principal place of employment by more than
thirty-five (35) miles from the individual's current office; or (ii) a
substantial reduction in the individual's base salary, title, compensation,
duties or benefits.
The management continuity agreements require that the employee will not
engage in any activity in which the employee would (i) participate, supervise
or advise in the design, development, marketing, sale or servicing of any
online, telephonic or ATM banking product or service, or any online securities
brokerage product or service, in the United States, or (ii) permit the
employee's name to be used in connection with a business which is competitive
or substantially similar to the business of Telebanc, in each case for a period
of one year after the employment relationship is terminated for any reason.
Moreover, such individuals may not solicit customers or employees of E*TRADE
during the period in which the non-competition provision is in effect.
Stock Option Agreement
E*TRADE required Telebanc to enter into the stock option agreement as a
prerequisite to entering into the merger agreement. The stock option agreement
grants E*TRADE the option to buy, as adjusted for Telebanc's June 21, 1999 2-
for-1 stock split, up to 6,739,762 shares of Telebanc common stock,
constituting approximately 19.99% of the outstanding shares of Telebanc common
stock as of May 28, 1999, at an exercise price, payable in cash, of $46.73 per
share.
The option is intended to increase the likelihood that the merger will be
completed. Consequently, aspects of the stock option agreement may have the
effect of discouraging persons who might now or at any time be interested in
acquiring all or a significant interest in Telebanc or its assets before
completion of the merger.
55
<PAGE>
The stock option agreement is exercisable by E*TRADE, in whole or in part,
at any time or from time to time after the occurrence of an event occurs which
would permit termination of the merger agreement and require payment to E*TRADE
of the $54 million termination fee or immediately prior to an extraordinary
transaction of the nature specified in the merger agreement which obligates
Telebanc to pay the termination fee. The E*TRADE option will terminate upon the
earlier of: (i) the effective time of the merger; (ii) the termination of the
merger agreement pursuant to its terms, other than a termination in connection
with which E*TRADE is entitled to the payment of the termination fee or expense
reimbursement; or (iii) 180 days following any termination of the merger
agreement in connection with which E*TRADE is entitled to the payment of the
$54 million termination fee, or, if at the expiration of such 180-day period,
the E*TRADE option cannot be exercised by reason of any applicable judgment,
decree, order, law or regulation, 20 business days after such impediment to
exercise shall have been removed or shall have become final and not subject to
appeal.
In no event will the sum of
. the amount (before taxes but net of reasonable and customary commissions
paid or payable in connection with such transaction) received by E*TRADE
pursuant to the sale of any of the shares of Telebanc common stock under
the stock option agreement less E*TRADE purchase price for such shares,
. any amounts (before taxes but net of reasonable and customary
commissions paid or payable in connection with such transaction)
received by E*TRADE on the transfer of the option or any portion of the
option to a person not affiliated with E*TRADE or to Telebanc, and
. the amount received by E*TRADE as a termination fee
exceed in the aggregate $90,000,000. If such amount exceeds $90,000,000,
E*TRADE may, in its sole discretion:
. reduce the number of shares of Telebanc common stock subject to the
option;
. pay cash to Telebanc;
. receive a smaller termination fee; or
. any combination of its other three choices.
Subsequent to the termination of the merger agreement, E*TRADE may, by
written notice, request that Telebanc register under the Securities Act all or
any part of the shares of Telebanc common stock acquired pursuant to the stock
option agreement. Telebanc shall use commercially reasonable efforts to
register the unpurchased registrable shares; provided, however, (a) E*TRADE
shall not be entitled to more than an aggregate of two effective registration
statements and (b) Telebanc will not be required to file any registration
statement for a certain period of time when: (i) Telebanc is in possession of
material non-public information which it reasonably believes would be
detrimental to be disclosed at that time and, after consultation with legal
counsel to Telebanc, Telebanc determined that the information would have to be
disclosed if a registration statement were filed at that time; (ii) Telebanc is
required under the Securities Act to include audited financial statements for
any period in the registration statement and such financial statements are not
then available for inclusion in the registration statement; or (iii) Telebanc
determines, in its reasonable judgment, that the registration would interfere
with any financing, acquisition or other material transaction involving
Telebanc or any of its affiliates.
Telebanc Affiliate Agreements
In connection with the merger, Mitchell H. Caplan, David A. Smilow, Aileen
Lopez Pugh, Laurence P. Greenberg, Stephen G. Dervenis, David R. DeCamp, Dean
C. Kehler, Marcia Meyerberg, Steven F. Piaker, Mark Rollinson and Michael M.
Lynton have entered into affiliate agreements with E*TRADE in which they
56
<PAGE>
agreed to restrict their transfer of any E*TRADE common stock they receive in
the merger and to refrain from taking actions which would adversely affect
E*TRADE's ability to account for the merger as a pooling-of- interests
transaction. Specifically, the Telebanc affiliate agreements provide, among
other things, that the affiliates of Telebanc will not sell, transfer or
otherwise dispose of the E*TRADE common stock issued to them in connection with
the merger other than:
. in compliance with Rule 145 of the Securities Act;
. if the sale, transfer or other disposition is done as part of an
effective registration statement under the Securities Act; or
. in the opinion of counsel reasonably acceptable to E*TRADE, such sale,
transfer or other disposition is exempt from registration under the
Securities Act.
The Telebanc affiliate agreements also generally provide that until the
earlier of:
. E*TRADE's public announcement of financial results covering at least
thirty days of combined operations of E*TRADE and Telebanc; or
. the merger agreement's termination;
the affiliate will not sell, exchange, transfer or otherwise dispose of or
reduce the affiliate's risk in respect of:
. any shares of E*TRADE common stock which the affiliate receives in
connection with the merger or any dividend or distribution with respect
to such shares, or any option, right or other interest with respect to
any such shares, dividends or distributions;
. shares of E*TRADE common stock and options or warrants to purchase
E*TRADE common stock beneficially owned by the affiliate; or
. any shares of E*TRADE common stock or any other equity securities of
E*TRADE which the affiliate purchases or otherwise acquires after the
date of the Telebanc affiliate agreement.
E*TRADE Affiliate Agreements
In connection with the merger, E*TRADE's affiliates have entered into
affiliate agreements with E*TRADE in which each affiliate has agreed to:
. vote the shares of E*TRADE common stock which the affiliate owns in
favor of approval of any increase in authorized capital stock of E*TRADE
necessary to complete the merger; and
. not sell, exchange, transfer or otherwise dispose of or reduce the
affiliate's risk in respect of any shares of E*TRADE common stock which
the affiliate currently owns or purchases or otherwise acquires until
the earlier of:
. E*TRADE's public announcement of financial results covering at least
thirty days of combined operations of E*TRADE and Telebanc; or
. the merger agreement's termination.
57
<PAGE>
PRO FORMA COMBINED FINANCIAL STATEMENTS
The unaudited pro forma combined financial statements give effect to the
proposed merger of E*TRADE and Telebanc on a pooling-of-interests basis. The
E*TRADE and Telebanc unaudited pro forma combined balance sheet assumes that
the merger of E*TRADE and Telebanc took place on September 30, 1999 and
combines the E*TRADE consolidated balance sheet with Telebanc's consolidated
balance sheet as of that date. The E*TRADE and Telebanc unaudited pro forma
combined statements of operations assume that the merger of E*TRADE and
Telebanc took place as of the beginning of the periods presented and combine
E*TRADE's consolidated statements of operations for the years ended September
30, 1999, 1998 and 1997 with Telebanc's consolidated statements of operations
for the twelve months ended September 30, 1999, and the years ended December
31, 1998 and 1997, respectively. The E*TRADE and Telebanc unaudited pro forma
combined financial statements are based on the respective historical annual and
interim consolidated financial statements and related notes thereto, which are
incorporated by reference in this Form S-4. This presentation is consistent
with the years expected to be combined after the date of the closing of the
merger. Fiscal year 1999 includes the results of Telebanc for the twelve months
ended September 30, 1999 and fiscal year 1998 includes the results of Telebanc
for the year ended December 31, 1998. The results of operations for the quarter
ended December 31, 1998 of Telebanc (gross revenues of $37,758,000, net
revenues of $8,905,000 and net income of $655,000), were included in both
fiscal year 1999 and 1998.
In February 1999 and May 1999, E*TRADE issued two-for-one stock splits by
distributing one additional share of common stock for every share of common
stock outstanding to shareowners. In addition, in June 1999, Telebanc issued a
two-for-one stock split by distributing one additional share of common stock
for every share of common stock outstanding to stockholders. Accordingly, all
pro forma E*TRADE and Telebanc share and per share amounts have been restated
to reflect the two-for-one stock splits, as appropriate. The pro forma Telebanc
share information reflect the post-split conversion of 1.05 E*TRADE shares for
each share of Telebanc common stock outstanding.
The unaudited pro forma combined financial statements are presented for
illustrative purposes only and are not necessarily indicative of the combined
financial position or results of operations of future periods or the results
that actually would have been realized had the entities been a single entity
during these periods.
The classification of certain revenue and expense items of E*TRADE and
Telebanc has been changed in the accompanying pro forma combined statements of
operations to reflect the classifications expected to be used by the combined
companies.
58
<PAGE>
E*TRADE GROUP, INC. AND SUBSIDIARIES
Pro Forma Combined Balance Sheets
(in thousands, except share amounts)
(Unaudited)
<TABLE>
<CAPTION>
September 30, 1999
---------------------------------------------------
Adjustments Pro Forma
E*TRADE Telebanc (1) Combined
---------- ---------- ----------- ----------
ASSETS
<S> <C> <C> <C> <C> <C>
Cash and equivalents....... $ 85,734 $ 40,067 $ -- $ 125,801
Cash and investments
required to be segregated
under Federal or other
regulations............... 103,500 -- -- 103,500
Brokerage receivables--
net....................... 2,912,581 -- -- 2,912,581
Mortgage-backed securities
available-for-sale........ 1,426,053 -- 1,426,053
Loans receivable, net...... -- 2,064,647 -- 2,064,647
Loans receivable held for
sale...................... -- 89,862 -- 89,862
Trading securities......... -- 38,269 -- 38,269
Investment securities...... 189,145 178,622 -- 367,767
Investments................ 424,293 -- -- 424,293
Property and equipment--
net....................... 155,785 23,069 -- 178,854
Other assets............... 55,942 120,655 -- 176,597
---------- ---------- -------- ----------
Total assets........... $3,926,980 $3,981,244 $ -- $7,908,224
========== ========== ======== ==========
<CAPTION>
LIABILITIES AND
SHAREOWNERS' EQUITY
<S> <C> <C> <C> <C> <C>
Liabilities:
Brokerage payables......... $2,824,212 $ -- $ -- $2,824,212
Deposits................... -- 2,162,682 -- 2,162,682
Borrowings by bank
subsidiary................ -- 1,267,474 -- 1,267,474
Accounts payable, accrued
and other liabilities..... 189,101 14,870 30,000 233,971
---------- ---------- -------- ----------
Total liabilities...... 3,013,313 3,445,026 30,000 6,488,339
---------- ---------- -------- ----------
Mandatorily redeemable
preferred securities ..... -- 30,584 -- 30,584
---------- ---------- -------- ----------
Shareowners' equity:
Common stock, $.01 par
value; E*TRADE shares
authorized, 600,000,000;
E*TRADE shares issued
and outstanding:
239,822,663 (actual);
275,145,791 (pro forma
combined)............... 2,398 353 -- 2,751
Additional paid-in
capital................. 763,958 505,209 -- 1,269,167
Unearned ESOP shares..... -- (2,122) -- (2,122)
Retained earnings
(deficit)............... (20,874) 12,510 (30,000) (38,364)
Accumulated other
comprehensive income.... 168,185 (10,316) -- 157,869
---------- ---------- -------- ----------
Total shareowners'
equity................ 913,667 505,634 (30,000) 1,389,301
---------- ---------- -------- ----------
Total liabilities and
shareowners'
equity.............. $3,926,980 $3,981,244 $ -- $7,908,224
========== ========== ======== ==========
</TABLE>
- --------
(1) Reflects the one-time estimated costs of $30 million associated with the
merger.
59
<PAGE>
E*TRADE GROUP, INC. AND SUBSIDIARIES
Pro Forma Combined Statements of Operations
(in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Fiscal Year 1999
----------------------------------
Telebanc
Twelve months
ended Pro Forma
E*TRADE September 30 Combined
--------- ------------- ---------
<S> <C> <C> <C>
Revenues:
Transaction revenues.................... $ 355,830 $ -- $355,830
Interest income......................... 195,675 192,595 388,270
Global and institutional................ 110,959 -- 110,959
Gain on sale of loans................... -- 2,827 2,827
Gain on available-for-sale securities... -- 3,315 3,315
Gain on trading securities.............. -- 113 113
Other................................... 32,305 1,983 34,288
--------- -------- --------
Gross revenues........................ 694,769 200,833 895,602
Interest expense........................ (73,367) (142,663) (216,030)
Provision for loan losses............... -- (2,783) (2,783)
--------- -------- --------
Net revenues.......................... 621,402 55,387 676,789
--------- -------- --------
Cost of services.......................... 283,869 13,684 297,553
--------- -------- --------
Operating expenses:
Selling and marketing................... 301,658 16,779 318,437
Technology development.................. 76,878 1,558 78,436
General and administrative.............. 85,095 14,025 99,120
Merger related expenses................. 6,304 870 7,174
--------- -------- --------
Total operating expenses.............. 469,935 33,232 503,167
--------- -------- --------
Total cost of services and operating
expenses............................. 753,804 46,916 800,720
--------- -------- --------
Operating income (loss)................... (132,402) 8,471 (123,931)
--------- -------- --------
Non-operating income (expense):
Gain on foreign exchange ............... 12 -- 12
Gain on sale of investments............. 49,957 4,136 54,093
Equity in earnings (losses) of
investments ........................... (9,103) 265 (8,838)
Net operating costs of real estate
acquired through foreclosure........... -- (83) (83)
--------- -------- --------
Total non-operating income ........... 40,866 4,318 45,184
--------- -------- --------
Pre-tax income (loss)..................... (91,536) 12,789 (78,747)
Income tax expense (benefit).............. (37,098) 5,792 (31,306)
Minority interest in subsidiary........... -- 2,197 2,197
--------- -------- --------
Income (loss) before cumulative effect of
accounting change and extraordinary
loss..................................... (54,438) 4,800 (49,638)
Cumulative effect of accounting change,
net of tax............................... -- (469) (469)
Extraordinary loss on early extinguishment
of debt, net of tax...................... -- (1,985) (1,985)
--------- -------- --------
Net income (loss) ........................ (54,438) 2,346 (52,092)
Preferred stock dividends................. 222 -- 222
--------- -------- --------
Income (loss) applicable to common stock.. $ (54,660) $ 2,346 $(52,314)
========= ======== ========
Income (loss) per share before cumulative
effect of accounting change and
extraordinary loss:
Basic................................... $ (0.23) $ (0.19)
========= ========
Diluted................................. $ (0.23) $ (0.19)
========= ========
Income (loss) per share:
Basic................................... $ (0.23) $ (0.20)
========= ========
Diluted................................. $ (0.23) $ (0.20)
========= ========
Shares used in computation of income
(loss) per share*:
Basic................................... 235,926 30,110 266,036
Diluted................................. 235,926 34,616 266,036**
</TABLE>
- --------
* Telebanc shares reflect the post split conversion of 1.05 E*TRADE shares for
each share of Telebanc common stock outstanding.
** Because the combined company reported a net loss for the year ended
September 30, 1999 on a pro forma combined basis, the calculation of diluted
earnings per share does not include Telebanc's or E*TRADE's common stock
equivalents as they are anti-dilutive and would result in a reduction of the
pro forma combined net loss per share.
60
<PAGE>
E*TRADE GROUP, INC. AND SUBSIDIARIES
Pro Forma Combined Statements of Operations
(in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Fiscal Year 1998
----------------------------------
E*TRADE Telebanc Pro Forma
September 30 December 31 Combined
------------ ----------- ---------
<S> <C> <C> <C>
Revenues:
Transaction revenues.................... $162,097 $ -- $ 162,097
Interest income......................... 96,730 100,110 196,840
Global and institutional................ 95,829 -- 95,829
Gain on sale of loans................... -- 2,088 2,088
Gain on available-for-sale securities... -- 3,536 3,536
Loss on trading securities.............. -- (43) (43)
Other................................... 21,129 1,452 22,581
-------- -------- ---------
Gross revenues........................ 375,785 107,143 482,928
Interest expense........................ (40,029) (80,305) (120,334)
Provision for loan losses............... -- (905) (905)
-------- -------- ---------
Net revenues.......................... 335,756 25,933 361,689
-------- -------- ---------
Cost of services.......................... 138,942 7,255 146,197
-------- -------- ---------
Operating expenses:
Selling and marketing................... 117,283 6,694 123,977
Technology development.................. 33,699 380 34,079
General and administrative.............. 41,752 7,413 49,165
Merger related expenses................. 1,167 -- 1,167
-------- -------- ---------
Total operating expenses.............. 193,901 14,487 208,388
-------- -------- ---------
Total cost of services and operating
expenses............................. 332,843 21,742 354,585
-------- -------- ---------
Operating income.......................... 2,913 4,191 7,104
-------- -------- ---------
Non-operating income (expense):
Loss on foreign exchange................ (762) -- (762)
Equity in earnings of investments....... -- 531 531
Net operating costs of real estate
acquired through foreclosure........... -- (336) (336)
-------- -------- ---------
Total non-operating income (expense).. (762) 195 (567)
-------- -------- ---------
Pre-tax income............................ 2,151 4,386 6,537
Income tax expense........................ 224 1,649 1,873
Minority interest in subsidiary........... -- 1,362 1,362
-------- -------- ---------
Net income................................ 1,927 1,375 3,302
Preferred stock dividends................. 240 2,112 2,352
-------- -------- ---------
Income (loss) applicable to common stock.. $ 1,687 $ (737) $ 950
======== ======== =========
Income per share:
Basic................................... $ 0.01 $ 0.00
======== =========
Diluted................................. $ 0.01 $ 0.00
======== =========
Shares used in computation of income per
share*:
Basic................................... 173,906 16,464 190,370
Diluted................................. 185,479 16,464 208,224**
</TABLE>
- --------
* Telebanc shares reflect the post split conversion of 1.05 E*TRADE shares for
each share of Telebanc common stock outstanding.
** Because Telebanc reported a net loss for the twelve months ended
December 31, 1998, the calculation of diluted earnings per share does not
include common stock equivalents as they are anti-dilutive and would result
in a reduction of net loss per share. If Telebanc had reported net income in
this period there would have been 6,281,000 additional shares in the
calculation of diluted earnings per share. These additional shares have been
included in the calculation of diluted earnings per share on a pro forma
combined basis as the combined company reported net income on a pro forma
combined basis.
61
<PAGE>
E*TRADE GROUP, INC. AND SUBSIDIARIES
Pro Forma Combined Statements of Operations
(in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Fiscal Year 1997
----------------------------------------
E*TRADE Telebanc Pro Forma
September 30 December 31 Combined
------------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues:
Transaction revenues................. $109,659 $ -- $109,659
Interest income...................... 40,865 59,301 100,166
Global and institutional............. 80,128 -- 80,128
Gain on sale of loans................ -- 1,148 1,148
Gain on available-for-sale
securities.......................... -- 982 982
Gain on trading securities........... -- 1,204 1,204
Other................................ 18,602 1,897 20,499
-------- -------- --------
Gross revenues..................... 249,254 64,532 313,786
Interest expense..................... (15,126) (46,063) (61,189)
Provision for loan losses............ -- (921) (921)
-------- -------- --------
Net revenues....................... 234,128 17,548 251,676
-------- -------- --------
Cost of services....................... 95,933 3,379 99,312
-------- -------- --------
Operating expenses:
Selling and marketing................ 67,281 2,046 69,327
Technology development............... 13,547 184 13,731
General and administrative........... 27,098 4,255 31,353
-------- -------- --------
Total operating expenses........... 107,926 6,485 114,411
-------- -------- --------
Total cost of services and
operating expenses................ 203,859 9,864 213,723
-------- -------- --------
Operating income....................... 30,269 7,684 37,953
-------- -------- --------
Non-operating expense:
Loss on foreign exchange............. (946) -- (946)
Equity in losses of investments...... -- (1,138) (1,138)
Net operating costs of real estate
acquired through foreclosure........ -- (278) (278)
-------- -------- --------
Total non-operating expense........ (946) (1,416) (2,362)
-------- -------- --------
Pre-tax income......................... 29,323 6,268 35,591
Income tax expense..................... 10,130 1,657 11,787
Minority interest in subsidiary........ -- 394 394
-------- -------- --------
Net income............................. 19,193 4,217 23,410
Preferred stock dividends.............. 240 546 786
-------- -------- --------
Income applicable to common stock...... $ 18,953 $ 3,671 $ 22,624
======== ======== ========
Income per share:
Basic................................ $ 0.14 $ 0.16
======== ========
Diluted.............................. $ 0.13 $ 0.14
======== ========
Shares used in computation of income
per share*:
Basic................................ 133,572 9,204 142,776
Diluted.............................. 147,833 15,563 163,396
</TABLE>
- --------
* Telebanc shares reflect the post split conversion of 1.05 E*TRADE shares for
each share of Telebanc common stock outstanding.
62
<PAGE>
COMPARISON OF RIGHTS OF HOLDERS OF
TELEBANC COMMON STOCK AND
E*TRADE COMMON STOCK
This section of the proxy statement/prospectus describes certain differences
between the rights of holders of Telebanc common stock and E*TRADE common
stock. While we believe that the description covers the material differences
between the two, this summary may not contain all of the information that is
important to you. You should carefully read this entire document and the other
documents we refer to for a more complete understanding of the differences
between being a stockholder of Telebanc and being a stockholder of E*TRADE.
As a stockholder of Telebanc, your rights are governed by Telebanc's Amended
and Restated Certificate of Incorporation, as currently in effect, and
Telebanc's Bylaws. After completion of the merger, you will become a
stockholder of E*TRADE. As an E*TRADE stockholder, your rights will be governed
by E*TRADE's Amended and Restated Certificate of Incorporation and E*TRADE's
Restated Bylaws. We are each incorporated under the laws of the State of
Delaware and accordingly, your rights as a stockholder will continue to be
governed by the Delaware General Corporation Law after completion of the
merger.
Classes of Common Stock of Telebanc and E*TRADE
E*TRADE has one class of common stock issued and outstanding. Holders of
E*TRADE common stock are each entitled to one vote for each share held.
Telebanc has one class of common stock issued and outstanding. Holders of
Telebanc common stock are each entitled to one vote for each share held.
Classified Board of Directors
Delaware law provides that a corporation's board of directors may be divided
into various classes with staggered terms of office. E*TRADE's board of
directors is divided into three classes, as nearly equal in size as possible,
with one class being elected annually. E*TRADE directors are elected for a term
of three years and until their successors are elected and qualified.
Telebanc's board of directors is divided into three classes, as nearly equal
in size as possible, with one class being elected annually. Telebanc directors
are elected for a term of three years and until their successors are elected
and qualified.
Number of Directors
E*TRADE's board of directors currently consists of eight directors. The
number of directors on E*TRADE's board may only be changed by a vote of two-
thirds of the directors, subject to the rights of the holders of any
outstanding series of E*TRADE preferred stock to elect additional directors.
There is currently no preferred stock of E*TRADE outstanding.
Telebanc's board of directors currently consists of eight directors.
Telebanc's certificate of incorporation provide that the number of directors
shall not be fewer than six nor more than fifteen. The number of directors is
determined by resolution of the Board of Directors.
Removal of Directors
E*TRADE directors, or the entire E*TRADE board, may be removed, with or
without cause, by the affirmative vote of the holders of at least 66 2/3% of
the combined voting power of all shares of E*TRADE entitled to vote generally
in the election of directors, voting together as a single class.
63
<PAGE>
Any Telebanc director or directors may be removed from office at any time,
but only:
. for cause; and
. by the affirmative vote, at a special meeting of the stockholders of
Telebanc called for such purpose, of the holders of at least 66 2/3% of
the total number of outstanding shares of Telebanc stock entitled to
vote generally in the election of directors, voting together as a single
class. At least 30 days prior to such special meeting of stockholders,
written notice shall be sent to the director or directors whose removal
will be considered at such meeting.
Filling Vacancies on the Board of Directors
Any newly created directorships in either of our boards of directors,
resulting from any increase in the number of authorized directors or any
vacancies, may be filled by a majority of the remaining members of such board
of directors, even though less than a quorum, or in the case of E*TRADE by a
sole remaining director, subject to the rights of holders of any outstanding
series of preferred stock.
In the case of E*TRADE, a vacancy created by the removal of a director by
the vote of the stockholders or by court order may be filled only by the
affirmative vote of a majority of the shares represented and voting at a duly
held meeting at which a quorum is present, which shares voting affirmatively
also constitute a majority of the required quorum.
Newly created directorships or decreases in directorships in either of our
boards of directors are to be apportioned among the classes of directors so as
to make all classes as nearly equal in number as practicable, provided that no
decreases in the number of directors in either of our boards of directors may
shorten the term of any director then in office.
Limits on Stockholder Action by Written Consent
E*TRADE stockholders may take action at annual or special meetings of
stockholders, but may not take action by written consent.
Telebanc stockholders may take action at annual or special meetings of
stockholders, but may not take action by written consent unless such consent is
unanimous.
Ability to Call Special Meetings
Special meetings of stockholders of E*TRADE may be called only by:
. the chairman of the board of directors;
. the president;
. the chairman or the secretary at the written request of a majority of
the total number of directors which E*TRADE would have if there were no
vacancies upon not fewer than 10 or more than 60 days' written notice;
or
. holders of shares entitled to cast not less than 10% of the votes at
such special meeting upon not fewer than 10 or more than 60 days'
written notice.
Special meetings of Telebanc stockholders may be called at any time, but
only by:
. the chairman of the board of directors;
. a majority of the directors in office, although less than a quorum; or
. the holders of not less than 50% of the stock of Telebanc entitled to
vote generally.
Advance Notice Provisions for Stockholder Nominations and Proposals
The E*TRADE bylaws allow stockholders to propose business to be brought
before annual stockholder meetings and to nominate candidates for election to
E*TRADE's board of directors at annual stockholder
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meetings. Nominations and proposals may only be made by a stockholder who has
properly brought business before the annual meeting and has given timely
written notice to the secretary of E*TRADE before the annual meeting.
To be properly brought before an annual meeting of E*TRADE, business must
be:
. specified in the notice of meeting (or any supplement thereto) given by
or at the direction of the board of directors;
. otherwise properly brought before the meeting by or at the direction of
the board of directors; or
. otherwise properly brought before the meeting by a stockholder.
To be timely, notices for stockholder proposals or nominations must be
delivered to or mailed and received at the principal executive offices of
E*TRADE not later than the close of business on the 60th day nor earlier than
the close of business on the 90th day prior to the first anniversary of the
preceding year's annual meeting. In the event that no annual meeting was held
in the previous year or the date of the annual meeting has been changed by more
than 30 days from the date contemplated at the time of the previous year's
proxy statement, notice by the stockholder to be timely must be so received not
earlier than the close of business on the 90th day prior to such annual meeting
and not later than the close of business on the later of the 60th day prior to
such annual meeting or, in the event public announcement of the date of such
annual meeting is first made by E*TRADE fewer than 70 days prior to the date of
such annual meeting, the close of business on the 10th day following the day on
which public announcement of the date of such meeting is first made by E*TRADE.
Notices to the secretary for stockholder proposals must set forth as to each
matter the stockholder proposes to bring before the annual meeting:
. a brief description of the business desired to be brought before the
annual meeting and the reasons for conducting such business at the
annual meeting;
. the name and address, as they appear on E*TRADE's books, of the
stockholder proposing such business;
. the class and number of shares of the corporation which are beneficially
owned by the stockholder;
. any material interest of the stockholder in such business; and
. any other information that is required to be provided by the stockholder
pursuant to Regulation 14A under the Securities Exchange Act, in his or
her capacity as a proponent to a stockholder proposal. Notwithstanding
the foregoing, in order to include information with respect to a
stockholder proposal in the proxy statement and form of proxy for a
stockholder's meeting, stockholders must provide notice as required by
the regulations under the Securities Exchange Act.
Notices to the secretary for stockholder nominations must set forth:
. as to each person whom the stockholder proposes to nominate for election
or re-election as a director:
. the name, age, business address and residence address of such
person;
. the principal occupation or employment of such person;
. the class and number of shares of E*TRADE which are beneficially
owned by such person;
. a description of all arrangements or understandings between the
stockholder and each nominee and any other person or persons (naming
such person or persons) pursuant to which the nominations are to be
made by the stockholder; and
. any other information relating to such person that is required to be
disclosed in solicitations of proxies for election of directors, or
is otherwise required, in each case pursuant to
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Regulation 14A under the Securities Exchange Act, including without
limitation such person's written consent to being named in the proxy
statement, if any, as a nominee and to serving as a director if
elected; and
. as to such stockholder giving notice, the information required to be set
forth with respect to such stockholder when the stockholder proposes to
bring a matter before the annual meeting.
The chairman of E*TRADE's annual meeting may, at the annual meeting, reject
any proposal or nomination made by a stockholder that is not made on a timely
basis and in accordance with the advance notice procedures set forth in
E*TRADE's bylaws.
The Telebanc bylaws also allow stockholders to propose business to be
brought before any annual stockholder meeting of Telebanc. For business to be
properly brought before a Telebanc annual meeting by a stockholder, the
stockholder must have given timely notice thereof in writing to the secretary
of Telebanc. To be timely, a stockholder's notice must be received at the
principal executive offices of Telebanc no later than the date designated for
receipt of stockholders' proposals in a prior public disclosure made by
Telebanc. If there has been no such prior public disclosure, then to be
timely, a stockholder's notice must be delivered to or mailed and received at
the principal executive offices of Telebanc not less than 60 days nor more
than 90 days prior to the annual meeting. If less than 70 days' notice of the
meeting is given to stockholders or prior public disclosure of the date of the
meeting is made, notice by the stockholder to be timely must be so received
not later than the close of business on the 10th day following the day on
which such notice of the date of the annual meeting was mailed or such public
disclosure was made.
Notices to the secretary for stockholder proposals must set forth as to
each matter the stockholder proposes to bring before the annual meeting:
. a brief description of the business desired to be brought before the
annual meeting and the reasons for conducting such business at the
annual meeting;
. the name and address, as they appear on Telebanc's books, of the
stockholder proposing such business;
. the class and number of shares of Telebanc stock which are beneficially
owned by the stockholder;
. any material interest of the stockholder in such business; and
. the same information with respect to any other stockholder that, to the
knowledge of the stockholder proposing such business, supports such
proposal.
The chairman of Telebanc's board of directors may, at the annual meeting,
reject any proposal or nomination made by a stockholder that is not made on a
timely basis and in accordance with the advance notice procedures set forth in
Telebanc's bylaws.
Preferred Stock
Both of our certificates of incorporation provide that our boards of
directors are authorized to provide for the issuance of shares of undesignated
preferred stock in one or more series, and to fix the designations, powers,
preferences and rights of the shares of each series and any qualifications,
limitations or restrictions thereof.
Amendment of Certificate of Incorporation
Under Delaware law, a certificate of incorporation of a Delaware
corporation may be amended by approval of the board of directors of the
corporation and the affirmative vote of the holders of a majority of the
outstanding shares entitled to vote for the amendment, unless a higher vote is
required by the corporation's certificate of incorporation.
E*TRADE's amended and restated certificate of incorporation provides that
the affirmative vote of the holders of at least 66 2/3% of the combined voting
power of all shares of E*TRADE entitled to vote generally
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in the election of directors, voting together as a single class, is required to
alter, change, amend, repeal or adopt any provision inconsistent with the
provisions of E*TRADE's certificate of incorporation which deal with the
following:
. matters relating to the board of directors, including the number of
members, board classification, vacancies and removal;
. the manner in which stockholder action may be effected;
. amendments to E*TRADE's bylaws; or
. business combinations.
Except as specifically required by law, no amendment to any provision of
Telebanc's amended and restated certificate of incorporation can be made unless
such amendment has been first proposed by the board of directors of Telebanc
upon the affirmative vote of at least two-thirds of the directors then in
office at a duly constituted meeting of the board of directors called for such
purpose, and thereafter approved by the stockholders of Telebanc by the
affirmative vote of the holders of at least a majority of the shares entitled
to vote on such a proposal at a duly-called annual or special meeting.
If, however, such an amendment deals with matters relating to:
. the board of directors, including the number of members, board
classification, vacancies and removal;
. the manner in which stockholder action may be effected;
. special meetings;
. approval for acquisitions of control and offers to acquire control;
. control share acquisitions;
. criteria for evaluating certain offers; or
. indemnification;
then, such amendment must be approved by the affirmative vote of the holders of
at least 66 2/3 % of the then outstanding shares of stock of the Telebanc
entitled to vote on such a proposal rather than a majority. Furthermore, if
such an amendment is to matters relating to the vote required for certain
business combinations, such amendment must be approved by the affirmative vote
of the holders of at least 80 % of the shares entitled to vote on such a
proposal rather than a majority.
Amendment of Bylaws
Under Delaware law, stockholders entitled to vote have the power to adopt,
amend or repeal bylaws. In addition, a corporation may, in its certificate of
incorporation, confer such power upon the board of directors. The stockholders
always have the power to adopt, amend or repeal bylaws, even though the board
may also be delegated such power.
E*TRADE's articles of incorporation and restated bylaws expressly authorize
and empower the board of directors of E*TRADE to alter, amend or repeal the
bylaws or adopt new bylaws by the affirmative vote of a majority of the
directors present at any regular or special meeting of the board of directors.
The E*TRADE bylaws may also be altered, amended or repealed or new bylaws may
be adopted by the affirmative vote of the holders of at least 66 2/3% of the
shares of the capital stock of E*TRADE issued and outstanding and entitled to
vote at any regular meeting of stockholders, or at any special meeting of
stockholders, provided notice of such alteration, amendment, repeal or adoption
of new bylaws has been stated in the notice of such special meeting.
Telebanc's articles of incorporation and bylaws expressly authorize and
empower the board of directors of Telebanc to adopt, amend and repeal the
bylaws of Telebanc, subject to the right of the stockholders entitled to
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vote with respect to such amendment to amend or repeal bylaws adopted by the
board of directors by the affirmative vote of the holders of 66 2/3 % of the
total number of outstanding shares entitled to vote generally in the election
of directors, voting as a single class.
Business Combinations and State Anti-Takeover Statutes
E*TRADE and Telebanc are both subject to Section 203 of the Delaware General
Corporation Law which, under certain circumstances, may make it more difficult
for a person who would be an "Interested Stockholder", as defined in Section
203, in our respective companies, to effect various business combinations with
either of us for a three-year period. Under Delaware law, a corporation's
certificate of incorporation or bylaws may exclude a corporation from the
restrictions imposed by Section 203. Our respective certificates of
incorporation and bylaws do not exclude us from the restrictions imposed under
Section 203.
In addition to any affirmative vote required by law, E*TRADE's amended and
restated certificate of incorporation requires that certain business
combinations by E*TRADE described in Section 203 of the Delaware General
Corporation Law be approved by the affirmative vote of the holders of at least
66 2/3% of the combined voting power of all shares of E*TRADE entitled to vote
generally in the election of directors, voting together as a single class,
unless such business combinations have been approved by at least two-thirds of
all of the directors of E*TRADE. Such affirmative vote is required
notwithstanding the fact that no vote may be required, or that some lesser
percentage may be specified by law or in any agreement with any national
securities exchange or otherwise.
Similarly, in addition to any affirmative vote required by law, Telebanc's
amended and restated certificate of incorporation requires that certain
business combinations by Telebanc described in Section 203 of the Delaware
General Corporation Law be approved by the affirmative vote of the holders of
at least:
. 80% of the total number of shares of Telebanc stock entitled to vote
generally in the election of directors; and
. 66 2/3% of the total number of shares of Telebanc stock entitled to vote
generally in the election of directors, excluding from both the
affirmative vote and the total number shares outstanding the shares of
Telebanc stock of the Interested Stockholder or any affiliate or
associate of such Interested Stockholder;
unless:
. such business combinations have been approved by at least two-thirds of
the directors unrelated to and unaffected by the Interested Stockholder;
or
. such business combinations meet price and procedure requirements set
forth in Telebanc's amended and restated certificate of incorporation.
The merger does not constitute a business combination under Section 203 of
the Delaware General Corporation Law or under the provisions of E*TRADE's
amended and restated certificate of incorporation or Telebanc's amended and
restated certificate of incorporation as described in this section.
Limitation of Liability of Directors
The Delaware General Corporation Law permits a corporation to include a
provision in its certificate of incorporation eliminating or limiting the
personal liability of a director or officer to the corporation or its
stockholders for damages for a breach of the director's fiduciary duty, subject
to certain limitations. Our respective certificates of incorporation include
such a provision to the maximum extent permitted by law.
While these provisions provide directors with protection from awards for
monetary damages for breaches of their duty of care, they do not eliminate that
duty. Accordingly, these provisions will have no effect on the availability of
equitable remedies such as an injunction or rescission based on a director's
breach of his or her fiduciary duty.
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Indemnification of Directors and Officers
The Delaware General Corporation Law permits a corporation to indemnify
officers and directors for actions taken in good faith and in a manner they
reasonably believed to be in, or not opposed to, the best interests of the
corporation, and with respect to any criminal action, which they had no
reasonable cause to believe was unlawful.
Our respective certificates of incorporation and bylaws provide that any
person who was or is a party or is threatened to be a party to or is involved
in any action, suit, or proceeding, whether civil, criminal, administrative or
investigative, because that person is or was a director or officer, or is or
was serving at the request of either of us as a director, officer, employee or
agent of another corporation or of a partnership, joint venture, trust or other
enterprise, will be indemnified against expenses, including judgments, fines,
amounts paid in settlement and attorneys' fees, and held harmless by each of us
to the fullest extent permitted by the Delaware General Corporation Law. The
indemnification rights conferred by each of us are not exclusive of any other
right to which persons seeking indemnification may be entitled under any
statute, our respective certificates of incorporation or bylaws, any agreement,
vote of stockholders or disinterested directors or otherwise. In addition, each
of us is authorized to purchase and maintain insurance on behalf of our
respective directors and officers.
Additionally, each of us may pay expenses incurred by our directors or
officers in defending a civil or criminal action, suit or proceeding, because
that person is a director or officer, in advance of the final disposition of
that action, suit or proceeding. However, such payment will be made only if we
receive an undertaking by or on behalf of that director or officer to repay all
amounts advanced if it is ultimately determined that he or she is not entitled
to be indemnified by us, as authorized by our respective certificates of
incorporation and bylaws.
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EXPERTS
The consolidated financial statements of E*TRADE Group, Inc. and subsidaries
incorporated in this proxy statement/prospectus by reference from E*TRADE
Group, Inc.'s Annual Report on Form 10-K for the year ended September 30, 1999,
have been audited by Deloitte & Touche LLP, independent auditors, as stated in
their report, which is incorporated herein by reference, and have been so
incorporated in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
The audited consolidated financial statements of Telebanc Financial
Corporation and subsidiaries incorporated by reference in this proxy statement/
prospectus and elsewhere in the registration statement to the extent and for
the periods indicated in their report have been audited by Arthur Andersen LLP,
independent public accountants and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
LEGAL MATTERS
The validity of the shares of E*TRADE common stock offered by this proxy
statement/prospectus and the federal income tax consequences in connection with
the Merger will be passed upon for E*TRADE by Brobeck, Phleger & Harrison LLP,
Palo Alto, California. Certain legal matters with respect to federal income tax
consequences in connection with the merger will be passed upon for Telebanc by
Hogan & Hartson L.L.P., Washington, DC.
WHERE YOU CAN FIND MORE INFORMATION
Telebanc and E*TRADE file annual, quarterly and special reports, proxy
statements and other information with the Securities and Exchange Commission.
You may read and copy any reports, statements or other information we file at
the Commission's public reference rooms in Washington, D.C., New York, New York
and Chicago, Illinois. Please call the Commission at 1-800-SEC-0330 for further
information on the public reference rooms. Our Securities and Exchange
Commission filings are also available to the public from commercial document
retrieval services and at the Website maintained by the Commission at
http://www.sec.gov.
E*TRADE has filed a registration statement with the Commission to register
the E*TRADE common stock to be issued to Telebanc stockholders in the merger.
This proxy statement/prospectus is a part of that registration statement and
constitutes a prospectus of E*TRADE in addition to being a proxy statement of
Telebanc for the Telebanc special meeting.
As allowed by the Commission's rules, this proxy statement/prospectus does
not contain all of the information relating to E*TRADE and Telebanc you can
find in the registration statement or the exhibits to the registration
statement. Some of the important business and financial information relating to
E*TRADE and Telebanc that you may want to consider in deciding how to vote is
not included in this proxy statement/prospectus, but rather is "incorporated by
reference" to documents that have been previously filed by E*TRADE and Telebanc
with the Commission. The information incorporated by reference is deemed to be
a part of this proxy statement/prospectus, except for any information
superseded by information contained directly in this proxy
statement/prospectus. See "Incorporation of Certain Documents by Reference."
E*TRADE has supplied all information contained or incorporated by reference
in this proxy statement/ prospectus relating to E*TRADE and Telebanc has
supplied all information contained or incorporated by reference in this proxy
statement/prospectus relating to Telebanc. Neither E*TRADE nor Telebanc
warrants the accuracy or completeness of information relating to the other.
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If you are a stockholder, you can obtain any of the documents incorporated
by reference through E*TRADE, Telebanc or the Commission. Documents
incorporated by reference are available from E*TRADE or Telebanc without
charge, excluding all exhibits. You may obtain documents incorporated by
reference in this proxy statement/prospectus by requesting them orally or in
writing to the following addresses or by telephone:
<TABLE>
<S> <C>
E*TRADE Group, Inc. Telebanc Financial Corporation
Investor Relations Investor Relations
4500 Bohannon Drive 1111 North Highland Street
Menlo Park, CA 94025 Arlington, VA 22201
(650) 331-6000 (703) 247-3700
</TABLE>
If you would like to request documents, please do so by December , 1999 in
order to receive them before the Telebanc special meeting.
You should rely only on the information contained in or incorporated by
reference in this proxy statement/prospectus to vote on the merger. Neither
E*TRADE nor Telebanc has authorized anyone to provide you with information
that is different from what is contained in this proxy statement/prospectus.
This proxy statement/prospectus is dated November 22, 1999. You should not
assume that the information contained in the proxy statement/prospectus is
accurate as of any other date, and neither the mailing of this proxy
statement/prospectus to stockholders nor the issuance of E*TRADE common stock
in the merger shall create any implication to the contrary.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by E*TRADE with the Securities and Exchange
Commission are incorporated by reference in this proxy statement/prospectus:
1. E*TRADE's Annual Report on Form 10-K for the year ended September 30,
1999, filed on October 22, 1999;
2. The description of E*TRADE's common stock, and associated rights,
contained in the Registration Statements on Form 8-A filed by E*TRADE with
the Commission, including any amendment or report filed for the purpose of
updating such description.
The following documents filed by Telebanc with the Securities and Exchange
Commission are incorporated by reference in this proxy statement/prospectus:
1. Telebanc's Annual Report on Form 10-K for the year ended December 31,
1998, filed on February 11, 1999, amended by Form 10-K/A filed March 19,
1999 and Form 10-K/A filed April 8, 1999.
2. Telebanc's Quarterly Reports on Form 10-Q filed on May 17, 1999,
August 16, 1999 and October 22, 1999;
3. Telebanc's Current Reports on Form 8-K filed April 2, 1999, April 8,
1999 and June 8, 1999; and
4. The description of Telebanc's common stock contained in the
Registration Statement on Form 8-A filed by Telebanc with the Commission,
including any amendment or report filed for the purpose of updating such
description.
All reports and definitive proxy or information statements filed by E*TRADE
and Telebanc pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange
Act subsequent to the date of this proxy statement/ prospectus and prior to
the date of the special meeting shall be deemed to be incorporated by
reference into this proxy statement/prospectus from the date of filing of such
documents. Any statement contained in a document incorporated or deemed to be
incorporated herein shall be deemed to be modified or superseded for purposes
of this proxy statement/prospectus to the extent that a statement contained
herein or in any other subsequently filed document which also is or is deemed
to be incorporated by reference herein modifies or supersedes such
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statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this proxy
statement/prospectus.
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH
ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THERE WILL BE PROVIDED WITHOUT
CHARGE TO EACH PERSON, INCLUDING ANY BENEFICIAL HOLDER OF TELEBANC COMMON
STOCK, TO WHOM A PROXY STATEMENT/PROSPECTUS IS DELIVERED, UPON ORAL OR WRITTEN
REQUEST OF ANY SUCH PERSON, A COPY OF ANY OR ALL DOCUMENTS INCORPORATED BY
REFERENCE HEREIN (EXCLUDING EXHIBITS UNLESS SUCH EXHIBITS ARE SPECIFICALLY
INCORPORATED BY REFERENCE HEREIN). WITH RESPECT TO E*TRADE'S DOCUMENTS,
REQUESTS SHOULD BE DIRECTED TO E*TRADE GROUP, INC., INVESTOR RELATIONS, 4500
BOHANNON DRIVE, MENLO PARK, CALIFORNIA 94025 (TELEPHONE 650-331-6000). WITH
RESPECT TO TELEBANC'S DOCUMENTS, REQUESTS SHOULD BE DIRECTED TO TELEBANC
FINANCIAL CORPORATION, INVESTOR RELATIONS, 1111 NORTH HIGHLAND STREET,
ARLINGTON, VIRGINIA 22201 (TELEPHONE 703-247-3700). IN ORDER TO ENSURE TIMELY
DELIVERY OF THE DOCUMENTS IN ADVANCE OF THE SPECIAL MEETING TO WHICH THIS PROXY
STATEMENT/PROSPECTUS RELATES, ANY SUCH REQUEST SHOULD BE MADE AT LEAST FIVE
BUSINESS DAYS PRIOR TO THE DATE OF THE SPECIAL MEETING.
STOCKHOLDER PROPOSALS
Any proposal that a stockholder wishes to have presented at the next annual
meeting of stockholders and included in the proxy materials of Telebanc must be
received at the main office of Telebanc, 1111 North Highland Street, Arlington,
Virginia 22201, no later than January 31, 2000. If such proposal is in
compliance with all of the requirements of Rule 14a-8 of the Exchange Act of
1934, as amended, it will be included in the proxy statement and set forth on
the form of proxy issued for the 2000 Annual Meeting of Stockholders.
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APPENDIX A
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
BY AND AMONG
E*TRADE GROUP, INC.,
TURBO ACQUISITION CORP.
AND
TELEBANC FINANCIAL CORPORATION
May 31, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
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ARTICLE I THE MERGER..................................................... A-1
1.1 The Merger........................................................ A-1
1.2 Closing; Effective Time........................................... A-1
1.3 Effect of the Merger.............................................. A-2
1.4 Certificate of Incorporation; Bylaws.............................. A-2
1.5 Directors and Officers............................................ A-2
1.6 Effect on Capital Stock........................................... A-2
1.7 Surrender of Certificates......................................... A-3
1.8 No Further Ownership Rights in Company Capital Stock.............. A-4
1.9 Lost, Stolen or Destroyed Certificates............................ A-4
1.10 Tax and Accounting Consequences................................... A-5
1.11 Withholding Rights................................................ A-5
1.12 Taking of Necessary Action; Further Action........................ A-5
ARTICLE II REPRESENTATIONS AND WARRANTIES OF COMPANY..................... A-5
2.1 Organization, Standing and Power.................................. A-5
2.2 Capital Structure................................................. A-6
2.3 Authority......................................................... A-6
2.4 SEC Documents; Financial Statements............................... A-7
2.5 Absence of Certain Changes........................................ A-8
2.6 Absence of Undisclosed Liabilities................................ A-8
2.7 Litigation........................................................ A-8
2.8 Restrictions on Business Activities............................... A-9
2.9 Compliance With Laws.............................................. A-9
2.10 Title to Property................................................. A-9
2.11 Intellectual Property............................................. A-9
2.12 Environmental Matters............................................. A-10
2.13 Taxes............................................................. A-11
2.14 Employee Benefit Plans............................................ A-12
2.15 Employee Matters.................................................. A-14
2.16 Interested Party Transactions..................................... A-15
2.17 Insurance......................................................... A-15
2.18 Regulatory Matters................................................ A-15
2.19 Material Contracts................................................ A-16
2.20 Banking Business.................................................. A-17
2.21 Year 2000 Compliance.............................................. A-18
2.22 Opinion of Financial Advisor...................................... A-18
2.23 Company Affiliates................................................ A-18
2.24 State Takeover Statutes; Charter Provisions....................... A-18
2.25 Tax and Accounting Treatment...................................... A-18
2.26 Brokers' and Finders' Fees........................................ A-18
2.27 Representations Complete.......................................... A-19
ARTICLE III REPRESENTATIONS AND WARRANTIES OF PARENT..................... A-19
3.1 Organization, Standing and Power.................................. A-19
3.2 Capital Structure................................................. A-19
3.3 Authority......................................................... A-20
3.4 SEC Documents; Financial Statements............................... A-20
3.5 Absence of Undisclosed Liabilities................................ A-21
3.6 Litigation........................................................ A-21
</TABLE>
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3.7 Compliance With Laws............................................ A-21
3.8 Year 2000 Compliance............................................ A-21
3.9 Tax Treatment................................................... A-21
3.10 Broker's and Finders' Fees...................................... A-21
3.11 Representations Complete........................................ A-22
ARTICLE IV CONDUCT PRIOR TO THE EFFECTIVE TIME......................... A-22
4.1 Conduct of Business............................................. A-22
4.2 Conduct of Business of Company.................................. A-22
4.3 Conduct of Parent............................................... A-25
4.4 No Solicitation................................................. A-25
ARTICLE V ADDITIONAL AGREEMENTS........................................ A-26
5.1 Registration Statement; Proxy Statements........................ A-26
5.2 Meeting of Stockholders......................................... A-28
5.3 Access to Information........................................... A-28
5.4 Confidentiality................................................. A-29
5.5 Public Disclosure............................................... A-29
5.6 Consents; Cooperation........................................... A-29
5.7 Reasonable Best Efforts and Further Assurances.................. A-29
5.8 Blue Sky Laws................................................... A-29
5.9 Listing of Additional Shares; Nasdaq Quotation.................. A-30
5.10 Pooling Accounting.............................................. A-30
5.11 Affiliate Agreements............................................ A-30
5.12 Tax Treatment................................................... A-30
5.13 Company Options................................................. A-30
5.14 Form S-8........................................................ A-31
5.15 Employees; Employee Benefit Matters............................. A-31
5.16 Director and Officer Indemnification............................ A-32
5.17 Comfort Letters................................................. A-32
5.18 Stockholder Litigation.......................................... A-32
5.19 Company Debt Securities......................................... A-33
ARTICLE VI CONDITIONS TO THE MERGER.................................... A-33
6.1 Conditions to Obligations of Each Party to Effect the Merger.... A-33
6.2 Additional Conditions to Obligations of Company................. A-34
6.3 Additional Conditions to the Obligations of Parent and Merger
Sub............................................................. A-34
ARTICLE VII TERMINATION, AMENDMENT AND WAIVER.......................... A-35
7.1 Termination..................................................... A-35
7.2 Effect of Termination........................................... A-36
7.3 Expenses and Termination Fees................................... A-36
7.4 Amendment....................................................... A-37
7.5 Extension; Waiver............................................... A-37
ARTICLE VIII GENERAL PROVISIONS........................................ A-37
8.1 Non-Survival at Effective Time.................................. A-37
8.2 Notices......................................................... A-38
8.3 Interpretation.................................................. A-38
8.4 Counterparts.................................................... A-39
8.5 Entire Agreement; Nonassignability; Parties in Interest......... A-39
8.6 Severability.................................................... A-39
8.7 Remedies Cumulative............................................. A-39
8.8 Governing Law................................................... A-39
8.9 Rules of Construction........................................... A-39
8.10 Definitions; Etc................................................ A-39
</TABLE>
ii
<PAGE>
EXHIBITS
<TABLE>
<C> <C> <S>
Exhibit A -- Form of Certificate of Merger
Exhibit B -- Form of Company Affiliate Agreement
Exhibit C -- Form of Parent Affiliate Agreement
Exhibit D -- Form of Management Continuity Agreement
</TABLE>
iii
<PAGE>
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
This AGREEMENT AND PLAN OF MERGER AND REORGANIZATION (the "Agreement") is
made and entered into as of May 31, 1999, by and among E*TRADE Group, Inc., a
Delaware corporation ("Parent"), Turbo Acquisition Corp., a Delaware
corporation and wholly owned subsidiary of Parent ("Merger Sub"), and Telebanc
Financial Corporation, a Delaware corporation ("Company").
RECITALS
A. The Board of Directors of Company has unanimously (i) determined that it
is advisable and fair to, and in the best interests of, Company and its
stockholders that, upon the terms and subject to the conditions of this
Agreement, Merger Sub merge with and into Company, with Company being the
surviving corporation (the "Merger"), (ii) approved this Agreement, the Merger
and the other transactions contemplated hereby and (iii) determined to
recommend the approval of this Agreement and the Merger by the stockholders of
Company.
B. The Board of Directors of Parent has (i) determined that the Merger is
advisable and in the best interests of Parent and its stockholders and (ii)
approved this Agreement, the Merger and the other transactions contemplated
hereby.
C. Pursuant to the Merger, among other things, the outstanding shares of
Common Stock, par value $.01 per share ("Company Common Stock"), of Company
shall be converted into the right to receive the consideration set forth
herein.
D. The parties intend, by executing this Agreement, to adopt a plan of
reorganization within the meaning of Section 368 of the Internal Revenue Code
of 1986, as amended (the "Code"), and to cause the Merger to qualify as a
"reorganization" under the provisions of Sections 368(a)(1)(A) and 368(a)(2)(E)
of the Code, and as a pooling of interests for financial accounting purposes.
E. Concurrently with the execution of this Agreement and as an inducement to
Parent and Merger Sub to enter into this Agreement, (a) Company and Parent have
entered into a stock option agreement dated the date hereof (the "Option
Agreement") providing for the purchase by Parent of newly-issued shares of
Company Common Stock under certain circumstances, and (b) certain affiliates of
Company have on the date hereof entered into Stockholder Agreements the
("Stockholder Agreements") pursuant to which they have agreed among other
things, to vote the shares of Company Common Stock over which such persons have
voting power to approve this Agreement and the Merger;
NOW, THEREFORE, in consideration of the foregoing and the representations,
warranties, covenants and agreements set forth herein, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
ARTICLE I
THE MERGER
1.1 The Merger. At the Effective Time (as defined in Section 1.2) and
subject to and upon the terms and conditions of this Agreement and the
applicable provisions of the Delaware General Corporation Law ("Delaware Law"),
Merger Sub shall be merged with and into Company, the separate corporate
existence of Merger Sub shall cease and Company shall continue as the surviving
corporation. Company as the surviving corporation after the Merger is
hereinafter sometimes referred to as the "Surviving Corporation."
1.2 Closing; Effective Time. The consummation of the Merger (the "Closing")
shall take place as soon as practicable, and in any event not later than two
(2) business days, after the satisfaction or waiver of
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each of the conditions set forth in Article VI hereof or at such other time as
the parties hereto may agree (the "Closing Date"). The Closing shall take place
at the offices of Brobeck, Phleger & Harrison LLP, Two Embarcadero Place, 2200
Geng Road, Palo Alto, California 94303, or at such other location as the
parties hereto may agree in writing. The Merger shall become effective on the
Closing Date, as set forth in the Certificate of Merger in the form attached
hereto as Exhibit A (the "Certificate of Merger"), which shall be filed with
the Secretary of State of the State of Delaware on the Closing Date. The term
"Effective Time" shall be the date and time when the Merger becomes effective
on the Closing Date, as set forth in the Certificate of Merger.
1.3 Effect of the Merger. At the Effective Time, the effect of the Merger
shall be as provided in this Agreement, the Certificate of Merger and the
applicable provisions of Delaware Law. At and after the Effective Time, the
Merger shall have the effects set forth in Sections 259 and 261 of the Delaware
Law. Without limiting the generality of the foregoing, and subject thereto, at
the Effective Time, all the property, rights, privileges, powers and franchises
of Company and Merger Sub shall vest in the Surviving Corporation, and all
debts, liabilities and duties of Company and Merger Sub shall become the debts,
liabilities and duties of the Surviving Corporation.
1.4 Certificate of Incorporation; Bylaws.
(a) At the Effective Time, the Certificate of Incorporation of Company, as
in effect immediately prior to the Effective Time, shall be the Certificate of
Incorporation of the Surviving Corporation; provided, however, that immediately
after the Effective Time the Certificate of Incorporation of the Surviving
Corporation shall be amended and restated so as to read in its entirety like
the Certificate of Incorporation of Merger Sub with Article I of the
Certificate of Incorporation amended to read as follows: "The name of the
corporation is Telebanc Financial Corporation."
(b) The Bylaws of Company, as in effect immediately prior to the Effective
Time, shall be the Bylaws of the Surviving Corporation until thereafter
amended; provided, however, that immediately after the Effective Time the
Bylaws of the Surviving Corporation shall be amended and restated so as to read
like the Bylaws of Merger Sub.
1.5 Directors and Officers. At the Effective Time, the directors of Merger
Sub shall be the initial directors of the Surviving Corporation, until their
successors are duly elected or appointed and qualified. The officers of Company
at the Effective Time shall be the initial officers of Surviving Corporation,
until their respective successors are duly elected or appointed and qualified.
1.6 Effect on Capital Stock. At the Effective Time, by virtue of the Merger
and without any action on the part of Parent, Merger Sub, Company or the
holders of any of the following securities:
(a) Conversion of Company Capital Stock. Each share of Company Common
Stock issued and outstanding immediately prior to the Effective Time (other
than any shares of Company Common Stock to be cancelled pursuant to Section
1.6(b)) will be converted automatically into the right to receive 2.1
shares (the "Exchange Ratio") of Parent Common Stock, par value $.01 per
share ("Parent Common Stock"), upon surrender of the certificate
representing such share of Company Common Stock in the manner provided in
Section 1.7 (or, in the case of a lost, stolen or destroyed certificate,
upon delivery of an affidavit and, if required, bond, in the manner
provided in Section 1.9).
(b) Cancellation of Company Capital Stock Owned by Parent, Merger Sub or
Company. Each share of Company Common Stock that is owned by Company as
treasury stock and each share of Company Common Stock owned by Parent or
Merger Sub or any direct or indirect wholly owned Subsidiary (as defined
below) of Parent, Merger Sub or Company immediately prior to the Effective
Time shall be canceled and extinguished without any conversion thereof.
(c) Company Stock Option Plans. At the Effective Time, Company's 1994
Stock Option Plan, 1997 Stock Option Plan and 1998 Stock Incentive Plan, as
amended (collectively, the "Company Stock
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Option Plans"), and all options to purchase Company Common Stock then
outstanding under the Company Stock Option Plans or pursuant to option
agreements listed on Schedule 1.6(c) attached hereto (collectively,
"Company Options") shall be assumed by Parent in accordance with Section
5.13.
(d) Unvested Company Common Stock. If any shares of Company Common Stock
outstanding immediately prior to the Effective Time are unvested or are
subject to a repurchase option, risk of forfeiture or other condition under
the Company Employee Stock Ownership Plan, any applicable restricted stock
purchase agreement, or other agreement with Company or under which Company
has any rights, then (unless such condition terminates by virtue of the
Merger pursuant to the express term of such agreement) the shares of Parent
Common Stock issued in exchange for such shares of Parent Common Stock will
also be unvested and subject to the same repurchase option, risk of
forfeiture or other condition, and the certificates representing such
shares of Parent Common Stock may accordingly be marked with appropriate
legends. Company shall take all action that may be necessary to ensure
that, from and after the Effective Time, Parent is entitled to exercise any
such repurchase option or other right set forth in any such restricted
stock purchase agreement or other agreement.
(e) Capital Stock of Merger Sub. At the Effective Time, each share of
Common Stock, par value $.001 per share, of Merger Sub ("Merger Sub Common
Stock") issued and outstanding immediately prior to the Effective Time
shall be converted into and exchanged for one validly issued, fully paid
and nonassessable share of Common Stock, par value $.001 per share, of the
Surviving Corporation, and the Surviving Corporation shall become a wholly
owned Subsidiary of Parent. Each stock certificate of Merger Sub evidencing
ownership of any such shares shall continue to evidence ownership of such
shares of capital stock of the Surviving Corporation.
(f) Adjustments to Exchange Ratio. The Exchange Ratio shall be
appropriately adjusted to reflect the effect of any stock split, reverse
split, stock dividend (including any dividend or distribution of securities
convertible into Parent Common Stock or Company Common Stock),
reorganization, recapitalization or other like change with respect to
Parent Common Stock or Company Common Stock occurring after the date hereof
and prior to the Effective Time and of any increase in the number of shares
of Company Common Stock outstanding resulting from any failure of Section
2.2 to be correct on the date hereof or by Company to comply with its
covenants under Section 4.2 of this Agreement, so as to provide Parent the
same economic effect as contemplated by this Agreement prior to such stock
split, reverse split, stock dividend, reorganization, recapitalization,
like change or increase .
(g) Fractional Shares. No fraction of a share of Parent Common Stock
will be issued, but in lieu thereof each holder of shares of Company
Capital Stock who would otherwise be entitled to a fraction of a share of
Parent Common Stock (after aggregating all fractional shares of Parent
Common Stock to be received by such holder) shall receive from Parent an
amount of cash (rounded to the nearest whole cent) equal to the product of
(i) such fraction, multiplied by (ii) the average of the closing sale
prices for a share of Parent Common Stock as quoted on the Nasdaq National
Market over the five (5) most recent trading days that Parent Common Stock
has traded ending on the last full trading day prior to the date on which
the Effective Time occurs.
1.7 Surrender of Certificates.
(a) Exchange Agent. Parent's transfer agent or another institution selected
by Parent and reasonably acceptable to Company shall act as exchange agent (the
"Exchange Agent") in the Merger.
(b) Parent to Provide Common Stock and Cash. Prior to the Effective Time,
Parent shall deposit with the Exchange Agent for exchange in accordance with
this Article I, through such reasonable procedures as Parent may adopt, (i) the
shares of Parent Common Stock issuable pursuant to Section 1.6(a) in exchange
for shares of Company Common Stock outstanding immediately prior to the
Effective Time and (ii) cash in an amount sufficient to permit payment of cash
in lieu of fractional shares pursuant to Section 1.6(g) and any dividend or
distribution to which holders of shares of Company Common Stock may be entitled
pursuant to Section 1.7(d).
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<PAGE>
(c) Exchange Procedures. Promptly after the Effective Time, Parent shall
cause to be mailed to each holder of record of a certificate or certificates
(the "Certificates") which immediately prior to the Effective Time represented
outstanding shares of Company Common Stock, whose shares were converted into
the right to receive shares of Parent Common Stock (and cash in lieu of
fractional shares) pursuant to Section 1.6, (i) a letter of transmittal (which
shall specify that delivery shall be effected, and risk of loss and title to
the Certificates shall pass, only upon receipt of the Certificates by the
Exchange Agent, and shall be in such form and have such other provisions as
Parent may reasonably specify) and (ii) instructions for use in effecting the
surrender of the Certificates in exchange for certificates representing shares
of Parent Common Stock (and cash in lieu of fractional shares). Upon surrender
of a Certificate for cancellation to the Exchange Agent or to such other agent
or agents as may be appointed by Parent, together with such letter of
transmittal, duly completed and validly executed in accordance with the
instructions thereto, the holder of such Certificate shall be entitled to
receive in exchange therefor a certificate representing the number of whole
shares of Parent Common Stock and payment in lieu of fractional shares which
such holder has the right to receive pursuant to Section 1.6 and any dividends
or other distributions pursuant to Section 1.7(d), and the Certificate so
surrendered shall forthwith be canceled. Until so surrendered, each outstanding
Certificate that, prior to the Effective Time, represented shares of Company
Common Stock will be deemed from and after the Effective Time, for all
corporate purposes, other than the payment of dividends, to evidence the
ownership of the number of full shares of Parent Common Stock into which such
shares of Company Common Stock shall have been so converted and the right to
receive an amount in cash in lieu of the issuance of any fractional shares in
accordance with Section 1.6 and any dividends or other distributions pursuant
to Section 1.7(d).
(d) Distributions With Respect to Unexchanged Shares. No dividends or other
distributions with respect to Parent Common Stock with a record date after the
Effective Time will be paid to the holder of any unsurrendered Certificate with
respect to the shares of Parent Common Stock represented thereby until the
holder of record of such Certificate shall surrender such Certificate. Subject
to applicable law, following surrender of any such Certificate, there shall be
paid to the record holder of the certificates representing whole shares of
Parent Common Stock issued in exchange therefor, without interest, at the time
of such surrender, the amount of any such dividends or other distributions with
a record date after the Effective Time theretofore payable (but for the
provisions of this Section 1.7(d)) with respect to such shares of Parent Common
Stock.
(e) Transfers of Ownership. If any certificate for shares of Parent Common
Stock is to be issued by the Exchange Agent in a name other than that in which
the Certificate surrendered in exchange therefor is registered, it will be a
condition of the issuance thereof that the Certificate so surrendered will be
properly endorsed and otherwise in proper form for transfer and that the person
requesting such exchange will have paid to Parent or any agent designated by it
any transfer or other taxes required by reason of the issuance of a check in
any name other than that of the registered holder of the Certificate
surrendered, or established to the satisfaction of Parent or any agent
designated by it that such tax has been paid or is not payable.
(f) No Liability. Notwithstanding anything to the contrary in this Section
1.7, none of the Exchange Agent, the Surviving Corporation or any party hereto
shall be liable to any person for any amount properly paid to a public official
pursuant to any applicable abandoned property, escheat or similar law.
1.8 No Further Ownership Rights in Company Capital Stock. All shares of
Parent Common Stock issued (and cash in lieu of fractional shares paid and any
dividends or other distributions pursuant to Section 1.7(d)) upon the surrender
for exchange of shares of Company Common Stock in accordance with the terms
hereof shall be deemed to have been issued in full satisfaction of all rights
pertaining to such shares of Company Common Stock, and there shall be no
further registration of transfers on the records of the Surviving Corporation
of shares of Company Common Stock which were outstanding immediately prior to
the Effective Time. If, after the Effective Time, Certificates are presented to
the Surviving Corporation for any reason, they shall be canceled and exchanged
as provided in this Article I.
1.9 Lost, Stolen or Destroyed Certificates. In the event any Certificates
shall have been lost, stolen or destroyed, the Exchange Agent shall issue in
exchange for such lost, stolen or destroyed Certificates, upon the
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<PAGE>
making of an affidavit of that fact by the holder thereof, such shares of
Parent Common Stock (and cash in lieu of fractional shares) as may be required
pursuant to Section 1.6; provided, however, that Parent may, in its discretion
and as a condition precedent to the issuance thereof, require the owner of such
lost, stolen or destroyed Certificates to deliver a bond in such sum as it may
reasonably direct as indemnity against any claim that may be made against
Parent, the Surviving Corporation or the Exchange Agent with respect to the
Certificates alleged to have been lost, stolen or destroyed.
1.10 Tax and Accounting Consequences. It is intended by the parties hereto
that the Merger shall qualify as a reorganization under the provisions of
Sections 368(a)(1)(A) and 368(a)(2)(E) of the Code and as a pooling of
interests for accounting purposes.
1.11 Withholding Rights. Parent and the Surviving Corporation shall be
entitled to deduct and withhold from the number of shares of Parent Common
Stock otherwise deliverable under this Agreement, and from any other payments
made pursuant to this Agreement, such amounts as Parent and the Surviving
Corporation are required to deduct and withhold with respect to such delivery
and payment under the Code or any provision of state, local, provincial or
foreign tax law. To the extent that amounts are so withheld, such withheld
amounts shall be treated for all purposes of this Agreement as having been
delivered and paid to the holder of shares of Company Common Stock in respect
of which such deduction and withholding was made by Parent and the Surviving
Corporation.
1.12 Taking of Necessary Action; Further Action. If, at any time after the
Effective Time, any further action is necessary or desirable to carry out the
purposes of this Agreement and to vest the Surviving Corporation with full
right, title and possession to all assets, property, rights, privileges, powers
and franchises of Company and Merger Sub, the officers and directors of
Company, Parent and Merger Sub are fully authorized in the name of their
respective corporations or otherwise to take, and will take, all such lawful
and necessary action, so long as such action is not inconsistent with this
Agreement.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF COMPANY
Except as disclosed in the document of even date herewith delivered by
Company to Parent prior to the execution and delivery of this Agreement and
referring to the representations and warranties in this Agreement (the "Company
Disclosure Schedule"), any exception so disclosed in the Company Disclosure
Schedule to specifically identify the Section of this Agreement to which such
exception relates, Company represents and warrants to Parent and Merger Sub as
follows:
2.1 Organization, Standing and Power. Each of Company and its Subsidiaries
is a corporation duly organized, validly existing and in good standing under
the laws of its jurisdiction of organization. Company is registered as a
savings and loan holding company in accordance with the Home Owners' Loan Act.
Each of Company and its Subsidiaries has the corporate power to own its
properties and to carry on its business as now being conducted and as proposed
to be conducted and is duly qualified to do business and is in good standing in
each jurisdiction in which the failure to be so qualified and in good standing
would have a Material Adverse Effect (as defined in Section 8.10) on Company.
Company has made available to Parent a true and correct copy of the certificate
or articles of incorporation, as amended, and bylaws, as amended, and any other
charter or organizational documents, each as amended, of Company and each of
its Subsidiaries. Neither Company nor any of its Subsidiaries is in violation
of any of the provisions of its certificate or articles of incorporation or
bylaws or other charter or organizational documents, each as amended. All of
the outstanding shares of capital stock and voting securities of each of
Company's Subsidiaries owned, directly or indirectly, by Company are duly
authorized, validly issued, fully paid and nonassessable, and those shares of
capital stock and voting securities of each of Company's Subsidiaries owned by
Company, directly or indirectly, are free and clear of all liens, charges,
claims or encumbrances or rights of others. Except as disclosed in the Company
SEC
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<PAGE>
Documents (as defined below), there are no outstanding subscriptions, options,
warrants, puts, calls, rights, exchangeable or convertible securities or other
commitments or agreements of any character relating to the issued or unissued
capital stock or other securities of any such Subsidiary, or otherwise
obligating Company or any such Subsidiary to issue, transfer, sell, purchase,
redeem or otherwise acquire any such securities. TeleBank is a federal savings
association existing under the laws of the United States. The deposit accounts
in TeleBank are insured by the Federal Deposit Insurance Corporation (the
"FDIC") through the Savings Association Insurance Fund to the fullest extent
permitted by law, and all premiums and assessments required in connection
therewith have been paid by TeleBank.
2.2 Capital Structure. The authorized capital stock of Company consists of
135,000,000 shares of Company Common Stock, and 500,000 shares of Preferred
Stock, par value $.01 per share ("Preferred Stock"), of which there were issued
and outstanding as of the close of business on May 28, 1999, 16,857,835 shares
of Company Common Stock and no shares of Preferred Stock. There are no other
outstanding shares of capital stock or voting securities and no outstanding
commitments to issue any shares of capital stock or voting securities after May
28, 1999 other than pursuant to the exercise of Company Options outstanding as
of such date. All outstanding shares of Company Common Stock are duly
authorized, validly issued, fully paid and non-assessable and are free and
clear of any liens or encumbrances other than any liens or encumbrances created
by or imposed upon the holders thereof, and are not subject to preemptive
rights or rights of first refusal created by the Amended and Restated
Certificate of Incorporation or Bylaws, each as amended, of Company or any
agreement to which Company is a party or by which it is bound. As of the close
of business on May 28, 1999, Company has reserved an aggregate of 4,773,019
shares of Common Stock for issuance to employees, consultants and directors
pursuant to the Company Stock Option Plans and the Company Options, of which
218,092 shares have been issued pursuant to option exercises or direct stock
purchases or awards, 2,570,680 shares are subject to outstanding, unexercised
options, and no shares are subject to outstanding stock purchase rights. Since
May 28, 1999, Company has not issued or granted additional options under the
Company Stock Option Plans or otherwise. Company has not issued or granted any
stock appreciation rights or performance units payable in stock of the Company
that are currently outstanding. Except for (i) the rights created pursuant to
this Agreement, the Company Stock Option Plans, the Company Options and the
Option Agreement and (ii) Company's right to repurchase any unvested shares
under the Company Stock Option Plans, the Company Options or the Company
Employee Stock Ownership Plan, there are no other options, warrants, calls,
rights, commitments or agreements of any character to which Company is a party
or by which it is bound obligating Company to issue, deliver, sell, repurchase
or redeem, or cause to be issued, delivered, sold, repurchased or redeemed, any
shares of capital stock of Company or obligating Company to grant, extend,
accelerate the vesting of, change the price of, or otherwise amend or enter
into any such option, warrant, call, right, commitment or agreement. Except for
this Agreement and as provided by Section 5.11, there are no contracts,
commitments or agreements relating to voting, purchase or sale of Company's
capital stock between or among Company and any of its stockholders. The terms
of the Company Stock Option Plans permit the assumption of options to purchase
Company Common Stock as provided in this Agreement, without the consent or
approval of the holders of such securities or the Company stockholders. True
and complete copies of all material agreements and instruments, that are
currently in force or under which Company has any liability, relating to or
issued under the Company Stock Option Plans, the Company Options and the
Company Employee Stock Ownership Plan have been provided to Parent and such
agreements and instruments have not been amended, modified or supplemented, and
there are no agreements to amend, modify or supplement such agreements or
instruments in any case from the form provided to Parent. All outstanding
shares of Company Common Stock and all Company Options were issued in
compliance with all applicable federal and state securities laws.
2.3 Authority. Assuming the filings and approvals described in clauses (i)
through (iv) of the last sentence of this Section are made or obtained (as the
case may be) and the condition set forth in Section 6.1(a) is satisfied,
Company has all requisite corporate power and authority to enter into this
Agreement and the Option Agreement and to consummate the transactions
contemplated hereby and thereby. The execution and delivery of this Agreement
and the Option Agreement and the consummation of the transactions contemplated
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<PAGE>
hereby and thereby have been duly authorized by all necessary corporate action
on the part of Company, subject only, as of the date of this Agreement, to the
approval of the Merger by Company's stockholders as contemplated by Section
6.1(a). Each of this Agreement and the Option Agreement has been duly executed
and delivered by Company and constitutes the valid and binding obligation of
Company, enforceable against Company in accordance with its terms, except as
such enforcement may be limited by (i) the effect of bankruptcy, insolvency,
reorganization, receivership, conservatorship, arrangement, moratorium or other
laws affecting or relating to the rights of creditors generally, or (ii) the
rules governing the availability of specific performance, injunctive relief or
other equitable remedies and general principles of equity, regardless of
whether considered in a proceeding in equity or at law. Assuming the filings
and approvals described in clauses (i) through (iv) of the last sentence of
this Section are made or obtained (as the case may be) and the condition set
forth in Section 6.1(a) is satisfied, the execution and delivery of this
Agreement and the Option Agreement by Company does not, and the consummation of
the transactions contemplated hereby and thereby will not, conflict with, or
result in any violation of, or default under (with or without notice or lapse
of time, or both), or give rise to a right of termination, cancellation or
acceleration of any obligation or loss of any benefit under, (i) any provision
of the certificate or articles of incorporation, bylaws, or other charter or
organizational documents, each as amended, of Company or any of its
Subsidiaries or (ii) any material mortgage, indenture, lease, contract or other
agreement or instrument, permit, concession, franchise, license, judgment,
order, decree, statute, law, ordinance, rule or regulation applicable to
Company or any of its Subsidiaries or any of their properties or assets, except
for any conflicts, violations, defaults or other occurrences that would not
(A) individually or in the aggregate have a Material Adverse Effect on Company
or any of its Subsidiaries or (B) prevent or materially impair or delay the
consummation of the Merger. No consent, approval, order or authorization of, or
registration, declaration or filing with, any court, administrative agency or
commission, self-regulatory organization ("SRO") or other foreign or domestic
governmental or quasi-governmental authority or instrumentality (each of the
foregoing, a "Governmental Entity") is required by or with respect to Company
or any of its Subsidiaries in connection with the execution and delivery of
this Agreement or the Option Agreement, the performance of Company's
obligations hereunder or thereunder or the consummation of the transactions
contemplated hereby or thereby, except for (i) the filing of the Certificate of
Merger as provided in Section 1.2, (ii) the filing of applications and notices
with and the receipt of requisite approvals from the Office of Thrift
Supervision (the "OTS") with respect to the Merger, (iii) the filing with, and
clearance by, the SEC of the Proxy Statement (as defined in Section 5.1)
relating to the Company Stockholders Meeting (as defined in Section 5.1), (iv)
such notices, applications, consents, approvals, orders, authorizations,
registrations, declarations and filings as may be required under applicable
federal or state securities laws or the securities laws of any foreign country
in connection with the Merger; and (v) such other consents, authorizations,
filings, approvals and registrations which, if not obtained or made, would not
have a Material Adverse Effect on Company and would not prevent, or materially
alter or delay, any of the transactions contemplated by this Agreement or the
Option Agreement. Company is not aware of any reason why the approvals of all
Governmental Entities necessary to permit consummation of the Merger or the
other transactions contemplated by this Agreement will not be received without
the imposition of a condition or requirement described in Section 6.3(c).
2.4 SEC Documents; Financial Statements. Company has furnished or made
available (including via EDGAR) to Parent a true and complete copy of each
statement, report, registration statement (with the prospectus in the form
filed pursuant to Rule 424(b) of the Securities Act of 1933, as amended (the
"Securities Act")), definitive proxy statement and other filings (including
exhibits, supplements and schedules thereto) filed with the SEC by Company
since January 1, 1997, and, prior to the Effective Time, Company will have
furnished or made available (including via EDGAR) to Parent true and complete
copies of any additional documents filed with the SEC by Company prior to the
Effective Time (collectively, the "Company SEC Documents"). As of their
respective filing dates, the Company SEC Documents complied in all material
respects with the requirements of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and the Securities Act, and none of the Company
SEC Documents contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements made therein, in light of the circumstances in which they were made,
not misleading, except to the extent corrected
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by a subsequently filed Company SEC Document. The financial statements of
Company, including the notes thereto, included in the Company SEC Documents
(the "Company Financial Statements") were complete and correct in all material
respects as of their respective dates (except to the extent corrected by a
subsequently filed Company SEC Document), complied as to form in all material
respects with applicable accounting requirements and with the published rules
and regulations of the SEC with respect thereto as of their respective dates,
and have been prepared in accordance with generally accepted accounting
principles applied on a basis consistent throughout the periods indicated
(except as may be indicated in the notes thereto or, in the case of unaudited
statements included in Quarterly Reports on Form 10-Q, as permitted by Form 10-
Q of the SEC). The Company Financial Statements fairly present the consolidated
financial condition and operating results of Company and its Subsidiaries at
the dates and during the periods indicated therein (subject, in the case of
unaudited statements, to normal and recurring year-end adjustments).
2.5 Absence of Certain Changes. Since December 31, 1998 (the "Company
Balance Sheet Date"), except as set forth in any Company SEC Document (but only
to the extent set forth therein), Company has conducted its business in the
ordinary course consistent with past practice and there has not occurred: (i)
any change, event or condition (whether or not covered by insurance) that has
resulted in, or might reasonably be expected to result in, a Material Adverse
Effect on Company; (ii) any acquisition, sale or transfer of any material asset
of Company or any of its Subsidiaries other than in the ordinary course of
business and consistent with past practice; (iii) any material change in
accounting methods or practices (including any change in depreciation or
amortization policies or rates) by Company or any revaluation by Company of any
of its or any of its Subsidiaries' assets, except as set forth in any Company
SEC Document (but only to the extent set forth therein); (iv) any declaration,
setting aside, or payment of a dividend or other distribution with respect to
the shares of Company, or any direct or indirect redemption, purchase or other
acquisition by Company of any of its shares of capital stock; (v) any material
contract entered into by Company or any of its Subsidiaries, other than in the
ordinary course of business and as made available to Parent, or any material
amendment or termination of, or default under, any material contract to which
Company or any of its Subsidiaries is a party or by which it is bound; (vi) any
amendment or change to the Certificate of Incorporation or Bylaws of Company;
(vii) any material increase in or modification of the compensation or benefits
payable or to become payable by Company or any of its Subsidiaries to any of
their respective directors, officers or employees, other than (in the case of
non-executive officer employees) in the ordinary course of business consistent
with past practice; (viii) any material change in the interest rate risk
management and hedging policies, procedures or practices of Company or any of
its Subsidiaries, or any failure to comply with such policies, procedures and
practices; or (ix) any negotiation or agreement by Company or any of its
Subsidiaries to do any of the things described in the preceding clauses (i)
through (vii) (other than negotiations with Parent and its representatives
regarding the transactions contemplated by this Agreement).
2.6 Absence of Undisclosed Liabilities. None of Company or any of its
Subsidiaries has any material obligations or liabilities of any nature (matured
or unmatured, fixed or contingent) other than (i) those set forth or adequately
provided for in the consolidated balance sheet (and the related notes thereto)
of Company and its Subsidiaries included in Company's Annual Report on Form 10-
K/A for the fiscal year ended December 31, 1998 (the "Company Balance Sheet"),
(ii) those incurred in the ordinary course of business consistent with past
practice since the Company Balance Sheet Date and which have not had and are
not reasonably likely to have a Material Adverse Effect on Company, and (iii)
those incurred in connection with the execution of this Agreement.
2.7 Litigation. There is no private or governmental action, suit,
proceeding, claim, arbitration, inquiry, examination, inspection or, to the
knowledge of Company or any of its Subsidiaries, investigation pending by or
before any Governmental Entity, agency, court or tribunal, foreign or domestic
or, to the knowledge of Company or any of its Subsidiaries, threatened against
Company or any of its Subsidiaries or any of their respective properties or any
of their respective officers or directors (in their capacities as such) that,
individually or in the aggregate, could reasonably be expected to prevent,
enjoin, alter or materially delay any of the transactions contemplated hereby
or could reasonably be expected to have a Material Adverse Effect on
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Company. There is no judgment, decree or order against Company or any of its
Subsidiaries, or, to the knowledge of Company and its Subsidiaries, any of
their respective directors or officers (in their capacities as such), that,
individually or in the aggregate, could reasonably be expected to prevent,
enjoin, alter or materially delay any of the transactions contemplated by this
Agreement or could reasonably be expected to have a Material Adverse Effect on
Company.
2.8 Restrictions on Business Activities. There is no agreement, judgment,
injunction, order or decree binding upon Company or any of its Subsidiaries
which has or could reasonably be expected to have the effect of prohibiting or
materially impairing any current or currently proposed business practice of
Company or any of its Subsidiaries, any acquisition of property by Company or
any of its Subsidiaries or the conduct of business by Company or any of its
Subsidiaries as currently conducted or as described in any Company SEC Document
as proposed to be conducted by Company or any of its Subsidiaries.
2.9 Compliance With Laws. Each of Company and its Subsidiaries has complied
in all material respects with all applicable federal, state, local, self-
regulatory and foreign laws, statutes, ordinances, rules and regulations, and
is not in violation in any material respect of, and has not received any
notices of material violation with respect to, its respective certificate or
articles of incorporation or bylaws or other charter or organizational
documents, or any federal, state, local, self-regulatory or foreign statute,
law, ordinance, rule or regulation applicable to the conduct of its business or
the ownership or operation of its business.
2.10 Title to Property. Company and its Subsidiaries have good, valid and
marketable title to all of their respective properties, interests in properties
and assets, real and personal, reflected in the Company Balance Sheet or
acquired after the Company Balance Sheet Date (except properties, interests in
properties and assets sold or otherwise disposed of since the Company Balance
Sheet Date in the ordinary course of business and except for any real property
that Company or any of its Subsidiaries has acquired in the ordinary course of
business by foreclosure or by deed in lieu thereof), or in the case of leased
properties and assets, valid leasehold interests in the leased properties and
assets, free and clear of all mortgages, liens, pledges, charges or
encumbrances of any kind or character, except (i) the lien of current taxes not
yet due and payable, (ii) recorded easements, covenants, conditions and other
restrictions of record as do not and will not materially detract from or
interfere with the use of the properties subject thereto or affected thereby,
or otherwise materially impair business operations involving such properties
and (iii) liens securing debt which is reflected on the Company Balance Sheet.
There are no defaults (or events that, with notice or lapse of time or both,
would constitute defaults) by Company or its Subsidiaries with respect to the
liens securing debt which is reflected on the Company Balance Sheet. With
respect to any properties or assets leased by Company or any of its
Subsidiaries, there are no defaults (or events that, with notice or lapse of
time or both, would constitute defaults) by Company or its Subsidiaries, or to
the knowledge of Company, any other party to the leases of such properties or
assets. There are no outstanding options, rights of first refusal or similar
rights to purchase the properties and/or assets owned by Company or any of its
Subsidiaries. All properties used in the operations of Company and its
Subsidiaries are reflected in the Company Balance Sheet to the extent generally
accepted accounting principles require the same to be reflected. Schedule 2.10
identifies each parcel of real property owned or leased by Company or any of
its Subsidiaries.
2.11 Intellectual Property.
(a) Company and its Subsidiaries own, or are licensed or otherwise possess
legally enforceable and unencumbered rights to use all patents, trademarks,
trade names, service marks, domain names, database rights, copyrights, and any
applications therefor, maskworks, net lists, technology, know-how, trade
secrets, inventory, ideas, algorithms, processes, computer software programs or
applications (in both source code and object code form), and tangible or
intangible proprietary information or material ("Intellectual Property") that
are used or currently proposed to be used by Company and its Subsidiaries in
their respective businesses as currently conducted or as currently proposed to
be conducted by Company and its Subsidiaries. Company has not (i) licensed any
of its Intellectual Property in source code form to any party or (ii) entered
into any exclusive agreements relating to its Intellectual Property.
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(b) Schedule 2.11 lists (i) all patents and patent applications and all
registered and unregistered trademarks, trade names and service marks,
registered and unregistered copyrights, and maskworks included in the
Intellectual Property, including the jurisdictions in which each such
Intellectual Property right has been issued or registered or in which any
application for such issuance and registration has been filed, (ii) all
material licenses, sublicenses and other agreements as to which Company is a
party and pursuant to which any person is authorized to use any Intellectual
Property (excluding commercially available, off-the-shelf software), and (iii)
all material licenses, sublicenses and other agreements as to which Company is
a party and pursuant to which Company is authorized to use any third-party
patents, trademarks or copyrights, including software ("Third Party
Intellectual Property Rights"), which are incorporated in, are, or form a part
of any Company product or service (excluding commercially available, off-the-
shelf software). No royalties or other continuing payment obligations are due
in respect of Third Party Intellectual Property Rights.
(c) To the knowledge of Company, there is no unauthorized use, disclosure,
infringement or misappropriation of any material Intellectual Property rights
of Company or any of its Subsidiaries, or any Intellectual Property right of
any third party to the extent licensed by or through Company or any of its
Subsidiaries, by any third party, including any employee or former employee of
Company or any of its Subsidiaries. Neither Company nor any of its Subsidiaries
has entered into any agreement to indemnify any other person against any charge
of infringement of any Intellectual Property .
(d) None of Company or its Subsidiaries is, nor will any of them be as a
result of the execution and delivery of this Agreement or the performance of
its obligations under this Agreement, in material breach of any license,
sublicense or other agreement relating to any Intellectual Property or Third
Party Intellectual Property Rights.
(e) All patents, registered trademarks, service marks and copyrights held by
Company and its Subsidiaries are valid and subsisting. Neither Company nor any
of its Subsidiaries (i) has been sued in any suit, action or proceeding which
involves a claim of infringement of any patents, trademarks, service marks,
copyrights or violation of any trade secret or other proprietary right of any
third party or (ii) has brought any action, suit or proceeding for infringement
of Intellectual Property or breach of any license or agreement involving
Intellectual Property against any third party. The marketing, licensing or sale
of the products or services of Company and its Subsidiaries does not infringe
any patent, trademark, service mark, copyright, trade secret or other
proprietary right of any third party.
(f) Company has secured valid written assignments from all consultants and
employees who contributed to the creation or development of Intellectual
Property of the rights to such contributions that Company does not already own
by operation of law.
(g) Company has taken reasonable steps consistent with prevailing industry
practice to protect and preserve the confidentiality of all Intellectual
Property not otherwise protected by patents, patent applications or copyright
("Confidential Information"). All use, disclosure or appropriation of
Confidential Information owned by Company or any of its Subsidiaries by or to a
third party has been pursuant to the terms of a written agreement between
Company and such third party. All use, disclosure or appropriation by Company
and its Subsidiaries of Confidential Information not owned by Company or any
such Subsidiary has been pursuant to the terms of a written agreement between
Company and the owner of such Confidential Information, or is otherwise lawful.
2.12 Environmental Matters.
(a) The following terms shall be defined as follows:
(i) "Environmental and Safety Laws" shall mean any federal, state or
local laws, ordinances, codes, regulations, rules, policies and orders that
are intended to assure the protection of the environment, or that classify,
regulate, call for the remediation of, require reporting with respect to,
or list or define air, water, groundwater, solid waste, hazardous or toxic
substances, materials, wastes, pollutants or contaminants, or which are
intended to assure the safety of employees, workers or other persons,
including the public.
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(ii) "Hazardous Materials" shall mean any toxic or hazardous substance,
material or waste or any pollutant or contaminant, or infectious or
radioactive substance or material, including without limitation, those
substances, materials and wastes defined in or regulated under any
Environmental and Safety Laws .
(iii) "Property" shall mean all real property leased or owned by Company
or its Subsidiaries either currently or in the past.
(iv) "Facilities" shall mean all buildings and improvements on the
Property of Company or its Subsidiaries.
(b) Company represents and warrants as follows, in each case (except clauses
(iii) and (iv) below) to its knowledge or the knowledge of any of its
Subsidiaries: (i) no methylene chloride or asbestos is contained in or has been
used at or released from the Facilities; (ii) all Hazardous Materials have been
disposed of in accordance with all Environmental and Safety Laws; (iii) Company
and its Subsidiaries have received no notice (verbal or written) of any
noncompliance of the Facilities or its past or present operations with
Environmental and Safety Laws; (iv) no notices, administrative actions or suits
are pending or, to the knowledge of Company or any of its Subsidiaries,
threatened relating to a violation of any Environmental and Safety Laws; (v)
neither Company nor any of its Subsidiaries is liable as a responsible party
under the federal Comprehensive Environmental Response, Compensation and
Liability Act (CERCLA), or state analog statute, arising out of events
occurring prior to the Effective Time; (vi) there have not been in the past,
and are not now, any Hazardous Materials on, under or migrating to or from the
Facilities or any Property; (vii) there have not been in the past, and are not
now, any underground tanks or underground improvements at, on or under any
Property including without limitation, treatment or storage tanks, sumps, or
water, gas or oil wells; (viii) there are no polychlorinated biphenyls (PCBs)
deposited, stored, disposed of or located on the Property or Facilities or any
equipment on the Property containing PCBs at levels in excess of 50 parts per
million; (ix) there is no formaldehyde on the Property or in the Facilities,
nor any insulating material containing urea formaldehyde in the Facilities; (x)
the Facilities and Company's and its Subsidiaries' uses and activities therein
have at all times complied with all Environmental and Safety Laws; and (xi)
Company and its Subsidiaries have all the permits and licenses required to be
issued under Environmental and Safety Laws and are in full compliance with the
terms and conditions of those permits.
2.13 Taxes. Company and each of its Subsidiaries, and any consolidated,
combined, unitary or aggregate group for Tax (as defined below) purposes of
which Company or any of its Subsidiaries is or has been a member have properly
completed and timely filed all Tax Returns (as defined below) required to be
filed by them and have paid all Taxes shown thereon to be due, other than any
Taxes for which adequate reserves under generally accepted accounting
principles have been recorded in the Financial Statements. Company has provided
adequate accruals in accordance with generally accepted accounting principles
in its financial statements for any Taxes that have not been paid, whether or
not shown as being due on any Tax Returns. Company has no material liability
for unpaid Taxes accruing after the date of its latest Financial Statements
other than Taxes arising in the ordinary course of its business. Except as
disclosed in the SEC Documents, there is (i) no material claim for Taxes that
is a lien against the property of Company or any of its Subsidiaries or is
being asserted against Company or any of its Subsidiaries other than liens for
Taxes not yet due and payable, (ii) Company has not been notified and has no
other knowledge that any audit of any Tax Return of Company or any of its
Subsidiaries is being conducted by a Tax authority, (iii) no extension of the
statute of limitations on the assessment of any Taxes granted by Company or any
of its Subsidiaries and currently in effect, and (iv) there is no agreement,
contract or arrangement to which Company or any of its Subsidiaries is a party
that may result in the payment of any amount that would not be deductible by
reason of Sections 280G or 404 of the Code. Company has not been and will not
be required to include any material adjustment in Taxable income for any Tax
period (or portion thereof) pursuant to Section 481 or 263A of the Code or any
comparable provision under state or foreign Tax laws as a result of
transactions, events or accounting methods employed prior to the Merger (based
on facts known as of the date of this Agreement). Neither Company nor any of
its Subsidiaries has filed or will file any consent to have the provisions of
paragraph 341(f)(2) of the Code (or comparable provisions of any state Tax
laws) apply to Company or any of
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its Subsidiaries. Neither Company nor any of its Subsidiaries is a party to any
currently effective Tax sharing or Tax allocation agreement. Neither Company
nor any of its Subsidiaries owes any amount under any Tax sharing or Tax
allocation agreement. Neither Company nor any of its Subsidiaries has filed any
disclosures under Section 6662 or comparable provisions of state, local or
foreign law to prevent the imposition of penalties with respect to any Tax
reporting position taken on any Tax Return. Neither Company nor any of its
Subsidiaries has within the last six (6) years been a member of a consolidated,
combined or unitary group of which Company was not the ultimate parent
corporation. Company and each of its Subsidiaries have in their possession
receipts for any Taxes paid to foreign Tax authorities. For purposes of this
Agreement, the following terms have the following meanings: "Tax" (and, with
correlative meaning, "Taxes" and "Taxable") means (i) any net income,
alternative or add-on minimum tax, gross income, gross receipts, sales, use, ad
valorem, transfer, franchise, profits, license, withholding, payroll,
employment, excise, severance, stamp, occupation, premium, property,
environmental or windfall profit tax, custom, duty or other tax, governmental
fee or other like assessment or charge of any kind whatsoever, together with
any interest or any penalty, addition to tax or additional amount imposed by
any Governmental Entity (a "Tax authority") responsible for the imposition of
any such tax (domestic or foreign), (ii) any liability for the payment of any
amounts of the type described in (i) as a result of being a member of an
affiliated, consolidated, combined or unitary group for any Taxable period and
(iii) any liability for the payment of any amounts of the type described in (i)
or (ii) as a result of any express or implied obligation to indemnify any other
person. As used herein, "Tax Return" shall mean any return, statement, report
or form (including, without limitation, estimated Tax returns and reports,
withholding Tax returns and reports and information reports and returns)
required to be filed with respect to Taxes.
2.14 Employee Benefit Plans.
(a) Schedule 2.14 lists, with respect to Company, any Subsidiary of Company
and any trade or business (whether or not incorporated) which is treated as a
single employer with Company (an "ERISA Affiliate") within the meaning of
Section 414(b), (c), (m) or (o) of the Code, (i) all material employee benefit
plans (as defined in Section 3(3) of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA")), maintained by Company or any ERISA
Affiliate, (ii) any other material supplemental retirement, severance,
sabbatical, employee relocation, cafeteria benefit (Code Section 125) or
dependent care (Code Section 129), life insurance or accident insurance plans,
programs or arrangements maintained by Company or any ERISA Affiliate, (iii)
all other material bonus, pension, profit sharing, savings, deferred
compensation or incentive plans, programs or arrangements maintained by Company
or any ERISA Affiliate, (iv) other material fringe or employee benefit plans,
programs or arrangements maintained by Company or any ERISA Affiliate that
apply to senior management of Company and that do not generally apply to all
employees, and (v) any current or former employment or executive compensation
or severance agreements, written or otherwise, maintained by Company or any
ERISA Affiliate as to which unsatisfied obligations of Company of greater than
fifty thousand dollars ($50,000) remain for the benefit of, or relating to, any
present or former employee, consultant or director of Company (together, the
"Company Employee Plans").
(b) Company has made available to Parent a copy of each of the Company
Employee Plans and related plan documents (including trust documents, insurance
policies or contracts, employee booklets, summary plan descriptions and other
authorizing documents, and any material employee communications relating
thereto, if applicable) and has, with respect to each Company Employee Plan
which is subject to ERISA reporting requirements, provided copies of the Form
5500 reports filed for the last three plan years. Any Company Employee Plan
intended to be qualified under Section 401(a) of the Code has either obtained
from the Internal Revenue Service a favorable determination letter as to its
qualified status under the Code, including all amendments to the Code effected
by the Tax Reform Act of 1986 and subsequent legislation, or has applied to the
Internal Revenue Service for such a determination letter prior to the
expiration of the requisite period under applicable Treasury Regulations or
Internal Revenue Service pronouncements in which to apply for such
determination letter and to make any amendments necessary to obtain a favorable
determination. Company has also furnished Parent with a copy of the most recent
Internal Revenue Service determination letter issued with
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respect to each such Company Employee Plan, and nothing has occurred since the
issuance of each such letter which could reasonably be expected to cause the
loss of the tax-qualified status of any Company Employee Plan subject to Code
Section 401(a). Company has also furnished or made available to Parent copies
of all registration statements and prospectuses filed with the SEC, OTS or
other governmental authority or distributed to employees or their beneficiaries
in connection with each Company Employee Plan.
(c) (i) Except as required by law, none of the Company Employee Plans
promises or provides retiree medical or other retiree welfare benefits to any
person, other than a benefit that could be terminated without further
liability; (ii) there has been no "prohibited transaction," as such term is
defined in Section 406 of ERISA and Section 4975 of the Code, with respect to
any Company Employee Plan, which could reasonably be expected to have, in the
aggregate, a Material Adverse Effect; (iii) each Company Employee Plan has been
administered in accordance with its terms and in compliance with the
requirements prescribed by any and all statutes, rules and regulations
(including ERISA and the Code), except as would not have, in the aggregate, a
Material Adverse Effect, and Company and each Subsidiary or ERISA Affiliate
have performed all obligations required to be performed by them under, and are
not in any material respect in default under or violation of, any of the
Company Employee Plans; (iv) neither Company nor any ERISA Affiliate is subject
to any material liability or penalty under Sections 4976 through 4980 of the
Code or Title I of ERISA with respect to any of the Company Employee Plans; (v)
all material contributions required to be made by Company or any Subsidiary or
ERISA Affiliate to any Company Employee Plan have been made on or before their
due dates and the amounts accrued in the Company Financial Statements for
contributions to each Company Employee Plan for the current plan years have
been determined in accordance with generally accepted accounting principles
consistently applied; (vi) with respect to each Company Employee Plan, no
"reportable event" within the meaning of Section 4043 of ERISA (excluding any
such event for which the thirty (30) day notice requirement has been waived
under the regulations to Section 4043 of ERISA) nor any event described in
Section 4062, 4063 or 4041 of ERISA has occurred; and (vii) each Company
Employee Plan can be amended, terminated or otherwise discontinued after the
Effective Time in accordance with its terms, without liability to Parent or
Company in excess of the amount accrued with respect to such plan on the
Company Financial Statements (other than ordinary administrative expenses
typically incurred in a termination event). With respect to each Company
Employee Plan subject to ERISA as either an employee pension plan within the
meaning of Section 3(2) of ERISA or an employee welfare benefit plan within the
meaning of Section 3(1) of ERISA, Company has prepared in good faith and timely
filed all requisite governmental reports (which were true and correct in all
material respects as of the date filed) and has properly and timely filed and
distributed or posted all material notices and reports to employees required to
be filed, distributed or posted with respect to each such Company Employee
Plan. No suit, administrative proceeding, action or other litigation has been
brought, or to the best knowledge of Company is threatened, against or with
respect to any such Company Employee Plan, including any audit or examination
by the IRS or United States Department of Labor. No payment or benefit which
will or may be made by Company to any employee will be characterized as an
"excess parachute payment" within the meaning of Section 280G(b)(1) of the
Code. Neither Company nor any ERISA Affiliate is a party to, or has ever been a
party to, or has made any contribution to or otherwise incurred any obligation
under, any "multiemployer plan" as defined in Section 3(37) of ERISA. Neither
Company nor any Company Subsidiary or ERISA Affiliate currently maintains,
sponsors, participates in or contributes to, nor has it within the last seven
(7) years maintained, established, sponsored, participated in, or contributed
to, any pension plan (within the meaning of Section 3(2) of ERISA) which is
subject to Part 3 of Subtitle B of Title I of ERISA, Title IV of ERISA or
Section 412 of the Code.
(d) With respect to each Company Employee Plan, Company and each of its
United States Subsidiaries have complied (except to the extent that any such
failure to comply would not, in the aggregate, have a Material Adverse Effect
on Company or any of its Subsidiaries) with (i) the applicable health care
continuation and notice provisions of Section 602 of ERISA and Section 4980B of
the Code ("COBRA") and the regulations thereunder, (ii) the applicable
requirements of the Family Medical and Leave Act of 1993 and the regulations
thereunder, and (iii) the applicable requirements of the Health Insurance
Portability and Accountability Act of 1996.
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(e) The consummation of the transactions contemplated by this Agreement will
not (i) entitle any current or former employee or other service provider of
Company, any Company Subsidiary or any other ERISA Affiliate to severance
benefits or any other payment, except as expressly provided in this Agreement,
or (ii) accelerate the time of payment or vesting, or increase the amount of
compensation due any such employee or service provider.
(f) There has been no amendment to, or written interpretation or
announcement (whether or not written) by Company or any ERISA Affiliate
relating to, or change in participation or coverage under, any Company Employee
Plan which would materially increase the expense of maintaining such Plan above
the level of expense incurred with respect to that Plan for the most recent
fiscal year included in Company's financial statements.
(g) No employee of Company or any of its Subsidiaries has elected to defer
(i) the receipt of any cash payable to such employee or (ii) the issuance of
any securities of Company to such employee, in either case under the Company
Stock Option Plans or the Company Options.
2.15 Employee Matters.
(a) Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby or thereby will (i) result
in any payment (including, without limitation, severance, unemployment
compensation, golden parachute, bonus or otherwise) becoming due to any
director or employee of Company or any of its Subsidiaries, (ii) materially
increase any benefits otherwise payable by Company or (iii) result in the
acceleration of the time of payment or vesting of any such benefits.
(b) Company and each of its Subsidiaries are in compliance in all material
respects with all currently applicable laws and regulations respecting
employment, discrimination in employment, terms and conditions of employment,
wages, hours and occupational safety and health and employment practices, and
is not engaged in any unfair labor practice. Company and each of its
Subsidiaries has withheld all material amounts required by law or by agreement
to be withheld from the wages, salaries, and other payments to employees, and
is not liable for any material arrears of wages or any material taxes or any
material penalty for failure to comply with any of the foregoing. Company is
not liable for any material payment to any trust or other fund or to any
governmental or administrative authority, with respect to unemployment
compensation benefits, social security or other benefits or obligations for
employees (other than routine payments to be made in the normal course of
business and consistent with past practice). To the knowledge of Company and
its Subsidiaries, there are no pending claims against Company or any of its
Subsidiaries under any workers compensation plan or policy or for long term
disability other than routine claims for benefits. There are no controversies
pending or, to the knowledge of Company or any of its Subsidiaries, threatened
between Company or any of its Subsidiaries, on the one hand, and any of their
respective employees, on the other hand, which controversies have or could
reasonably be expected to result in an action, suit, proceeding, claim,
arbitration or investigation before any agency, court or tribunal, foreign or
domestic. Neither Company nor any of its Subsidiaries is a party to any
collective bargaining agreement or other labor union contract; nor does Company
know of any activities or proceedings of any labor union to organize any such
employees. To the best of Company's knowledge, no employees of Company are in
violation in any material respect of any term of any employment contract,
patent disclosure agreement, noncompetition agreement, or any restrictive
covenant to a former employer relating to the right of any such employee to be
employed by Company because of the nature of the business conduced or presently
proposed to be conducted by Company or to the use of trade secrets or
proprietary information of others. Except as disclosed in the Company SEC
Documents filed prior to the date of this Agreement, Company does not have any
employment agreement with any of its officers or other employees. As of the
date hereof, no employees (other than clerical or solely administrative
employees) of Company have given notice to Company, nor is Company otherwise
aware, that any such employee intends to terminate his or her employment with
Company.
(c) All employees of Company or any of its Subsidiaries engaged in the
business of, acting as, or performing the duties of a registered
representative, registered principal or similar registered personnel or agent
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(under the definition of such terms in the rules of the National Association of
Securities Dealers, Inc. (the "NASD")), any other SRO or any state which has
jurisdiction over Company or any of its Subsidiaries (if applicable) are
properly registered to act in the capacity of a registered representative,
registered principal or similar registered personnel or agent under the rules
of the NASD, any other SRO or any state which has jurisdiction over Company or
any of its Subsidiaries (if applicable).
2.16 Interested Party Transactions. Except as disclosed in the Company SEC
Documents filed prior to the date of this Agreement, there have been no
transactions of the type required to be disclosed pursuant to Items 402 and 404
of Regulation S-K under the Securities Act and the Exchange Act.
2.17 Insurance. Company and each of its Subsidiaries have policies of
insurance and bonds of the type and in amounts customarily carried by persons
conducting businesses or owning assets similar to those of Company and its
Subsidiaries. There is no material claim pending under any of such policies or
bonds as to which coverage has been questioned, denied or disputed by the
underwriters of such policies or bonds. All premiums due and payable under all
such policies and bonds have been paid and Company and its Subsidiaries are
otherwise in compliance in all material respects with the terms of such
policies and bonds. Company has no knowledge of any threatened termination of,
or material premium increase with respect to, any of such policies.
2.18 Regulatory Matters.
(a) Company and each of its Subsidiaries have obtained all authorizations,
consents, licenses, permits (temporary or otherwise), orders, approvals,
waivers, franchises and other rights ("Governmental Permits") of Governmental
Entities (i) pursuant to which Company or any of its Subsidiaries currently
operates or holds any interest in any of its properties or (ii) that is
required for the operation of Company's or any of its Subsidiaries' business or
the holding of any such interest, and all of such Governmental Permits are in
full force and effect, except where the failure to obtain or have any such
Governmental Permits could not reasonably be expected to have a Material
Adverse Effect on Company. There are no circumstances of which Company is aware
which indicate that any such Governmental Permits may be revoked or not renewed
or withdrawn or amended, in whole or in part (except in each case to an
immaterial or beneficial extent). Schedule 2.18(a) sets forth a true and
complete list of all Governmental Permits held by Company or any of its
Subsidiaries.
(b) Company and its Subsidiaries have complied, and are in compliance, in
all material respects with all applicable federal, state, local and self-
regulatory laws, statutes, licensing requirements, rules, and regulations. Each
of Company and its Subsidiaries has, and is in compliance in all material
respects with, all Governmental Permits necessary to conduct their businesses,
including, but not limited to, Governmental Permits of the OTS, the FDIC, the
SEC, the NASD, the NASD Regulation, Inc., the Nasdaq Stock Market, or any state
or foreign securities or prosecutorial authority. Neither Company nor any of
its Subsidiaries has received any notice from any Governmental Entity (i)
asserting that Company or any of its Subsidiaries is not in compliance with any
of the statutes, regulations, or ordinances that such Governmental Entity
enforces or (ii) restricting or disqualifying their activities (except for
restrictions generally imposed by law, rule, regulation or administrative
policy on banking organizations generally). After giving effect to the Merger,
all Governmental Permits of the Surviving Corporation and its Subsidiaries
shall continue to be valid and in full force and effect to the same extent as
they presently are for Company and its Subsidiaries, except for any conditions
or restrictions imposed on Parent, Company or a Subsidiary in approvals issued
by a Governmental Entity in connection with the Merger. There is no order
issued, investigation or proceeding pending or (to Company's knowledge)
threatened, or notice served, with respect to any violation of any law,
statute, ordinance, order, writ, decree, rule, or regulation issued by any
Governmental Entity applicable to either Company or any of its Subsidiaries or
any of their respective directors, officers or employees.
(c) Neither Company nor any of its Subsidiaries is a party or subject to,
any agreement, consent decree or order, or other understanding or arrangement
with, or any directive of any Governmental Entity which imposes any material
restrictions on, or otherwise affects in any material respect, the conduct of
the business of Company or any of its Subsidiaries. Schedule 2.18(c) sets forth
all compliance or enforcement proceedings or,
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to the knowledge of Company, investigations or inquiries convened, and all
fines, sanctions and other measures imposed by any Governmental Entity or body
against, concerning or relating to Company, any of its Subsidiaries, or any of
their current respective directors, officers or employees.
(d) Each of Company and its Subsidiaries, to the extent required to so
register (the "Broker-Dealers"), is duly registered as a broker-dealer with the
SEC and under all applicable state, federal, foreign or related laws and, to
the extent required, is a member of the NASD and a member of SIPC. None of the
Broker-Dealers has exceeded in any material respect the business activities
enumerated in any membership agreements or other limitations imposed in
connection with its registrations, forms (including Form BDs and reports filed
with the NASD or any other Governmental Entity. The information contained in
such registrations, forms and reports was true and complete in all material
respects as of the date of the filing thereof with the SEC. Each such
registration is in full force and effect on the date hereof.
(e) Each of Company and its Subsidiaries, to the extent required to so
register (the "Advisers"), is duly registered as an investment adviser under
the Investment Advisers Act of 1940, as amended (the "Advisers Act"), and under
all state, federal and foreign investment adviser or related laws pursuant to
which it is required to be so registered. The information contained in forms
and reports filed by any Advisors (including Form ADVs) was or will be true and
complete in all material respects as of the time of the filing thereof with the
SEC. Each such registration is in full force and effect on the date hereof.
2.19 Material Contracts.
(a) Except for the contracts described in or filed as an exhibit to the
Company SEC Documents, neither Company nor any of its Subsidiaries is a party
to or bound by any of the following (together with the foregoing contracts
described in or filed as an exhibit to the Company SEC Documents, collectively,
the "Material Contracts"):
(i) any contract of participation with any other bank in any loan in
excess of $500,000 or any sales of assets of Company or its Subsidiaries
with recourse of any kind to Company or any of its Subsidiaries except the
sale of mortgage loans, servicing rights, repurchase or reverse repurchase
agreements, securities or other financial transactions in the ordinary
course of business;
(ii) any agreement providing for the sale or servicing of any loan or
other asset which constitutes a "recourse arrangement" with respect to
credit quality under applicable regulation or policy promulgated by a
Governmental Entity (except for agreements for the sale of guaranteed
portions of loans guaranteed in part by the U.S. Small Business
Administration and related servicing agreements);
(iii) any contract or agreement for the acquisition of the securities or
any material portion of the assets of any other person or entity in each
case outside the ordinary course of business;
(iv) any contract or agreement for the purchase of materials, supplies,
equipment or services involving in the case of any such contract or
agreement more than one million dollars ($1,000,000) over the life of the
contract;
(v) any contract, agreement or instrument that expires or may be renewed
at the option of any person other than Company or its Subsidiaries so as to
expire more than one year after the date of this Agreement that involve
payment of more than one million dollars ($1,000,000) per year;
(vi) any material trust indenture, mortgage, promissory note, loan
agreement or other contract, agreement or instrument for the borrowing of
money, any currency exchange, commodities or other hedging arrangement
(other than deposit contracts, Federal Home Loan Bank advances and other
agreements entered into in the ordinary course of Company's business) or
any leasing transaction of the type required to be capitalized in
accordance with generally accepted accounting principles;
(vii) any contract or agreement for capital expenditures in excess of
one million dollars ($1,000,000) in the aggregate;
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(viii) any contract or agreement limiting the freedom of Company or any
of its Subsidiaries to engage in any line of business or to compete with
any other Person as that term is defined in the Exchange Act, or under the
constitution, laws, rules or regulations of any SRO, or any
confidentiality, secrecy or non-disclosure contract or agreement;
(ix) any contract or agreement involving payments during any twelve-
month period of one million dollars ($1,000,000) or more, pursuant to which
Company or any of its Subsidiaries is a lessor of any machinery, equipment,
motor vehicles, office furniture, fixtures or other personal property;
(x) any contract or agreement with any person with whom Company or any
of its Subsidiaries does not deal at arm's length within the meaning of the
Code;
(xi) any agreement of guarantee, support, indemnification, assumption or
endorsement of, or any similar commitment with respect to, the obligations,
liabilities (whether accrued, absolute, contingent or otherwise) or
indebtedness of any other Person other than those entered into in the
ordinary course of operating a banking business; or
(xii) any material agreement which would be terminable other than by
Company or its Subsidiaries as a result of the consummation of the
transactions contemplated by this Agreement.
(b) Each of Company and its Subsidiaries has performed all of the material
obligations required to be performed by it and is entitled to all accrued
benefits under, and is not alleged to be in default in respect of, each
Material Contract to which it is a party or by which it is bound. Each of the
Material Contracts is in full force and effect, unamended, and there exists no
default or event of default or event, occurrence, condition or act, with
respect to Company or any of its Subsidiaries or, to Company's knowledge, with
respect to any other contracting party, which, with the giving of notice, the
lapse of the time or the happening of any other event or condition, would
become a default or event of default under any Material Contract. True, correct
and complete copies of all Material Contracts have been made available to
Parent or filed as an exhibit to the Company SEC Documents.
2.20 Banking Business.
(a) Schedule 2.20(a) lists all exchange traded on over-the-counter equity,
interest rate, foreign exchange or other swap, forward, future, option, cap,
floor or collar or any other contract that is not included on the balance sheet
and is a derivative contract (including various combinations thereof) to which
Company or any of its Subsidiaries is a party and has agreed to enter. Further,
with respect to Company, Schedule 2.20(a) lists all securities owned by Company
and its Subsidiaries that are referred to as "structured rates," "high risk
mortgage derivatives," "capped floating rate notes," or "capped floating rate
mortgage derivatives," or similar securities. All swaps, caps, floors, option
agreements, futures and forward contracts and other similar risk management
arrangements, whether entered into for Company's own account, or for the
account of one or more of Company's Subsidiaries or their customers, were
entered into (i) in accordance with all applicable laws, rules, regulations and
regulatory policies and (ii) with counterparties believed to be financially
responsible at the time; and each of them constitutes the valid and legally
binding obligation of Company or one of its Subsidiaries, enforceable in
accordance with its terms (except as enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent
transfer and similar laws of general applicability relating to or affecting
creditors' rights or by general equity principles), and are in full force and
effect. Neither Company nor any of its Subsidiaries, nor to Company's knowledge
any other party thereto, is in breach of any of its obligations under such
agreement or arrangement.
(b) Schedule 2.20(b) lists each investment security held by Company and any
of its Subsidiaries on the date indicated thereon. Such Schedule sets forth,
with respect to each such investment security: (i) the issues thereof; (ii) the
outstanding balance, face amount or number of shares; (iii) the maturity, if
applicable; (iv) the title of the issue; and (v) the classification under SFAS
No. 115.
(c) Schedule 2.20(c) sets forth as of the date indicated thereon a true and
complete description of (i) by type and classification, if any, each loan,
lease, interest in a pool of loans, other extension of credit or
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commitment to extend credit by Company or any of its Subsidiaries; (ii) by type
and classification, all loans, leases, interests in pools of loans, other
extensions of credit and commitments to extend credit of Company or its
Subsidiaries that have been classified by regulators or auditors (external or
internal) as "Watch List," "Specially Mentioned," "Substandard," "Doubtful,"
"Loss" or any comparable classification; and (iii) each asset of TeleBank that
as of March 31, 1999 was classified as "Other Real Estate Owned" and the book
value thereof.
(d) TeleBank has received a rating of "Satisfactory" in its most recent
Community Reinvestment Act examination. TeleBank has not been advised of any
supervisory concerns regarding its or Company's compliance with the Community
Reinvestment Act.
2.21 Year 2000 Compliance. Company and Company's Subsidiaries have taken
reasonable steps necessary to address the software, accounting and record-
keeping issues raised in order to be Year 2000 compliant in all material
respects (within the meaning of SEC, OTS, Federal Financial Institution's
Examination Council and SRO requirements) on or before the end of 1999, and
Company does not expect the future cost of addressing such issues to be
material. Neither Company nor any of Company's Subsidiaries has received a
rating of less than satisfactory from any bank regulatory agency with respect
to Year 2000 compliance. Company and Company's Subsidiaries are in compliance
with all guidelines provided by the OTS and the Federal Financial Institution's
Examination Council regarding Year 2000 issues.
2.22 Opinion of Financial Advisor. Company has been advised in writing by
its financial advisor, Goldman, Sachs & Co., that in such advisor's opinion, as
of the date hereof, the Exchange Ratio is fair, from a financial point of view,
to the stockholders of Company.
2.23 Company Affiliates. Schedule 2.23 contains a true and complete list of
all persons who, to Company's knowledge, may be deemed to be an Affiliate (as
defined below) of Company. For purposes of this Agreement, persons and/or
entities deemed affiliates of an entity within the meaning of Rule 144 of the
Rules and Regulations of the SEC promulgated under the Securities Act for
purposes of Accounting Series, Releases 130 and 135, as amended, of the SEC are
referred to as "Affiliates."
2.24 State Takeover Statutes; Charter Provisions. The Board of Directors of
Company has taken all actions so that neither (a) the restrictions contained in
Section 203 of the Delaware Law applicable to a "business combination" (as
defined in such Section 203) nor (b) the restrictions contained in Article 11
of Company's Amended and Restated Certificate of Incorporation applicable to a
"business combination" (as defined in such Article 11) will apply to the
execution, delivery or performance of this Agreement, the Stockholder
Agreements or the Option Agreement or the consummation of the Merger or the
other transactions contemplated by this Agreement, the Stockholder Agreements
or the Option Agreement. No other state takeover statute is applicable to the
Merger, this Agreement, the Option Agreement, the Stockholder Agreements or the
transactions contemplated hereby or thereby.
2.25 Tax and Accounting Treatment. Neither Company nor, to Company's
knowledge, any of its directors or officers has taken any action that would
interfere with Parent's or the Surviving Corporation's ability to account for
the Merger as a pooling of interests or would prevent the Merger from
constituting a transaction qualifying as a reorganization within the meaning of
Section 368(a) of the Code. Neither Company nor, to Company's knowledge, any of
its directors or officers has knowledge of any agreement, plan or other
circumstance relating to Company or any of its Affiliates that would interfere
with Parent's or the Surviving Corporation's ability to account for the Merger
as a pooling of interests or prevent the Merger from qualifying as a
reorganization within the meaning of Section 368(a) of the Code.
2.26 Brokers' and Finders' Fees. Company has not incurred, nor will it
incur, directly or indirectly, any liability for brokerage or finders' fees or
agents' commissions or investment bankers' fees or any similar charges in
connection with this Agreement or any transaction contemplated hereby, other
than under its engagement letter with Goldman, Sachs & Co. (a true and complete
copy of which has been furnished to Parent).
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2.27 Representations Complete. None of the representations or warranties
made by Company herein or in any schedule hereto, including the Company
Disclosure Schedule, or certificate furnished by Company pursuant to this
Agreement, or the Company SEC Documents, when all such documents are read
together in their entirety, contains or will contain at the Effective Time any
untrue statement of a material fact, or omits or will omit at the Effective
Time to state any material fact necessary in order to make the statements
contained herein or therein, in the light of the circumstances under which
made, not misleading.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT
Except as disclosed in the document of even date herewith delivered by
Parent to Company prior to the execution and delivery of this Agreement and
referring to the representations and warranties in this Agreement (the "Parent
Disclosure Schedule"), any exception so disclosed in the Parent Disclosure
Schedule to specifically identify the Section of this Agreement to which such
exception relates, Parent represents and warrants to Company as follows:
3.1 Organization, Standing and Power. Each of Parent and Merger Sub is a
corporation duly organized, validly existing and in good standing under the
laws of its jurisdiction of organization. Parent and Merger Sub have all
requisite corporate power and authority to enter into this Agreement and the
Option Agreement and to consummate the transactions contemplated hereby and
thereby.
3.2 Capital Structure. The authorized capital stock of Parent consists of
300,000,000 shares of Parent Common Stock and 1,000,000 shares of Parent's
preferred stock, par value $.01 per share ("Parent Preferred Stock"), of which
there were issued and outstanding as of the close of business on May 20, 1999,
116,741,621 shares of Parent Common Stock (before giving effect to the 2-for-1
split of Parent Common Stock which became effective on May 21, 1999) and no
shares of Parent Preferred Stock. There are no other outstanding shares of
capital stock or voting securities and no outstanding commitments to issue any
shares of capital stock or voting securities after May 20, 1999, other than
shares issued pursuant to the Parent stock split described above and other than
pursuant to the exercise of options outstanding as of such date under Parent's
1993 Stock Option Plan and 1996 Stock Incentive Plan (collectively, the "Parent
Stock Option Plans"). All outstanding shares of Parent Common Stock are duly
authorized, validly issued, fully paid and non-assessable and are free and
clear of any liens or encumbrances other than any liens or encumbrances created
by or imposed upon the holders thereof, and are not subject to preemptive
rights or rights of first refusal created by statute, the Certificate of
Incorporation or Bylaws, each as amended, of Parent or any agreement to which
Parent is a party or by which it is bound. As of the close of business on May
20, 1999, Parent had reserved an aggregate of 17,704,144 shares of Common Stock
for issuance to employees, consultants and directors pursuant to the Parent
Stock Option Plans, of which 15,096,000 shares are subject to outstanding,
unexercised options, and an aggregate of 675,000 shares are available for
issuance under the Parent's 1996 Stock Purchase Plan. Parent has not issued or
granted any stock appreciation rights or performance units under the Parent
Stock Option Plans or otherwise. Except for (i) the rights created pursuant to
this Agreement and the Parent Stock Option Plans (including options thereunder)
and (ii) Parent's right to repurchase any unvested shares under the Parent
Stock Option Plans, there are no other options, warrants, calls, rights,
commitments or agreements of any character to which Parent is a party or by
which it is bound obligating Parent to issue, deliver, sell, repurchase or
redeem, or cause to be issued, delivered, sold, repurchased or redeemed, any
shares of capital stock of Parent or obligating Parent to grant, extend,
accelerate the vesting of, change the price of, or otherwise amend or enter
into any such option, warrant, call, right, commitment or agreement. There are
no contracts, commitments or agreements relating to voting, purchase or sale of
Parent's capital stock between or among Parent and any of its stockholders.
True and complete copies of all material agreements and instruments relating to
or issued under the Parent Stock Option Plans have been provided or made
available to Company and such agreements and instruments have not been amended,
modified or supplemented, and there are no agreements to amend, modify or
supplement such agreements or instruments in any case from the form provided or
made available to
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Company. All outstanding shares of Parent Common Stock and all options to
purchase Parent Common Stock were issued in compliance with all applicable
federal and state securities laws. The shares of Parent Common Stock to be
issued pursuant to Section 1.6 hereof, when issued in accordance with this
Agreement, will be duly authorized, validly issued, fully paid and non-
assessable, and free and clear of any liens or encumbrances other than liens or
encumbrances created by or imposed upon the holders thereof.
3.3 Authority. Assuming the filings and approvals described in clauses (i)
through (vii) of the last sentence of this Section are made or obtained (as the
case may be) and that the condition set forth in Section 6.1(a) is satisfied,
the execution and delivery of this Agreement and the Option Agreement and the
consummation of the transactions contemplated hereby and thereby have been duly
authorized by all necessary corporate action on the part of Parent and Merger
Sub, as applicable. This Agreement and the Option Agreement each has been duly
executed and delivered by Parent and Merger Sub, as applicable, and constitutes
the valid and binding obligations of Parent and Merger Sub, enforceable against
them in accordance with its terms, except as such enforcement may be limited by
(i) the effect of bankruptcy, insolvency, reorganization, receivership,
conservatorship, arrangement, moratorium or other laws affecting or relating to
the rights of creditors generally, or (ii) the rules governing the availability
of specific performance, injunctive relief or other equitable remedies and
general principles of equity, regardless of whether considered in a proceeding
in equity or at law. Assuming the filings and approvals described in clauses
(i) through (vii) of the last sentence of this Section are made or obtained (as
the case may be) and that the condition set for in Section 6.1(a) is satisfied,
the execution and delivery of this Agreement and the Option Agreement do not,
and the consummation of the transactions contemplated hereby will not, conflict
with, or result in any violation of, or default under (with or without notice
or lapse of time, or both), or give rise to a right of termination,
cancellation or acceleration of any obligation or loss of a benefit under, (i)
any provision of the Certificate of Incorporation or Bylaws of Parent or Merger
Sub, as amended, or (ii) any material mortgage, indenture, lease, contract or
other agreement or instrument, permit, concession, franchise, license,
judgment, order, decree, statute, law, ordinance, rule or regulation applicable
to Parent or Merger Sub or their respective properties or assets, except for
any conflicts, violations, defaults or other occurrences that would not (A)
individually or in the aggregate have a Material Adverse Effect on Parent or
any of its Subsidiaries or (B) prevent or materially impair or delay the
consummation of the Merger. No consent, approval, order or authorization of, or
registration, declaration or filing with, any Governmental Entity, is required
by or with respect to Parent or Merger Sub in connection with the execution and
delivery of this Agreement or the Option Agreement by Parent and Merger Sub or
the consummation by Parent and Merger Sub of the transactions contemplated
hereby, except for (i) the filing of the Certificate of Merger as provided in
Section 1.2 hereof, (ii) the filing of applications and notices with and the
receipt of requisite approval from, as applicable, the OTS and the FDIC with
respect to the Merger, (iii) the filing with, and declaration of effectiveness
or clearance by, the SEC and the NASD of the Registration Statement and, if
applicable, a Proxy Statement relating to any Parent Stockholder Approval, (iv)
the filing of a Form 8-K with the SEC and the NASD within 15 days after the
Closing Date, (v) any filings or applications as may be required under
applicable federal, SRO or state securities laws or the securities laws of any
foreign country, (vi) the filing with the Nasdaq National Market of a
Notification Form for Listing of Additional Shares with respect to the shares
of Parent Common Stock issuable upon conversion of the Company Common Stock in
the Merger and upon exercise of the options under the Company Stock Option
Plans assumed by Parent, (vii) the filing of a registration statement on Form
S-8 with the SEC, or other applicable form covering the shares of Parent Common
Stock issuable pursuant to outstanding options under the Company Stock Option
Plans assumed by Parent, and (viii) such other consents, authorizations,
filings, approvals and registrations which, if not obtained or made, would not
have a Material Adverse Effect on Parent and would not prevent or materially
alter or delay any of the transactions contemplated by this Agreement. Parent
is not aware of any reason why the approvals of all Governmental Entities
necessary to permit consummation of the Merger or the other transactions
contemplated by this Agreement will not be received without the imposition of a
condition or requirement described in Section 6.1(d).
3.4 SEC Documents; Financial Statements. Parent has made available
(including via EDGAR) to Company each statement, report, registration statement
(with the prospectus in the form filed pursuant to
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Rule 424(b) of the Securities Act), definitive proxy statement, and other
filings (including exhibits, supplements and schedules thereto) filed with the
SEC by Parent since December 31, 1996, (collectively, the "Parent SEC
Documents"). As of their respective filing dates, the Parent SEC Documents
complied in all material respects with the requirements of the Exchange Act and
the Securities Act, and none of the Parent SEC Documents contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements made therein, in light of
the circumstances in which they were made, not misleading, except to the extent
corrected by a subsequently filed Parent SEC Document. The financial statements
of Parent, including the notes thereto, included in the Parent SEC Documents
(the "Parent Financial Statements") were complete and correct in all material
respects as of their respective dates (except to the extent corrected by a
subsequently filed Parent SEC Document), complied as to form in all material
respects with applicable accounting requirements and with the published rules
and regulations of the SEC with respect thereto as of their respective dates,
and have been prepared in accordance with generally accepted accounting
principles applied on a basis consistent throughout the periods indicated
(except as may be indicated in the notes thereto or, in the case of unaudited
statements included in Quarterly Reports on Form 10-Q, as permitted by Form 10-
Q of the SEC). The Parent Financial Statements fairly present the consolidated
financial condition and operating results of Parent and its Subsidiaries at the
dates and during the periods indicated therein (subject, in the case of
unaudited statements, to normal and recurring year-end adjustments).
3.5 Absence of Undisclosed Liabilities. Parent has no material obligations
or liabilities of any nature (matured or unmatured, fixed or contingent) other
than (i) those set forth or adequately provided for in the consolidated balance
sheet of Parent and its Subsidiaries or in the related notes to the
consolidated financial statements included in Parent's Annual Report on Form
10-K for the period ended September 25, 1998 (the "Parent Balance Sheet"), (ii)
those disclosed in Parent SEC Documents filed subsequent to the Parent Balance
Sheet Date, and (iii) those incurred in the ordinary course of business
consistent with past practice since the Parent Balance Sheet Date and which
have not had and are not reasonably likely to have a Material Adverse Effect on
Parent.
3.6 Litigation. There is no judgment, decree or order against Parent or any
of its Subsidiaries or, to the knowledge of Parent, any of their respective
directors or officers (in their capacities as such) that could prevent, enjoin,
alter or materially delay any of the transactions contemplated by this
Agreement.
3.7 Compliance With Laws. Each of Parent and its Subsidiaries has complied
in all material respects with all applicable federal, state, local, self-
regulatory and foreign laws, statutes, ordinances, rules and regulations, and
is not in violation in any material respect of, and has not received any
notices of material violation with respect to, its respective certificate or
articles of incorporation or bylaws or other charter or organizational
documents, or any federal, state, local, self-regulatory or foreign statute,
law, ordinance, rule or regulation applicable to the conduct of its business or
the ownership or operation of its business.
3.8 Year 2000 Compliance. Parent and its Subsidiaries have taken reasonable
steps necessary to address the software, accounting and record-keeping issues
raised in order to be Year 2000 compliant in all material respects (within the
meaning of SEC and any applicable SRO requirements) on or before the end of
1999, and Parent does not expect the future cost of addressing such issues to
be material. Parent and its Subsidiaries are in compliance with all guidelines
provided by the SEC and any applicable SRO regarding Year 2000 issues.
3.9 Tax Treatment. Neither Parent nor any of its directors or officers has
taken any action that would prevent the Merger from constituting a transaction
qualifying as a reorganization within the meaning of Section 368(a) of the
Code. Neither Parent nor, to Parent's knowledge, any of its affiliates or
agents is aware of any agreement, plan or other circumstance that would prevent
the Merger from qualifying as a reorganization within the meaning of Section
368(a) of the Code.
3.10 Broker's and Finders' Fees. Parent has not incurred, nor will it incur,
directly or indirectly, any liability for brokerage or finders' fees or agents'
commissions or investment bankers' fees or any similar
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charges in connection with this Agreement or any transaction contemplated
hereby, other than the fees and expenses of BancBoston Robertson Stephens Inc.
(which will be borne by Parent).
3.11 Representations Complete. None of the representations or warranties
made by Parent and Merger Sub herein or in any Schedule hereto, including the
Parent Disclosure Schedule, or certificate furnished by Parent pursuant to this
Agreement, or the Parent SEC Documents, when all such documents are read
together in their entirety, contains or will contain at the Effective Time any
untrue statement of a material fact, or omits or will omit at the Effective
Time to state any material fact necessary in order to make the statements
contained herein or therein, in the light of the circumstances under which
made, not misleading.
ARTICLE IV
CONDUCT PRIOR TO THE EFFECTIVE TIME
4.1 Conduct of Business. During the period from the date of this Agreement
and continuing until the earlier of the termination of this Agreement or the
Effective Time, Company agrees (except to the extent expressly contemplated by
this Agreement or as consented to in writing by Parent), to carry on its and
its Subsidiaries' business in the ordinary course in substantially the same
manner as heretofore conducted, to pay and to cause its Subsidiaries to pay
debts and Taxes when due subject to good faith disputes over such debts or
Taxes, to pay or perform other obligations when due, and to use all
commercially reasonable best efforts consistent with past practice and policies
to preserve intact its and its Subsidiaries' present business organizations,
keep available the services of its and its Subsidiaries' present executive
officers and key employees and preserve its and its Subsidiaries' relationships
with customers, suppliers, distributors, licensors, licensees, and others
having business dealings with it or its Subsidiaries, to the end that its and
its Subsidiaries' goodwill and ongoing businesses shall be unimpaired at the
Effective Time. Each of Company and Parent agrees to promptly notify the other
of any event or occurrence not in the ordinary course of its or its
Subsidiaries' business, and of any event which could have a Material Adverse
Effect on it or any of its Subsidiaries.
4.2 Conduct of Business of Company. During the period from the date of this
Agreement and continuing until the earlier of the termination of this Agreement
or the Effective Time, except as expressly contemplated by this Agreement,
Company shall not do, cause or permit any of the following, or allow, cause or
permit any of its Subsidiaries to do, cause or permit any of the following,
without the prior written consent of Parent:
(a) Charter Documents. Cause or permit any amendment, modification,
alteration or rescission of its certificate or articles of incorporation,
bylaws or other charter or organizational documents;
(b) Dividends; Changes in Capital Stock. Declare or pay any dividends on
or make any other distributions (whether in cash, stock or property) in
respect of any of its capital stock (other than (i) the Stock Split, as
defined below, (ii) dividends or distributions by any wholly owned
Subsidiary of Company to Company or another wholly owned Subsidiary thereof
and (iii) any dividends or distributions by non-wholly owned Subsidiaries
of Company to the extent described in Section 4.2(b) of the Company
Disclosure Schedule) or split, combine or reclassify any of its capital
stock or issue or authorize the issuance of any other securities in respect
of, in lieu of or in substitution for shares of its capital stock, or
repurchase or otherwise acquire, directly or indirectly, any shares of its
capital stock except from former employees, directors and consultants in
accordance with agreements providing for the repurchase of shares in
connection with any termination of service to it or its Subsidiaries;
(c) Options. Grant any options, stock appreciation rights or other
rights to acquire securities other than as permitted in clause (e) below or
accelerate, amend or change the period of exercisability or vesting of
options or other rights granted under its stock plans or authorize cash
payments in exchange for any options or other rights granted under any of
such plans;
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(d) Material Contracts. Enter into any contract or commitment, or
violate, amend or otherwise modify or waive any of the terms of any of its
contracts, other than in the ordinary course of business consistent with
past practice and in no event shall such contract, commitment, amendment,
modification or waiver involve payments by Company or any of its
Subsidiaries of amounts in excess of five hundred thousand dollars
($500,000);
(e) Issuance of Securities. Issue, deliver or sell or authorize or
propose the issuance, delivery or sale of, or purchase or propose the
purchase of, any shares of its capital stock or securities convertible
into, or subscriptions, rights, warrants or options to acquire, or other
agreements or commitments of any character obligating it to issue any such
shares or other convertible securities, other than (i) the issuance of
shares of Company Common Stock pursuant to the exercise of Company Options
outstanding under the Company Stock Option Plans as of the date of this
Agreement and (ii) the issuance of shares of Company Common Stock pursuant
to the exercise of warrants outstanding as of the date of this Agreement
and disclosed in the Company SEC Documents;
(f) Intellectual Property. Transfer to any person or entity any rights
to its Intellectual Property other than the transfer of non-exclusive
rights to its Intellectual Property in the ordinary course of business
consistent with past practice;
(g) Exclusive Rights. Enter into or amend any agreements pursuant to
which any other party is granted exclusive marketing or other exclusive
rights of any type or scope with respect to any of its products or
technology;
(h) Dispositions. Sell, lease, license or otherwise dispose of or
encumber any of its properties or assets which are material, individually
or in the aggregate, to the business of Company and its Subsidiaries (taken
as a whole), except in the ordinary course of business consistent with past
practice and except for the sale of real estate owned in accordance with
current policies of Company with respect thereto;
(i) Indebtedness. Other than in the ordinary course of business
(including creation of deposit liabilities, entry into repurchase
agreements, purchases or sales of federal funds, Federal Home Loan Bank
advances, and sales of certificates of deposit) consistent with past
practice (A) incur any indebtedness for borrowed money, (B) assume,
guarantee, endorse or otherwise as an accommodation become responsible for
the obligations of any other Person or (C) cancel, release, assign or
modify any material amount of indebtedness of any other person or entity;
(j) Leases. Enter into any operating lease in excess of five hundred
thousand dollars ($500,000) per year;
(k) Payment of Obligations. Pay, discharge or satisfy in an amount in
excess of five hundred thousand dollars ($500,000) in any one case or one
million ($1,000,000) in the aggregate, any claim, liability or obligation
(absolute, accrued, asserted or unasserted, contingent or otherwise)
arising other than in the ordinary course of business, other than the
payment, discharge or satisfaction of liabilities reflected or reserved
against in the Company Financial Statements;
(l) Capital Expenditures. Make any capital expenditures, capital
additions or capital improvements except (i) in the ordinary course of
business and consistent with past practice that do not exceed five hundred
thousand dollars ($500,000) in any one case or one million ($1,000,000) in
the aggregate and (ii) existing commitments under contracts or agreements
disclosed on the Company Disclosure Schedule with respect to Section 2.19;
(m) Insurance. Materially reduce the amount of any material insurance
coverage provided by existing insurance policies;
(n) Employee Benefit Plans; New Hires; Pay Increases. (A) Adopt or amend
any employee benefit or stock purchase or option plan (except as required
by law or as provided in Section 5.15(b)), or (B) hire any new director
level or executive officer level employee, pay any special bonus or special
remuneration to any employee or director, or, other than, with respect to
non-executive officer employees,
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in the ordinary course of business consistent with past practice, increase
the salaries or wage rates of its employees;
(o) Severance Arrangements. Grant any severance or termination pay (i)to
any director or officer or (ii) to any other employee except payments made
pursuant to written plans or agreements outstanding, or written Company
policies in effect, on the date hereof (in each case furnished to Parent
prior to the date of this Agreement);
(p) Lawsuits. Commence any action, suit or proceeding other than (i)in
the ordinary course of business, (ii) in such cases where it in good faith
determines that failure to commence suit would result in the material
impairment of a valuable aspect of its business, provided that it consults
with Parent prior to the filing of such a suit, or (iii) in respect of a
breach of this Agreement;
(q) Acquisitions. Acquire or agree to acquire by merging or
consolidating with, or by purchasing a substantial portion of the assets
of, or by any other manner, any business or any corporation, partnership,
association or other business organization or division thereof, or
otherwise acquire or agree to acquire any assets which are material,
individually or in the aggregate, to Company, or acquire or agree to
acquire any equity securities of any corporation, partnership, limited
liability company, association or business organization which securities
acquired or agreed to be acquired would constitute greater than five
percent (5%) of the outstanding securities of such entity;
(r) Taxes. Other than in the ordinary course of business or as required
by applicable law, rule or regulation, make or change any material election
in respect of Taxes, adopt or change any accounting method in respect of
Taxes, enter into any material closing agreement, settle any material claim
or assessment in respect of Taxes, or consent to any extension or waiver of
the limitation period applicable to any material claim or assessment in
respect of Taxes;
(s) Revaluation. Revalue any of its assets, including without limitation
writing down the value of inventory or writing off notes or accounts
receivable, other than in the ordinary course of business or as required by
applicable law, rule or regulation;
(t) Accounting Policies and Procedures. Make any material change to its
accounting methods, principles, policies, procedures or practices, except
as may be required by GAAP, Regulation S-X promulgated by the SEC the OTS
or the FDIC;
(u) Year 2000 Compliance. Fail to carry forward in all material respects
Company's Year 2000 assessment and compliance program, as made available to
Parent by Company;
(v) Risk Management. Except as required by applicable law or regulation,
or written rule, instruction or directive by a Governmental Entity which is
furnished to Parent promptly following receipt thereof: (i) make any
material change to its asset/liability management, loan, investment or
other material banking policies; (ii) implement or adopt any material
change in its interest rate risk management and hedging policies,
procedures or practices; (iii) fail to follow its existing policies or
practices with respect to managing its exposure to interest rate risk; or
(iv) fail to use commercially reasonable means to avoid any material
increase in its aggregate exposure to interest rate risk;
(w) Loans. Make any loan or advance or purchase any whole loan or
interest in an pool of loans other than in accordance with lending policies
as in effect on the date hereof;
(x) Affiliate Credit. Grant or commit to grant any extension of credit
or amend the terms of any such credit outstanding on the date hereof to any
executive officer, director or holder of 10% or more of the outstanding
capital stock of Company, or any Affiliate of such person, if such credit
would exceed $100,000;
(y) Domain Name. Change domain names or fail to renew existing domain
name registrations on a timely basis; or
(z) Other. Take or agree in writing or otherwise to take, any of the
actions described in Sections 4.2(a) through (y) above, or (i) any action
which would make any of its representations or warranties
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contained in this Agreement materially untrue or materially incorrect or
prevent it from performing or cause it not to perform its covenants
hereunder in any material respect, (ii) any action that will result in any
of the conditions to the Merger as set forth in Article VI not being
satisfied or in violation of any provision of this Agreement or the Option
Agreement, except, in every case, as may be required by applicable law, or
(iii) any other action that would materially adversely delay or materially
adversely impair the ability of Company to consummate the Merger.
4.3 Conduct of Parent. During the period from the date of this Agreement and
continuing until the Effective Time, except as expressly contemplated or
permitted by this Agreement or the Option Agreement or with Company's prior
written consent, Parent shall not: (a) take any action that will result in any
of the conditions to the Merger set forth in Article VI not being satisfied or
in a violation of any provision of this Agreement or the Option Agreement,
except, in every case, as may be required by applicable law; or (b) take any
other action that would materially adversely delay or materially adversely
impair the ability of Parent to consummate the Merger.
4.4 No Solicitation. Company and its Subsidiaries and the officers,
directors, employees, agents, representatives and advisors of Company and its
Subsidiaries (collectively, Company's "Representatives") will not, directly or
indirectly, (i) take any action to solicit, initiate, encourage (including by
way of furnishing non-public information or furnishing any information, other
than as required by applicable law, rules or regulations, in a manner which
could reasonably be expected to assist a third party in formulating a Takeover
Proposal), take any other action designed to facilitate or agree to any
Takeover Proposal (as defined in Section 7.3(f) hereof) or (ii) subject to the
next sentence, engage in negotiations with, or disclose any nonpublic
information relating to Company or any of its Subsidiaries to any person that
has advised Company that it may be considering making, or that has made, a
Takeover Proposal, or whose efforts to formulate a Takeover Proposal would be
assisted thereby; provided, nothing herein shall prohibit Company's Board of
Directors from taking and disclosing to Company's stockholders a position with
respect to an unsolicited tender offer pursuant to Rules 14d-9 and 14e-2
promulgated under the Exchange Act. Notwithstanding the immediately preceding
sentence, if an unsolicited written Takeover Proposal shall be received by the
Board of Directors of Company, then, to the extent the Board of Directors of
Company believes in good faith (after written advice from its financial
advisor) that such Takeover Proposal would, if consummated, result in a
transaction more favorable to Company's stockholders from a financial point of
view than the transaction contemplated by this Agreement (any such more
favorable Takeover Proposal being referred to in this Agreement as a "Superior
Proposal") and the Board of Directors of Company determines in good faith after
advice from outside legal counsel that it is necessary for the Board of
Directors of Company to comply with its fiduciary duties to stockholders under
applicable law, Company and its Representatives may furnish in connection
therewith information to the party making such Superior Proposal and engage in
negotiations with such party, and such actions shall not be considered a breach
of this Section 4.4 or any other provisions of this Agreement; provided that in
each such event Company notifies Parent of such determination by the Company
Board of Directors and provides Parent with a true and complete copy of the
Superior Proposal received from such third party, and provides (or has
provided) Parent with all documents containing or referring to non-public
information of Company that are supplied to such third party; provided,
further, that Company provides such non-public information pursuant to a non-
disclosure agreement at least as restrictive on such third party as the
Confidentiality Agreement (as defined in Section 5.4) is on Parent; provided,
further, however, that Company shall not, and shall not permit any of its
officers, directors, employees or other representatives to agree to or endorse
any Takeover Proposal or withdraw its recommendation of the Merger unless
Company has provided Parent at least five (5) days prior notice thereof.
Company will promptly (and in any event within 24 hours) notify Parent after
receipt of any Takeover Proposal or any notice that any person is considering
making a Takeover Proposal or any request for non-public information relating
to Company or any of its Subsidiaries or for access to the properties, books or
records of Company or any of its Subsidiaries by any person that has advised
Company that it may be considering making, or that has made, a Takeover
Proposal, or whose efforts to formulate a Takeover Proposal would be assisted
thereby (such notice to include the identity of such person or persons), and
will keep Parent fully informed of the status and details of any such Takeover
Proposal notice, request or any correspondence or
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communications related thereto and shall provide Parent with a true and
complete copy of such Takeover Proposal notice or request or correspondence or
communications related thereto, if it is in writing, or a complete written
summary thereof, if it is not in writing. Company shall immediately cease and
cause to be terminated all existing discussion or negotiations with any persons
conducted heretofore with respect to a Takeover Proposal.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 Registration Statement; Proxy Statements.
(a) As soon as practicable after the execution of this Agreement, Company
and Parent shall prepare, and Company shall file with the SEC preliminary proxy
materials relating to a meeting of Company's stockholders to consider the
Merger (the "Company Stockholders Meeting") and the vote of the stockholders of
Company with respect to the Merger. In the event that Parent fails to obtain
the Parent Stockholder Approval at the June 25 Meeting (as defined in Section
5.7), Parent shall file with the SEC preliminary proxy materials (which may be
contained in a joint proxy statement/prospectus together with the preliminary
proxy materials relating to the Company Stockholders Meeting) relating to the
Parent Stockholders Meeting (as defined in Section 7.1(f)) and the vote of the
stockholders of Parent with respect to the proposed increase in authorized
capital stock of Parent described in Section 6.1(a). As soon as practicable
following receipt of SEC comments on the proxy statement/ prospectus (or joint
proxy statement/prospectus or proxy statement for the Parent Stockholders
Meeting, as the case may be) to be sent to the stockholders of Company in
connection with the Company Stockholders Meeting and, if applicable, the
Stockholders of Parent in connection with the Parent Stockholders Meeting (such
proxy statement/prospectus or joint proxy statement/prospectus (as the case may
be), together with any amendments thereof or supplements thereto, in each case
in the form or forms sent as aforesaid, the "Proxy Statement"; and, together
with any separate proxy statement relating to the Parent Stockholders Meeting,
the "Proxy Statements"), Company shall file with the SEC definitive proxy
materials relating to the Company Stockholders Meeting and Parent shall file
with the SEC a registration statement on Form S-4 (or such other successor form
as shall be appropriate) pursuant to which the shares of Parent Common Stock to
be issued in the Merger will be registered with the SEC (the "Registration
Statement"), which shall include the Proxy Statement as a prospectus, in
connection with the registration under the Securities Act of the shares of
Parent Common Stock to be distributed to holders of Company Common Stock
pursuant to the Merger; in the event that Parent fails to obtain the Parent
Stockholder Approval at the June 25 Meeting, Parent shall also file with the
SEC definitive proxy materials relating thereto and shall include the Proxy
Statements (in the case of a joint proxy statement/prospectus) in the
Registration Statement. Each of Parent and Company shall use its reasonable
best efforts to have or cause the Registration Statement to become effective
(including clearing the Proxy Statement or Proxy Statements, as the case may
be, with the SEC) as promptly as practicable, and shall take any and all
actions required under any applicable federal or state securities laws or blue
sky laws in connection with the issuance of Parent Common Stock pursuant to the
Merger. Without limiting the generality of the foregoing, on the one hand, each
of Parent and Company shall (i) notify the other as promptly as practicable
after the receipt by it of any written or oral comments of the SEC on, or of
any written or oral request by the SEC or any other governmental official for
amendments or supplements to, or any other filing or supplemental or additional
information relating to, the Proxy Statement (or Proxy Statements, as the case
may be) or the Registration Statement, and shall promptly supply the other with
copies of all correspondence between it or any of its representatives, on the
one hand, and the SEC or any other governmental official, on the other hand,
with respect to any of the foregoing filings, and (ii) use all reasonable
efforts, after consultation with the other such party, to respond promptly to
any comments made by the SEC with respect to the Proxy Statement or Proxy
Statements, as the case may be (including each preliminary version thereof),
and the Registration Statement (including each amendment thereof and supplement
thereto). As promptly as practicable after the Registration Statement shall
have become effective, each of Company and Parent shall mail or cause to be
mailed its Proxy Statement (if any, in the case of Parent) to its stockholders.
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(b) Parent and Company shall each cause the Registration Statement and the
Proxy Statement (or Proxy Statements, as the case may be) to comply in all
material respects with the Securities Act, the Exchange Act and all other
applicable federal and state securities law requirements. Each of Parent and
Company shall, and shall cause its respective representatives to, fully
cooperate with the other such party and its respective representatives in the
preparation of the Proxy Statement (or Proxy Statements, as the case may be)
and the Registration Statement, and shall provide promptly to the other such
information concerning it and its affiliates, directors, officers and
stockholders as the other may reasonably request in connection with the
preparation of the Proxy Statement or Proxy Statements, as the case may be, and
the Registration Statement. If at any time prior to the Effective Time Company
or Parent shall become aware of any fact, event or circumstance that is
required to be set forth in an amendment to the Registration Statement or a
supplement to the Proxy Statement (or Proxy Statements, as the case may be),
Company or Parent, as the case may be, shall promptly notify the other of such
fact, event or circumstance and the parties shall cooperate with each other in
filing with the SEC or any other governmental official, and (in the case of a
supplement to the Proxy Statement or Proxy Statements, as the case may be)
mailing to stockholders of Company, such amendment or supplement.
(c) The Proxy Statement (or Proxy Statements, as the case may be) shall
contain the unanimous recommendation of the Board of Directors of Company that
the Company stockholders approve this Agreement and the Merger and the
conclusion of the Board of Directors that the terms and conditions of the
Merger are advisable and fair to, and in the best interests of, the
stockholders of Company; provided that no such recommendation need be included,
and any such recommendation may be withdrawn if previously included, if a
Superior Proposal has been made and Company and Company's Board of Directors
withdraw or modify such recommendation in compliance with, and otherwise have
complied in all respects with, Section 4.4. Notwithstanding anything to the
contrary contained herein, Company shall not include in the Proxy Statement any
information with respect to Parent or its affiliates or associates, the form
and content of which information shall not have been approved by Parent prior
to such inclusion (which consent will not be unreasonably withheld or delayed).
(d) In the event that a Proxy Statement relating to the Parent Stockholders
Meeting is required hereunder, such Proxy Statement shall contain the unanimous
recommendation of the Board of Directors of Parent that the Parent stockholders
approve the increase in authorized capital stock described in Section 6.1(a);
provided that such recommendation may be withdrawn upon a notice of termination
of this Agreement pursuant hereto.
(e) Company agrees that: (i) the information supplied by Company for
inclusion in the registration statement shall not at the time the Registration
Statement (including any amendments or supplements thereto) is declared
effective by the SEC or at the Effective Time contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, (ii) the information
supplied by Company for inclusion in the Proxy Statement relating to the
Company Stockholders Meeting shall not, on the date the Proxy Statement
relating to the Company Stockholders Meeting is first mailed to the
stockholders of Company or at the time of the Company Stockholders Meeting,
contain any statement which, at such time, is false or misleading with respect
to any material fact, or omit to state any material fact necessary in order to
make the statements made therein, in light of the circumstances under which
they are made, not false or misleading, or omit to state any material fact
necessary to correct any statement in any earlier communication with respect to
the solicitation of proxies for the Company Stockholders Meeting which has
become false or misleading; and (iii) if at any time prior to the Effective
Time any event or information should be discovered by Company which should be
set forth in an amendment to the Registration Statement or a supplement to the
Proxy Statement, Company shall promptly inform Parent of such event or
information. Notwithstanding the foregoing, Company makes no representation,
warranty or covenant with respect to any information supplied by Parent or
Merger Sub which is contained in any of the foregoing documents.
(f) Parent agrees that: (i) the information supplied by Parent for inclusion
in the Registration Statement shall not at the time the Registration Statement
(including any amendments or supplements thereto) is declared effective by the
SEC or at the Effective Time contain any untrue statement of a material fact or
omit to state
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any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they were
made, not misleading; (ii) the information supplied by Parent for inclusion in
the Proxy Statement relating to the Company Stockholders Meeting shall not, on
the date such Proxy Statement is first mailed to Company's stockholders or at
the time of the Company Stockholders Meeting, contain any statement which, at
such time, is false or misleading with respect to any material fact, or omit to
state any material fact necessary in order to make the statements therein, in
light of the circumstances under which it is made, not false or misleading, or
omit to state any material fact necessary to correct any statement in any
earlier communication with respect to the solicitation of proxies for the
Company Stockholders Meeting which has become false or misleading and (iii) if
at any time prior to the Effective Time any event or information should be
discovered by Parent which should be set forth in an amendment to the
Registration Statement or in a supplement to such Proxy Statement, Parent will
promptly inform Company of such event or information. Notwithstanding the
foregoing, neither Parent nor Merger Sub makes any representation, warranty or
covenant with respect to any information supplied by or on behalf of Company or
any of its affiliates which is contained in any of the foregoing documents.
5.2 Meeting of Stockholders. Company (and, if a Parent Stockholders Meeting
is required to be held hereunder, Parent) shall promptly after the date hereof
take all action necessary in accordance with Delaware Law and its certificate
of incorporation and bylaws, each as amended, to convene the Company
Stockholders Meeting (or Parent Stockholders Meeting, as the case may be)
within forty-five (45) days of the Registration Statement being declared
effective by the SEC (or, as applicable, the Proxy Statement relating to the
Parent Stockholders Meeting is cleared by the SEC). Company and Parent shall
consult with each other regarding the date of the Company Stockholders Meeting
and any Parent Stockholders Meeting. Company shall use its commercially
reasonable efforts to solicit from stockholders of Company proxies in favor of
the Merger and shall take all other action necessary or advisable to secure the
vote or consent of stockholders required to effect the Merger, provided that
such solicitation efforts need not be made (although all efforts required to
hold the Company Stockholders Meeting will continue to be required), if a
Superior Proposal has been made and Company and Company's Board of Directors
withdraw or modify such recommendation in compliance with, and otherwise have
complied in all respects with, Section 4.4. In the event that Parent is
required to seek the Parent Stockholders Approval at the Parent Stockholders
Meeting pursuant to Section 7.1(f), Parent shall use commercially reasonable
efforts to solicit from stockholders of Parent proxies in favor of the increase
in authorized capital stock described in Section 6.1(a), provided that such
solicitation efforts need not be made, and the Parent Stockholders Meeting need
not be held, if there is a notice of termination of this Agreement pursuant
hereto.
5.3 Access to Information.
(a) At all times prior to the Effective Time, subject to applicable law and
the Confidentiality Agreement (as defined below), Company shall afford Parent
and its accountants, counsel and other representatives, reasonable access
during normal business hours to (i) all of Company's and its Subsidiaries'
properties, books, contracts, commitments and records, (ii) all Tax Returns and
work papers and all other information relating to Taxes of Company and its
Subsidiaries, and (iii) all other information concerning the business,
properties and personnel of Company and its Subsidiaries as Parent may
reasonably request. Company agrees to provide to Parent and its accountants,
counsel and other representatives copies of internal financial statements,
budgets, operating plans and projections promptly upon request.
(b) Subject to compliance with applicable law, from the date hereof until
the Effective Time, each of Parent and Company shall confer on a regular and
frequent basis with one or more representatives of the other party to report
material operational matters and the general status of ongoing operations.
(c) No information or knowledge obtained in any investigation pursuant to
this Section 5.3 shall affect or be deemed to modify any representation or
warranty contained herein or the conditions to the obligations of the parties
to consummate the Merger.
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5.4 Confidentiality. The parties acknowledge that each of Parent and Company
have previously executed a non-disclosure agreement dated May 26, 1999 (the
"Confidentiality Agreement"), which Confidentiality Agreement shall continue in
full force and effect in accordance with its terms, except to the extent
necessary to comply with the terms of this Agreement.
5.5 Public Disclosure. Unless otherwise permitted by this Agreement, Parent
and Company shall consult with each other before issuing any press release or
otherwise making any public statement or making any other public (or non-
confidential) disclosure (whether or not in response to an inquiry) regarding
the terms of this Agreement or any of the transactions contemplated hereby, and
neither shall issue any such press release or make any such statement or
disclosure without the prior approval of the other (which approval shall not be
unreasonably withheld or delayed), except as may be required by law or by
obligations pursuant to any listing agreement with any national securities
exchange or with the NASD, in which case the party proposing to issue such
press release or make such public statement or disclosure shall use
commercially reasonable efforts to consult with the other party before issuing
such press release or making such public statement or disclosure.
5.6 Consents; Cooperation. Each of Parent, Merger Sub and Company will, and
will cause their respective Subsidiaries to, take all reasonable actions
necessary to comply promptly with all legal requirements which may be imposed
on them with respect to the consummation of the transactions contemplated by
this Agreement and will promptly cooperate with and furnish information to any
party hereto necessary in connection with any such requirements imposed upon
such other party in connection with the consummation of the transactions
contemplated by this Agreement and will take all reasonable actions necessary
to obtain (and will cooperate with the other parties hereto in obtaining) any
consent, approval, order or authorization of, or any registration, declaration
or filing with, any Governmental Entity or other person, required to be
obtained or made in connection with the taking of any action contemplated by
this Agreement. Parent and Company shall have the right to review in advance,
and to the extent practicable each will consult the other as to, in each case
subject to applicable laws relating to the exchange of information, all of the
information which will appear in any filing made with, or written materials
submitted to, any third party or Governmental Entity in connection with the
transactions contemplated by this Agreement. In the event an injunction or
other order shall have been issued which prevents, alters or delays the Merger
or any other transaction contemplated hereby, each party agrees to use its
reasonable best efforts to have such injunction or other order lifted. Parent
and Company and their respective Subsidiaries shall cooperate and use their
respective reasonable best efforts to prepare all documentation, to effect all
filings and to obtain all permits, consents, approvals and authorizations of
all third parties and Governmental Entities necessary to consummate the
transactions contemplated by this Agreement, including without limitation the
OTS, the NASD (the "NASD Approval") and any applicable state approval ("State
Approval") and to consult with the other party with respect to obtaining such
permits, consents, approvals and authorizations. Each of Parent and Company
agrees, upon request, to furnish the other party with all information
concerning itself, its Subsidiaries, directors, officers and shareholders and
such other matters as may be reasonably necessary or advisable in connection
with any filing, notice or application made by or on behalf of such other party
or any of its Subsidiaries to any third party or Governmental Entity.
5.7 Reasonable Best Efforts and Further Assurances. Each of the parties to
this Agreement shall use its reasonable best efforts to effect the transactions
contemplated hereby and to fulfill and cause to be fulfilled the conditions to
Closing under this Agreement including, without limitation, Parent using
reasonable best efforts to obtain the Parent Stockholder Approval at the
meeting of Parent's stockholders scheduled to be held on June 25, 1999 or at
any adjournment or postponement thereof (the "June 25 Meeting"). Each party
hereto, at the reasonable request of another party hereto, shall execute and
deliver such other instruments and do and perform such other acts and things as
may be necessary or desirable for effecting completely the consummation of this
Agreement and the transactions contemplated hereby.
5.8 Blue Sky Laws. Parent shall take such steps as may be necessary to
comply with the securities and blue sky laws of all jurisdictions which are
applicable to the issuance of the shares of Parent Common Stock in connection
with the Merger. Company shall use its best efforts to assist Parent as may be
necessary to comply
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with the securities and blue sky laws of all jurisdictions which are applicable
in connection with the issuance of the shares of Parent Common Stock in
connection with the Merger.
5.9 Listing of Additional Shares; Nasdaq Quotation. Prior to the Effective
Time, Parent shall file with the Nasdaq National Market a Notification Form for
Listing of Additional Shares with respect to the shares of Parent Common Stock
issuable upon conversion of the Company Common Stock in the Merger. Company and
Parent agree to continue the quotation of Company Common Stock and Parent
Common Stock, respectively, on the Nasdaq National Market during the term of
the Agreement so that, to the extent necessary, appraisal rights will not be
available to stockholders of Company under Section 262 of the Delaware Law.
5.10 Pooling Accounting. Parent and Company shall each use its reasonable
best efforts to cause the business combination to be effected by the Merger to
be accounted for as a pooling of interests under generally accepted accounting
principles and applicable SEC rules and regulations. Each of Parent and Company
shall use its reasonable best efforts to cause its Affiliates not to take any
action that would adversely affect the ability of Parent or the Surviving
Corporation to account for the business combination to be effected by the
Merger as a pooling of interests.
5.11 Affiliate Agreements.
(a) Schedule 2.23 sets forth those persons who may be deemed Affiliates of
Company. Company shall provide Parent with such information and documents as
Parent shall reasonably request for purposes of reviewing such list. Prior to
the Effective Time, Company shall use its reasonable best efforts to obtain and
deliver or cause to be delivered to Parent a duly executed Company Affiliate
Agreement in the form attached hereto as Exhibit B (a "Company Affiliate
Agreement") from the persons identified in Schedule 2.23 as soon as practicable
(and in any event within three business days) after the execution hereof (to
the extent not executed heretofore) and from any other person as soon as
practicable after the date on which such person becomes an Affiliate of
Company. Parent and Merger Sub shall be entitled to place appropriate legends
on the certificates evidencing shares of Parent Common Stock to be received by
such Affiliates of Company pursuant to the terms of this Agreement, and to
issue appropriate stop transfer instructions to the transfer agent for Parent
Common Stock, in each of the foregoing cases in accordance with the terms of
such Company Affiliate Agreement.
(b) Schedule 5.11(b) sets forth those persons who may be deemed Affiliates
of Parent. Parent shall provide Company with such information and documents as
Company shall reasonably request for purposes of reviewing such list. Parent
shall use its reasonable best efforts to deliver or cause to be delivered to
Company a duly executed Parent Affiliate Agreement in the form of Exhibit C
attached hereto (the "Parent Affiliate Agreements") from the persons identified
in Schedule 5.11(b) as soon as practicable (and in any event within three
business days) after the execution hereof (to the extent not executed
heretofore) and from any other person as soon as practicable after the date on
which such person becomes an Affiliate of Parent.
5.12 Tax Treatment. The parties shall use their reasonable best efforts to
cause the Merger to qualify as a "reorganization" within the meaning of Section
368(a) of the Code.
5.13 Company Options.
(a) At the Effective Time, the Company Stock Option Plans, the Company
Options and each outstanding option to purchase shares of Company Common Stock
under the Company Stock Option Plans, whether vested or unvested, will be
assumed by Parent. Company represents and warrants to Parent that Schedule 5.13
hereto sets forth a true and complete list as of the date hereof of all holders
of outstanding options under the Company Stock Option Plans and all other
Company Options, including the number of shares of Company capital stock
subject to each such option, the exercise or vesting schedule, the exercise
price per share and the term of each such option. On the Closing Date, Company
shall deliver to Parent an updated Schedule 5.13 hereto current as of such
date. Each such option so assumed by Parent under this Agreement shall continue
to have, and be subject to, the same terms and conditions set forth in the
Company Stock Option Plans, the Company Options
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and the applicable stock option agreements, immediately prior to the Effective
Time, except that (i) such option will be exercisable for that number of whole
shares of Parent Common Stock equal to the product of the number of shares of
Company Common Stock that were issuable upon exercise of such option
immediately prior to the Effective Time multiplied by the Exchange Ratio and
rounded down to the nearest whole number of shares of Parent Common Stock, and
(ii) the per share exercise price for the shares of Parent Common Stock
issuable upon exercise of such assumed option will be equal to the quotient
determined by dividing the exercise price per share of Company Common Stock at
which such option was exercisable immediately prior to the Effective Time by
the Exchange Ratio, rounded up to the nearest whole cent, subject to any
adjustments necessary to protect the status of any option as an incentive stock
option as defined in Section 422 of the Code. It is the intention of the
parties that the options so assumed by Parent qualify, to the maximum extent
permissible following the Effective Time as incentive stock options as defined
in Section 422 of the Code to the extent such options qualified as incentive
stock options prior to the Effective Time. As soon as practicable (and in any
event within thirty (30) business days after the Effective Time, Parent will
issue to each person who, immediately prior to the Effective Time was a holder
of an outstanding option under the Company Stock Option Plans or a Company
Option a document, in form and substance submitted to Company at least ten (10)
days before the Closing Date and reasonably satisfactory to Company, evidencing
the foregoing assumption of such option by Parent. All Company Options assumed
by Parent hereunder will be exercisable in accordance with their terms without
regard to whether such document has been delivered to the holder thereof.
(b) All outstanding rights of Company which it may hold immediately prior to
the Effective Time to repurchase unvested shares of Company Common Stock (the
"Repurchase Options") shall be assigned to Parent in the Merger and shall
thereafter be exercisable by Parent upon the same terms and conditions in
effect immediately prior to the Effective Time, except that the shares
purchasable pursuant to the Repurchase Options and the purchase price per shall
be adjusted to reflect the Exchange Ratio.
5.14 Form S-8. Parent agrees to use its reasonable best efforts to file as
soon as practicable after the Effective Time (and in any event no later than
twenty (20) business days after the Effective Time), a registration statement
on Form S-8 covering the shares of Parent Common Stock issuable pursuant to
outstanding options under the Company Stock Option Plans assumed by Parent.
Company shall cooperate with and assist Parent in the preparation of such
registration statement.
5.15 Employees; Employee Benefit Matters.
(a) Concurrently with the execution of this Agreement, each of the
individuals set forth on Schedule 5.15(a) shall have delivered to Parent an
executed Management Continuity Agreement in the form of Exhibit D attached
hereto.
(b) If required by Parent in writing delivered to Company not less than five
(5) business days before Closing, Company shall, on or before the day
immediately prior to the Closing Date, terminate the Company 401(k) Plan (the
"Plan") and no further contributions shall be made to the Plan. Company shall
provide to Parent (i) certified copies of resolutions adopted by the Board of
Directors of Company authorizing the termination and (ii) an executed amendment
to the Plan in form and substance reasonably satisfactory to Parent to conform
the plan document for the Plan with all applicable requirements of the Code and
regulations thereunder relating to the tax-qualified status of the Plan.
(c) To the extent permissible under the applicable provisions of the Code
and ERISA and the terms of any employee benefit plans sponsored or maintained
by Parent or its Subsidiaries, (i) for purposes of crediting periods of service
for eligibility to participate and vesting, employees of Company and its
Subsidiaries shall receive full credit for purposes of eligibility and vesting,
and periods of service with Company and any Subsidiary before the Effective
Time shall be treated as if such service had been with Parent and
(ii) individuals who are employees of Company or any of its Subsidiaries at the
Effective Time and who become employees of Parent or any Subsidiary thereof
shall be eligible to participate in any employee benefit plan (within the
meaning of ERISA Section 3(3)) (except for the Parent 401(k) Plan and Parent
Stock Option
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Plans) maintained by Parent or any Subsidiary thereof on the same terms and
conditions as apply generally to other employees of Parent or any of its
Subsidiaries.
(d) Parent will or will cause the Surviving Corporation or Telebank to offer
a position of at-will employment on Parent's customary employment terms (except
to the extent Management Continuity Agreements in the form of Exhibit D are in
effect) to each of Company's and its Subsidiaries' personnel as of the
Effective Time at their existing employment location as of the Effective Time.
(e) Company agrees to use commercially reasonable efforts to cause each of
its employees and officers to enter into proprietary information agreements, in
substantially the form previously provided by Parent to Company, as soon as
practicable.
5.16 Director and Officer Indemnification.
(a) Parent agrees not to cause or allow the Surviving Corporation to modify,
and to cause the Surviving Corporation to honor, any rights to indemnification
or exculpation from liabilities for acts or omissions occurring at or prior to
the Effective Time now existing in favor of the officers and directors of
Company and its Subsidiaries as provided in their respective certificates of
incorporation or by-laws (or comparable organizational documents) and any
indemnification agreements of Company.
(b) For four years after the Effective Time, Parent will cause the Surviving
Corporation to use commercially reasonable efforts to provide officers' and
directors' liability insurance in respect of acts or omissions occurring at or
prior to the Effective Time covering each such person currently covered by
Company's officers' and directors' liability insurance policy on terms
reasonably comparable to those of such policy in effect on the date hereof,
provided that in satisfying its obligation under this paragraph, Parent shall
not be obligated to cause the Surviving Corporation to pay premiums in excess
of 150% of the amount per annum Company paid in its last full fiscal year,
which amount has been disclosed in writing to Parent, and if the Surviving
Corporation is unable to obtain the insurance required by this paragraph, it
shall obtain as much comparable insurance as possible for an annual premium
equal to such maximum amount.
(c) Parent will not permit the Surviving Corporation to merge or consolidate
with any other person unless the Surviving Corporation will ensure that the
surviving or resulting entity assumes the obligations imposed by this Section
5.16.
5.17 Comfort Letters.
(a) Parent shall use its reasonable best efforts to cause to be delivered to
Company a procedures letter of Parent's independent auditors, dated a date
within two (2) business days before the date on which the Registration
Statement shall become effective and addressed to Parent and Company, in form
reasonably satisfactory to Company and customary in scope and substance for
letters delivered by independent public accountants in accordance with Opinion
16 of the Accounting Principles Board and Statement of Accounting Standards No.
72 in connection with registration statements similar to the Registration
Statement.
(b) Company shall use its reasonable best efforts to cause to be delivered
to Parent a procedures letter of Company's independent auditors, dated a date
within two (2) business days before the date on which the Registration
Statement shall become effective and addressed to Parent and Company, in form
reasonably satisfactory to Parent and customary in scope and substance for
letters delivered by independent public accountants in accordance with Opinion
16 of the Accounting Principles Board and Statement of Accounting Standards No.
72 in connection with registration statements similar to the Registration
Statement.
5.18 Stockholder Litigation. Unless and until Company has withdrawn its
recommendation of the Merger in compliance with Section 4.4, Company shall give
Parent the opportunity to participate in or, in the event Parent is named in
any such litigation, to lead, in each case at its own expense, the defense of
any stockholder litigation against Company and/or its directors relating to the
transactions contemplated by this
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Agreement and the Option Agreement. In the event Parent is leading any such
stockholder litigation, Company shall be given the opportunity to participate
at its own expense in the defense of such stockholder litigation.
5.19 Company Debt Securities. As required by all contracts and agreements
relating to Company's outstanding 11 1/2% Subordinated Notes due 2004, 11.00%
Junior Subordinated Deferrable Interest Debentures, 9.0% Junior Subordinated
Deferrable Interest Debentures (Series A), and 9.5% Senior Subordinated Notes
due March 31, 2004, Parent shall: (a) expressly assume, by supplemental
indenture or as otherwise required by such contracts and agreements, all
obligations under such contracts and agreements and the performance of the
covenants and conditions of Company to be performed and observed therein; (b)
maintain compliance with all applicable capital requirements, financial tests
and other financial ratios contained therein; and (c) deliver all such
certificates and opinions as required therein.
ARTICLE VI
CONDITIONS TO THE MERGER
6.1 Conditions to Obligations of Each Party to Effect the Merger. The
respective obligations of each party to this Agreement to consummate and effect
the Merger shall be subject to the satisfaction at or prior to the Effective
Time of each of the following conditions, any of which may be waived, in
writing, by agreement of all the parties hereto:
(a) Stockholder Approvals. This Agreement and the Merger shall have been
approved and adopted by the holders of two-thirds ( 2/3) of the shares of
Company Common Stock outstanding as of the record date set for the Company
Stockholders Meeting, and an increase in the number of authorized shares of
Parent Common Stock sufficient to allow consummation of the Merger and the
transactions contemplated hereby shall have been approved and adopted by
the holders of a majority of the shares of Parent Common Stock outstanding
as of the record date set for a meeting to be held for such purpose (the
"Parent Stockholder Approval").
(b) Registration Statement Effective. The SEC shall have declared the
Registration Statement effective. No stop order suspending the
effectiveness of the Registration Statement or any part thereof shall have
been issued, and no proceeding for that purpose, and no similar proceeding
shall have been initiated by the SEC in respect of the Proxy Statement; and
all requests for additional information on the part of the SEC shall have
been complied with to the reasonable satisfaction of the parties hereto.
(c) No Injunctions or Restraints; Illegality. No temporary restraining
order, preliminary or permanent injunction or other order issued by any
court of competent jurisdiction or other legal or regulatory restraint or
prohibition preventing the consummation of the Merger shall be in effect,
nor shall any proceeding brought by an administrative agency or commission
or other governmental authority or instrumentality, domestic or foreign,
seeking any of the foregoing be pending; nor shall there be any action
taken, or any statute, rule, regulation or order enacted, entered, enforced
or deemed applicable to the Merger, which prevents or prohibits the
consummation of the Merger. In the event an injunction or other order shall
have been issued, each party agrees to use its commercially reasonable
efforts to have such injunction or other order lifted.
(d) Listing of Additional Shares. The filing with the Nasdaq National
Market of a Notification Form for Listing of Additional Shares with respect
to the shares of Parent Common Stock issuable upon conversion of the
Company Common Stock in the Merger and upon exercise of the options under
the Company Stock Option Plans assumed by Parent, shall have been made.
(e) Pooling Letters. Parent shall have received letters, each dated the
Closing Date, from Deloitte & Touche, LLP, Parent's independent auditors,
and Arthur Andersen LLP, Company's independent auditors, to the effect that
the Merger qualifies for pooling of interests accounting treatment if
consummated in accordance with this Agreement.
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6.2 Additional Conditions to Obligations of Company. The obligations of
Company to consummate and effect the Merger shall be subject to the
satisfaction at or prior to the Effective Time of each of the following
conditions, any of which may be waived, in writing, by Company:
(a) Representations, Warranties and Covenants. (i) The representations
and warranties of Parent in this Agreement shall be true and correct in all
respects (ignoring for this purpose all materiality or Material Adverse
Effect qualifications in such representations and warranties) when made and
as of the Effective Time as though such representations and warranties were
made on and as of such time (other than (A) representations and warranties
expressly made as of an earlier date, which shall have been true and
correct as of such earlier date, and (B) failures to be true and correct
that do not, in the aggregate, constitute a Material Adverse Effect on
Parent) and (ii) Parent and Merger Sub shall have performed and complied in
all material respects with all covenants, obligations and conditions of
this Agreement required to be performed and complied with by them at or
prior to the Effective Time.
(b) Certificate of Parent. Company shall have been provided with a
certificate executed on behalf of Parent by its President and its Chief
Financial Officer certifying that the condition set forth in Section 6.2(a)
has been fulfilled.
(c) Governmental Approval. Parent, Company and Merger Sub and their
respective Subsidiaries shall have timely obtained from each Governmental
Entity all approvals, waivers and consents, if any, necessary for
consummation of or in connection with the Merger and the other transactions
contemplated hereby, including such approvals, waivers and consents as may
be required under the Home Owners Loan Act, the Securities Act, the
Exchange Act, any SRO constitution or rules or any state Blue Sky laws.
(d) Tax Opinion. Company shall have received a written opinion of Hogan
& Hartson L.L.P. (or if such firm is unable to, or fails to timely deliver,
such opinion, Brobeck, Phleger & Harrison LLP) dated as of the Closing Date
to the effect that the Merger will constitute a reorganization within the
meaning of Section 368(a) of the Code, and such opinion shall not have been
withdrawn. In rendering such opinion, counsel shall be entitled to rely
upon, among other things, reasonable assumptions as well as representations
of Parent, Merger Sub and Company.
6.3 Additional Conditions to the Obligations of Parent and Merger Sub. The
obligations of Parent and Merger Sub to consummate and effect the Merger shall
be subject to the satisfaction at or prior to the Effective Time of each of the
following conditions, any of which may be waived, in writing, by Parent:
(a) Representations, Warranties and Covenants. (i) The representations
and warranties of Company in this Agreement shall be true and correct in
all respects (ignoring for this purpose all materiality or Material Adverse
Effect qualifications in such representations and warranties) when made and
as of the Effective Time as though such representations and warranties were
made on and as of such time (other than (A) representations and warranties
expressly made as of an earlier date and (B) failures to be true and
correct that do not, in the aggregate, constitute a Material Adverse Effect
on Company) and (ii) Company shall have performed and complied in all
material respects with all covenants, obligations and conditions of this
Agreement required to be performed and complied with by it at or prior to
the Effective Time.
(b) Certificate of Company. Parent shall have been provided with a
certificate executed on behalf of Company by its President and Chief
Financial Officer certifying that the condition set forth in Section 6.3(a)
has been fulfilled.
(c) Governmental Approval. Parent, Company and Merger Sub and their
respective Subsidiaries shall have timely obtained from each Governmental
Entity all approvals, waivers and consents, if any, necessary for
consummation of or in connection with the Merger and the other transactions
contemplated hereby, including such approvals, waivers and consents as may
be required under the Home Owners Loan Act, the Securities Act, the
Exchange Act, any SRO constitution or rules, or any state Blue Sky laws;
provided, however, that none of the preceding shall be deemed obtained or
made if it shall impose a non-
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customary condition or restriction that Parent reasonably determines in
good faith could reasonably be expected to result in a Material Adverse
Effect on Parent or the Surviving Corporation.
(d) Third Party Consents. Parent shall have been furnished with evidence
satisfactory to it of the consent or approval of those persons whose
consent or approval shall be required in connection with the Merger under
any Material Contract of Company or any of its Subsidiaries or otherwise,
the failure of which to obtain could reasonably be expected to have a
Material Adverse Effect on Parent or the Surviving Corporation.
(e) Injunctions or Restraints on Conduct of Business. No temporary
restraining order, preliminary or permanent injunction or other order
issued by any court of competent jurisdiction or other legal or regulatory
restraint provision limiting or restricting Parent's conduct or operation
of the business of Company and its Subsidiaries, following the Merger shall
be in effect, nor shall any proceeding brought by an administrative agency
or commission, SRO or other Governmental Entity, domestic or foreign,
seeking the foregoing be pending.
(f) No Material Adverse Effect. There shall not have occurred since the
date hereof any Material Adverse Effect on Company.
(g) Tax Opinion. Parent shall have received a written opinion of
Brobeck, Phleger & Harrison LLP (or if such firm is unable to, or fails to
timely deliver, such opinion, Hogan & Hartson L.L.P.) dated as of the
Closing Date to the effect that the Merger will constitute a reorganization
within the meaning of Section 368(a) of the Code, and such opinion shall
not have been withdrawn. In rendering such opinion, counsel shall be
entitled to rely upon, among other things, reasonable assumptions as well
as representations of Parent, Merger Sub and Company.
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
7.1 Termination. At any time prior to the Effective Time, whether before or
after approval of the matters presented in connection with the Merger by the
stockholders of Company, this Agreement may be terminated:
(a) by mutual consent of Parent and Company;
(b) by either Parent or Company, if, the Closing shall not have occurred
on or before December 31, 1999 (provided that the right to terminate this
Agreement under this Section 7.1(b) shall not be available to any party
whose action or failure to act has been the cause of or resulted in the
failure of the Merger to occur on or before such date and such action or
failure to act constitutes a breach of this Agreement);
(c) by Parent, if (i) Company shall breach any of its representations,
warranties or obligations hereunder to an extent that would cause the
condition set forth in Section 6.3(a) not to be satisfied and such breach
shall not have been cured within ten (10) business days of receipt by
Company of written notice of such breach (provided that the right to
terminate this Agreement by Parent shall not be available to Parent if
Parent is at that time in material breach of this Agreement), (ii) the
Board of Directors of Company shall have withdrawn or modified its
recommendation of this Agreement or the Merger or any transaction
contemplated hereby in a manner adverse to Parent or shall have resolved to
do any of the foregoing, (iii) Company shall have failed to comply with the
Option Agreement or with Section 4.4 or Section 5.2 of this Agreement, or
(iv) the Board of Directors of Company shall have recommended, endorsed,
accepted or agreed to a Takeover Proposal or shall have resolved to do so;
(d) by Company, if Parent shall breach any of its representations,
warranties or obligations hereunder to an extent that would cause the
condition set forth in Section 6.2(a) not to be satisfied and such breach
shall not have been cured within ten (10) business days following receipt
by Parent of written notice of
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such breach (provided that the right to terminate this Agreement by Company
shall not be available to Company where Company is at that time in material
breach of this Agreement);
(e) by Parent if a Trigger Event (as defined in Section 7.3(e)) or
Takeover Proposal shall have occurred and the Board of Directors of
Company, in connection therewith, does not within five (5) business days of
such occurrence (i) reconfirm its approval and recommendation of this
Agreement and the transactions contemplated hereby and (ii) reject such
Takeover Proposal or Trigger Event; or
(f) by either Parent or Company if (i) any permanent injunction or other
order of a court or other competent authority preventing the consummation
of the Merger shall have become final and nonappealable, (ii) if any
required approval of the stockholders of Company shall not have been
obtained by reason of the failure to obtain the required vote upon a vote
held at a duly held meeting of stockholders of Company or at any
adjournment thereof or (iii) if the Parent Stockholder Approval shall not
have been obtained at the June 25 Meeting and the Parent Stockholder
Approval is not obtained at a meeting of Parent's stockholders, or any
postponement or adjournment thereof, to be held on or about the day of the
Company Stockholders Meeting (the "Parent Stockholders Meeting").
7.2 Effect of Termination. In the event of termination of this Agreement as
provided in Section 7.1, this Agreement shall forthwith become void and there
shall be no liability or obligation on the part of Parent, Merger Sub or
Company or their respective officers, directors, stockholders or affiliates,
except to the extent that such termination results from the breach by a party
hereto of any of its representations, warranties or covenants set forth in this
Agreement; provided that (a) the provisions of Section 5.4 (Confidentiality),
Section 7.3 (Expenses and Termination Fees), Section 8.8 (Governing Law) and
this Section 7.2 shall remain in full force and effect and survive any
termination of this Agreement and (b) nothing herein shall relieve any party
from liability for fraud or willful breach in connection with this Agreement or
the transactions contemplated hereby.
7.3 Expenses and Termination Fees.
(a) Subject to subsections (b), (c), (d), (e) and (f) of this Section 7.3,
whether or not the Merger is consummated, all costs and expenses incurred in
connection with this Agreement and the transactions contemplated hereby
(including, without limitation, the fees and expenses of its advisers, brokers,
finders, agents, accountants and legal counsel) shall be paid by the party
incurring such expense, it being understood and agreed that expenses incurred
in connection with printing the Proxy Materials and the Registration Statement,
and registration and filing fees incurred in connection with the Registration
Statement, the Proxy Materials and the listing of additional shares pursuant to
Section 6.1(d) and filing fees associated with compliance with applicable OTS
requirements in connection with the Merger shall be deemed to be incurred
equally by Company and Parent.
(b) In the event that (i) Parent shall terminate this Agreement pursuant to
Section 7.1(e), (ii) Parent shall terminate this Agreement pursuant to Section
7.1(c)(ii), (iii) or (iv), (iii) either Parent or Company shall terminate this
Agreement pursuant to Section 7.1(f)(ii) following a failure of the
stockholders of Company to approve this Agreement and, prior to the time of the
Company Stockholders Meeting, there shall have been a Trigger Event or a
Takeover Proposal with respect to Company, then in the case of each of (i)
through (iii) Company shall reimburse Parent for all of the out-of-pocket costs
and expenses incurred by Parent in connection with this Agreement and the
transactions contemplated hereby (including, without limitation, the reasonable
fees and expenses of its advisors, accountants and legal counsel), and, in
addition to any other remedies Parent may have, Company shall promptly pay to
Parent cash in an amount equal to fifty-four million dollars ($54,000,000) (the
"Termination Fee").
(c) In the event that (i) Parent or Company shall terminate this Agreement
pursuant to Section 7.1(b) and, prior to the time of such termination, there
shall have been a Trigger Event or a Takeover Proposal with respect to Company
or (ii) Parent shall terminate this Agreement pursuant to Section 7.1(c)(i),
Company shall promptly reimburse Parent for all of the reasonable out-of-pocket
costs and expenses incurred by Parent in connection
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with this Agreement and the transactions contemplated hereby (including,
without limitation, the fees and expenses of its advisors, accountants and
legal counsel), and, in the event a definite agreement or letter of intent is
entered by Company with respect to a Takeover Proposal, a Takeover Proposal is
consummated or a Trigger Event results in a Person or group of Persons within
the meaning of Section 13(d) of the Exchange Act and the regulations thereunder
beneficially owning forty percent (40%), or results in a Person together with
any other Persons acting in concert within the meaning of Part 574 of the OTS
rules and regulations beneficially owning forty percent (40%), or more of the
voting power of Company within nine (9) months of the later of (x) such
termination of this Agreement and (y) the payment of the above-described
expenses, Company shall also promptly pay to Parent the Termination Fee.
(d) In the event that Parent or Company shall terminate this Agreement
pursuant to Section 7.1(f)(iii), then Parent shall promptly reimburse Company
for all of the reasonable out-of-pocket costs and expenses incurred by Company
in connection with this Agreement and the transactions contemplated hereby
(including, without limitation, the fees and expenses of its advisors,
accountants and legal counsel).
(e) As used herein, a "Trigger Event" shall occur if any Person (as that
term is defined in Section 13(d) of the Exchange Act and the regulations
promulgated thereunder) acquires securities representing twenty percent (20%)
or more, or commences a tender or exchange offer, open market purchase program
or other publicly announced initiative following the successful consummation of
which the offeror and its affiliate would beneficially own securities
representing twenty percent (20%) or more, of the voting power of Company.
(f) For purposes of this Agreement, "Takeover Proposal" means any offer or
proposal for, or any indication of interest in, a merger or other business
combination involving Company or any of its Subsidiaries or the acquisition of
twenty percent (20%) or more of the outstanding shares of capital stock, or a
significant portion of the assets of, Company or any of its Subsidiaries, other
than the transactions contemplated by this Agreement.
7.4 Amendment. The boards of directors of the parties hereto may cause this
Agreement to be amended at any time by execution of an instrument in writing
signed on behalf of each of the parties hereto; provided that an amendment made
subsequent to adoption of the Agreement by the stockholders of Company or
Merger Sub shall not (i) alter or change the amount or kind of consideration to
be received on conversion of the Company Common Stock, or (ii) alter or change
any of the terms and conditions of the Agreement if such alteration or change
would materially adversely affect the holders of Company Common Stock or Merger
Sub Common Stock.
7.5 Extension; Waiver. At any time prior to the Effective Time any party
hereto may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other parties
hereto, (ii) waive any inaccuracies in the representations and warranties made
to such party contained herein or in any document delivered pursuant hereto and
(iii) waive compliance with any of the agreements or conditions for the benefit
of such party contained herein. Any agreement on the part of a party hereto to
any such extension or waiver shall be valid only if set forth in an instrument
in writing signed on behalf of such party.
ARTICLE VIII
GENERAL PROVISIONS
8.1 Non-Survival at Effective Time. The representations, warranties and
agreements set forth in this Agreement shall terminate at the Effective Time,
except that the agreements set forth in Article I, Section 5.4
(Confidentiality), 5.14 (Form S-8), 5.16 (Director and Officer
Indemnification), 5.7 (Reasonable Best Efforts and Further Assurances), 7.3
(Expenses and Termination Fees) and this Article VIII shall survive the
Effective Time.
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8.2 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally or by commercial
delivery service, or mailed by registered or certified mail (return receipt
requested) or sent via facsimile (with confirmation of receipt) to the parties
at the following address (or at such other address for a party as shall be
specified by like notice):
(a) if to Parent or Merger Sub, to:
E*TRADE Group, Inc.
Four Embarcadero Place
2400 Geng Road
Palo Alto, CA 94303
Attention: Thomas A. Bevilacqua, Esq.
Facsimile No.: (650) 842-8781
Telephone No.: (650) 842-2475
with a copy to:
Brobeck, Phleger & Harrison LLP
Two Embarcadero Place
2200 Geng Road
Palo Alto, CA 94303
Attention: Curtis L. Mo, Esq.
Facsimile No.: (650) 496-2885
Telephone No.: (650) 424-0160
and
Brobeck, Phleger & Harrison LLP
Spear Street Tower
One Market San Francisco, CA 94105
Attention: J. Michael Shepherd, Esq.
Steve L. Camahort, Esq.
Facsimile No.: (415) 442-1010
Telephone No.: (415) 442-0900
(b) if to Company, to:
Telebanc Financial Corporation
1111 North Highland Street
Arlington, VA 22201-2807
Attention: President
Facsimile No.: (703) 524-0556
Telephone No.: (703) 247-3700
with a copy to:
Hogan & Hartson L.L.P.
Columbia Square
555 Thirteenth Street, N.W.
Washington, D.C. 20004
Attention: Stuart G. Stein, Esq.
Steven Museles, Esq.
Facsimile No.: (202) 637-5910
Telephone No.: (202) 637-5600
8.3 Interpretation. When a reference is made in this Agreement to Exhibits
or Schedules, such reference shall be to an Exhibit or Schedule to this
Agreement unless otherwise indicated. The words
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"include," "includes" and "including" when used herein shall be deemed in each
case to be followed by the words "without limitation." The phrase "made
available" in this Agreement shall mean that the information referred to has
been made available if requested by the party to whom such information is to be
made available. The phrases "the date of this Agreement", "the date hereof",
and terms of similar import, unless the context otherwise requires, shall be
deemed to refer to the date set forth in the first paragraph of this Agreement.
The table of contents and headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
8.4 Counterparts. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each
of the parties and delivered to the other parties, it being understood that all
parties need not sign the same counterpart.
8.5 Entire Agreement; Nonassignability; Parties in Interest. This Agreement
and the documents and instruments and other agreements specifically referred to
herein or delivered pursuant hereto, including the Exhibits, the Schedules,
including the Company Disclosure Schedule and the Parent Disclosure Schedule,
(a) constitute the entire agreement among the parties with respect to the
subject matter hereof and supersede all prior agreements and understandings,
both written and oral, among the parties with respect to the subject matter
hereof, except for the Confidentiality Agreement, which shall continue in full
force and effect, and shall survive any termination of this Agreement or the
Closing, in accordance with its terms; (b) are not intended to confer upon any
other person any rights or remedies hereunder, except as set forth in Sections
1.6(a)-(c)-(d)-(f)-(g) (Effect on Capital Stock), 1.7 (Surrender of
Certificates) and 5.16 (Director and Officer Indemnification); and (c) shall
not be assigned by operation of law or otherwise except as otherwise
specifically provided.
8.6 Severability. In the event that any provision of this Agreement, or the
application thereof, becomes or is declared by a court of competent
jurisdiction to be illegal, void, invalid or unenforceable, the remainder of
this Agreement will continue in full force and effect and the application of
such provision to other persons or circumstances will be interpreted so as
reasonably to effect the intent of the parties hereto. The parties further
agree to replace such illegal, void, invalid or unenforceable provision of this
Agreement with a legal, valid and enforceable provision that will achieve, to
the extent possible, the economic, business and other purposes of such illegal,
void, invalid or unenforceable provision.
8.7 Remedies Cumulative. Except as otherwise provided herein, any and all
remedies herein expressly conferred upon a party will be deemed cumulative with
and not exclusive of any other remedy conferred hereby, or by law or equity
upon such party, and the exercise by a party of any one remedy will not
preclude the exercise of any other remedy.
8.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware without reference to such
state's principles of conflicts of law. Each of the parties hereto irrevocably
consents to the exclusive jurisdiction of any court located within the State of
Delaware in connection with any matter based upon or arising out of this
Agreement or the matters contemplated herein, agrees that process may be served
upon them in any manner authorized by the laws of the State of Delaware for
such persons and waives and covenants not to assert or plead any objection
which they might otherwise have to such jurisdiction and such process.
8.9 Rules of Construction. The parties hereto agree that they have been
represented by counsel during the negotiation, preparation and execution of
this Agreement and, therefore, waive the application of any law, regulation,
holding or rule of construction providing that ambiguities in an agreement or
other document will be construed against the party drafting such agreement or
document.
8.10 Definitions; Etc.
(a) For purposes of this Agreement, (i) "Material Adverse Effect" means,
with respect to any person or entity, any event, change, condition or effect
that is, or could be reasonably expected to be, materially adverse
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to the condition (financial or otherwise), properties, assets (including,
without limitation, intangible assets), liabilities, business, operations or
results of operations of such person or entity and its Subsidiaries, taken as a
whole; provided, however, that in no event shall a decrease in such person's or
entity's stock price in and of itself be considered a "Material Adverse
Effect", (ii) "Subsidiary" means, with respect to any party, any corporation,
partnership or other organization or entity, whether incorporated or
unincorporated, in which such party has, directly or indirectly, a fifty
percent (50%) or greater interest, and (iii) any reference to a party's
"knowledge" means the actual knowledge of such party's executive officers and
directors.
(b) The parties acknowledge that, insofar as Company's Board of Directors
has declared and approved a 2-for-1 split of Company Common Stock payable to
its stockholders of record as of the close of business on May 28, 1999 (the
"Stock Split"), the Exchange Ratio and all share numbers herein representing
numbers of shares of Company Common Stock do not give effect to the Stock Split
and shall be deemed to be proportionally adjusted for the Stock Split upon the
effectiveness thereof. Notwithstanding anything herein to the contrary,
consummation of the Stock Split shall not be deemed a breach of this Agreement.
IN WITNESS WHEREOF, Company, Parent and Merger Sub have caused this
Agreement to be executed and delivered by their respective officers thereunto
duly authorized, all as of the date first written above.
TELEBANC FINANCIAL CORPORATION
/s/ Mitchell H. Caplan
By: _________________________________
Name: Mitchell H. Caplan
Title: President and Chief Executive
Officer
E*TRADE GROUP, INC.
/s/ Christos M. Cotsakos
By: _________________________________
Name: Christos M. Cotsakos
Title: Chief Executive Officer
TURBO ACQUISITION CORP.
/s/ Christos M. Cotsakos
By: _________________________________
Name: Christos M. Cotsakos
Title: President
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APPENDIX B
STOCK OPTION AGREEMENT
STOCK OPTION AGREEMENT (the "Agreement"), dated as of May 31, 1999, by and
between, E*TRADE Group, Inc., a Delaware corporation ("Parent"), and Telebanc
Financial Corporation, a Delaware corporation ("Company"). Capitalized terms
used herein but not defined herein shall have the meanings set forth in the
Reorganization Agreement referred to below.
WHEREAS, concurrently with the execution and delivery of this Agreement,
Company, Parent and Turbo Acquisition Corp., a Delaware corporation and wholly-
owned subsidiary of Parent ("Merger Sub"), are entering into an Agreement and
Plan of Merger and Reorganization, dated as of the date hereof (the
"Reorganization Agreement"), pursuant to which, among other things, upon the
terms and subject to the conditions thereof, Merger Sub will be merged with and
into Company (the "Merger"), with Company continuing as the surviving
corporation; and
WHEREAS, as a condition and inducement to Parent's willingness to enter into
the Reorganization Agreement, Parent has required that Company agree, and
Company has agreed, to grant to Parent an option to purchase certain newly
issued shares of Company's Common Stock, par value $.01 per share ("Company
Common Stock"), upon the terms and subject to the conditions set forth herein;
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements set forth herein and in the Reorganization Agreement,
the parties hereto agree as follows:
1. Grant of Option. Company hereby grants to Parent an irrevocable option
(the "Company Option") to purchase up to 3,369,881 shares (the "Company
Shares") of Company Common Stock in the manner set forth below at a price (the
"Exercise Price") of $93.45 per Company Share, payable in cash.
2. Exercise of Option. (a) The Company Option may be exercised by Parent, in
whole or in part at any time or from time to time after (i) the occurrence of
any of the events described in Section 7.3(b) of the Reorganization Agreement
or (ii) immediately prior to the occurrence of any of the events which obligate
Company to pay Parent the Termination Fee pursuant to section 7.3(c) of the
Reorganization Agreement. In the event Parent wishes to exercise the Company
Option, Parent shall deliver to Company a written notice (an "Exercise Notice")
specifying the total number of Company Shares it wishes to purchase; provided
that, if prior notification to or approval of the Office of Thrift Supervision
(the "OTS") or any other regulatory or antitrust agency is required in
connection with such purchase, Parent shall promptly file the required notice
or application for approval, shall promptly notify Company of such filing, and
shall expeditiously process the same and the period of time that otherwise
would run pursuant to this sentence shall run instead from the date on which
any required notification periods have expired or been terminated or such
approvals have been obtained and any requisite waiting period or periods shall
have passed. Each closing of a purchase of Company Shares (an "Option Closing")
shall occur at a place, on a date and at a time designated by Parent in an
Exercise Notice delivered at least two business days prior to the date of the
Option Closing. The Company Option shall terminate upon the earlier of: (w) the
Effective Time; (x) the termination of the Reorganization Agreement pursuant to
Section 7.1 thereof (other than a termination in connection with which Parent
is entitled to any payments as specified in Sections 7.3(b) or (c) thereof);
(y) 180 days following any termination of the Reorganization Agreement in
connection with which Parent is entitled to a payment as specified in Section
7.3(b) thereof (or if, at the expiration of such 180 day period, the Company
Option cannot be exercised by reason of any applicable judgment, decree, order,
law or regulation, twenty (20) business days after such impediment to exercise
shall have been removed or shall have become final and not subject to appeal);
or (z) 180 days following the occurrence of any event in connection with which
Parent has become entitled to payment of the Termination Fee pursuant to
Section 7.3(c) of the Reorganization Agreement (or if, at the expiration of
such 180 day period, the Company Option cannot be exercised by reason of any
applicable judgment, decree, order, law or regulation, twenty (20) business
days after such impediment to exercise shall have been removed or shall have
become final and not subject to appeal).
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(b) Notwithstanding any other provision of this Agreement or the
Reorganization Agreement, in no event shall Parent's Total Profit (as
hereinafter defined) exceed in the aggregate $90,000,000 and, if it otherwise
would exceed such amount Parent, in its sole discretion, shall either (i)
reduce the number of Company Shares subject to the Company Option, (ii) pay
cash to Company, (iii) receive a smaller Termination Fee (as defined in Section
7.3(b) of the Reorganization Agreement) or (iv) any combination thereof, so
that Parent's actually realized Total Profit shall not exceed in the aggregate
$90,000,000 after taking into account the foregoing actions.
(c) As used herein, the term "Total Profit" shall mean the sum of (i) (x)
the amount (before taxes but net of reasonable and customary commissions paid
or payable in connection with such transaction) received by parent pursuant to
the sale of Company Shares less (y) Parent's purchase price for such Company
Shares, (ii) any amounts (before taxes but net of reasonable and customary
commissions paid or payable in connection with such transaction) received by
parent on the transfer of the Company Option (or any portion thereof) to any
unaffiliated Person(s) (if permitted hereunder) or to Company and (iii) the
amount received by Parent pursuant to Section 7.3(b) or Section 7.3(c) of the
Reorganization Agreement.
3. Conditions to Closing. The obligation of Company to issue the Company
Shares to Parent hereunder is subject to the conditions that (i) all consents,
approvals, orders or authorizations of, or registrations, declarations or
filings with, any Governmental Entity or Regulatory Entity if any, required in
connection with the issuance of the Company Shares hereunder shall have been
obtained or made, as the case may be; and (ii) no preliminary or permanent
injunction or other order by any court of competent jurisdiction prohibiting or
otherwise restraining such issuance shall be in effect.
4. Closing. At each Option Closing, (a) Company will deliver to Parent a
certificate or certificates in definitive form representing the number of
Company Shares designated by Parent in its Exercise Notice, such certificate or
certificates to be registered in the name of Parent or its designee and to bear
the legend set forth in Section 10, and (b) Parent will deliver to Company the
aggregate Exercise Price for the Company Shares so designated by wire transfer
of immediately available funds or certified check or bank check. At any Option
Closing at which Parent is exercising the Company Option in part, Parent shall
present and surrender this Agreement to Company, and Company shall deliver to
Parent an executed new agreement with the same terms as this Agreement
evidencing the right to purchase the remaining balance of the shares of Company
Common Stock purchasable hereunder.
5. Representations and Warranties of Company. Company represents and
warrants to Parent that (a) Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware and has
the corporate power and authority to enter into this Agreement and to carry out
its obligations hereunder, (b) the execution and delivery of this Agreement by
Company and the consummation by Company of the transactions contemplated hereby
have been duly authorized by all necessary corporate action on the part of
Company and no other corporate proceedings on the part of Company are necessary
to authorize this Agreement or any of the transactions contemplated hereby, (c)
this Agreement has been duly executed and delivered by Company and constitutes
a valid and binding obligation of Company, enforceable against Company in
accordance with its terms, except as such enforceability may be limited by
bankruptcy and other laws affecting the rights and remedies of creditors
generally and general principles of equity, (d) Company has taken all action
necessary to authorize and reserve for issuance and to permit it to issue, upon
exercise of the Company Option, and at all times from the date hereof through
the expiration of the Company Option will have reserved, that number of
unissued Company Shares that are subject to the Company Option, all of which,
upon their issuance and delivery in accordance with the terms of this
Agreement, will be validly issued, fully paid and nonassessable, (e) upon
delivery of the Company Shares to Parent upon the exercise of the Company
Option, Parent will acquire the Company Shares free and clear of all liens,
claims, charges, encumbrances and security interests of any nature whatsoever
except those imposed by Parent, (f) assuming that the consents approvals,
authorizations, permits, filings and notifications referred to in subsection
(g) are obtained or made, as applicable, the execution and delivery of this
Agreement by Company does not, and the performance of this
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Agreement by Company will not, conflict with, or result in any violation of, or
default (with or without notice or lapse of time, or both) under, or give rise
to a right of termination, cancellation or acceleration of any obligation or
the loss of a benefit under, or the creation of a lien, pledge, security
interest or other encumbrance on assets pursuant to (any such conflict,
violation, default, right of termination, cancellation or acceleration, loss or
creation, a "Violation"), (A) any provision of the Amended and Restated
Certificate of Incorporation or By-laws, each as amended, of Company or (B) any
provisions of any material mortgage, indenture, lease, contract or other
agreement, instrument, permit, concession, franchise, or license or (C) any
judgment, order, decree, statute, law, ordinance, rule or regulation applicable
to Company or its properties or assets, except in the case of clauses (B) and
(C) immediately above, for violations which would not, individually or in the
aggregate, have a Material Adverse Effect on Company and (g) except as
described in Section 2.3 of the Reorganization Agreement, the execution and
delivery of this Agreement by Company does not, and the performance of this
Agreement by Company will not, require any consent, approval, authorization or
permit of, or filing with or notification to, any Governmental Entity or
Regulatory Entity.
6. Representations and Warranties of Parent. Parent represents and warrants
to Company that (a) Parent is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware and has the
corporate power and authority to enter into this Agreement and to carry out its
obligations hereunder, (b) the execution and delivery of this Agreement by
Parent and the consummation by Parent of the transactions contemplated hereby
have been duly authorized by all necessary corporate action on the part of
Parent and no other corporate proceedings on the part of Parent are necessary
to authorize this Agreement or any of the transactions contemplated hereby, (c)
this Agreement has been duly executed and delivered by Parent and constitutes a
valid and binding obligation of Parent, enforceable against Parent in
accordance with its terms, except as such enforceability may be limited by
bankruptcy and other laws affecting the rights and remedies of creditors
generally and general principles of equity, (d) assuming that the consents,
approvals, authorizations, permits, filings and notifications referred to in
subsection (e) are obtained or made, as applicable, the execution and delivery
of this Agreement by Parent does not, and the performance of this Agreement by
Parent will not, result in any Violation pursuant to, (A) any provision of the
Certificate of Incorporation or By-laws, each as amended, of Parent, (B) any
provisions of any material mortgage, indenture, lease, contract or other
agreement, instrument, permit, concession, franchise, or license or (C) any
judgment, order, decree, statute, law, ordinance, rule or regulation applicable
to Parent or its properties or assets, except in the case of each of clauses
(B) and (C) immediately, above, for Violations which would not, individually or
in the aggregate, have a Material Adverse Effect on Parent, (e) except as
described in Section 3.3 of the Reorganization Agreement and Section 3(a) of
this Agreement, and except as may be required under the Exchange Act, the
execution and delivery of this Agreement by Parent does not, and the
performance of this Agreement by Parent will not, require any consent,
approval, authorization or permit of, or filing with or notification to, any
Governmental Entity or Regulatory Entity and (f) any Company Shares acquired
upon exercise of the Company Option will not be, and the Company Option is not
being, acquired by Parent with a view to the public distribution thereof and
Parent will not sell or otherwise dispose of such shares in violation of
applicable law or this Agreement.
7. Registration Rights.
(a) Following any exercise of the Company Option, Parent may by written
notice (the "Registration Notice") to Company request Company to register under
the Securities Act all or any part of the shares of Company Common Stock
acquired pursuant to this Agreement, including any voting securities issued by
way of dividend, distribution or otherwise in respect thereof (the "Restricted
Shares"), beneficially owned by Parent (the "Registrable Securities") in order
to permit the sale or other distribution of such Registrable Securities,
including pursuant to a firm commitment underwritten public offering; provided,
however, that any such Registration Notice must relate to a number of shares
equal to at least 2% of the outstanding shares of Company Common Stock and that
any rights to require registration hereunder shall terminate with respect to
any Shares that may be sold in any 90-day period pursuant to Rule 144 under the
Securities Act. The Registration Notice shall include a certificate executed by
Parent and its proposed managing underwriter, which underwriter shall be an
investment banking firm of nationally recognized standing and reasonably
acceptable to
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the Company (the "Manager"), stating that Manager in good faith believes that,
based on the then prevailing market conditions, it will be able to sell the
Registrable Securities at a per share price equal to at least 90% of the Fair
Market Value of such shares. For purposes of this Section 8, the term "Fair
Market Value" shall mean the per share average of the closing sale prices of
Company's Common Stock on the Nasdaq National Market for the twenty (20)
trading days immediately preceding the date of the Registration Notice.
(b) Company shall use commercially reasonable efforts to effect, as promptly
as practicable, the registration under the Securities Act of the unpurchased
Registrable Securities; provided, however, that (i) Parent shall not be
entitled to more than two effective registration statements hereunder and (ii)
Company will not be required to file any such registration statement during any
period of time (not to exceed 40 days after such request in the case of clause
(A) below or 90 days in the case of clauses (B) and (C) below) when (A) Company
is in possession of material non-public information which it reasonably
believes would be detrimental to be disclosed at such time and, based on
consultation with counsel to Company, such information would have to be
disclosed if a registration statement were filed at that time; (B) Company is
required under the Securities Act to include audited financial statements for
any period in such registration statement and such financial statements are not
yet available for inclusion in such registration statement; or (C) Company
determines, in its reasonable good faith, judgment, that such registration
would interfere with any financing, acquisition or other material transaction
involving Company or any of its affiliates. If consummation of the sale of any
Registrable Securities pursuant to a registration hereunder does not occur
within 180 days after the filing with the SEC of the initial registration
statement, then such registration shall not be taken into account as an
effective registration for purposes of clause (i) above. Company shall use
commercially reasonable efforts to cause any Registrable Securities registered
pursuant to this Section 8 to be qualified for sale under the securities or
Blue Sky laws of such jurisdictions as Parent may reasonably request and shall
continue such registration or qualification in effect in such jurisdiction;
provided, however, that Company shall not be required to qualify to do business
in, or consent to general service of process in, any jurisdiction by reason of
this provision.
(c) The registration rights set forth in this Section 8 are subject to the
condition that Parent shall provide Company with such information with respect
to Parent's Registrable Securities, the plans for the distribution thereof, and
such other information with respect to Parent as, in the reasonable judgment of
counsel for Company, is necessary to enable Company to include in such
registration statement all material facts required to be disclosed with respect
to a registration thereunder.
(d) If Company securities of the same type as the Registrable Securities are
then authorized for quotation or trading or listing on the New York Stock
Exchange, the Nasdaq National Market, or any other securities exchange or
automated quotations system, Company, upon the request of Parent, shall
promptly file an application, if required, to authorize for quotation, trading
or listing the shares of Registrable Securities on such exchange or system and
will use its reasonable best efforts to obtain approval, if required, of such
quotation, trading or listing as soon as practicable.
(e) A registration effected under this Section 7 shall be effected at
Company's expense, except for underwriting discounts and commissions and fees
and expenses of counsel to Parent, and Company shall provide to the
underwriters such documentation (including certificates, opinions of counsel
and "comfort" letters from auditors) as are customary in connection with
underwritten public offerings as such underwriters may reasonably require. In
connection with any such registration, the parties agree (i) to indemnify each
other and the underwriters in the customary manner and (ii) to enter into an
underwriting agreement in form and substance customary for transactions of the
type contemplated hereby with the Manager and the other underwriters
participating in such offering.
8. Adjustment Upon Changes in Capitalization.
(a) In the event of any change in Company Common Stock by reason of stock
dividends, splits, mergers (other than the Merger), recapitalizations,
combinations, exchange of shares or the like, the type and number of shares or
securities subject to the Company Option, and the Exercise Price per share,
shall be adjusted
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appropriately, and proper provision shall be made in the agreements governing
such transaction so that Parent shall receive, upon exercise of the Company
Option, the number and class of shares or other securities or property that
Parent would have received in respect of the Company Common Stock if the
Company Option had been exercised immediately prior to such event or the record
date therefor, as applicable.
(b) In the event that Company shall enter in an agreement: (i) to
consolidate with or merge into any person, other than Parent or any of its
Subsidiaries, and shall not be the continuing or surviving corporation of such
consolidation or merger; (ii) to permit any person, other than Parent or one of
its subsidiaries, to merge into Company and Company shall be the continuing or
surviving corporation, but, in connection with such merger, the then-
outstanding shares of Company Common Stock shall be changed into or exchanged
for stock or other securities of Company or any other person or cash or any
other property or the outstanding shares of Company Common Stock immediately
prior to such merger shall after such merger represent less than 50% of the
outstanding shares and share equivalents of the merged company; or (iii) to
sell or otherwise transfer all or substantially all of its assets to any
person, other than Parent or any of its Subsidiaries, then, and in each such
case, the agreement governing such transaction shall make proper provision so
that upon the consummation of any such transaction and upon the terms and
conditions set forth herein, Parent shall receive for each Company Share with
respect to which the Company Option has not been exercised an amount of
consideration in the form of and equal to the per share amount of consideration
that would be received by the holder of one share of Company Common Stock less
the Exercise Price (and, in the event of an election or similar arrangement
with respect to the type of consideration to be received by the holders of
Company Common Stock, subject to the foregoing, proper provision shall be made
so that the holder of the Company Option would have the same election or
similar rights as would the holder of the number of shares of Company Common
Stock for which the Company Option is then exercisable).
9. Certain Agreements of Company. Company agrees: (1) that it will not, by
charter amendment or through reorganization, consolidation, merger, dissolution
or sale of assets, or by any other voluntary act, avoid or seek to avoid the
observance or performance of any of the covenants, stipulations or conditions
to be observed or performed hereunder by Company and (2) promptly to take all
action as may from time to time be required (including (x) complying with all
applicable premerger notification, reporting and waiting period requirements
specified in 15 U.S.C. Section 18a and regulations promulgated thereunder and
(y) in the event that, under the Home Owners' Loan Act, as amended, or any
state or other federal banking law, prior approval of or notice to the OTS or
to any state or other federal regulatory authority is necessary before the
Option may be exercised, cooperating fully with Parent in preparing such
applications or notices and providing such information to the OTS or such state
or other federal regulatory authority as they may require) in order to permit
Parent to exercise the Option and Company duly and effectively to issue shares
of Company Common Stock pursuant hereto.
10. Restrictive Legends. Each certificate representing shares of Company
Common Stock issued to Parent hereunder shall, to the extent applicable,
include a legend in substantially the following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY BE REOFFERED OR SOLD
ONLY IF SO REGISTERED OR IF AN EXEMPTION FROM SUCH REGISTRATION IS
AVAILABLE. SUCH SECURITIES ARE ALSO SUBJECT TO ADDITIONAL RESTRICTIONS ON
TRANSFER AS SET FORTH IN THE STOCK OPTION AGREEMENT, DATED AS OF MAY 31,
1999, A COPY OF WHICH MAY BE OBTAINED FROM THE ISSUER.
11. Binding Effect; No Assignment. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
permitted assigns. Neither this Agreement nor the rights or the obligations of
either party hereto are assignable, except by operation of law, or with the
written consent of the other party. Nothing contained in this Agreement,
express or implied, is intended to confer upon any person other than the
parties hereto and their respective permitted assigns any rights or remedies of
any nature whatsoever by reason of this Agreement. Any Restricted Shares sold
by Parent in compliance with the
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provisions of Section 7 shall, upon consummation of such sale, be free of the
restrictions imposed with respect to such shares by this Agreement, unless and
until Parent shall repurchase or otherwise become the beneficial owner of such
shares, and any transferee of such shares shall not be entitled to the rights
of Parent. Certificates representing shares sold in a registered public
offering pursuant to Section 7 shall not be required to bear the legend set
forth in Section 10.
12. Specific Performance. The parties recognize and agree that if for any
reason any of the provisions of this Agreement are not performed in accordance
with their specific terms or are otherwise breached, immediate and irreparable
harm or injury would be caused for which money damages would not be an adequate
remedy. Accordingly, each party agrees that, in addition to other remedies, the
other party shall be entitled to an injunction restraining any violation or
threatened violation of the provisions of this Agreement. In the event that any
action should be brought in equity to enforce the provisions of this Agreement,
neither party will allege, and each party hereby waives the defense, that there
is an adequate remedy at law.
13. Entire Agreement. This Agreement and the Reorganization Agreement
(including the Company Disclosure Schedule and the Parent Disclosure Schedule
relating thereto) constitute the entire agreement among the parties with
respect to the subject matter hereof and supersede all other prior agreements
and understandings, both written and oral, among the parties or any of them
with respect to the subject matter hereof.
14. Further Assurance. Each party will execute and deliver all such further
documents and instruments and take all such further action as may be necessary
in order to consummate the transactions contemplated hereby.
15. Validity. The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of the other
provisions of this Agreement, which shall remain in full force and effect. In
the event any court or other competent authority holds any provision of this
Agreement to be null, void or unenforceable, the parties hereto shall negotiate
in good faith the execution and delivery of an amendment to this Agreement in
order, as nearly as possible, to effectuate, to the extent permitted by law,
the intent of the parties hereto with respect to such provision. Each party
agrees that, should any court or other competent authority hold any provision
of this Agreement or part hereof to be null, void or unenforceable, or order
any party to take any action inconsistent herewith, or not take any action
required herein, the other party shall not be entitled to specific performance
of such provision or part hereof or to any other remedy, including but not
limited to money damages, for breach hereof or of any other provision of this
Agreement or part hereof as the result of such holding or order.
16. Notices. Any notice or communication required or permitted hereunder
shall be in writing and either delivered personally, telegraphed or telecopied
or sent by certified or registered mail, postage prepaid, and shall be deemed
to be given, dated and received when so delivered personally, telegraphed or
telecopied or, if mailed, five business days after the date of mailing to the
following address or telecopy number, or to such other address or addresses as
such person may subsequently designate by notice given hereunder.
(a) if to Parent or Merger Sub, to:
E*TRADE Group, Inc.
Four Embarcadero Place
2400 Geng Road
Palo Alto, CA 94303
Attention: Thomas A. Bevilacqua, Esq.
Facsimile No.: (650) 842-8781
Telephone No.: (650) 842-2475
B-6
<PAGE>
with a copy to:
Brobeck, Phleger & Harrison LLP
2200 Geng Road
Two Embarcadero Place
Palo Alto, CA 94303
Attention: Curtis L. Mo, Esq.
Facsimile No.: (650) 496-2885
and
Brobeck, Phleger & Harrison LLP
Spear Street Tower
One Market
San Francisco, CA 94105
Attention: J. Michael Shepherd, Esq.
Steve L. Camahort, Esq.
Facsimile No.: (415) 442-1010
(b) if to Company, to:
Telebanc Financial Corporation
1111 North Highland Street
Arlington, VA 22201-2807
Attention: President
Facsimile No.: (703) 524-0556
with a copy to:
Hogan & Hartson LLP
Columbia Square
555 Thirteenth Street, N.W.
Washington D.C. 20204
Attention: Steven Museles, Esq.
Stuart Stein, Esq.
Facsimile No.: (202) 637-5600
17. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware applicable to agreements made
and to be performed entirely within such State without regard to any applicable
conflicts of law rules.
18. Descriptive Headings. The descriptive headings herein are inserted for
convenience of reference only and are not intended to be part of or to affect
the meaning or interpretation of this Agreement.
19. Counterparts. This Agreement may be executed in counterparts, each of
which shall be deemed to be an original, but all of which, taken together,
shall constitute one and the same instrument.
20. Expenses. Except as otherwise expressly provided herein or in the
Reorganization Agreement, all costs and expenses incurred in connection with
the transactions contemplated by this Agreement shall be paid by the party
incurring such expenses.
21. Amendments; Waiver. This Agreement may be amended by the parties hereto
and the terms and conditions hereof may be waived only by an instrument in
writing signed on behalf of each of the parties hereto, or, in the case of a
waiver, by an instrument signed on behalf of the party waiving compliance.
B-7
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective duly authorized officers as of the date first
above written.
E*TRADE Group, Inc.
/s/ Christos M. Cotsakos
By: _________________________________
Name: Christos M. Cotsakos
Title: Chief Executive Officer
Telebanc Financial Corporation
/s/ Mitchell H. Caplan
By: _________________________________
Name: Mitchell H. Caplan
Title: President and Chief Executive
Officer
SIGNATURE PAGE TO STOCK OPTION AGREEMENT
B-8
<PAGE>
APPENDIX C
FORM OF STOCKHOLDER AGREEMENT
This STOCKHOLDER AGREEMENT (this "Agreement") is made and entered into as of
May 31, 1999 between E*TRADE Group, Inc., a Delaware corporation ("Parent"),
and the undersigned stockholder ("Stockholder") of Telebanc Financial
Corporation, a Delaware corporation ("Company"). Capitalized terms used and not
otherwise defined herein shall have the respective meanings set forth in the
Reorganization Agreement described below.
RECITALS
WHEREAS, pursuant to an Agreement and Plan of Merger and Reorganization
dated as of May 31, 1999 by and among Parent, Turbo Acquisition Corp., a
Delaware corporation and a wholly owned subsidiary of Parent ("Merger Sub") and
Company (such agreement as it may be amended is hereinafter referred to as the
"Reorganization Agreement"). Parent has agreed to acquire the outstanding
securities of Company pursuant to a statutory merger of Merger Sub with and
into Company (the "Merger") in which each outstanding share of capital stock of
Company (the "Company Capital Stock") will be converted into shares of common
stock of Parent (the "Parent Shares") at the exchange rate set forth in the
Reorganization Agreement (the "Transaction");
WHEREAS, in order to induce Parent to enter into the Reorganization
Agreement and consummate the Transaction, Company has agreed to use its
reasonable best efforts to cause each stockholder of Company who is an
affiliate of Company to execute and deliver to Parent a Stockholder Agreement
upon the terms set forth herein; and
WHEREAS, Stockholder is the registered and beneficial owner of such number
of shares of the outstanding capital stock of Company as is indicated on the
signature page of this Agreement (the "Shares").
NOW, THEREFORE, the parties agree as follows:
1. Agreement to Retain Shares.
1.1 Transfer and Encumbrance.
(a) Stockholder is the beneficial owner of the Shares. The Shares
constitute Stockholder's entire interest in the outstanding capital stock
and voting securities of Company. The Shares are, and will be at all times
up until the Expiration Date, free and clear of any liens, claims, options,
charges or other encumbrances. Stockholder's principal residence or place
of business is accurately set forth on the signature page hereto.
(b) Stockholder agrees not to transfer (except as may be specifically
required by court order or by operation of law, in which case any such
transferee shall agree to be bound hereby), sell, exchange, pledge or
otherwise dispose of or encumber any Shares or any New Shares (as defined
below), or to make any offer or agreement relating thereto, at any time
prior to the Expiration Date. As used herein, the term "Expiration Date"
shall mean the earlier to occur of (i) the Effective Time or (ii)
termination of the Reorganization Agreement in accordance with the terms
thereof.
1.2 New Shares. Stockholder agrees that any shares of capital stock or
voting securities of Company that Stockholder purchases or with respect to
which Stockholder otherwise acquires beneficial ownership after the date of
this Agreement and prior to the Expiration Date ("New Shares") shall be
subject to the terms and conditions of this Agreement to the same extent as
if they constituted Shares.
2. Agreement to Vote Shares. Prior to the Expiration Date, at every meeting
of the stockholders of Company at which any of the following is considered or
voted upon, and at every adjournment thereof, and on every action or approval
by written resolution of the stockholders of Company with respect to any of the
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<PAGE>
following, Stockholder shall vote the Shares and any New Shares in favor of
approval and adoption of the Reorganization Agreement and of the Transaction.
Notwithstanding the foregoing, nothing in this Agreement shall limit or
restrict Stockholder from acting in his capacity as a director or officer of
Company, to the extent applicable, it being understood that this Agreement
shall apply to Stockholder solely in his capacity as a stockholder of Company.
3. Irrevocable Proxy. Stockholder hereby agrees to timely deliver to Parent
a duly executed proxy in the form attached hereto as Annex A (the "Proxy"),
such Proxy to cover the Shares and all New Shares in respect of which
Stockholder is entitled to vote at each meeting of the stockholders of Company
(including, without limitation, each written consent in lieu of a meeting). In
the event that Stockholder is unable to provide any such Proxy in a timely
manner, Stockholder hereby grants Parent a power of attorney to execute and
deliver such Proxy for and on behalf of Stockholder, such power of attorney,
which being coupled with an interest, shall survive any death, disability,
bankruptcy, or any other such impediment of Stockholder. Upon the execution of
this Agreement by Stockholder, Stockholder hereby revokes any and all prior
proxies or powers of attorney given by Stockholder with respect to the Shares
and agrees not to grant any subsequent proxies or powers of attorney with
respect to the Shares until after the Expiration Date.
4. Representations, Warranties and Covenants of Stockholder. Stockholder
hereby represents, warrants and covenants to Parent as follows:
(a) Stockholder has full power and legal capacity to execute and deliver
this Agreement, to perform its obligations hereunder and to consummate the
transactions contemplated hereby. This Agreement has been duly and validly
executed and delivered by Stockholder and constitutes the valid and binding
obligation of Stockholder, enforceable against Stockholder in accordance
with its terms. Except as may be limited by (i) the effect of bankruptcy,
insolvency, conservatorship, arrangement, moratorium or other laws
affecting or relating to the rights of creditors generally, or (ii) the
rules governing the availability of specific performance, injunctive relief
or other equitable remedies and general principles of equity, regardless of
whether considered in a proceeding in equity or at law, the execution and
delivery of this Agreement by Stockholder does not, and the performance of
Stockholder's obligations hereunder will not, result in any breach of or
constitute a default (or an event that with notice or lapse of time or both
would become a default) under, or give to others any right to terminate,
amend, accelerate or cancel any right or obligation under, or result in the
creation of any lien or encumbrance on any Shares or New Shares pursuant
to, any note, bond, mortgage, indenture, contract, agreement, lease,
license, permit, franchise or other instrument or obligation to which
Stockholder is a party or by which Stockholder or the Shares or New Shares
are or will be bound or affected.
(b) Except to the same extent Company is permitted to do so pursuant to
Section 4.4 of the Reorganization Agreement, until the Expiration Date,
Stockholder will not (and will use Stockholder's reasonable best efforts to
cause Company, its affiliates, officers, directors and employees and any
investment banker, attorney, accountant or other agent retained by
Stockholder, Company or any of the same, not to, except to the extent
otherwise permitted under Section 4.3 of the Reorganization Agreement): (i)
initiate or solicit, directly or indirectly, any proposal, plan or offer to
acquire all or any material part of the business or properties or capital
stock of Company, whether by merger, purchase of assets, tender offer or
otherwise, or to liquidate Company or otherwise distribute to the
stockholders of Company all or any substantial part of the business,
properties or capital stock of Company (each, an "Acquisition Proposal");
(ii) initiate, directly or indirectly, any contact with any person in an
effort to or with a view towards soliciting any Acquisition Proposal; (iii)
furnish information concerning Company's business, properties or assets to
any corporation, partnership, person or other entity or group (other than
Parent, or any associate, agent or representative of Parent) under any
circumstances that could reasonably be expected to relate to an actual or
potential Acquisition Proposal; or (iv) negotiate or enter into discussions
or an agreement, directly or indirectly, with any entity or group with
respect of any potential Acquisition Proposal. In the event Stockholder
shall receive or become aware of any Acquisition Proposal subsequent to the
date hereof, Stockholder shall promptly inform Parent as to any such matter
and the
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<PAGE>
details thereof to the extent possible without breaching any other
agreement to which such Stockholder is a party or violating its fiduciary
duties.
(c) Stockholder understands and agrees that if Stockholder attempts to
transfer, vote or provide any other person with the authority to vote any
of the Shares other than in compliance with this Agreement, Company shall
not, and Stockholder hereby unconditionally and irrevocably instructs
Company to not, permit any such transfer on its books and records, issue a
new certificate representing any of the Shares or record such vote unless
and until Stockholder shall have complied with the terms of this Agreement.
Stockholder further understands and agrees that Parent may elect to not
permit the transfer of shares of Parent Common Stock or the issuance of a
new certificate representing such shares unless and until such a transfer
can be made without adversely affecting the ability of Parent or the
Surviving Corporation to account for the business combination to be
effected by the Merger as a pooling of interests.
5. Additional Documents. Stockholder hereby covenants and agrees to execute
and deliver any additional documents necessary or desirable, in the reasonable
opinion of Parent, to carry out the purpose and intent of this Agreement.
6. Consent and Waiver. Stockholder hereby gives any consents or waivers that
are reasonably required for the consummation of the Transaction under the terms
of any agreement to which Stockholder is a party or pursuant to any rights
Stockholder may have.
7. Termination. This Agreement and the Proxy delivered in connection
herewith shall terminate and shall have no further force or effect as of the
Expiration Date.
8. Confidentiality. Stockholder agrees (i) to hold any information regarding
this Agreement and the Transaction in strict confidence, and (ii) not to
divulge any such information to any third person, except to the extent any of
the same is hereafter publicly disclosed by Parent.
9. Miscellaneous.
9.1 Severability. If any term, provision, covenant or restriction of
this Agreement is held by a court of competent jurisdiction to be invalid,
void or unenforceable, then the remainder of the terms, provisions,
covenants and restrictions of this Agreement shall remain in full force and
effect and shall in no way be affected, impaired or invalidated.
9.2 Binding Effect and Assignment. This Agreement and all of the
provisions hereof shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and permitted assigns, but,
except as otherwise specifically provided herein, neither this Agreement
nor any of the rights, interests or obligations of the parties hereto may
be assigned by either of the parties without the prior written consent of
the other. This Agreement is intended to bind Stockholder solely as a
securityholder of Company only with respect to the specific matters set
forth herein.
9.3 Amendment and Modification. This Agreement may not be modified,
amended, altered or supplemented except by the execution and delivery of a
written agreement executed by the parties hereto.
9.4 Specific Performance; Injunctive Relief. The parties hereto
acknowledge that Parent will be irreparably harmed and that there will be
no adequate remedy at law for a violation of any of the covenants or
agreements of Stockholder set forth herein. Therefore, it is agreed that,
in addition to any other remedies that may be available to Parent upon any
such violation, Parent shall have the right to enforce such covenants and
agreements by specific performance, injunctive relief or by any other means
available to Parent at law or in equity and Stockholder hereby waives any
and all defenses which could exist in its favor in connection with such
enforcement and waives any requirement for the security or posting of any
bond in connection with such enforcement.
9.5 Notices. All notices, requests, demands or other communications that
are required or may be given pursuant to the terms of this Agreement shall
be in writing and shall be deemed to have been duly
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<PAGE>
given if delivered by hand or mailed by registered or certified mail,
postage prepaid, or sent by facsimile transmission, as follows:
(a) If to Stockholder, at the address set forth below Stockholder's
signature at the end hereof.
(b) if to Parent, to:
E*TRADE Group, Inc.
Four Embarcadero Place
2400 Geng Road
Palo Alto, CA 94303
Attention: Thomas A. Bevilacqua, Esq.
Facsimile No: (650) 842-8781
Telephone No: (650) 842-2500
with a copy to:
Brobeck, Phleger & Harrison LLP
2200 Geng Road
Two Embarcadero Place
Palo Alto, CA 94303
Attention: Curtis L. Mo, Esq.
Facsimile No.: (650) 496-2885
Telephone No.: (650) 424-0160
and
Brobeck, Phleger & Harrison LLP
Spear Street Tower
One Market
San Francisco, CA 94105
Attention: J. Michael Shepherd, Esq.
Steve L. Camahort, Esq.
Facsimile No.: (415) 442-1010
Telephone No.: (415) 442-0900
or to such other address as any party hereto or any Indemnified Person may
designate for itself by notice given as herein provided.
9.6 Governing Law. This Agreement shall be governed by, construed and
enforced in accordance with the internal laws of the State of Delaware
without giving effect to the principles of conflicts of law thereof.
9.7 Entire Agreement. This Agreement and the Proxy contain the entire
understanding of the parties in respect of the subject matter hereof, and
supersede all prior negotiations and understandings between the parties
with respect to such subject matter.
9.8 Counterpart. This Agreement may be executed in several counterparts,
each of which shall be an original, but all of which together shall
constitute one and the same agreement.
9.9 Effect of Headings. The section headings herein are for convenience
only and shall not affect the construction or interpretation of this
Agreement.
(Signature Page Follows)
C-4
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Company Agreement to be
executed as of the date first above written.
E*TRADE GROUP, INC. STOCKHOLDER
By: _________________________________ _____________________________________
(Signature)
Name: _______________________________
_____________________________________
Title: ______________________________ (Signature of Spouse)
_____________________________________
(Print Name of Stockholder)
_____________________________________
(Print Street Address)
_____________________________________
(Print City, State and Zip)
_____________________________________
(Print Telephone Number)
_____________________________________
(Social Security or Tax I.D. Number)
Total Number of Shares of Company Common Stock owned on the date hereof:
Common Stock: _______________________
State of Residence: _________________
SIGNATURE PAGE TO STOCKHOLDER AGREEMENT
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<PAGE>
APPENDIX D
PERSONAL AND CONFIDENTIAL
November 19, 1999
Board of Directors
Telebanc Financial Corporation
1111 North Highland Street
Arlington, Virginia 22201-2807
Ladies and Gentlemen:
You have requested our opinion as to the fairness from a financial point of
view to the holders of the outstanding shares of Common Stock, par value $0.01
per share (the "Shares"), of Telebanc Financial Corporation (the "Company") of
the exchange ratio of 1.05 shares of Common Stock, par value $0.01 per share
(the "E*TRADE Common Stock"), of E*TRADE Group, Inc. ("E*TRADE") to be received
for each Share (the "Exchange Ratio") pursuant to the Agreement and Plan of
Merger and Reorganization, dated as of May 31, 1999, by and among E*TRADE,
Turbo Acquisition Corp., a wholly owned subsidiary of E*TRADE, and the Company
(the "Agreement").
Goldman, Sachs & Co., as part of its investment banking business, is
continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, competitive
biddings, secondary distributions of listed and unlisted securities, private
placements and valuations for estate, corporate and other purposes. We are
familiar with the Company having provided certain investment banking services
to the Company from time to time, including having acted as lead managing
underwriter of a public offering of 4,370,000 Shares in April 1999, and having
acted as its financial advisor in connection with, and having participated in
certain of the negotiations leading to, the Agreement. We also have provided
certain investment banking services to E*TRADE from time to time and may
provide investment banking services to E*TRADE in the future. Goldman, Sachs &
Co. provides a full range of financial advisory and securities services and, in
the course of its normal trading activities may from time to time effect
transactions and hold securities, including derivative securities, of the
Company or E*TRADE for its own account and for the account of customers.
In connection with this opinion, we have reviewed, among other things, the
Agreement; the Registration Statement on Form S-4, including the Proxy
Statement-Prospectus relating to the special meeting of stockholders of the
Company to be held in connection with the Agreement; Annual Reports to
Stockholders and Annual Reports on Form 10-K of the Company for the four years
ended December 31, 1998 and of E*TRADE for the three fiscal years ended
September 30, 1998; certain interim reports to stockholders and Quarterly
Reports on Form 10-Q of the Company and E*TRADE; certain other communications
from the Company and E*TRADE to their respective stockholders; and certain
internal financial analyses and forecasts for the Company and E*TRADE prepared
by their respective managements. We also have held discussions with members of
the senior management of the Company and E*TRADE regarding the strategic
rationale for, and the potential benefits of, the transaction contemplated by
the Agreement and the past and current business operations, financial condition
and future prospects of their respective companies. In addition, we have
reviewed the reported price and trading activity for the Shares and the E*TRADE
Common Stock, compared certain financial and stock market information for the
Company and E*TRADE with similar information for certain other companies the
securities of which are publicly traded, E*TRADE reviewed the financial terms
of certain recent business combinations involving internet companies
specifically and in other industries generally and performed such other studies
and analyses as we considered appropriate.
D-1
<PAGE>
We have relied upon the accuracy and completeness of all of the financial
and other information reviewed by us and have assumed such accuracy and
completeness for purposes of rendering this opinion. In that regard, we have
assumed, with your consent, that the internal financial forecasts prepared by
the management of E*TRADE have been reasonably prepared on a basis reflecting
the best currently available estimates and judgements of E*TRADE and that such
forecasts will be realized in the amounts and time periods contemplated
thereby. In addition, we have not made an independent evaluation or appraisal
of the assets and liabilities of the Company or E*TRADE or any of their
subsidiaries, and we have not been furnished with any such evaluation or
appraisal. We have assumed, with your consent, that the transaction
contemplated by the Agreement will be accounted for as a pooling-of-interests
under generally accepted accounting principals. We also have assumed that all
material governmental, regulatory or other consents and approvals necessary for
the consummation of the transaction contemplated by the Agreement will be
obtained without any adverse effect on the Company or E*TRADE or on the
contemplated benefits of the transaction contemplated by the Agreement. We were
not requested to solicit, and did not solicit, interest from other parties with
respect to an acquisition of or other business combination with the Company.
Our advisory services and the opinion expressed herein are provided for the
information and assistance of the Board of Directors of the Company in
connection with its consideration of the transaction contemplated by the
Agreement and such opinion does not constitute a recommendation as to how any
holder of Shares should vote with respect to such transaction.
Based upon and subject to the foregoing and based upon such other matters as
we consider relevant, it is our opinion that as of the date hereof the Exchange
Ratio pursuant to the Agreement is fair from a financial point of view to the
holders of Shares.
Very truly yours,
-------------------------------------
(GOLDMAN, SACHS & CO.)
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<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 15. Indemnification of Directors and Officers
In accordance with the Delaware General Corporation Law, the Registrant's
Certificate of Incorporation includes provisions regarding the limitation of
liability and indemnification of officers and directors of the Registrant.
Article TENTH of the Registrant's Certificate of Incorporation provides as
follows:
TENTH. A Director of the Corporation shall not be personally liable to
the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a Director, except for liability (1) for any breach of
the Director's duty of loyalty to the Corporation or its stockholders, (2)
for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (3) under Section 174 of the
General Corporation Law of Delaware, or (4) for any transaction from which
the Director derived any improper personal benefit. If the General
Corporation Law of Delaware is hereafter amended to authorize, with the
approval of a corporation's stockholders, further reductions in the
liability of a corporation's directors for breach of fiduciary duty, then a
Director of the Corporation shall not be liable for any such breach to the
fullest extent permitted by the General Corporation Law of Delaware as so
amended. Any repeal or modification of the foregoing provisions of this
Article TENTH by the stockholders of the Corporation shall not adversely
affect any right or protection of a Director of the Corporation existing at
the time of such repeal or modification.
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<PAGE>
Item 21. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<C> <S>
2.1 Agreement and Plan of Merger and Reorganization dated as of May 31,
1999 by and among the Registrant, Turbo Acquisition Corp. and Telebanc
Financial Corporation (attached as Appendix A to the proxy
statement/prospectus contained in this registration statement).
2.2 Stock Option Agreement dated as of May 31, 1999 by and between the
Registrant and Telebanc Financial Corporation (attached as Appendix B
to the proxy statement/prospectus contained in this registration
statement).
3.1 Registrant's Second Amended and Restated Articles of Incorporation
(incorporated by reference to the Registrant's quarterly report on
Form 10-Q for the period ending March 31, 1998).
3.2 Registrant's Restated Bylaws (incorporated by reference to Exhibit 3.4
of the Registrant's Registration Statement on Form S-1, Registration
Statement No. 333-05525).
4.1 Form of Specimen Certificate for Registrant's Common Stock
(incorporated by reference to Exhibit 4.1 of the Registrant's
Registration Statement on Form S-1, Registration Statement
No. 333-05525).
4.2 Form of Stockholder Agreement dated May 31, 1999 by and among the
Registrant and certain stockholders of Telebanc Financial Corporation
(attached as Appendix C to the proxy statement/prospectus contained in
this registration statement).
5.1 Opinion of Brobeck, Phleger & Harrison LLP regarding the legality of
the securities being issued.
8.1 Opinion of Brobeck, Phleger & Harrison LLP regarding certain tax
matters.
23.1 Consent of Deloitte & Touche LLP, Independent Auditors, with respect
to Registrant's financial statements.
23.2 Consent of Arthur Andersen LLP, Independent Public Accountants, with
respect to Telebanc Financial Corporation's financial statements.
23.3 Consent of Goldman, Sachs & Co.
23.4 Consent of Brobeck, Phleger & Harrison LLP (included in Exhibit 5.1
and Exhibit 8.1).
24.1 Power of Attorney (see page II-3).
99.1 Opinion of Goldman, Sachs & Co. (attached as Appendix D to the proxy
statement/prospectus contained in this registration statement).
99.2 Form of Proxy Card.
</TABLE>
Item 22. Undertakings
(a) The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent or
given, the latest annual report, to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X is not set forth in the prospectus, to deliver, or
cause to be delivered to each person to whom the prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.
(b) (1) The undersigned registrant hereby undertakes as follows: that prior
to any public reoffering of the securities registered hereunder through use of
a prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
(2) The registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (1) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the
II-2
<PAGE>
registration statement and will not be used until such amendment is effective,
and that, for purposes of determining any liability under the Securities Act of
1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof."'
(c) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
(d) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-4 and has duly caused this Registration
Statement on Form S-4 to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Menlo Park, California on November 22, 1999.
E*TRADE GROUP, INC.
/s/ Leonard C. Purkis
By: _________________________________
Leonard C. Purkis,
Executive Vice President, Finance
and Administration, and Chief
Financial Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Leonard C. Purkis and Brigitte VanBaelen and
each of them, with full power to act without the other, his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution
for him and in his name, place and stead, in any and all capacities, to sign
any and all amendments (including post-effective amendments) to this
registration statement, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite or necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Christos M. Cotsakos Chairman of the Board and November 22, 1999
____________________________________ Chief Executive Officer
Christos M. Cotsakos (Principal Executive
Officer)
/s/ Kathy Levinson President and Chief November 22, 1999
____________________________________ Operating Officer
Kathy Levinson (Principal Executive
Officer)
/s/ Leonard C. Purkis Executive Vice President, November 22, 1999
____________________________________ Finance and Administration,
Leonard C. Purkis and Chief Financial Officer
(Principal Financial and
Accounting Officer)
/s/ Brigitte VanBaelen Vice President, Executive November 22, 1999
____________________________________ Service and Community
Brigitte VanBaelen Development and Assistant
Corporate Secretary
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ William A. Porter Chairman Emeritus November 22, 1999
____________________________________
Williarm A. Porter
/s/ Richard S. Braddock Director November 22, 1999
____________________________________
Richard S. Braddock
/s/ Masayoshi Son Director November 22, 1999
____________________________________
Masayoshi Son
/s/ William E. Ford Director November 22, 1999
____________________________________
William E. Ford
/s/ George Hayter Director November 22, 1999
____________________________________
George Hayter
/s/ Lewis E. Randall Director November 22, 1999
____________________________________
Lewis E. Randall
/s/ Lester C. Thurow Director November 22, 1999
____________________________________
Lester C. Thurow
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<C> <S>
2.1 Agreement and Plan of Merger and Reorganization dated as of May 31,
1999 by and among the Registrant, Turbo Acquisition Corp. and Telebanc
Financial Corporation (attached as Appendix A to the proxy
statement/prospectus contained in this registration statement).
2.2 Stock Option Agreement dated as of May 31, 1999 by and between the
Registrant and Telebanc Financial Corporation (attached as Appendix B
to the proxy statement/prospectus contained in this registration
statement).
3.1 Registrant's Second Amended and Restated Articles of Incorporation
(incorporated by reference to the Registrant's quarterly report on
Form 10-Q for the period ending March 31, 1998).
3.2 Registrant's Restated Bylaws (incorporated by reference to Exhibit 3.4
of the Registrant's Registration Statement on Form S-1, Registration
Statement No. 333-05525).
4.1 Form of Specimen Certificate for Registrant's Common Stock
(incorporated by reference to Exhibit 4.1 of the Registrant's
Registration Statement on Form S-1, Registration Statement
No. 333-05525).
4.2 Form of Stockholder Agreement dated May 31, 1999 by and among the
Registrant and certain stockholders of Telebanc Financial Corporation
(attached as Appendix C to the proxy statement/prospectus contained in
this registration statement).
5.1 Opinion of Brobeck, Phleger & Harrison LLP regarding the legality of
the securities being issued.
8.1 Opinion of Brobeck, Phleger & Harrison LLP regarding certain tax
matters.
23.1 Consent of Deloitte & Touche LLP, Independent Auditors, with respect
to Registrant's financial statements.
23.2 Consent of Arthur Andersen LLP, Independent Public Accountants, with
respect to Telebanc Financial Corporation's financial statements.
23.3 Consent of Goldman, Sachs & Co.
23.4 Consent of Brobeck, Phleger & Harrison LLP (included in Exhibit 5.1
and Exhibit 8.1).
24.1 Power of Attorney (see page II-3).
99.1 Opinion of Goldman, Sachs & Co. (attached as Appendix D to the proxy
statement/prospectus contained in this registration statement).
99.2 Form of Proxy Card
</TABLE>
<PAGE>
November 22, 1999
E*TRADE Group, Inc.
4500 Bohannon Drive
Menlo Park, California 94025
Re: E*TRADE Group, Inc. Registration Statement on Form S-4 for
35,641,068 Shares of Common Stock
Ladies and Gentlemen:
We have acted as counsel to E*TRADE Group, Inc., a Delaware corporation (the
"Company"), in connection with the registration of 35,641,068 shares of the
Company's Common Stock (the "Shares"), as described in the Company's
Registration Statement on Form S-4 ("Registration Statement") filed with the
Securities and Exchange Commission under the Securities Act of 1933, as
amended (the "Act").
This opinion is being furnished in accordance with the requirements of Item 21
of Form S-4 and Item 601(b)(5)(i) of Regulation S-K.
We have reviewed the Company's charter documents, the corporate proceedings
taken by the Company in connection with the original issuance and sale of the
Shares, and a certificate of a Company officer regarding (among other things)
the Company's receipt of consideration upon the original issuance and sale of
the Shares. Based on such review and assuming the Registration Statement
becomes effective and remains effective, and all applicable state and federal
laws are complied with, we are of the opinion that the Shares are duly
authorized, validly issued, fully paid and nonassessable.
We consent to the filing of this opinion as Exhibit 5.1 to the Registration
Statement and to the reference to this firm under the caption "Legal Matters" in
the prospectus which is part of the Registration Statement. In giving this
consent, we do not thereby admit that we are within the category of persons
whose consent is required under Section 7 of the Act, the rules and regulations
of the Securities and Exchange Commission promulgated thereunder, or Item 509 of
Regulation S-K.
This opinion letter is rendered as of the date first written above and we
disclaim any obligation to advise you of facts, circumstances, events or
developments which hereafter may be brought to our attention and which may
alter, affect or modify the opinion expressed herein. Our opinion is expressly
limited to the matters set forth above and we render no opinion, whether by
implication or otherwise, as to any other matters relating to the Company or the
Shares.
Very truly yours,
BROBECK, PHLEGER & HARRISON LLP
<PAGE>
[LETTERHEAD OF BROBECK, PHLEGER & HARRISON LLP]
November 22, 1999
E*TRADE Group, Inc.
4500 Bohannon Drive
Menlo Park, CA 94025
Ladies and Gentlemen:
This opinion is being delivered to you in connection with (i) the
Agreement and Plan of Merger and Reorganization (the "Agreement") dated as of
May 31, 1999, by and among E*TRADE Group, Inc., a Delaware corporation
("E*TRADE"), Turbo Acquisition Corp., a Delaware corporation and a wholly owned
subsidiary of E*TRADE ("Sub"), and Telebanc Financial Corporation, a Delaware
corporation ("Telebanc"), and (ii) the preparation and filing with the
Securities and Exchange Commission of a Form S-4 Registration Statement relating
to the Merger (the "Registration Statement"). Pursuant to the Agreement, Sub
will merge with and into Telebanc (the "Merger"), and Telebanc will become a
wholly owned subsidiary of E*TRADE.
Except as otherwise provided, capitalized terms referred to herein have
the meanings set forth in the Agreement. All section references, unless
otherwise indicated, are to the Internal Revenue Code of 1986, as amended (the
"Code").
We have acted as legal counsel to E*TRADE in connection with the Merger.
As such, and for the purpose of rendering this opinion, we have examined and are
relying upon (without any independent investigation or review thereof) the truth
and accuracy, at all relevant times, of the statements, covenants,
representations and warranties contained in the following documents (including
all schedules and exhibits thereto):
1. The Agreement;
2. The Registration Statement; and
3. Such other instruments and documents related to the formation,
organization and operation of E*TRADE, Telebanc and Sub and to the consummation
of the Merger and the other transactions contemplated by the Agreement as we
have deemed necessary or appropriate.
<PAGE>
November 22, 1999
Page 2
In connection with rendering this opinion, we have assumed or obtained
representations (and are relying thereon, without any independent investigation
or review thereof) that:
A. Original documents submitted to us (including signatures) are
authentic, documents submitted to us as copies conform to the original
documents, and there has been (or will be by the Effective Time) due execution
and delivery of all documents where due execution and delivery are prerequisites
to the effectiveness thereof; and
B. The Merger will be consummated in accordance with the Agreement
without any waiver or breach of any material provision thereof, and the Merger
will be effective under applicable state law.
Based on our examination of the foregoing items and subject to the
assumptions, exceptions, limitations and qualifications set forth herein, we are
of the opinion that the statements regarding United States federal income tax
consequences set forth in the Registration Statement under the heading "The
Merger - Certain Federal Income Tax Considerations," insofar as they constitute
statements of law or legal conclusions, are correct in all material respects.
We express no opinion as to any federal, state or local, foreign or other tax
consequences, other than as set forth in the Registration Statement under the
heading "The Merger - Certain Federal Income Tax Considerations."
In addition to the assumptions and representations described above, this
opinion is subject to the exceptions, limitations and qualifications set forth
below.
(1) This opinion represents and is based upon our best judgment
regarding the application of federal income tax laws arising under the Code,
existing judicial decisions, administrative regulations and published rulings
and procedures. Our opinion is not binding upon the Internal Revenue Service or
the courts, and there is no assurance that the Internal Revenue Service will not
successfully assert a contrary position. Furthermore, no assurance can be given
that future legislative, judicial or administrative changes, on either a
prospective or retroactive basis, will not adversely affect the accuracy of the
conclusions stated herein. Nevertheless, we undertake no responsibility to
advise you of any new developments in the application or interpretation of the
federal income tax laws.
(2) No opinion is expressed as to any transaction other than the Merger
(whether or not undertaken in connection with the Merger) or as to any
transaction whatsoever, including the Merger, if all the transactions described
in the Agreement are not consummated in accordance with the terms of such
Agreement and without waiver or breach of any material provision thereof or if
all of the representations, warranties, statements and assumptions upon which we
relied are not true and accurate at all relevant times. In the event any one of
the statements, representations, warranties or assumptions upon
<PAGE>
November 22, 1999
Page 3
which we have relied to issue this opinion is incorrect, our opinion might be
adversely affected and may not be relied upon.
This opinion is rendered to you solely in connection with the filing of
the Registration Statement. We hereby consent to the filing of this opinion as
an exhibit to the Registration Statement. We also consent to the references to
our firm name wherever appearing in the Registration Statement with respect to
the discussion of the federal income tax consequences of the Merger, including
any amendments to the Registration Statement. This opinion may not be relied
upon for any other purpose, and may not be made available to any other person,
without our prior written consent.
Very truly yours,
BROBECK, PHLEGER & HARRISON LLP
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement
of E*TRADE Group, Inc. on Form S-4 of our report dated October 13, 1999
appearing in the Annual Report on Form 10-K of E*TRADE Group, Inc. for the year
ended September 30, 1999 and to the reference to us under the heading "Experts"
in the Prospectus, which is part of this Registration Statement.
Deloitte & Touche LLP
San Jose, California
November 22, 1999
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report included in this registration statement and to the incorporation by
reference in this registration statement of our report dated February 10, 1999
included in Telebanc Financial Corporation's Form 10-K for the year ended
December 31, 1998 and to all references to our Firm included in this
registration statement.
Arthur Andersen LLP
Vienna, Virginia
November 22, 1999
<PAGE>
Exhibit 23.3
[LETTERHEAD OF GOLDMAN, SACHS & CO.]
PERSONAL AND CONFIDENTIAL
- ----------------------------
November 19, 1999
Board of Directors
Telebanc Financial Corporation
1111 North Highland Street
Arlington, Virginia 22201-2807
Re: Registration Statement on Form S-4 of E*TRADE Group, Inc. relating to
Common Stock being registered in connection with its merger with Telebanc
Financial Corporation
Ladies and Gentlemen:
Reference is made to our opinion letter, dated November 19, 1999, with respect
to the fairness from a financial point of view to the holders of the
outstanding shares of Common Stock, par value $0.01 per share (the "Shares"),
of Telebanc Financial Corporation (the "Company") of the exchange ratio of 1.05
shares of Common Stock, par value $0.01 per share, of E*TRADE Group, Inc.
("E*TRADE") to be received for each Share pursuant to the Agreement and Plan of
Merger and Reorganization, dated as of May 31, 1999, by and among E*TRADE,
Turbo Acquisition Corp., a wholly owned subsidiary of E*TRADE, and the Company.
The foregoing opinion letter is provided for the information and assistance of
the Board of Directors of the Company in connection with its consideration of
the transaction contemplated therein and is not to be used, circulated, quoted
or otherwise referred to for any other purpose, nor is it to be filed with,
included in or referred to in whole or in part in any registration statement,
proxy statement or any other document, except in accordance with our prior
written consent. We understand that the Company has determined to include our
opinion in the above-reference Registration Statement.
In that regard, we hereby consent to the reference to the opinion of our Firm
under the captions "Telebanc's Financial Advisor Opined that the Consideration
is Fair to Telebanc Stockholders," "The Merger--Background of the Merger," "The
Merger--Reasons for the Merger" and "The Merger--Opinion of Financial Advisor
to Telebanc" and to the inclusion of the foregoing opinion in the Proxy
Statement/Prospectus included in the above-mentioned Registration Statement. In
giving such consent, we do not thereby admit that we come within the category
of persons whose consent is required under Section 7 of the Securities Act of
1933 or the rules and regulations of the Securities and Exchange Commission
thereunder.
Very truly yours,
/s/ Goldman, Sachs & Co.
- -----------------------------
(GOLDMAN, SACHS & CO.)
<PAGE>
Exhibit 99.2
REVOCABLE PROXY
TELEBANC FINANCIAL CORPORATION
This Proxy is Solicited on Behalf of The Board of Directors
The undersigned stockholder of Telebanc Financial Corporation ("TFC") hereby
appoints Mitchell H. Caplan and Arlen W. Gelbard, or either of them, with full
power of substitution in each, as proxies to cast all votes which the
undersigned stockholder is entitled to cast at the special meeting of
stockholders (the "TFC Meeting") to be held at 2:00 p.m. on December 28, 1999
at the offices of TFC, 1111 North Highland Street, Arlington, Virginia 22201
and at any adjournments thereof, upon the following matters. The undersigned
stockholder hereby revokes any proxy or proxies heretofore given.
This proxy will be voted as directed by the undersigned stockholder. UNLESS
CONTRARY DIRECTION IS GIVEN, THIS PROXY WILL BE VOTED: (1) TO APPROVE AND ADOPT
AN AGREEMENT AND PLAN OF MERGER AND REORGANIZATION, DATED AS OF MAY 31, 1999,
AND THE MERGER PROVIDED FOR THEREIN, AMONG E*TRADE GROUP, INC. ("E*TRADE"),
TURBO ACQUISITION CORP. ("MERGER SUB") AND TFC, PURSUANT TO WHICH (i) MERGER
SUB, A WHOLLY OWNED SUBSIDIARY OF E*TRADE, WILL BE MERGED WITH AND INTO TFC,
WITH TFC SURVIVING THE MERGER AS A WHOLLY OWNED SUBSIDIARY OF E*TRADE AND (ii)
EACH SHARE OF TFC COMMON STOCK WILL BE CONVERTED INTO THE RIGHT TO RECEIVE A
NUMBER OF SHARES OF E*TRADE COMMON STOCK EQUAL TO 1.05 AND (2) TO ADJOURN THE
SPECIAL MEETING TO ANOTHER TIME AND/OR PLACE IF NECESSARY TO SOLICIT ADDITIONAL
VOTES. The undersigned stockholder may revoke this proxy at any time before it
is voted by (i) delivering to the Corporate Secretary of TFC a written notice
of revocation prior to the TFC Meeting, (ii) delivering to TFC prior to the TFC
Meeting a duly executed proxy bearing a later date, or (iii) attending the TFC
Meeting and voting in person. The undersigned stockholder hereby acknowledges
receipt of TFC's Notice of Special Meeting and Proxy Statement/Prospectus.
If you receive more than one proxy card, please sign and return all cards in
the accompanying envelope.
See
Reverse
Side
(continued and to be signed and dated on reverse side)
<PAGE>
X
Please mark your
votes as this.
--------------
Shares of Common Stock
Proposal: To approve and adopt the Agreement and Plan of Merger and
Reorganization, dated as of May 31, 1999, among E*TRADE, Merger Sub
and TFC, and the Merger provided for therein, pursuant to which (i)
Merger Sub will be merged with and into TFC, with TFC as the
surviving corporation and a wholly owned subsidiary of E*TRADE, and
(ii) each share of TFC Common Stock will be converted into the right
to receive a number of shares of TFC Common Stock equal to 1.05.
<TABLE>
<S> <C> <C>
FOR AGAINST ABSTAIN
[_] [_] [_]
</TABLE>
Other Matters: The proxies are authorized to adjourn the special meeting to
another time and/or place if necessary to solicit additional
votes for approval of the foregoing Agreement and Plan of Merger
and Reorganization and Merger.
<TABLE>
<S> <C> <C>
FOR AGAINST ABSTAIN
[_] [_] [_]
</TABLE>
Date: __________________________
__________________________
__________________________
Signature of Stockholder or
Authorized Representative
Please date and sign exactly as name appears hereon. Each executor,
administrator, trustee, guardian, attorney-in-fact
and other fiduciary should sign and indicate his or her full title. When stock
has been issued in the name of
two or more persons, all should sign.
