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). (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 2 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 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 3 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 4 investment banking firm of nationally recognized standing and reasonably acceptable to 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. 5 (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 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 6 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 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. 7 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 with a copy to: Brobeck, Phleger & Harrison LLP 2200 Geng Road Two Embarcadero Place 8 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. 9 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. 10 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. By: /s/ Christos M. Cotsakos --------------------------------------- Name: Christos M. Cotsakos Title: Chief Executive Officer Telebanc Financial Corporation By: /s/ Mitchell H. Caplan --------------------------------------- Name: Mitchell H. Caplan Title: President and Chief Executive Officer SIGNATURE PAGE TO STOCK OPTION AGREEMENT
Stock Option Agreement - E*Trade Group Inc. and Telebanc Financial Corp.
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