UNITED STATES

SECURITY AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

SCHEDULE 14A

 

Proxy Statement Pursuant to Section 14(a)

of the Securities Exchange Act of 1934)

 

Filed by the Registrant þ

 

Filed by a Party other than the Registrant o  

 

Check the appropriate box:

 

o  Preliminary Proxy Statement

o  Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

þ  Definitive Proxy Statement

o  Definitive Additional Materials

o  Soliciting Material Pursuant to §240.14a-12

 

INVESTOOLS INC.

(Name of Registrant as Specified In Its Charter)

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

 

Payment of Filing Fee (Check the appropriate box):

 

 

 

 

 

 

 

 

$41,207.80

 

 

 

 

 

 

 

 

 

 

 

INVESTOOLS INC.

13947 South Minuteman Drive

DRAPER, UTAH 84020

 

December 13, 2006

Dear INVESTools Stockholder,

 

You are cordially invited to attend a special meeting of stockholders (the “Special Meeting”) of INVESTools Inc. (the “Company”) to be held on Wednesday, January 17, 2007, at 10:00 a.m. (local time) at the New York Marriott East Side Hotel, 1535 Broadway, New York, NY 10036. A notice of the meeting, a proxy card and a proxy statement containing information about the matters to be acted upon are enclosed.

 

As you may know, we have agreed to acquire thinkorswim Group, Inc., which will create a unique business model with the ability to offer differentiated product offerings for retail and institutional investors.

 

All holders of record at the close of business on November 30, 2006, of the outstanding shares of common stock of the Company will be entitled to vote at the Special Meeting, at which you will be asked to:

 

1. Approve the issuance of shares of our common stock in connection with the proposed merger of thinkorswim Group, Inc. and a wholly-owned subsidiary of the Company, and grants of options to purchase our common stock to the employees of thinkorswim Group, Inc. (the “Issuance Proposal”);

 

2. Approve the amendment to our Certificate of Incorporation to increase the authorized common stock to 100 million shares (the “Charter Amendment”);

 

3. Approve amendments to the Company’s 2001 Stock Option Plan to increase the number of shares of common stock available for issuance thereunder from 8 million to 12 million shares, and to expand potential award recipients to include consultants of the Company (the “Option Plan Amendments”);

 

4. Approve the adjournment of the meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the meeting to approve the proposals; and

 

5. Act upon other business as may properly come before the meeting or any adjournment thereof.

 

The rules of The NASDAQ Global Market require stockholder approval of the issuance of our common stock in the proposed transaction.

 

Approval of the Issuance Proposal and the Option Plan Amendments requires the affirmative vote of a majority of the shares of our common stock present in person or by proxy at the Special Meeting and entitled to vote thereon, provided that a quorum consisting of a majority of the shares of common stock entitled to vote is present. Approval of the Charter Amendment requires the affirmative vote of a majority of the shares of our common stock entitled to vote thereon.

 

The accompanying proxy statement provides important information about the proposals — please read it carefully.

 

It is important that your shares be represented at the meeting. Accordingly, we request that you promptly sign, date and return the enclosed proxy card in the accompanying postage-paid envelope or authorize the individuals named on your proxy card to vote your shares by calling the toll-free telephone number or by using the Internet as described in the instructions included with your proxy card.

 

If you have any questions or need assistance voting your shares, please call D.F. King & Co., Inc., who is assisting us, toll-free at 1-888-886-4425.

 

Regards,

 

Lee K. Barba

Chief Executive Officer

 

 

 

 

This proxy statement is dated December 13, 2006,
and is first being mailed to stockholders on or about December 18, 2006.

 

INVESTOOLS INC.

13947 South Minuteman Drive

DRAPER, UTAH 84020

 

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

January 17, 2007

 

To the Stockholders of INVESTools Inc.:

 

A special meeting of stockholders (the “Special Meeting”) of INVESTools Inc. (the “Company”) will be held on Wednesday, January 17, 2007 at 10:00 a.m. (local time) at the New York Marriott East Side Hotel, 1535 Broadway, New York, NY 10036, for the following purposes:

 

1. To approve the issuance of shares of our common stock in connection with the proposed merger of thinkorswim Group, Inc. and a wholly-owned subsidiary of the Company, and grants of options to purchase our common stock to the employees of thinkorswim Group, Inc. (the “Issuance Proposal”);

 

2. To approve the amendment to our Certificate of Incorporation to increase the authorized common stock to 100 million shares (the “Charter Amendment”);

 

3. To approve amendments to the Company’s 2001 Stock Option Plan to increase the number of shares of common stock available for issuance thereunder from 8 million to 12 million shares and to expand potential award recipients to include consultants of the Company (the “Option Plan Amendments”);

 

4. To approve the adjournment of the meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the meeting to approve the proposals described above; and

 

5. To act upon other business as may properly come before the meeting or any adjournment thereof.

 

Further information regarding the Special Meeting and the proposals described above is set forth in the accompanying Proxy Statement. The Board of Directors has fixed the close of business on November 30, 2006, as the record date for the meeting, and only holders of common stock of record at such time will be entitled to vote at the Special Meeting or any adjournments thereof. You are cordially invited to attend the Special Meeting in person. Even if you plan to attend the Special Meeting, we urge you to vote your shares at your earliest convenience in order to ensure that your shares will be represented at the meeting. You can vote by signing, dating and returning the enclosed proxy card in the postage-paid envelope, or by submitting your proxy voting instructions by telephone or through the Internet. If you hold your shares through a broker or other nominee you should contact your broker to determine whether you may submit your proxy by telephone or Internet.

 

The Board of Directors has unanimously approved the proposals described above. Accordingly, the Board of Directors unanimously recommends that you vote “FOR” approval of the Issuance Proposal, the Option Plan Amendments and the Charter Amendment.

 

By Order of the Board of Directors

 

Lee K. Barba

Chairman of the Board

 

December 13, 2006

TABLE OF CONTENTS

 

INVESTOOLS INC.
13947 South Minuteman Drive
DRAPER, UTAH 84020

 

PROXY STATEMENT

Special Meeting of Stockholders

 

This Proxy Statement and accompanying Proxy Card are being furnished to stockholders in connection with the solicitation of proxies by the Board of Directors (the “Board of Directors”) of INVESTools Inc., a Delaware corporation (“INVESTools” or the “Company”), for use at the special meeting of stockholders of the Company to be held at the New York Marriott East Side Hotel, 1535 Broadway, New York, NY 10036, at 10:00 a.m. (local time) on January 17, 2007, and at any adjournments thereof (such meeting or adjournment(s) thereof referred to as the “Special Meeting”), for the purpose of considering and voting upon the matters set forth in the accompanying Notice of Special Meeting of Stockholders. This Proxy Statement and the accompanying form of proxy card are first being mailed to stockholders on or about December 18, 2006.

 

The close of business on November 30, 2006, 2006, has been fixed as the record date for the determination of stockholders entitled to notice of and to vote at the Special Meeting. As of the record date, there were 45,133,616 shares of our common stock, par value $0.01 per share (the “Common Stock”), issued and outstanding. Each share is entitled to one vote on all issues requiring a stockholder vote at the Special Meeting. The presence, in person or by proxy, of at least a majority of the outstanding shares of Common Stock on the record date is necessary to constitute a quorum at the Special Meeting. Abstentions and broker non-votes are counted for purposes of determining the presence or absence of a quorum for the transaction of business.

 

Approval of the first proposal, the issuance of shares of Common Stock in connection with the proposed merger of thinkorswim Group, Inc., a Delaware corporation (“thinkorswim”) and a wholly-owned subsidiary of the Company, and the granting of options to purchase Common Stock to the employees of thinkorswim, will require the affirmative vote of a majority of the shares of Common Stock present in person or by proxy at the Special Meeting and entitled to vote thereon.

 

Approval of the second proposal, the amendment to INVESTools’ Certificate of Incorporation, will require the affirmative vote of a majority of the shares of our common stock entitled to vote thereon.

 

Approval of the third proposal, the amendments to the Company’s 2001 Stock Option Plan to increase the number of shares of Common Stock available for issuance thereunder from 8 million to 12 million shares, and to expand potential award recipients to include consultants of the Company, will require the affirmative vote of a majority of the shares of Common Stock present in person or by proxy at the Special Meeting and entitled to vote thereon.

 

Any person who signs and mails the enclosed proxy, even though executed and returned, may revoke the proxy at any time prior to the voting of the proxy (i) by the execution and submission of a revised, later-dated proxy, (ii) by written notice to the Corporate Secretary of the Company or (iii) by voting in person at the Special Meeting. However, a proxy will not be revoked simply by attending the Special Meeting and not voting. To revoke a proxy previously submitted by telephone or the Internet, a stockholder of record can simply vote again at a later date, using the same procedures, in which case the later submitted vote will be recorded and the earlier vote will thereby be revoked.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

All statements in this Proxy Statement that are not historical are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements may be identified by words such as “believe,” “intend,” “expect,” “may,” “could,” “would,” “will,” “should,” “plan,” “project,” “contemplate,” “anticipate,” or similar statements. Because these statements reflect the Company’s current views concerning future events, these forward-looking statements are subject to risks and uncertainties. The Company has made every reasonable effort to ensure that the information and assumptions on which these statements and projections are based are current, reasonable, and complete. However, a variety of factors could cause actual results to differ materially from the projections, anticipated results or other expectations expressed in this Proxy Statement, including, without limitation, the ability to successfully integrate acquired companies; the success of brand development efforts and strategic alliances; demand for the Company’s products and services; the ability to compete effectively and adjust to changing market conditions; inability to protect the Company’s proprietary technology; difficulties or delays in developing improved products when expected or desired and with the additional features contemplated or desired; the potential for intellectual property infringement, warranty, product liability, and other claims; the uncertainties associated with governmental regulation; and other factors detailed from time to time in INVESTools’ SEC filings. The forward-looking statements are made only as of the date hereof and the Company assumes no obligation to publicly update or revise the forward-looking statements whether as a result of new information, future events, or otherwise.

 

The Special Meeting will be held on January 17, 2007, at 10:00 a.m. (local time) at the New York Marriott East Side Hotel, 1535 Broadway, New York, NY 10036. At the Special Meeting, stockholders will consider and vote upon:

 

 

 

 

 

 

All holders of Common Stock are entitled to notice, but only stockholders of record holding Common Stock as of the close of business on November 30, 2006, the record date for the Special Meeting, are entitled to vote at the Special Meeting. As of the record date, there were 45,133,616 shares of Common Stock outstanding. Approximately 9,000 stockholders of record held such shares. Every holder of Common Stock is entitled to one vote for each such share the stockholder held as of the record date.

 

The Issuance Proposal and the Option Plan Amendments will require the affirmative vote of a majority of the shares of Common Stock present in person or by proxy at the Special Meeting and entitled to vote thereon. The Charter Amendment will require the affirmative vote of a majority of the shares of Common Stock issued and outstanding.

 

 

You have the right to revoke your proxy at any time before the vote taken at the Special Meeting: if you hold your shares in your name as a stockholder of record, by notifying D.F. King & Co., Inc., at 1-888-886-4425; by attending the Special Meeting and voting in person (your attendance at the meeting will not, by itself, revoke your proxy; you must vote in person at the meeting); by submitting a later-dated proxy card, telephone vote, or Internet vote; or, if you have instructed a broker, bank or other nominee to vote your shares, by following the directions received from your broker, bank or other nominee to change those instructions.

 

 

The Company will pay the cost of this proxy solicitation. In addition to soliciting proxies by mail, directors, officers and employees of INVESTools may solicit proxies personally and by telephone, facsimile or other electronic means of communication. These persons will not receive additional or special compensation for such solicitation services. INVESTools will, upon request, reimburse brokers, banks and other nominees for their expenses in sending proxy materials to their customers who are beneficial owners and obtaining their voting instructions. The Company has retained D.F. King & Co., Inc., a proxy solicitation firm, to assist it in the solicitation of proxies for the Special Meeting and will pay a customary fee of approximately $9,000 plus reimbursement of out-of-pocket expenses.

 

 

On September 18, 2006, INVESTools entered into the Merger Agreement with thinkorswim, pursuant to which thinkorswim will become a wholly-owned subsidiary of INVESTools in the Merger. Under the terms of the Merger Agreement, which was approved unanimously by the Boards of Directors of INVESTools and thinkorswim, thinkorswim stockholders will receive approximately $170 million in cash and 19.1 million shares of Common Stock. Employees of thinkorswim will also receive retention bonus opportunities equaling, in the aggregate,

$20 million, which would be paid in equal annual installments over the three-year period following the closing of the Merger. For a detailed description of the conditions to the Merger, please see “Issuance of Common Stock in Connection with the Proposed Merger — Merger Agreement.” For a detailed description of our reasons for the Merger, please see “Issuance of Common Stock in Connection with the Proposed Merger — INVESTools’ Reasons for the Transaction.”

 

Upon the consummation of the transaction, the combined company will be subject to certain risks. In deciding whether to approve the Issuance Proposal and the Charter Amendment, you should carefully read and consider the risk factors contained in “thinkorswim-thinkorswim Qualitative and Quantitative Disclosure About Market Risk” and in INVESTools’ Annual Report on Form 10-K for the year ended December 31, 2005.

 

 

The Board of Directors has unanimously approved the proposals described above. Accordingly, the Board of Directors unanimously recommends that you vote “FOR” approval of the Issuance Proposal, the Option Plan Amendments and the Charter Amendment.

 

 

Subject to the satisfaction or waiver of all conditions precedent to the Merger, the Company has agreed, effective immediately following the Merger, that current thinkorswim directors Tom Sosnoff and Scott Sheridan shall become members of the Board of Directors and they, or their designees, will be nominated at any annual meeting of our stockholders held within the next three years. The size of the Board of Directors shall concurrently be increased to eight members.

 

 

At the close of business on the record date, our directors and executive officers were entitled to vote 2,159,706 shares of Common Stock, or approximately 5% of the shares outstanding on that date. These individuals have indicated that they intend to vote in favor of the Issuance Proposal and the Charter Amendment. For more information about the security ownership of our directors and executive officers, please see “Security Ownership of Certain Beneficial Owners.”

 

 

In connection with the Merger, one of the Company’s financial advisors, Updata Securities, Inc. (“Updata”), delivered a written opinion to the Board of Directors as to the fairness to INVESTools, from a financial point of view, of the consideration to be paid to the thinkorswim stockholders in connection with the Merger. The full text of Updata’s written opinion, dated September 15, 2006, is attached to this Proxy Statement as Annex A. The Company encourages you to read this opinion carefully in its entirety for a description of the procedures followed, assumptions made, matters considered and limitations on the review undertaken. The opinion is addressed to the Board of Directors and does not constitute a recommendation to any stockholder as to how such stockholder should vote or act on any matter relating to the issuance of the additional shares of Common Stock. INVESTools has agreed to pay Updata a fee for the delivery of this opinion.

 

 

In connection with the Merger, the Company will issue approximately 19.1 million shares of Common Stock and will pay approximately $170 million in cash to thinkorswim’s securityholders. An additional $15.2 million in cash will be used to pay customary fees and expenses in connection with the Merger, the financing arrangements and the related transactions. The cash payments are expected to be funded by a combination of the following:

 

 

 

Under Delaware law and INVESTools’ Certificate of Incorporation, holders of shares of Common Stock are not entitled to any dissenters’ rights to seek appraisal of their shares, or to any preemptive rights, in connection with the proposed transaction.

 

 

There are no material U.S. federal income tax consequences to the Company’s current stockholders that will result from our issuance of additional shares of Common Stock in the Merger.

 

 

The Merger with thinkorswim will be accounted for under the purchase method of accounting under accounting principles generally accepted in the United States of America (“US GAAP”). For a detailed discussion of accounting treatment, please see “Issuance of Common Stock in Connection with the Proposed Merger — Accounting Treatment.”

 

 

Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “Hart-Scott-Rodino Act” or “HSR Act”), and the rules promulgated thereunder by the Federal Trade Commission (“FTC”), the Merger may not be completed until notification and report forms have been filed with the FTC and the Antitrust Division of the Department of Justice (“DOJ”) and the applicable waiting period has expired or been terminated. INVESTools and thinkorswim filed notification and report forms under the HSR Act with the FTC and the Antitrust Division of the DOJ on October 13, 2006, and received early termination of the waiting period on October 23, 2006.

 

Additionally, prior to the completion of the Merger, thinkorswim, as a U.S.-registered broker-dealer, is required under the rules of the National Association of Securities Dealers (the “NASD”) to make certain filings in respect of the change in control of thinkorswim.

 

Except as noted above with respect to the required filings under the Hart-Scott-Rodino Act, the filings with the NASD, and the filing of a Certificate of Merger in Delaware at or before the effective date of the Merger, the Company is unaware of any material federal, state or foreign regulatory requirements or approvals required for the completion of the Merger.

 

 

INVESTools Inc.

 

INVESTools is a global leader in investor education. INVESTools offers a full range of investor education products and services that provide lifelong learning in a variety of delivery formats, including instructor-led workshops, “at home” study programs, personal training sessions and through the Internet. More than 260,000 investors around the world have graduated from INVESTools investor education programs. Visit INVESTools’ corporate website at http://www.investools.com for more information regarding the INVESTools Method^tm.  INVESTools’ principal executive offices are located at 13947 South Minuteman Drive, Draper, Utah 84020.

 

thinkorswim Group, Inc.

 

As a leading retail online brokerage firm, thinkorswim specializes in options and also offers customers a broad range of products including equities, futures, mutual funds and bonds. The company supports retail and institutional traders through its own trading platforms and is widely recognized as the premier option software for order entry, professional analytical tools and real-time position management. thinkorswim has revolutionized the option industry by teaching and executing complex, multi-leg option strategies with single-click functionality. thinkorswim’s principal executive offices are located at 600 West Chicago Avenue, Suite 100, Chicago, Illinois 60610.

 

thinkorswim recently received Barron’s top rating in their 2006 Annual Survey of Best Online Brokers. thinkorswim’s platform surpassed its peer group as Barron’s choice for options traders and was the only firm to finish #1 and #2 in software and browser-based ratings.

 

The table below depicts the earnings (loss) per common share, pro forma earnings (loss) per common share, book value per common share and cash dividends declared per common share for (i) each of INVESTools and thinkorswim on a historical basis and (ii) the combination of INVESTools and thinkorswim on a pro forma combined basis. The pro forma data of the combined company assumes that 19.1 million shares of Common Stock will be issued in the Merger. The pro forma data of the combined company was derived by combining the historical consolidated financial information of INVESTools and thinkorswim using the purchase method of accounting for business combinations as described elsewhere in this Proxy Statement. For a discussion of the assumptions and adjustments made in the preparation of the pro forma financial information presented in this Proxy Statement, see “Unaudited Pro Forma Condensed Combined Financial Statements.”

 

You should read the information presented in this table below together with the selected historical consolidated financial data, historical consolidated financial statements and the related notes of INVESTools incorporated herein by reference, the separate historical consolidated financial statements and related notes of thinkorswim appearing elsewhere in this Proxy Statement, and the Unaudited Pro Forma Condensed Combined Financial Statements appearing elsewhere in this Proxy Statement. The pro forma data is unaudited and for illustrative purposes only. The companies may have performed differently had they been combined for the periods presented. You should not rely on this information as being indicative of the historical results that would have been achieved had the companies been combined for the periods illustrated or the future results that the combined company will achieve after the consummation of the Merger.

 

 

The following table sets forth a summary of selected historical financial data of INVESTools for each of the fiscal years in the five-year period ended December 31, 2005 and for the nine-month periods ended September 30, 2006 and 2005. The information is derived from, and should be read in conjunction with, the consolidated financial statements and the notes related to those financial statements, of INVESTools. See “Where you can find Additional Information.” In the opinion of INVESTools’ management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. The information set forth below is not necessarily indicative of the results of future operations.

 

 

 

 

The following table sets forth a summary of selected historical financial data of thinkorswim for each of the fiscal years in the three-year period ended December 31, 2005 and the nine-month periods ended September 30, 2006 and 2005. This information is derived from, and should be read in conjunction with, the audited consolidated financial statements and the notes related to those financial statements of thinkorswim, which are included elsewhere in this Proxy Statement. See “Index to thinkorswim Financial Statements.” In the opinion of thinkorswim’s management, all material adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. The information set forth below is not necessarily indicative of the results of future operations.

 

 

The following table sets forth a summary of selected unaudited pro forma condensed combined operating financial data and is designed to show how the Merger of thinkorswim and a wholly-owned subsidiary of INVESTools might have affected historical financial statements if the Merger had been completed at an earlier time. This information is derived from, and should be read in conjunction with, the unaudited pro forma condensed combined financial statements of INVESTools and thinkorswim which are included elsewhere in this Proxy Statement. See “Unaudited Pro Forma Condensed Combined Financial Statements.”

 

The unaudited pro forma balance sheet assumes that the Merger took place on September 30, 2006, and combines INVESTools’ September 30, 2006 condensed consolidated balance sheet with thinkorswim’s September 30, 2006 condensed consolidated balance sheet. The unaudited pro forma statements of operations for the nine months ended September 30, 2006 and for the year ended December 31, 2005 give effect to the Merger as if it occurred on January 1, 2005.

 

The summary unaudited pro forma condensed combined financial information is presented for illustrative purposes only and is not necessarily indicative of the financial condition or results of operations of future periods or the financial condition or results of operations that actually would have been realized had the entities been a single entity during these periods.

 

 

 

 

The unaudited pro forma condensed combined financial statements contained herein have been derived by combining INVESTools’ historical consolidated balance sheet and statements of operations with that of thinkorswim’s for the periods presented. The unaudited pro forma condensed combined statements of operations for the year ended December 31, 2005, and for the nine months ended September 30, 2006, give pro forma effect as if the transaction had occurred on January 1, 2005. The unaudited pro forma condensed combined balance sheet gives pro forma effect as if the transaction had occurred on September 30, 2006. The historical combined financial information has been adjusted to give effect to pro forma events that are (1) directly attributable to the Merger, (2) factually supportable, and (3) with respect to the statement of operations, expected to have a continuing impact on the combined results. Pro forma adjustments are based on preliminary estimates and assumptions.

 

The unaudited pro forma condensed combined financial statements were prepared using the purchase method of accounting in accordance with Statement of Financial Accounting Standards No. 141, Business Combinations, with INVESTools as the acquiring entity. Under the purchase method of accounting, the total estimated purchase price is allocated to the net tangible and identifiable intangible assets of thinkorswim, based on their respective estimated fair values. The unaudited pro forma condensed combined financial information has been prepared based on a preliminary analysis of fair values performed by certain valuation experts. Therefore, the actual amounts recorded as of the completion of the Merger might differ materially from the information presented in the unaudited pro forma condensed combined financial statements.

 

INVESTools expects to incur certain costs over the next few years associated with integrating the technologies of INVESTools and thinkorswim. Management’s development of these integration plans is underway. The impact of these plans, assuming they are in place at the consummation date of the Merger, could increase or decrease the amount of goodwill and intangible assets recognized in accordance with EITF No. 95-3, Recognition of Liabilities in Connection with a Purchase Business Combination. The unaudited pro forma condensed combined financial statements do not reflect the cost of any integration activities or benefits that may result from synergies that may be derived from any integration activities.

 

As part of the Merger Agreement, INVESTools agreed to issue up to a maximum of 728,608 additional shares of common stock to thinkorswim shareholders in the event the stock’s average trading price fell below $8.75 per share during the twenty-day period prior to certain dates subsequent to the Merger (with an $8.00 floor on such share price). The various dates are those on which specific groups of thinkorswim shareholders are first permitted to sell INVESTools shares, or portions thereof, that they received as merger consideration. The potential dates specified fall between six months and three years after the Merger closes. At the time the Merger was announced, the fair market value of INVESTool’s stock was $8.59. Because the additional shares are contingently issuable if the price falls below $8.75 per share, the value of the portion of the purchase price attributable to the issuance of common stock has been increased to $8.75 per share in accordance with EITF No. 97-15, Accounting for Contingency Arrangements Based on Security Prices in a Purchase Business Combination.

 

INVESTOOLS INC.

 

UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEETS

September 30, 2006

 

 

INVESTOOLS INC.

 

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS

Nine Months Ended September 30, 2006

 

 

INVESTOOLS INC.

 

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS

Year Ended December 31, 2005

 

Pro Forma Adjustments

 

Pro forma adjustments for the unaudited pro forma condensed combined financial statements are as follows:

 

a. To reflect the excess of acquisition cost over the estimated fair value of tangible and intangible net assets acquired. These preliminary allocations are subject to change based on finalization of the fair values of the tangible and intangible assets acquired and liabilities assumed as described above. The purchase price, purchase-price allocation, and financing of the transaction are summarized as follows (in thousands):

 

 

b. To reflect the estimated deferred tax liabilities arising from the purchase, and the change in INVESTools’ valuation allowance on its deferred tax assets based on future reversals of the deferred tax liabilities attributable to the Merger. The change in the valuation allowance also results in a reclassification of INVESTools’ various existing deferred tax asset and liability accounts.

 

c. To reflect the working capital adjustment whereby INVESTools will add to the merger consideration paid to thinkorswim shareholders an amount by which working capital (as calculated pursuant to the Merger Agreement) in the aggregate exceeds $5 million. The working capital adjustment was estimated based upon the net working capital as of September 18, 2006, and a final determination of this additional consideration will occur later in December 2006.

 

d. To reflect as of September 30, 2006 the thinkorswim assumed change-in-control compensation obligations payable to certain individuals prior to the date the acquisition is to close.

 

e. To reflect the issuance of a term note to partially finance the cash portion of the purchase price.

f. To reflect the elimination of the shareholders’ equity accounts of thinkorswim, and to reflect the issuance of 19.1 million shares of INVESTools common stock valued at $167.2 million as partial consideration for the purchase. The per share fair value of the stock on the date the Merger was announced ($8.59), was adjusted to also give effect to the contingent additional consideration mentioned above, which reflects a minimum per share valuation of $8.75.

 

g. To reflect the elimination of thinkorswim’s existing intangible assets and goodwill.

 

h. To reflect the additional cash paid to thinkorswim shareholders and approximately $15.2 million in transaction costs paid to third parties. However, these transaction costs have been estimated and are subject to change at closing. A portion of the cash is assumed at September 30, 2006 to be derived from the liquidation of marketable securities held by both companies.

 

i. To reflect the increase in interest expense resulting from the issuance of debt to finance part of the cash portion of the purchase price. The interest rate on new debt of $125 million is assumed to be 7.5%. However, this is an estimate, and is subject to change at closing. A change of 1% in the interest rate would result in a change in both interest expense and net loss for the nine months ended September 30, 2006 and the year ended December 31, 2005 of $0.7 million and $1.2 million, respectively.

 

j. To reflect the accrual of $6.7 million annually in retention bonuses INVESTools has agreed to pay annually to a group of thinkorswim employees. The bonuses are to be paid over a period of three years from the date of the Merger.

 

k. To reflect the additional share-based compensation expense related to unvested stock options for the purchase of 2.3 million shares of INVESTools common stock to be granted to employees or third-party consultants of thinkorswim. Options granted to employees are accounted for under SFAS 123(R), Share Based Payment, and options granted to consultants are accounted for under SFAS 123(R) and remeasured based on the guidance of EITF 96-18, Accounting for Equity Instruments That are Issued to Other Than Employees for Acquiring or in Conjunction with Selling, Goods or Services. The options were valued using the Black-Scholes option pricing model. Variables assumed were a volatility factor of 56 percent, a risk-free interest factor of 4.6 percent, and an expected life of 6.3 years. The fair market value per common share used ($8.59) was the same as that for INVESTools’ common stock at the time the Merger was announced. The exercise price for half the options equaled this fair market value, and the other half was 150% of the fair market value, both as specified in the Merger Agreement. The total value of the options is being amortized on a straight-line basis over a four-year vesting period. The actual value of the options will change upon their final issuance (expected to occur immediately following closing).

 

l. To reflect the increase in amortization expense due to the amortization of those identifiable assets which have definite lives, i.e., covenants-not-to-compete, core technology, and customer relationships. The covenants-not-to-compete and core technology are presumed to be amortized using the straight-line method over periods of 3 to 7 years. The customer relationships are presumed to be amortized over a period of 14 years, using an accelerated method based on the estimated undiscounted cash flows associated with the customers.

 

m. To eliminate net interest income previously earned on marketable securities, net of unrealized losses included in accumulated other comprehensive loss recorded on INVESTools’ balance sheets as of the beginning of the respective pro forma periods. The securities are presumed to be liquidated by the time the transaction is closed in order to pay a portion of the cash consideration to thinkorswim shareholders.

 

n. To eliminate thinkorswim’s provision for income taxes due to the effect of the pro forma adjustments on the operating results of the combined companies.

 

Pro Forma Net Loss Per Share

 

The net loss and shares used in computing the net loss per share for the year ended December 31, 2005 and nine months ended September 30, 2006 are based on INVESTools’s historical weighted average common shares outstanding during the respective periods. The effect of the additional shares of INVESTools common stock assumed issued as part of the Merger transaction has been included for purposes of presenting pro forma net loss per share. However, the effect of any common stock issuable upon the exercise of INVESTools’ stock options has been excluded from the historical and pro forma computation of net loss per share as the effect would be anti-dilutive. Accordingly, both basic and diluted pro forma loss per common share reflect the same calculation.

 

 

The Special Meeting will be held on January 17, 2007, at 10:00 a.m. local time at the New York Marriott East Side Hotel, 1535 Broadway, New York, NY 10036.

 

 

At the Special Meeting, stockholders will consider and vote upon:

 

 

 

 

 

 

All holders of Common Stock are entitled to notice, but only stockholders of record holding Common Stock as of the close of business on November 30, 2006, the record date for the Special Meeting, are entitled to vote at the Special Meeting. As of the record date, there were 45,133,616 shares of Common Stock outstanding. Approximately 9,000 stockholders held such shares. Every holder of Common Stock is entitled to one vote for each share held as of the record date.

 

 

The Issuance Proposal and the Option Plan Amendments will require the affirmative vote of a majority of the shares of Common Stock present in person or by proxy at the Special Meeting and entitled to vote thereon. The Charter Amendment will require the affirmative vote of a majority of the shares of Common Stock issued and outstanding.

 

 

If you are a stockholder of record and submit a proxy by telephone or the Internet or by returning a signed proxy card by mail, your shares will be voted at the Special Meeting as you indicate on your proxy card or by such other method. If no instructions are indicated on your properly-signed proxy card, your shares of Common Stock will be voted “FOR” the approval of the proposals described above and “FOR” any postponement or adjournment of the Special Meeting, if necessary or appropriate to solicit additional proxies.

 

If your shares are held in “street name” by your broker, you should instruct your broker how to vote your shares using the instructions provided by your broker. If you have not received such voting instructions or require further information regarding such voting instructions, contact your broker and he or she can give you directions on how to vote your shares. Under the rules of The NASDAQ Global Market (“NASDAQ”), brokers who hold shares in “street name” for customers may not exercise their voting discretion with respect to non-routine matters such as the proposals described above and thus, absent specific instructions from the beneficial owner of such shares, brokers are not empowered to vote such shares with respect to the proposals (i.e., “broker non-votes”). Shares of Common Stock held by persons attending the Special Meeting but not voting, or shares for which the Company has received proxies with respect to which holders have abstained from voting, will be considered abstentions. Abstentions and properly executed broker non-votes, if any, will be treated as shares that are present and entitled to vote at the Special Meeting for purposes of determining whether a quorum exists and will have the same effect as a vote “AGAINST” the Charter Amendment, and will not affect the outcome of the Option Plan Amendments and Issuance Proposal.

INVESTools does not expect that any matter other than the proposals described above (and to approve the adjournment of the meeting, if necessary or appropriate to solicit additional proxies) will be brought before the Special Meeting. If, however, any such other matter is properly presented at the Special Meeting or any adjournment or postponement, the persons appointed as proxies will have discretionary authority to vote the shares represented by duly executed proxies in accordance with their discretion and judgment.

 

 

Stockholders of record will have the option to submit their proxies or voting instructions via the Internet or by telephone. If your shares are held in “street name,” you should check the voting instruction card provided by your broker to see which options are available and the procedures to be followed. Many brokers also offer telephone and Internet voting options.

 

In addition to submitting the enclosed proxy card by mail, INVESTools stockholders of record may submit their proxies:

 

 

 

 

You have the right to revoke your proxy at any time before the vote taken at the Special Meeting: if you hold your shares in your name as a stockholder of record, by notifying D.F. King & Co., Inc., at 1-888-886-4425; by attending the Special Meeting and voting in person (your attendance at the meeting will not, by itself, revoke your proxy; you must vote in person at the meeting); by submitting a later-dated proxy card, telephone vote, or Internet vote; or, if you have instructed a broker, bank or other nominee to vote your shares, by following the directions received from your broker, bank or other nominee to change those instructions.

 

 

Although it is not currently expected, the Special Meeting may be adjourned or postponed for the purpose of soliciting additional proxies. Any adjournment may be made without notice (if the adjournment is not for more than thirty days), other than by an announcement made at the Special Meeting of the time, date and place of the adjourned meeting. Whether or not a quorum exists, holders of a majority of the shares of Common Stock present in person or represented by proxy at the Special Meeting and entitled to vote thereat may adjourn the Special Meeting. Any signed proxies received by the Company in which no voting instructions are provided on such matter will be voted in favor of an adjournment in these circumstances. Any adjournment or postponement of the Special Meeting for the purpose of soliciting additional proxies will allow stockholders who have already sent in their proxies to revoke them at any time prior to their use at the Special Meeting as adjourned or postponed.

 

 

The Company will pay the cost of this proxy solicitation. In addition to soliciting proxies by mail, directors, officers and employees of INVESTools may solicit proxies personally and by telephone, facsimile or other electronic means of communication. These persons will not receive additional or special compensation for such solicitation services. INVESTools will, upon request, reimburse brokers, banks and other nominees for their expenses in sending proxy materials to their customers who are beneficial owners and obtaining their voting instructions. The Company has retained D.F. King & Co., Inc., a proxy solicitation firm, to assist it in the solicitation of proxies for the Special Meeting and will pay approximately $9,000 plus reimbursement of out-of-pocket expenses.

 

 

At the close of business on the record date, INVESTools’ directors and executive officers were entitled to vote 2,159,706 shares of Common Stock, or approximately 5% of the shares outstanding on that date. These individuals have indicated that they intend to vote in favor of the Issuance Proposal, the Option Plan Amendments and the Charter Amendment.

 

On September 18, 2006, INVESTools entered into the Merger Agreement with thinkorswim, pursuant to which thinkorswim will become a wholly-owned subsidiary of INVESTools following the Merger. For a detailed description of the conditions to the Merger, please see “— Merger Agreement” below. For a detailed description of our reasons for the Merger, please see “— INVESTools’ Reasons for the Transaction” below.

 

In connection with, and subject to, the Merger, the Company will issue 19,104,762 shares of Common Stock to current thinkorswim stockholders and grant options to the employees of thinkorswim to purchase 2,255,563 shares of Common Stock under the Company’s 2001 Stock Option Plan, half with an exercise price equal to the fair market value of the underlying Common Stock at the time of grant and half with an exercise price equal to 150% of such fair market value. Employees of thinkorswim will also receive retention bonus opportunities equaling, in the aggregate, $20 million, which would be paid in equal annual installments over the three-year period following the closing of the Merger.

 

NASDAQ rules require the approval of the Company’s stockholders prior to the issuance of additional shares of Common Stock in any transaction if the common stock to be issued as merger consideration (i) has, or will have upon issuance, voting power equal to or in excess of 20% of the voting power outstanding before the issuance of such common stock or (ii) is, or will be upon issuance, equal to or in excess of 20% of the number of shares of common stock outstanding before the issuance of the common stock. The number of shares to be issued to thinkorswim stockholders in the Merger is equal to approximately 42.3% of the shares outstanding before the Merger (29.7% after the Merger). Therefore, your approval is required.

 

The adoption of this Proposal is conditioned on the approval of the Charter Amendment by the Company’s stockholders. The adoption of this Proposal is not conditioned on the approval of the Option Plan Amendments by the Company’s stockholders.

 

INVESTools’ strategic objective is to offer its students the highest quality investor education possible as well as those ancillary services which INVESTools believes its students are seeking. As a result of market research undertaken during 2002-2004, INVESTools realized its students were seeking some guidance from INVESTools in their selection of a brokerage firm. As a result, INVESTools contacted several brokerage firms during 2004 to identify the firms with the most suitable product offering for its students. In 2004 and 2005, INVESTools entered into advertising agreements with optionXpress Holdings Inc. and CyberTrader Inc., a wholly-owned subsidiary of the Charles Schwab Corporation.

 

During 2005 and 2006, these agreements resulted in a significant number of INVESTools’ students opening accounts with either optionsXpress or CyberTrader. In February 2006, at a regularly scheduled Board of Directors meeting, the Board discussed the relative merits of continuing or enhancing INVESTools’ advertising agreements, as well as building or acquiring a brokerage platform. During the Spring of 2006, management identified several executives that might be suitable to help build a brokerage platform and met with several clearing firms.

 

In March 2006, several students of INVESTools met with Tom Sosnoff, Chief Executive Officer of thinkorswim Group Inc., to learn more about thinkorswim and the benefits of its online trading platform. This discussion was facilitated via a Webex presentation, during which Lee Barba, Chief Executive Officer of INVESTools, was in attendance. After discussion with a number of INVESTools employees about thinkorswim’s positioning in the marketplace and the strength of its software and browser-based platforms, Mr. Barba concluded that thinkorswim could be an ideal platform to offer to INVESTools’ student population.

 

In late April 2006, Mr. Barba, Mr. Sosnoff and a representative of Paragon Capital Partners (“Paragon”), INVESTools’ financial advisor, met at thinkorswim’s offices in Chicago, at which they discussed the possibility of the two parties entering into an advertising agreement, as well as the possibility of INVESTools acquiring a minority stake in thinkorswim. In this connection, they signed a mutual confidentiality agreement. Following this

initial meeting, Mr. Barba and Mr. Sosnoff had several meetings and telephone conversations to discuss potential various partnership alternatives in greater detail.

 

In early May 2006, Mr. Barba raised the possibility of a merger between INVESTools and thinkorswim. At this point, Mr. Sosnoff disclosed high-level financial results for thinkorswim but did not share any detailed financial or operating information. In late May 2006, the Board of Directors met to discuss the benefits of a possible transaction with thinkorswim. In mid-June 2006, at another Board of Directors meeting, the Board discussed the preliminary financial terms being negotiated.

 

After the June Board meeting, with the assistance of its legal and financial advisors, INVESTools began extensive due diligence of thinkorswim. Simultaneous with this due diligence process, INVESTools began to meet with potential financing sources. From early July 2006 until mid-September 2006, INVESTools and thinkorswim negotiated the key aspects of the Merger Agreement. The Board of Directors had regular updates of the due diligence process, as well as the negotiation of the key terms of the Merger Agreement and related documents.

 

On September 15, 2006, the Board of Directors held a meeting with members of management, Paragon and Simpson Thacher & Bartlett LLP, INVESTools’ legal advisors, to discuss the status of negotiations of the proposed transaction. Members of INVESTools’ senior management and INVESTools’ financial and legal advisors reviewed the history of the negotiations and the terms and conditions of the Merger Agreement that had been negotiated. Updata reviewed with the Board of Directors its financial analysis of the transaction and informed the Board of Directors that, in its opinion, the proposed merger consideration was fair, from a financial point of view, to holders of INVESTools common stock. Complete drafts of the Merger Agreement and related agreements, which had been distributed to each director prior to the meeting, were reviewed. Updata’s written opinion was subsequently delivered to the Board of Directors on September 18, 2006 when the Merger Agreement was executed. The Board of Directors and legal and financial advisors engaged in extensive discussion relating to, and consideration of, the proposed transaction, the potential alternatives to the transaction and the benefits and risks of entering into the Merger Agreement, including the possible effect on INVESTools’ existing business, compared to continuing as a stand alone entity.

 

After full deliberation, the Board of Directors resolved (i) that it was advisable and fair to and in the best interests of INVESTools and INVESTools’ stockholders, for INVESTools to enter into the Merger Agreement with thinkorswim, (ii) to approve and adopt the Merger Agreement and the transactions contemplated by the Merger Agreement, (iii) to approve and adopt the ancillary agreements, and (iv) to recommend that INVESTools’ stockholders approve and adopt the Issuance Proposal and the Charter Amendment.

 

On the evening of September 18, 2006, INVESTools and thinkorswim signed the Merger Agreement and related agreements. Thereafter, INVESTools issued a press release announcing the transaction.

 

In reaching its decision to pursue a combination of INVESTools and thinkorswim, the Board of Directors consulted with senior management and the Company’s financial and legal advisors and considered a number of factors, including those set forth below.

 

The Company believes that a combination of INVESTools and thinkorswim represents a compelling opportunity to improve value for stockholders by creating a market leader in the investor education and online brokerage industries and establishing a foundation for long-term growth. The Company believes that there are a number of potential benefits of the proposed Merger with thinkorswim, including, among others:

 

 

 

The Board of Directors also considered potential adverse consequences and negative factors, primarily consisting of the following:

 

 

The Board of Directors concluded, however, that these risks are outweighed by the substantial benefits of the Merger with thinkorswim.

 

In reaching its decision to approve the Merger of thinkorswim and a wholly-owned subsidiary of INVESTools, the Board of Directors of thinkorswim, most of whom represent major stockholders of thinkorswim, analyzed a number of factors, including the merger consideration in the Merger, the synergies between the businesses of thinkorswim and INVESTools, and the growth prospects for both businesses. The Board of Directors of thinkorswim determined the following:

 

 

Updata focuses on providing merger and acquisition and strategic advisory services to information technology companies including software, consulting, financial technology and other information technology companies. In this capacity, Updata is continually engaged in valuing technology businesses. INVESTools engaged Updata to act as its financial advisor in connection with the Merger. On September 15, 2006, Updata delivered to the Board of Directors its oral and written opinions that, as of that date, and subject to the assumptions, limitations and qualifications set forth in such opinion, the consideration to be paid to the thinkorswim stockholders in connection with the Merger was fair, from a financial point of view, to INVESTools.

 

THE FULL TEXT OF THE OPINION DELIVERED BY UPDATA TO THE BOARD OF DIRECTORS, DATED SEPTEMBER 15, 2006, WHICH SETS FORTH THE ASSUMPTIONS MADE, GENERAL PROCEDURES FOLLOWED, MATTERS CONSIDERED AND LIMITATIONS ON THE SCOPE OF REVIEW UNDERTAKEN BY UPDATA IN RENDERING ITS OPINION, IS ATTACHED AS ANNEX A TO THIS

PROXY STATEMENT AND IS INCORPORATED HEREIN BY REFERENCE. UPDATA HAS CONSENTED IN WRITING TO THE INCLUSION OF THE OPINION IN THIS PROXY STATEMENT. THE OPINION SPEAKS ONLY AS OF THE DAY UPDATA DELIVERED ITS OPINION. UPDATA DELIVERED THE OPINION SOLELY FOR THE INFORMATION OF THE BOARD OF DIRECTORS IN CONNECTION WITH ITS CONSIDERATION OF THE TRANSACTION AND IT DOES NOT CONSTITUTE A RECOMMENDATION TO ANY INVESTOOLS STOCKHOLDER AS TO WHETHER OR HOW TO VOTE ITS, HIS OR HER SHARES OF COMMON STOCK. THE SUMMARY OF THE UPDATA OPINION SET FORTH BELOW IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION ATTACHED TO THIS PROXY STATEMENT AS ANNEX A. INVESTOOLS SHAREHOLDERS ARE ENCOURAGED TO READ THE OPINION CAREFULLY IN ITS ENTIRETY.

 

In rendering its opinion, Updata, among other things:

 

 

Updata relied on, without independent verification of, the accuracy and completeness of all the financial and other information (including, without limitation, the representations and warranties contained in the Merger Agreement) that was publicly available or furnished to Updata by INVESTools or thinkorswim. Updata did not assume responsibility to verify, and did not independently verify, the accuracy or completeness of such information. Updata further relied upon the assurances of management of INVESTools that they were unaware of any facts that would make the information provided incomplete or misleading in any respect. With respect to the financial projections examined by Updata, it assumed that such financial projections were reasonably prepared and reflect the best available estimates and good faith judgments of INVESTools and thinkorswim, and did not assume any responsibility for or express any view as to the financial forecasts or the assumptions on which they were based. Updata has assumed that the amount and timing of the Projected Benefits are reasonable and that the Projected Benefits will be realized substantially in accordance with such estimates. The forecasts and projections, including the Projected Benefits, were based on numerous variables and assumptions that are inherently uncertain, including, without limitations, facts related to general economic and market conditions. Accordingly, actual results could vary

significantly from those set forth in such forecasts and projections. Updata has neither made nor obtained an independent appraisal or valuation of any of the assets of INVESTools or thinkorswim, nor has it conducted an inspection of the respective properties and facilities of INVESTools or thinkorswim.

 

Updata did not opine on, nor did its opinion consider:

 

 

Updata’s opinion is necessarily based upon market, economic, financial and other conditions as they existed and could be evaluated as of the date of the opinion, and any subsequent change in such conditions would require a reevaluation of such opinion. Although subsequent developments may affect its opinion, Updata has assumed no obligation to update, revise or reaffirm it.

 

The preparation of a fairness opinion is a complex process and is not necessarily susceptible to summary description. The summary of Updata’s analyses set forth below summarizes the material analyses presented to the Board of Directors, but is not a complete description of the presentation by Updata to the Board of Directors or the analysis performed by Updata in connection with preparing its opinion. In arriving at its opinion, Updata did not attribute any particular weight to any analyses or factors considered by it, but rather made subjective, qualitative judgments as to the significance and relevance of each analysis and factor. Accordingly, Updata believes that its analyses and the summary set forth below must be considered as a whole and that selecting portions of its analyses, without considering all analyses, or of the following summary, without considering all factors and analyses, could create an incomplete view of the processes underlying the analyses set forth in the Updata presentation to the Board of Directors and Updata’s opinion.

 

The terms of the proposed Merger, including the type and amount of merger consideration, were determined through negotiations between INVESTools and thinkorswim and were approved by the Board of Directors. The decision to enter into the Merger was solely that of the Board of Directors. As described above, the opinion of Updata as to the fairness of the merger consideration from a financial point of view was only one of a number of factors taken into consideration by the Board of Directors in making its determination to approve the proposed Merger.

 

The following is a brief summary of the material financial analyses performed by Updata in connection with providing its opinion to the Board of Directors on September 15, 2006.

 

Analysis of Implied Multiples of the Merger Consideration

 

Updata analyzed certain transaction multiples implied by the merger consideration. Specifically, Updata calculated the following implied transaction multiples using the equity value and enterprise value of the transaction derived from the merger consideration:

 

These implied transaction multiples were then compared to the corresponding multiples observed in its analysis of (i) publicly traded companies deemed to be comparable to thinkorswim, and (ii) select precedent acquisitions deemed to be comparable to thinkorswim.

 

Analysis of Publicly Traded Companies Comparable to thinkorswim

 

This analysis reviews a business’ operating performance and outlook relative to a group of peer companies and then compares the Implied Transaction Multiples to the trading multiples of the peer group. Updata chose firms that it believed to be comparable to thinkorswim in terms of online brokerage focus and business models, including optionsXpress, Charles Schwab Corp., TD Ameritrade Holding Corp., E*Trade Financial Corp., and TradeStation Group Inc. Using published Wall Street estimates for the peer group, Updata analyzed revenue, EBITDA, and P/E multiples when making its comparisons, because valuations based on these multiples are generally accepted in the analysis of online brokerage firms. Revenue and EBITDA multiples were based on enterprise value, and P/E multiples were based on market value of equity. Enterprise value represents a company’s current stock price multiplied by its fully diluted common shares, plus debt and preferred stock, minus cash and cash equivalents on the most recent publicly available balance sheet. EBITDA means a company’s earnings before interest, taxes, depreciation and amortization, and it excludes all one-time charges and expenses. Updata used closing per share prices of the peer group companies as of September 13, 2006 in its calculations.

 

The following table lists the low, median and high data for a selected group of the comparable companies compared to the Implied Transaction Multiples. Based on the comparison to the peer group, Updata noted that the Implied Transaction Multiples were within the range of trading multiples.

 

 

Analysis of Selected Transactions

 

This analysis provides a valuation range based on financial information of selected public and privately held companies which have been acquired and are in similar industries as the business being evaluated. Using publicly available historical financial data of the acquisition targets and publicly available transaction values for these acquisitions, Updata compared the Merger with 17 selected mergers and acquisitions transactions involving online brokerage firms. These transactions included (target/acquirer):

 

 

 

For each selected acquisition, Updata calculated multiples based on the enterprise value to the target company’s LTM revenue and EBITDA wherever such information was publicly available. The following chart lists the low, median and high data for the selected transactions and the Implied Transaction Multiples. Updata noted that the Implied Transaction Multiples were within the range of the selected acquisitions.

 

 

Updata also observed that no company or transaction used in the above analyses is identical to thinkorswim or the Merger, and the reasons for and circumstances surrounding each of the analyzed transactions are inherently different. Accordingly, an analysis of the results of the foregoing is not mathematical; rather it involves complex, qualitative considerations and judgments, reflected in Updata’s opinion, concerning differences in the financial and operating characteristics of the compared companies, the characteristics of the selected transactions and other factors that could affect the public trading values (or other valuation) of the comparable companies, INVESTools and thinkorswim.

 

Discounted Cash Flow Analysis

 

Updata calculated a range of theoretical values for thinkorswim based upon projected discounted cash flows from 2007-2011, and a terminal value based upon a range of multiples of 2011 EBITDA. Results were based on financial estimates, approved by thinkorswim’s management through 2011, Updata’s analysis of after-tax, unlevered free cash flows, and discount rates between 13% and 17%. Changes in these estimated ranges, or in management’s estimates of business performance, would change the implied theoretical values. The discounted cash flow analysis produced a range of theoretical values, depending on the assumptions utilized, from an enterprise value of $444 million to $527 million. See the following table for details. Updata noted that this range of derived enterprise values was greater than the enterprise value implied by the merger consideration.

 

 

Pro Forma Accretion/Dilution Analysis

 

Updata analyzed the financial impact of the Merger on INVESTools financial results as compared to INVESTools standalone projected financial results. Accretion/dilution was calculated for INVESTools projected free cash flow per share and projected Adjusted EBITDA (defined as earnings before interest, taxes, depreciation and amortization and adjusted to add back 90% of the change in deferred revenue and other non-cash charges for the relevant period) per share for the projected fiscal years ended December 31, 2007 and December 31, 2008. The effect on free cash flow per share and Adjusted EBITDA per share was calculated using various assumptions,

including but not limited to the following: (i) the transaction closes on December 31, 2006, (ii) consideration paid to thinkorswim shareholders consisted of $170 million in cash (of which $125 million was new borrowings and $45 million was from available cash on INVESTools’ balance sheet) and 19.1 million shares of newly issues IEDU common stock, and (iii) the financial projections and Projected Benefits used in the analysis for thinkorswim and INVESTools were provided by and/or approved by the respective companies, subject to certain assumptions made by Updata.

 

Based on Updata’s analysis, the Merger, on a Free Cash Flow per Share basis, is dilutive in 2007 and accretive in 2008. On the basis of Adjusted EBITDA per Share, the Merger is accretive in 2007 and 2008. The following table sets forth the results of this analysis.

 

 

Updata, as part of its investment banking services, is regularly engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, strategic transactions, corporate restructurings, and other investment banking activity. Updata may in the future provide investment banking or other financial advisory services to INVESTools or thinkorswim or their affiliates and may receive fees for the rendering of such services.

 

Pursuant to an engagement letter dated August 17, 2006, INVESTools had agreed to pay Updata, upon delivery of the opinion, a customary fee of $425,000. The letter also provides that INVESTools will reimburse Updata for its out-of-pocket expenses (regardless of whether or not the opinion was delivered) and will indemnify Updata and certain related persons against certain liabilities arising out of its engagement. In addition, Updata’s engagement letter stipulates that Updata will bring down the fairness opinion to the closing of the Merger if requested by the Board of Directors.

 

On September 18, 2006, INVESTools entered into the Merger Agreement with thinkorswim. The following description of the Merger Agreement does not purport to be complete and is qualified in its entirety by reference to the complete text of the Merger Agreement, a copy of which has been filed as Exhibit 2.1 to INVESTools’ Current Report on Form 8-K filed on September 20, 2006. See “Where You Can Find Additional Information.”

 

Under the terms of the Merger Agreement, which was approved unanimously by the Boards of Directors of INVESTools and thinkorswim, thinkorswim will become a wholly-owed subsidiary of INVESTools following the Merger and thinkorswim stockholders will receive half of the merger consideration in cash and half in stock, representing approximately $170 million in cash and 19.1 million shares of Common Stock.

 

Following the Merger, current thinkorswim securityholders will generally not be allowed to transfer the Common Stock to be received in the Merger until six months following the Merger, and Mr. Sosnoff and Mr. Sheridan are subject to a longer restrictive period while employed by the Company. After the expiration of such periods, the Company will provide a shelf registration statement to effectuate sales of Common Stock held by current thinkorswim securityholders or their permitted transferees. In addition, up to 728,608 additional shares of Common Stock may be issued to current thinkorswim securityholders on the date such periods expire if, at such time, the Common Stock is trading for less than $8.75 per share (with an $8.00 floor on such price for purposes of the calculation of this additional consideration).

 

The parties to the Merger Agreement have made customary representations, warranties and covenants therein. INVESTools has also agreed to call a meeting of INVESTools stockholders to consider approval of the Issuance Proposal and the Charter Amendment. The Merger Agreement also provides for customary covenants providing for the parties to use their commercially reasonable efforts to take actions necessary for the closing of the Merger.

 

Consummation of the Merger is subject to various customary conditions, including, among others:

 

 

 

Under the Merger Agreement, thinkorswim has agreed not to, directly or indirectly, solicit, facilitate, initiate, entertain or encourage any inquiries or communications regarding, or the making of any proposal or offer that constitutes or may constitute, an Acquisition Proposal (as defined in the Merger Agreement).

 

thinkorswim and its subsidiaries have agreed to conduct their business in all material respects in the ordinary course of business and in a manner consistent with past practice and in compliance with all applicable laws and to use their commercially reasonable efforts to (i) preserve intact their business organization and their assets, rights and properties, (ii) operate according to plans and budgets provided to INVESTools, (iii) retain the services of their present officers, key employees and software development consultants, (iv) maintain in effect their material contracts and (v) preserve their present relationships with customers and other persons with whom they have business relations.

 

The Merger Agreement contains certain termination rights for both INVESTools and thinkorswim. In the event of a termination by either INVESTools or thinkorswim, substantially all of the provisions of the Merger Agreement will cease to have any effect.

 

The Merger Agreement is subject to and governed by the laws of the State of Delaware.

 

INVESTools and thinkorswim, Inc., a wholly-owned subsidiary of thinkorswim, entered into a Marketing Agreement on September 18, 2006 pursuant to which INVESTools has agreed to display the thinkorswim logo prominently in its Investors Toolbox and thinkorswim, Inc. has agreed to give INVESTools’ students a preferred rate for thinkorswim’s services. INVESTools and thinkorswim, Inc. will work together to develop an interface to allow INVESTools’ students to access thinkorswim, Inc.’s brokerage platform. thinkorswim, Inc. has agreed to pay INVESTools a monthly fee of $175,000, with a semi-annual review of the pricing. The Marketing Agreement expires on December 31, 2007 unless renewed by mutual agreement. INVESTools has agreed to only enter into similar marketing arrangements with one other brokerage firm during the term of the Marketing Agreement.

 

Subject to the satisfaction or waiver of all conditions precedent to the Merger, the Company has agreed, effective immediately following the Merger, that current thinkorswim directors Messrs. Sosnoff and Sheridan shall become members of the Board of Directors and that they, or their designees, will be nominated at each annual meeting of the Company’s stockholders held within the next three years following the closing of the Merger. The size of the Board of Directors shall concurrently be increased to eight members, to allow for the addition of the two nominees set forth above.

The management of INVESTools will not change as a result of the Merger. Mr. Sosnoff shall be the President of thinkorswim, Mr. Sheridan shall be the Executive Vice President of thinkorswim and Kristine Ross shall be the Chief Financial Officer of thinkorswim.

 

The Company will enter into substantially identical employment agreements, each having three-year terms, with Messrs. Sosnoff and Sheridan (the “Executives”) effective upon the closing of the Merger. Pursuant to these agreements, Messrs. Sosnoff and Sheridan will serve as President and Executive Vice President of thinkorswim, respectively, and will each be entitled to a base salary of $120,000 per year and eligible to earn an annual bonus award in an amount determined in the sole discretion of the compensation committee of the Board of Directors, but in no event less than $225,000 (which will be considered earned ratably on a monthly basis throughout the applicable fiscal year). The employment agreements will also provide for grants of non-qualified stock options, one-half of which will have an exercise price per share equal to the fair market value of the Common Stock on the date of grant and one-half of which will have an exercise price per share equal to 150% of the fair market value of the Common Stock on the date of grant. These options will become vested and exercisable as to 25% of the shares subject thereto on each of the first, second, third, and fourth anniversaries of their grant date, subject to the Executive’s continued service with the Company. Additionally, if a change in control of the Company occurs during the employment term, the options will become 100% vested and exercisable on an accelerated basis immediately prior to a change in control of the Company. In the event of a termination of the Executive’s employment due to the Executive’s death or disability, the Executive will be entitled to payment of earned and unpaid salary and bonus and continued payment of base salary for three months following termination of employment. In the event of a termination of an Executive’s employment by the Company without cause or by the Executive due to a resignation for constructive termination (which would include diminution in status, titles or duties), the Executive will be entitled to payment of earned and unpaid salary and bonus and continued payment of base salary for the longer of (i) twelve months or (ii) the scheduled expiration of the term of his employment agreement. The employment agreements also contain non-competition and non-solicitation covenants that apply during the employment term and following termination of employment for any reason until the later of the scheduled expiration of the employment term or the one-year anniversary of such termination of employment.

 

If the Executive’s employment is terminated by the Company without cause or by the Executive due to resignation for constructive termination, and at the time of such termination the Company is actively engaged in substantive negotiations with respect to a transaction that, if consummated, would result in a change in control of the Company, then the Executive agrees to continue to serve the Company and its subsidiaries and affiliates as a consultant for a period of up to 12 months following such termination of employment. Executive’s stock options will continue to vest during such consulting period in accordance with their normal vesting schedule (and will be vested on an accelerated basis if the change in control occurs during such consulting period), and Executive will be paid a per diem amount for his consulting services.

 

Under the Hart-Scott-Rodino Act, and the rules promulgated thereunder by the FTC, the Merger may not be completed until notification and report forms have been filed with the FTC and the Antitrust Division of the DOJ, and the applicable waiting period has expired or been terminated. INVESTools and thinkorswim filed notification and report forms under the HSR Act with the FTC and the Antitrust Division on October 13, 2006, and received early termination of the waiting period on October 23, 2006.

 

Additionally, prior to the completion of the Merger, thinkorswim, as a U.S.-registered broker-dealer, is required under the rules of the NASD to make certain filings in respect of the change in control of thinkorswim.

 

Except as noted above with respect to the required filings under the Hart-Scott-Rodino Act, the filings with the NASD and the filing of a Certificate of Merger in Delaware at or before the effective date of the Merger, the Company is unaware of any material federal, state or foreign regulatory requirements or approvals required for the completion of the Merger.

 

To the knowledge of the Board of Directors, none of the directors or executive officers of the Company will receive benefits as a result of the Merger that will be in addition to or different from the benefits received by the Company’s stockholders generally.

 

The Merger with thinkorswim will be accounted for under the purchase method of accounting under U.S. GAAP, which means that thinkorswim’s results of operations will effectively be included with ours from the effective time of the Merger and its consolidated identifiable assets (both tangible and intangible) and liabilities will be recorded at their fair values at the same time with the excess, if any, allocated to goodwill.

 

There are no material U.S. federal income tax consequences to the Company’s current stockholders that will result from the issuance of additional shares of Common Stock in the Merger.

 

In connection with the Merger, the Company will issue approximately 19.1 million shares of Common Stock and pay approximately $170 million in cash to thinkorswim’s securityholders. An additional $15.2 in cash will be used to pay customary fees and expenses in connection with the Merger, the financing arrangements and the related transactions. The cash payments are expected to be funded by a combination of the following:

 

 

Senior Secured Credit Facilities

 

Commitment Letter

 

The Company has received a fully executed debt commitment letter, dated as of September 18, 2006, from JPMorgan Chase Bank, N.A. (“JPMCB”) and J.P. Morgan Securities Inc. (“JPMorgan”). Pursuant to the debt commitment letter, subject to the conditions set forth therein, JPMCB has committed to provide the Company up to $150 million of senior secured credit facilities in the form of a $125 million senior secured term loan facility and a $25 million senior secured revolving credit facility. The proceeds of the senior secured term loan facility will be used to finance in part the Merger. The proceeds of the senior secured revolving credit facility will be used for general corporate purposes, including permitted acquisitions.

 

The debt commitments expire on January 31, 2007. The documentation governing the senior secured credit facilities has not been finalized and, accordingly, the actual terms of such facilities may differ slightly from those described in this Proxy Statement.

 

Conditions Precedent

 

The availability of the senior secured credit facilities is subject to, among other things, there not having occurred since December 31, 2005 any change or condition that would constitute a “Company Material Adverse Effect” or “Parent Material Adverse Effect”, as each term defined in the Merger Agreement, the accuracy in all material respects at the closing date of specified representations of the Company in the Merger Agreement, consummation of the Merger in accordance with the Merger Agreement (and no provision thereof being waived or amended in a manner materially adverse to the lenders without the consent of JPMorgan) and the negotiation, execution and delivery of definitive documentation.

General Provisions

 

The senior secured credit facilities will consist of a $125 million senior secured term loan facility and a $25 million senior secured revolving credit facility, both with terms of five years. The revolving credit facility will include provisions for the issuance of letters of credit and swingline loans. The senior secured credit facilities will permit the borrower to increase the amount of the revolving facility up to an aggregate of $50 million. No alternative financing arrangements or alternative financing plans have been made in the event that the senior secured credit facilities are not available as anticipated.

 

Interest Rate and Fees

 

Loans under the senior secured credit facilities are expected to bear interest, at the borrower’s option, initially, at (1) a rate equal to the London interbank offered rate (with adjustments for statutory reserve requirements), or LIBOR, plus an applicable margin, or (2) a rate equal to the higher of (a) the prime rate of JPMCB and (b) the federal funds effective rate plus 0.50%, plus an applicable margin. After delivery of the borrower’s financial statements for the second full fiscal quarter completed after the closing date, the applicable margins for borrowings under the term loan facility and the revolving credit facility may be reduced subject to a leverage-based pricing grid.

 

In addition, the borrower will pay to the lenders customary commitment fees under the revolving credit facility in respect of the unutilized commitments thereunder and a ticking fee on the aggregate amount of the revolving and term facilities from November 1, 2006 to the closing date.

 

Prepayments and Amortization

 

The borrower will be permitted to make voluntary prepayments at any time, without premium or penalty (other than LIBOR breakage costs, if applicable), and will be required to make mandatory prepayments of term loans with (1) net cash proceeds of non-ordinary course asset sales (subject to reinvestment rights and other exceptions), (2) issuances of debt (other than permitted debt) and (3) 50% of the surviving corporation’s excess cash flow (to be defined) subject to a leverage-ratio test. The term loan will amortize in equal quarterly installments in aggregate annual amounts equal to 5% of the original principal amount of the term loan, with the balance payable at the final maturity date.

 

Guarantors

 

All obligations under the new senior secured credit facilities will be unconditionally guaranteed by each existing and future direct or indirect wholly-owned material domestic subsidiary, other than any domestic subsidiary that is a broker-dealer.

 

Collateral

 

The obligations of the borrower under the senior secured credit facilities will be secured on a first priority basis, subject to permitted liens and other agreed-upon exceptions, by (i) a first-priority pledge of all the capital stock of each wholly-owned restricted subsidiary of the Company and (ii) by security interests in, and mortgages on, substantially all tangible and intangible assets of the Company and each subsidiary.

 

Other Terms

 

The senior secured credit facilities will contain customary representations, warranties and covenants, including, among other things, restrictions on indebtedness, liens, fundamental changes, investments and acquisitions, sales of assets, sale leasebacks, mergers and consolidations, dividends and other distributions, redemptions, prepayments of certain subordinated indebtedness and certain existing indebtedness, and a maximum total leverage ratio. The senior secured credit facilities will also include customary events of default, including a change of control (to be defined).

 

The Board of Directors has unanimously approved the Merger, the issuance of shares of Common Stock in connection with the Merger, the amendments to the Company’s 2001 Stock Option Plan, and the amendment to INVESTools’ Certificate of Incorporation.

 

THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE “FOR” THE APPROVAL OF THE ISSUANCE OF SHARES OF COMMON STOCK IN CONNECTION WITH THE COMPANY’S PROPOSED MERGER OF ITS WHOLLY-OWNED SUBSIDIARY WITH THINKORSWIM, AND GRANTS TO THE EMPLOYEES OF THINKORSWIM OF OPTIONS TO PURCHASE COMMON STOCK.

 

The Board of Directors has approved the amendment and restatement of INVESTools’ Certificate of Incorporation to authorize additional shares of Common Stock to permit the issuance of Common Stock to the stockholders of thinkorswim in connection with the Merger and the grants to employees of thinkorswim of options to purchase shares of Common Stock. See “Issuance of Common Stock in Connection with the Proposed Merger — Background of the Merger,” “— INVESTools’ Reasons for the Merger” and “— thinkorswim’s Reasons for the Merger” for a discussion of the background and reasons for the amendment of INVESTools’ Certificate of Incorporation.

 

The amendment to INVESTools’ Certificate of Incorporation will increase the number of authorized shares of capital stock of the Company from “61,000,000” to “101,000,000,” and will increase the number of authorized shares of Common Stock from “60,000,000” to “100,000,000.”

 

Under Delaware law and the provisions of INVESTools’ current Certificate of Incorporation, the adoption of the proposed amendment to the Certificate of Incorporation requires the affirmative vote of the holders of at least a majority of the issued and outstanding shares of Common Stock.

 

If the Company’s stockholders approve the amendment to INVESTools’ Certificate of Incorporation and the issuances of Common Stock to thinkorswim stockholders in connection with the Merger and the grants to the employees of thinkorswim of options to purchase Common Stock, the Company intends to file the amended Certificate of Incorporation with the Delaware Secretary of State immediately prior to the consummation of the proposed Merger. The amended Certificate of Incorporation will become effective on the date the filing is accepted by the Delaware Secretary of State. Please note, however, that the proposed amendment of INVESTools’ Certificate of Incorporation may be abandoned by the Board of Directors, without further action by the Company’s stockholders, at any time before or after the Special Meeting if for any reason the Board of Directors deems it advisable.

 

The adoption of this Proposal is conditioned on the approval of the Issuance Proposal by the Company’s stockholders. The adoption of this Proposal is not conditioned on the approval of the Option Plan Amendments by the Company’s stockholders.

 

There are no material U.S. federal income tax consequences to the Company’s current stockholders that will result from the amendment to INVESTools’ Certificate of Incorporation.

 

The Board of Directors has unanimously approved the Merger, the issuance of shares of Common Stock in connection with the Merger, the amendments to the Company’s 2001 Stock Option Plan, and the amendment to INVESTools’ Certificate of Incorporation.

 

THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE “FOR” THE APPROVAL OF THE AMENDMENT TO INVESTOOLS’ CERTIFICATE OF INCORPORATION.

 

 

On October 31 and December 6, 2006, the Compensation Committee recommended to the Board of Directors that the stockholders approve amendments to the Company’s 2001 Stock Option Plan (the “Plan”) to, respectively, increase the number of shares of Common Stock available for issuance thereunder from 8 million to 12 million shares, and to expand potential award recipients to include consultants of the Company. Attached to this Proxy Statement as Annex B is a copy of the Plan, as amended and approved by the Board of Directors, and as submitted to the stockholders for their approval.

 

Approval of the Option Plan Amendments requires the affirmative vote of a majority of the shares of Common Stock present or represented by proxy and entitled to a vote at the Special Meeting.

 

The Board of Directors believes that approval of the Option Plan Amendments will allow the Company to continue to provide key employees and directors with a proprietary interest in the growth and performance of the Company while aligning the interests of management with those of the Company’s stockholders. Approval of the Option Plan Amendments will also allow the Company to continue to have flexibility in structuring compensation arrangements to attract and retain key employees and directors for the Company, and to provide the Company with an alternative means of compensating consultants.

 

The Board of Directors believes that the growth of the Company depends significantly upon the efforts of its key employees and directors and that such individuals are best motivated to put forth maximum effort on behalf of the Company if they own an equity interest in the Company. In accordance with this philosophy, in December 2001, the Board of Directors adopted, and the stockholders approved, the Plan. The purpose of the Plan is to further the interests of the Company, its subsidiaries and its stockholders by providing incentives in the form of stock options to key employees and directors who contribute to the success and profitability of the Company and its subsidiaries.

 

The Plan, with the amendments as proposed, provides for the grant to employees, directors, and consultants of the Company (or its subsidiaries) of options to purchase shares of Common Stock. The Plan is administered by the Compensation Committee of the Board of Directors (the “Compensation Committee”), which has complete discretion to select the optionees and to establish the terms and condition of each option, subject to the provision of the Plan. Options granted under the Plan may be “incentive stock options” as defined in Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”), or nonstatutory stock options.

 

The adoption of this Proposal is conditioned on the approval of the Issuance Proposal and the Charter Amendment by the Company’s stockholders.

 

 

As of December 6, 2006 the Company has reserved a total of 12 million shares of Common Stock (including the 4 million additional shares subject to stockholder approval at the Special Meeting) for issuance under the Plan. If any option granted under the Plan expires or terminates for any reason without having been exercised in full, then the unpurchased shares subject to that option will once again be available for additional option grants. As of December 6, 2006, options to acquire 5,572,118 shares of Common Stock had been granted under the Plan at exercises prices ranging from $0.18 to $12.67 per share, or a weighted average per share exercise price of $1.80 per share.

 

Proportionate adjustments may be made to the number, class and/or kind of shares for which options are authorized to be granted under the Plan, the number, class or kind of shares then subject to options previously granted under the Plan, the price per share payable upon exercise of each option outstanding under the Plan and/or any other affected term of an option, in the discretion of the Board of Directors, in the event of any reclassification, recapitalization, stock dividend, stock split, combination or exchange of shares, rights offering, or other similar transaction or event. To the extent deemed equitable and appropriate by the Board of Directors, and subject to any required stockholder action, any option granted under the Plan will pertain to the securities and other property to

which a holder of the number of shares of stock covered by the option would have been entitled to receive in connection with such event.

 

 

Options granted under the Plan may not be exercised more than 10 years after the date of grant and the Compensation Committee may set a shorter option period. Options may be granted under the Plan only until December 3, 2011.

 

If an optionee ceases continuous service for the Company for cause, all options held by the optionee shall lapse immediately following the last day that the optionee is employed by the Company or the effective date of the termination of his services to the Company. If an optionee ceases continuous service for the Company for any reason other than cause, death, disability, or retirement on or after the age of 65 of the optionee, all options held by the optionee will lapse at the earlier of the end of the option period or ten days following the last day that the optionee is employed by the Company or the effective date of the termination of his services to the Company; provided, however, the options may be exercised only as to those shares that have vested as of the termination date. In the case of death of the optionee, the beneficiaries designated by the optionee shall have one year from the optionee’s demise or to the end of the option period, whichever is earlier, to exercise the option; provided, however, the option may be exercised only as to those shares that have vested at the time the optionee died. If the optionee retires on or after attaining age 65, the option shall lapse at the earlier of the end of the option period or three months after the date of retirement; provided, however, the option may be exercised only as to those shares that have vested on the retirement date. In the event of termination of continuous service due to total and permanent disability (within the meaning of Section 422 of the Code), the option shall lapse at the earlier of the end of the option period or twelve months after the date of such termination; provided, however, the option may be exercised only as to those shares that have vested at the time the optionee became disabled. Notwithstanding the foregoing, with respect to option grants to thinkorswim employees in connection with the Merger, in the event that the optionee’s employment is terminated by the Company without “cause” during the 12 month period following the occurrence of a “change of control” (as defined in the Plan), then such optionee’s then outstanding unvested options will become fully vested upon such termination of employment.

 

The exercise price of incentive stock options may not be less than 100% of the fair market value of the Common Stock as of the date of grant (110% of the fair market value if the grant is to an employee who owns more than 10% of the total combined voting power of all classes of capital stock of the Company). The Code currently limits to $100,000 the aggregate value of Common Stock for which incentive stock options may first become exercisable in any calendar year under the Plan or any other option plan adopted by the Company. Nonstatutory stock options may be granted under the Plan at an exercise price of not less than the par value of the Common Stock on the date of grant. The maximum number of shares with respect to which options (incentive or nonstatutory) may be granted each calendar year to an optionee is 2 million. On December 12, 2006, the closing price for the Common Stock on NASDAQ was $13.24 per share.

 

Unless otherwise provided by the Compensation Committee, an option granted under the Plan vests as to 1/4 of the total number of shares covered by the option during each 12-month period commencing 12 months after the date of grant of the option. The Board of Directors may, in its discretion and subject to applicable law, provide for the exercise of options either as to an increased percentage of shares per year or as to all remaining shares.

 

 

An option granted under the Plan is not transferable otherwise than by will or the laws of descent and distribution or pursuant to a qualified domestic relations order as defined by the Code or Title I of the Employee Retirement Income Security Act of 1974, as amended, or the rules thereunder, and may be exercised during the lifetime of an optionee only by him. The Compensation Committee may grant options that are transferable, without payment of consideration, to immediate family members of an optionee or to trusts or partnerships for such family members. The Compensation Committee may also amend outstanding options to provide for such transferability.

 

The Compensation Committee may amend the Plan or condition or modify options awarded under the Plan in response to changes in securities or other laws or rules, regulations or regulatory interpretations applicable to the Plan or to comply with stock exchange rules or requirements without approval of the stockholders. The Compensation Committee may, from time to time, terminate or modify the Plan in any respect; provided, however, that, any amendment, whether with or without the approval of the stockholders, that alters the terms or provisions of an option granted before the amendment (unless the alteration is expressly permitted under the Plan) will be effective only with the consent of the optionee to whom the option was granted.

 

 

As of December 6, 2006, approximately 540 employees were eligible to be considered for the grant of options under the Plan. Following the consummating of the Merger, the Company expects that approximately 630 employees will be eligible to be considered for the grant of options under the Plan. The grant of options to key employees, directors, and consultants under the Plan is entirely in the discretion of the Compensation Committee. The Compensation Committee has no outstanding grants of options to purchase Common Stock and no grants are under consideration at the present time.

 

 

Under existing federal income tax provisions, a participant who receives stock options that are subject to restrictions that create a “substantial risk of forfeiture” (within the meaning of Section 83 of the Code) will not normally realize any income, nor will the Company normally receive any deduction for federal income tax purposes, in the year such option is granted.

 

When a nonstatutory stock option granted pursuant to the Plan is exercised, the optionee will realize ordinary income measured by the difference between the aggregate fair market value of the shares of Common Stock on the exercise date and the aggregate purchase price of the shares of Common Stock as to which the option is exercised, and, subject to Section 162(m) of the Code, the Company will be entitled to a deduction in the year the option is exercised equal to the amount the optionee is required to treat as ordinary income.

 

An optionee generally will not recognize any income upon the exercise of any incentive stock option, but the excess of the fair market value of the shares at the time of exercise over the option price will be an item of adjustment, which may, depending on particular factors relating to the optionee, subject the optionee to the alternative minimum tax imposed by Section 55 of the Code. An optionee will recognize capital gain or loss in the amount of the difference between the exercise price and the sale price on the sale or exchange of stock acquired pursuant to the exercise of an incentive stock option, provided the optionee does not dispose of such stock within either two years from the date of grant or one year from the date of exercise of the incentive stock option (the “required holding periods”). An optionee disposing of such shares before the expiration of the required holding period will recognize ordinary income generally equal to the difference between the option price and the fair market value of the stock on the date of exercise. The remaining gain, if any, will be capital gain. The Company will not be entitled to a federal income tax deduction in connection with the exercise of an incentive stock option, except where the optionee disposes of the Common Stock received upon exercise before the expiration of the required holding periods.

 

The foregoing does not purport to be a complete summary of the federal income tax considerations that may be relevant to holders of options or to the Company. It also does not reflect provisions of the income tax laws of any municipality, state or foreign country in which an optionee may reside, nor does it reflect the tax consequences of an optionee’s death.

 

 

The Board of Directors has unanimously approved the Merger, the issuance of shares of Common Stock in connection with the Merger, the amendments to the Company’s 2001 Stock Option Plan and the amendment to INVESTools’ Certificate of Incorporation.

 

THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE “FOR” THE APPROVAL OF THE AMENDMENTS TO THE COMPANY’S 2001 STOCK OPTION PLAN.