<PAGE>
PROSPECTUS
424(b)(3)
TELEBANC
FINANCIAL CORPORATION
345,000 Shares of Common Stock
The 345,000 shares of common stock, par value $.01 per share ("Common
Stock") offered hereby (the "Offering") are being sold by TeleBanc Financial
Corporation ("TeleBanc" or the "Company"). The Common Stock is issuable from
time to time only upon the exercise of Warrants to purchase shares of Common
Stock (the "Warrants") which were issued and sold in connection with the
Company's initial public offering in May 1994. The Warrants were issued under a
Warrant Agreement (the "Warrant Agreement") between the Company and Wilmington
Trust Company as Warrant Agent. Each Warrant is exercisable any time after May
27, 1995, and will expire on May 1, 2004. The offering price of the Common Stock
will be the exercise price of the Warrants, $7.65625 per share. There is
currently no public market for the Common Stock. The Company does not intend to
list the Common Stock on any securities exchange or include the Common Stock for
quotation on any quotation system. Although Friedman, Billings, Ramsey & Co.,
Inc. ("FBR") currently makes a market in the Common Stock, no active trading
market for the Common Stock is expected to develop. The absence or
discontinuance of a market for the Common Stock may have an adverse impact on
the price and liquidity of the Common Stock. See "Market for the Common Stock."
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
Prospective investors should consider carefully the matters discussed under
"Risk Factors" relating to certain factors relevant to an assessment of TeleBanc
or the Common Stock.
THE SECURITIES OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR DEPOSITS, AND
ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION
OR ANY OTHER GOVERNMENTAL AGENCY.
-------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
===================================================================================================================
Price to Underwriting Discounts Proceeds to
Public and Commissions Company (2)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share of Common Stock........... $7.65625 $ N/A $7.65625
- -------------------------------------------------------------------------------------------------------------------
Total............................. $2,641,406 $ N/A $2,641,406
===================================================================================================================
<FN>
(1) Before deducting estimated expenses of $ 25,000 relating to the Offering
payable by the Company. See "Use of Proceeds; Purpose of Offering."
</FN>
</TABLE>
-------------------------
The date of this Prospectus is May 6, 1996
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports and other information with the Securities and Exchange
Commission (the "Commission"). Such reports, proxy statements and other
information can be inspected at the Public Reference Section maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and the
following regional offices of the Commission: 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511 and Seven World Trade Center, 13th Floor, New
York, New York 10048. Copies of such material can be obtained from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates.
The Company has filed with the Commission a registration statement on Form
S-3 (the "Registration Statement"), of which this Prospectus is a part, under
the Securities Act of 1933, as amended (the "Securities Act"), with respect to
the Common Stock offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement, certain portions of which
have been omitted as permitted by the rules and regulations of the Commission.
Statements contained in this Prospectus as to the contents of any contract or
other documents are not necessarily complete, and in each instance, reference is
made to the copy of such contract or documents filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference and the exhibits and schedules thereto. For further information
regarding the Company and the Common Stock, reference is hereby made to the
Registration Statement and such exhibits and schedules which may be obtained
from the Commission at its principal office in Washington, D.C. upon payment of
the fees prescribed by the Commission.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The documents listed below have been filed by the Company under the
Exchange Act with the Commission and are incorporated herein by reference:
1. The Company's Annual Report on Form 10-K for the year ended December 31,
1995.
All documents filed subsequent to the date of this Prospectus pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act and prior to termination
of the offering of all shares of Common Stock to which this Prospectus relates
shall be deemed to be incorporated by reference in this Prospectus and shall be
part hereof from the date of filing of such document.
Any statement contained herein or in a document incorporated or deemed to
be incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained in this
Prospectus (in the case of a statement in a previously filed document
incorporated or deemed to be incorporated by reference herein), or in any other
subsequently filed document that is also incorporated or deemed to be
incorporated by reference herein, modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus. Subject to the
foregoing, all information appearing in this Prospectus is qualified in its
entirety by the information appearing in the documents incorporated by
reference.
The Company will provide without charge to each person, including any
beneficial owner, to whom a copy of this Prospectus is delivered, upon their
written or oral request, a copy of any or all of the documents incorporated
herein by reference (other than exhibits to such documents, unless such exhibits
are specifically incorporated by reference in such documents). Written requests
for such copies should be addressed to Aileen Lopez Pugh, TeleBanc Financial
Corporation, 1111 North Highland Street, Arlington, Virginia 22201, telephone
number (703) 247-3700.
2
<PAGE>
THE COMPANY
TeleBanc was organized by MET Holdings, and in March 1994 became the
direct savings and loan holding company parent of Metropolitan Bank for Savings,
F.S.B., which had been acquired by MET Holdings in 1989. Metropolitan Bank for
Savings, F.S.B. was renamed "TeleBank" (the "Bank") in March 1996. During the
second quarter of 1994, TeleBanc raised $20.9 million of net proceeds through
the sale of 750,000 shares of Common Stock and units consisting of an aggregate
$17.3 million of subordinated debt and the 345,000 warrants. The primary
business of TeleBanc is the business of the Bank. The Bank was incorporated as a
state-chartered building and loan association in 1933 and was converted to a
federally chartered stock savings and loan association in a voluntary
supervisory conversion in 1987. In 1989, it was converted to a federal savings
bank and acquired by MET Holdings. MET Holdings, which holds 63.4% of the
outstanding Common Stock, also owns approximately 80% of Arbor Capital Partners,
Inc. ("Arbor Capital"), a registered investment adviser and broker-dealer, and
holds a non-subsidiary investment in Loan Identification Number Corporation
("LIN Corporation"), which is developing proprietary data processing software
for mortgage originations and servicing.
At December 31, 1995, the Company reported total assets of $553.9
million, total deposits of $306.5 million and stockholders' equity of $21.6
million.
The Company's executive offices and the Bank's home office are located
at 1111 North Highland Street, Arlington, Virginia 22201, telephone (703)
247-3700.
RECENT DEVELOPMENTS
New Activities
Management has received regulatory approval for the Bank to own 50% of
a new entity, AGT Mortgage Services, LLC ("AGT"). AGT will service performing
loans for a fee (including those held by the Bank) and perform servicing and
workout for troubled or defaulted loans for a fee. It is anticipated that
operations will commence in the second quarter of 1996.
In addition, the independent members of the Board of Directors of the
Company have directed management to commence negotiations for a potential merger
of MET Holdings into the Company. MET Holdings owns approximately 80% of Arbor
Capital. The Board anticipates that a tax free stock swap will be consummated.
The exchange ratio of Company stock for the stock of MET Holdings will be based
upon the fair market value of MET Holdings and the fair market value of the
Company's Common Stock, subject to receipt of an independent appraisal and
independent opinion as to the fairness of the merger to stockholders of the
Company (other than MET Holdings) from a financial perspective. At this time, no
definitive agreement or arrangement has been reached and, accordingly, no
assurance can be provided that the contemplated transaction will be concluded.
On May 2, 1996, the Bank entered into an Agreement to Assume Deposit
Liabilities by and among First Commonwealth Savings Bank FSB ("First
Commonwealth"), First Commonwealth Financial Corp., John C. York, Jr. and the
Bank. Pursuant to this agreement, the Bank will assume certain brokered and
telephone solicited deposit accounts of First Commonwealth, which deposits had a
current balance of $53.1 million as of April 30, 1996. In the deposit
assumption, First Commonwealth will pay the Bank the amount of the deposit
liabilities assumed, plus the amount of deposit liabilities (less certain
renewals) multiplied by 0.25%. Also, if a federal law is enacted or other
federal action is taken requiring the payment by the Bank of a one-time fee to
recapitalize the Savings Association Insurance Fund, First Commonwealth will pay
the tax effected amount of that fee as to the deposits transferred, up to .527%
of such deposits. The agreement may be terminated by the Bank following its
completion of a corporate investigation of First Commonwealth by May 16, 1996,
if the Bank reasonably determines that the business and operations of First
Commonwealth relating to the deposit liabilities or the deposit liabilities are
not substantially as represented and warranted on the date of the agreement.
3
<PAGE>
Financial Highlights for First Quarter of 1996
The following tables set forth certain selected historical financial
data of the Company for the periods and at the dates indicated. The selected
consolidated financial data as of March 31, 1996 and for the three month periods
ended March 31, 1995 and March 31, 1996 are unaudited but, in the opinion of
management, reflect all adjustments (all of which are of a normal recurring
nature) necessary for a fair presentation for the results of operations for
those periods. The financial data as of December 31, 1995 has been derived from
the audited financial statements of the Company included in the Company's annual
report on Form 10-K for the year ended December 31, 1995, which report is
incorporated herein by reference.
<TABLE>
<CAPTION>
At
----------------------- Change Change
3/31/96 12/31/95 ($) (%)
------- -------- ---------- ------
(Dollars in thousands, except percentages)
<S> <C> <C> <C> <C>
Financial Condition
Total assets $ 580,614 $ 553,943 $ 26,671 4.81%
Loans receivable, net 253,177 248,667 4,510 1.81
Mortgage-backed securities,
available for sale 257,904 234,210 23,694 10.12
Investment securities,
available for sale 44,066 40,058 4,008 10.01
Deposits 331,662 306,500 25,162 8.21
Advances from Federal
Home Loan Bank 105,500 105,500 -- --
Securities sold under
agreements to repurchase 92,508 93,905 (1,397) (1.49)
Subordinated debt, net of
original issue discount 16,518 16,496 22 0.13
Total stockholders' equity 22,435 21,565 870 4.03
</TABLE>
<TABLE>
<CAPTION>
For the three months ended:
---------------------------
3/31/96 3/31/95
------- -------
(Dollars in thousands)
----------------------
Results of Operations Data:
<S> <C> <C>
Interest income $ 11,131 $ 8,653
Interest expense 8,357 7,155
----- -----
Net interest income 2,774 1,498
Provision for loan and mortgage related
security losses 419 309
--- ---
Net interest income after provision for loan
and mortgage related security losses 2,355 1,189
Non-interest income 605 630
Total general and administrative expenses 1,679 1,248
Total other non-interest expenses 300 87
Income tax expense 332 164
--- ---
Net income $ 649 $ 320
=== ===
</TABLE>
4
<PAGE>
Comparison of Three Months Ended March 31, 1995 and 1996
Results of Operations. The Company reported net income of $649,000 for
the quarter ended March 31, 1996, a 102.8% increase from the net income of
$320,000 for the same period in 1995. The Company reported earnings per share of
$0.31 for the quarter ending March 31, 1996 as compared to $0.16 for the quarter
ending March 31, 1995.
Net income for the three months ended March 31, 1996 consisted
primarily of $2.8 million in net interest income, $348,000 in loan fees and a
$241,000 gain on the sale of investment securities available for sale, offset by
$2.0 million in non-interest expenses, $419,000 in provision for loan and
mortgage related security losses and $332,000 in income tax expense. For the
same period in 1995, the Company reported net interest income of $1.5 million
and $617,000 in trading profit offset by $1.3 million in non-interest expenses,
$309,000 in provision for loan and mortgage related security losses, and
$164,000 in income tax expense. The increase in net interest income reflects an
improved annualized interest rate spread from 1.30% for the three months ending
March 31, 1995 to 2.03% for the same period in 1996. The provision for loan and
mortgage related security losses reflects management's intent to provide prudent
reserves for potential loan losses.
Financial Condition. As of March 31, 1996, assets totaled $580.6
million, an increase of 4.81% from $553.9 million as of December 31, 1995. Since
becoming the holding company for the Bank in 1994, the Company has experienced
significant growth in total assets largely due to management's efforts to invest
and leverage the $21.9 million of net proceeds from the Company's initial public
offering in June 1994. From March 31, 1994 to March 31, 1996, the Company's
assets grew from $216.4 million to $580.6 million, or 168.0%. The Company does
not anticipate continued growth of total assets and liabilities at rates
comparable to recent periods. During the fourth quarter of 1995, management
reclassified the entire held to maturity investment and mortgage-backed
securities portfolios as available for sale.
Stockholders' equity increased $870,000 to $22.4 million at March 31,
1996 from $21.6 million at December 31, 1995. The increase reflects $649,000 in
net income for the quarter ended March 31, 1996, and an unrealized gain on
securities available for sale of $221,000 net of taxes which affects the
Company's capital, but does not impact the statement of operations.
RISK FACTORS
The Common Stock offered hereby involves a high degree of risk. In
addition to the other information set forth in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the Common
Stock offered by this Prospectus.
Restrictions on Availability of Funds for Dividends on Common Stock
The principal sources of funds for the Company's payments of any cash
dividends on the Common Stock will be dividends from the Company's subsidiary,
the Bank, as well as liquid investments of funds which are not invested in the
Bank or otherwise required to be maintained by the Company pursuant to the terms
of its outstanding subordinated notes.
Applicable rules and regulations of the OTS impose limitations on
capital distributions by savings institutions such as the Bank. Within these
limitations, certain "safe harbor" capital distributions are permitted, subject
to providing OTS at least 30 days' advance notice. Savings institutions which
have capital in excess of all fully phased-in capital requirements before and
after the proposed capital distribution and that have not been notified that
they are in need of more than normal supervision ("Tier 1 Institutions") may
make capital distributions during a calendar year up to the greater of (i) 100%
of net income to date during the calendar year, plus the amount that would
reduce by one-half its "surplus capital ratio" (the excess capital over its
fully phased-in capital requirements) at the beginning of the calendar year, or
(ii) 75% of its net income over the most recent four-quarter period.
5
<PAGE>
The OTS may prohibit a proposed capital distribution by any institution
if the OTS determines that such distribution would constitute an unsafe or
unsound practice. In addition, effective December 19, 1992, the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA") prohibits an insured
depository institution from declaring any dividend or making any other capital
distribution if, following the distribution or payment, the institution would be
classified as "undercapitalized" or lower. At December 31, 1995, the Bank
qualified as a well capitalized institution. Based on capital requirements in
effect as of January 1, 1996, the Bank would have been able to pay $7.3 million
in dividends in the aggregate to the Company as of December 31, 1995. The
Company does not presently anticipate any difficulties in obtaining regulatory
approval for the payment of dividends by the Bank to the Company in order to
permit the Company to service its outstanding subordinated debt. The annual
expense to service the Company's outstanding subordinated debt is approximately
$2.0 million.
The Company also may be required by the OTS to maintain the capital of
the Bank at a level consistent with regulatory capital requirements. This may
reduce the amount of funds that would otherwise be available to the Company for
the payment of dividends, if any, on the Common Stock.
The Company's capital distributions are also restricted by the terms of
the indenture ("Indenture") between the Company and Wilmington Trust Company, as
trustee, pursuant to which the Company issued $17.3 million in aggregate
principal amount of subordinated notes in connection with the Company's initial
public offering in May 1994. The Indenture imposes certain limitations on the
payment of dividends and other capital distributions by the Company and requires
the Company initially to maintain liquid assets in an amount equal to 150% of
the annual debt service on all indebtedness of the Company until certain income
targets are achieved and the reserve requirement is reduced to 100% of annual
debt service. See "Dividend Policy--General."
Supervisory Agreement
In May 1993, the Bank entered into a supervisory agreement with the OTS
pursuant to which the Bank agreed to (i) adopt and implement certain policies
and procedures in connection with investment activities, particularly with
respect to the use of futures transactions and other hedging strategies and
activities; (ii) submit for OTS review a comprehensive business plan; (iii)
adopt and implement certain policies and procedures regarding executive
compensation; (iv) not extend credit or be a party to any indebtedness of any
holding company of the Bank or any affiliate of the Bank, except upon providing
prior notice to the OTS, and otherwise not engage in any affiliated
transactions, except to the extent permitted by applicable law; and (v) adopt
and effect specified loan underwriting and appraisal policies and procedures.
The supervisory agreement also required the Bank to establish certain valuation
allowances, to enter into a tax allocation agreement with MET Holdings and to
continue the disposition of certain investments in the Bank's automobile leasing
service corporation subsidiary, ARLO Service Corporation ("ARLO"). Furthermore,
under the supervisory agreement, the Bank was required to increase the size of
its Board of Directors, appoint independent Board members and classify the terms
of such Directors. The Board was required to appoint a compliance committee for
monitoring and coordinating the Bank's adherence to the provisions of the
supervisory agreement.
In response to the supervisory agreement, the Bank took a number of
actions:
o The Bank established investment policies and procedures to comply with
applicable rules and regulations regarding hedging strategies and
activities. The Bank no longer engages in any futures transactions.
o In July 1993, the Bank submitted to the OTS a comprehensive three-year
business plan. In October 1993, the OTS accepted the portion of the
Bank's business plan covering the period from May 1993 through December
1994, subject to certain conditions. In November 1994, the OTS accepted
the Bank's business plan for the year ending December 31, 1995. The
Bank believes that it has been operating consistent with the terms and
the provisions of the business plan and the conditions imposed by the
OTS.
o As to executive compensation matters, the Board of Directors'
Compensation Committee, which consists of independent Directors,
reviews all compensation of the Bank's officers pursuant to Board of
Directors approved policies, and makes recommendations to the full
Board as to actions to be taken in that regard.
6
<PAGE>
o The Bank terminated its line of credit with MET Holdings and therefore
no longer extends credit to MET Holdings. The Bank has never extended
credit to the Company.
o The Bank adopted specific policies with respect to loan underwriting
and appraisals. Also, effective September 1992, and pursuant to OTS
direction, the Bank established additional general valuation allowances
of $367,000. Prior to such time, the Bank had recorded an equivalent
amount of such valuation allowances, but the OTS required that the
previously reported allowances be reclassified as specific valuation
allowances inasmuch as they reflected purchased reserves in connection
with loan pools purchased by the Bank. The Board of Directors of the
Bank continues to review the adequacy of the Bank's general valuation
allowances on at least a quarterly basis.
o The Bank entered into a tax allocation agreement among the Bank, MET
Holdings, and the Bank's subsidiary, ARLO. In April 1994, the Bank and
the Company entered into a tax allocation agreement.
o In September 1991, the Bank repossessed automobiles which served as
collateral for loans made to an auto leasing company in which ARLO was
a principal stockholder. As of December 31, 1994, the Bank had written
off its investment, compared to a book value of $413,278 at December
31, 1991.
o The Bank expanded its Board of Directors to six members, three of whom
are independent (i.e., not employees of the Bank). As of the date of
this prospectus, the appointment of one of the Bank's three independent
directors, Mr. Arlen Gelbard, has been conditionally approved by the
OTS, subject to completion of the OTS standard review of Mr. Gelbard's
background and qualifications. The Board is divided into three classes,
as equal in number as possible, each with staggered terms. The Board of
Directors intends to continue to seek qualified persons to serve as
independent directors, and to increase the size of the Board to add
such new directors. The Board also has charged the Audit/Compliance
Committee with responsibility to monitor and coordinate the Bank's
adherence to the provision of the supervisory agreement.
In March 1994, and in connection with the organization of TeleBanc, the
Bank agreed to an amendment to the supervisory agreement with the OTS. The
amendment was entered into as a condition to the OTS approving the acquisition
of control of the Bank by the Company and was meant to address concerns of the
OTS related to the Bank's record of helping to meet the credit needs of its
community pursuant to the Community Reinvestment Act of 1977 (the "CRA").
Pursuant to the amendment, the Bank committed $250,000 for investment in a local
community development corporation for the purpose of financing low and moderate
income housing, and entered into a correspondent agreement with a local mortgage
company to purchase one to four family dwelling loans in Arlington County,
Virginia, the Bank's delineated lending area for CRA purposes. In 1995, the OTS
lifted the aforementioned requirement and the Bank is now required to invest the
$250,000 in an investment tax credit fund that qualifies for CRA purposes.
The amendment to the supervisory agreement also requires the Bank to
submit monthly and quarterly reports to the OTS, and to improve its efforts to
satisfy its obligations under CRA. These efforts include adhering to the Bank's
CRA plan, providing monthly Board of Director reports regarding CRA compliance
and progress, and incorporating into the Bank's CRA plan processes and
provisions for monitoring the development of products and services and lending
patterns related to CRA activities. In addition, the Bank is required to advise
the OTS regarding contacts and other activities related to the purchase and
origination of loans in the Bank's local market area.
As described above, the Bank has taken a number of specific steps in
response to the supervisory agreement. None of such actions is expected to have
any material adverse impact on the Bank's future results of operations. The Bank
believes it is substantially in compliance with the supervisory agreement as of
December 31, 1995. Failure by the Bank to comply with the supervisory agreement
could result in the imposition of civil monetary penalties and/or restrictions
on the Bank's operations.
7
<PAGE>
Non-Traditional Operating Plan
The Bank's business plan differs from that of most banks and thrifts.
The Bank principally raises funds through the telemarketing of certificates of
deposit and FHLB advances and other borrowings, rather than through a branch
network. In addition, the Bank maintains a much higher percentage of its
interest-earning assets in mortgage-backed and other investment securities than
a traditional thrift. The Bank tends to pay relatively high rates of interest on
its deposit accounts, while its mortgage-backed and investment securities
portfolios, as well as its purchased loan portfolio, generally have lower yields
than the residential mortgage loans which thrifts traditionally originate. For
example, for the year ended December 31, 1995, according to the latest available
Office of Thrift Supervision's Uniform Thrift Performance Report, the average
yield on interest earning assets and the average cost of funds for savings
institutions in the southeast region was 8.06% and 4.98%, respectively,
resulting in an interest rate spread of 3.08%. For the same period, the
Company's average yield on interest earning assets and average cost of funds was
8.31% and 6.59%, respectively, resulting in an interest rate spread of 1.72%.
Management believes, however, that the level of general and administrative
expenses resulting from the Bank's branchless banking strategy enables the Bank
to operate profitably notwithstanding the relatively narrower spread between the
rate earned on its interest-earning assets and the cost of its interest-bearing
liabilities. For example, for the year ended December 31, 1995, according to the
latest available Office of Thrift Supervision's Uniform Thrift Performance
Report, general and administrative expenses as a percentage of total assets for
savings institutions in the southeast region was 2.39%, as compared with 1.00%
for the Company. Although the Bank has operated profitably during the past
several years, until 1994 this period was characterized by generally declining
interest rates and less competition for deposits because of lower loan demand.
Net income was adversely impacted by increased market interest rates during
1994, but it improved by $2.2 million, or 407%, in 1995, reflecting the
repricing of adjustable interest-earning assets and an improvement in the ratio
of interest earning assets to interest-bearing liabilities. Management cannot
predict the impact of sustained increased interest rates or renewed competition
for deposits. The Bank's net income may also be adversely affected by
unanticipated increases in operating expenses which may result from a variety of
circumstances beyond the control of management.
The Bank's non-traditional operating plan also may subject it to
increased regulatory scrutiny in the future. In that regard, TeleBanc has grown
the Bank significantly over the past two years in order to leverage the
significant additional working capital raised in its 1994 initial public
offering. Total assets increased from $220.3 million at December 31, 1993 to
$553.9 million at December 31, 1995. This growth was in accordance with the
Bank's OTS approved business plan. Management does not expect such growth to
continue at similar rates in the foreseeable future.
Adverse Impact of Interest Rate Changes
The Company's results of operations depend to a large extent on the
level of the Bank's net interest income, which is the difference between
interest income from interest-earning assets (such as loans and mortgage-backed
and related securities) and interest expense on interest-bearing liabilities
(such as deposits and borrowings). If interest-rate fluctuations cause the
Bank's cost of funds to increase faster than the yield of its interest-bearing
assets, its net interest income will be reduced. For example, during each of
1993 and 1994, the Bank's net interest income decreased from the prior
comparable period, primarily due to the fact that interest expense on
interest-bearing liabilities rose more quickly than interest income on
interest-earning assets. In 1995, the Bank's net interest income increased by
$3.9 million, or 82.4%, from 1994. In reaction to the changing interest rate
environment, the Company has taken steps to reduce its one-year interest rate
sensitivity "gap" (giving effect to hedging activities). At December 31, 1993,
1994 and 1995 such gap was 22.08%, 2.85% and (4.49%), respectively. Management
believes that the Bank's interest-rate risk position at December 31, 1995
represents a reasonable amount of interest-rate risk. The Company is unable to
predict future fluctuations in interest rates. The market value of most of the
Bank's financial assets are sensitive to fluctuations in market interest rates.
Fixed-rate investments, mortgage-backed and related securities and mortgage
loans generally decline in value as interest rates rise. Management classifies
certain securities as available for sale to provide flexibility for liquidity
purposes as well as to control asset levels for regulatory purposes. If the need
to sell an asset for liquidity or other purposes arises, management believes
that there are adequate securities classified as available for sale with a
positive mark-to-market and that such sale would not have a material impact on
results of operations. As of December 31, 1995, the Company maintained
8
<PAGE>
satisfactory liquidity levels requiring no sale of assets classified as
available for sale. The Company's asset liability management strategy is to
maintain an evenly matched one-to-five year gap, which allows the Company to
maintain a relatively stable interest rate spread and minimize the potential
negative impact of changing interest rates. The extent to which borrowers prepay
loans also is affected by prevailing interest rates. When interest rates
increase, borrowers are less likely to prepay their loans; whereas, when
interest rates decrease, borrowers are more likely to prepay loans. Funds
generated by prepayments may be invested at a lower rate. Prepayments may
adversely affect the value of mortgage loans, the levels of such assets that are
retained in the Bank's portfolio, net interest income and loan servicing income.
Similarly, prepayments on mortgage-backed and related securities also may affect
adversely the value of such securities and related income.
Government Regulation
The Company is subject to regulation as a savings and loan holding
company and the Bank, as a federally chartered savings bank, is subject to
extensive regulation by the OTS and the Federal Deposit Insurance Corporation
("FDIC"). The OTS and FDIC have adopted numerous regulations and undertaken
other regulatory initiatives, and further regulations and initiatives are
anticipated. In addition, among other significant effects, FDICIA provides for
regulatory seizure in the event of certain declines in the tangible capital
levels of insured institutions, requires risk-based deposit insurance premiums
based on assessment of the risks posed by an institution's assets, and imposes
liability on holding companies for regulatory capital deficiencies of insured
institution subsidiaries under certain circumstances. This legislation, or any
future legislation, could have an adverse effect on the Company.
As a federally chartered, FDIC-insured savings association, the Bank is
also subject to numerous statutory and regulatory requirements, including among
other things, the CRA. Under CRA and the OTS's implementing regulations, the
Bank has a continuing and affirmative obligation to help meet the credit needs
of its local communities, including low- and moderate-income neighborhoods,
consistent with the safe and sound operation of the institution. In addition,
the OTS is required to take into account the Bank's record of meeting the credit
needs of its community in determining whether to grant approval for certain
types of applications. The Bank's current CRA record is rated by the OTS as
"satisfactory."
In 1995, the federal financial regulatory agencies promulgated a final
rule revising the regulations that implement the CRA. The revised regulations
outline special evaluations for wholesale institutions. The Bank believes that
it meets the definition of a wholesale institution and that it serves the credit
needs of the entire nation. The Bank has submitted a request to the OTS to be
designated as a wholesale institution. The OTS has not yet responded to the
Bank's request.
The Bank also is subject to OTS assessments to fund operations. The OTS
has adopted the following fees: (i) asset-based assessments for all savings
institutions; (ii) examination fees for certain affiliates of savings
associations; (iii) application fees; (iv) securities filing fees; and (v)
publication fees. Of these fees, the asset-based assessments are the most
significant. Such assessments, which are paid semi-annually every January 31 and
July 31, incorporate a "general assessment" which varies depending on the asset
size of the institution and an additional "premium assessment" for certain
institutions requiring increased supervision. The semi-annual assessment paid by
the Bank on July 31, 1995 for the six-month period ending December 31, 1995 was
comprised solely of a general assessment of $300,782.
No Public Market
There is no established market for the Common Stock. The Company does
not intend to list the Common Stock on any securities exchange or have it
included for quotation by any quotation system. For these reasons, the market
for, and liquidity of, the Common Stock is limited, and is likely to continue to
be limited. FBR has indicated that it intends to continue to make a market in
the Common Stock. FBR is not obligated, however, to make a market in the Common
Stock, and any market making may be discontinued at any time at the sole
discretion of FBR.
9
<PAGE>
The liquidity of the Common Stock depends upon the presence in the
marketplace of willing buyers and sellers, a fact over which neither the Company
nor any market maker has control, and may be limited by other factors, including
the beneficial ownership limitations imposed on the Common Stock. See "Market
for the Common Stock."
Future Sales of Securities by the Company
The 345,000 shares of Common Stock offered hereby will be issued upon
the exercise of outstanding warrants by the holders thereof. The Company is
authorized under its Amended and Restated Certificate of Incorporation to issue
up to an additional 1,450,000 shares of Common Stock without shareholder
approval. At March 15, 1996, there were 2,049,500 shares of Common Stock issued
and outstanding, 1,299,500 of which are held by MET Holdings. Any additional
sales of Common Stock by the Company to non-affiliates of the Company will have
a dilutive effect on the ownership of the Company by current shareholders, and
may have a dilutive effect on the value of Common Stock then outstanding if such
additional Common Stock is sold below the book value of the Common Stock. At
March 15, 1996, the book value of the Common Stock was $10.32 per share. As of
the last trading day prior to the date of this Prospectus, the last reported
sale of Common Stock to a non-affiliate of the Company was on April 19, 1996 at
a price of $8.00 per share.
Allocation of Proceeds
The Company intends to invest the net proceeds of the Offering, if any,
for general corporate purposes, primarily for investment in the Bank for
expansion of the Bank's current operations. See "Use of Proceeds; Purpose of
Offering." Although there are no definitive plans or agreements, the Company and
the Bank continue to explore expansion opportunities to apply the capital of the
Company and the Bank, including capital that may be raised by the sale of Common
Stock offered hereby, if any. Management has received regulatory approval for
the Bank to own 50% of a new entity, AGT Mortgage Services, LLC ("AGT"). AGT
will service performing loans for a fee (including those held by the Bank) and
perform servicing and workout for troubled or defaulted loans for a fee. It is
anticipated that operations will commence in the second quarter of 1996. In
addition, the independent members of the Board of Directors of the Company have
directed management to commence negotiations for a potential merger of MET
Holdings into the Company. MET Holdings owns approximately 80% of Arbor Capital.
The Board anticipates that a tax free stock swap will be consummated. The
exchange ratio of Company stock for the stock of MET Holdings will be based upon
the fair market value of MET Holdings and the fair market value of the Company's
Common Stock, subject to receipt of an independent appraisal and independent
opinion as to the fairness of the merger to stockholders of the Company (other
than MET Holdings) from a financial perspective. At this time, no definitive
agreement or arrangement has been reached and, accordingly, no assurance can be
provided that the contemplated transaction will be concluded. See "Recent
Developments." Decisions regarding the use of proceeds and their allocation is
subject to the broad discretion of management, as overseen by the Board of
Directors.
Control of Company by MET Holdings
Assuming the sale of 345,000 shares of Common Stock in the Offering, on
a pro forma basis MET Holdings will own 54.3% of the issued and outstanding
Common Stock. As a result of this ownership, MET Holdings will continue to
control the Company and will be able to elect the Company's directors and to
determine the outcome of most other corporate actions requiring stockholder
approval. Mr. David A. Smilow and Mr. Mitchell H. Caplan, the Chairman and
President, respectively, of MET Holdings, serve in the same positions at
TeleBanc. Mr. Smilow serves as the Chairman of the Board and Mr. Caplan serves
as the Chief Executive Officer and President of the Bank. MET Holdings will be
able to prevent a change in control of the Company or alternatively may effect a
change of control of the Company without the participation of other
stockholders. Such ability of MET Holdings may have an adverse impact on the
price and liquidity of the Common Stock offered hereby. See "Description of the
Common Stock--Delaware Law and Certain Charter and Bylaw Provisions."
10
<PAGE>
USE OF PROCEEDS; PURPOSE OF OFFERING
The net proceeds to the Company from the sale of the Common Stock
offered by the Company hereby, assuming all outstanding Warrants are exercised
by the holders thereof, are estimated to be $2.6 million, after deducting the
estimated offering expenses payable by the Company. However, there can be no
assurances that any Warrants will be exercised and that the Company will receive
any proceeds from the sale of the Common Stock offered hereby. As of the last
trading day prior to the date of this Prospectus, the last reported sale of
Common Stock to a non-affiliate of the Company was on April 19, 1996 at a price
of $8.00 per share. The Warrant exercise price is $7.65625.
The net proceeds will be used for general corporate purposes, primarily
for investment in the Bank for expansion of the Bank's current operations.
Although there are no definitive plans or agreements, the Company and the Bank
continue to explore expansion opportunities to apply the capital of the Company
and the Bank, including capital that may be raised by the sale of Common Stock
offered hereby, if any. Management has received regulatory approval for the Bank
to own 50% of a new entity, AGT Mortgage Services, LLC ("AGT"). AGT will service
performing loans for a fee (including those held by the Bank) and perform
servicing and workout for troubled or defaulted loans for a fee. It is
anticipated that operations will commence in the second quarter of 1996. In
addition, the independent members of the Board of Directors of the Company have
directed management to commence negotiations for a potential merger of MET
Holdings into the Company. MET Holdings owns approximately 80% of Arbor Capital.
The Board anticipates that a tax free stock swap will be consummated. The
exchange ratio of Company stock for the stock of MET Holdings will be based upon
the fair market value of MET Holdings and the fair market value of the Company's
Common Stock, subject to receipt of an independent appraisal and independent
opinion as to the fairness of the merger to stockholders of the Company (other
than MET Holdings) from a financial perspective. At this time, no definitive
agreement or arrangement has been reached and, accordingly, no assurance can be
provided that the contemplated transaction will be concluded.
DIVIDEND POLICY
General
Since its formation as the holding company of the Bank in March 1994,
the Company has not paid any cash dividends on its Common Stock. Any dividends
declared by the Company will be at the discretion of its Board of Directors. The
Board of Directors of the Company may consider a policy of paying cash dividends
on the Common Stock in the future. However, no decision has been made as to the
amount or timing of such dividends, if any. The Board of Directors of the
Company expects initially to retain all earnings to provide capital for the
operation and expansion of the Company's business. Dividends, when and if paid,
will depend, among other things, on the Company's operating results and
financial condition, regulatory limitations, tax considerations and other
factors, and will be subject to certain restrictions pursuant to the Indenture.
The only significant source of funds available for the Company to conduct its
business and to pay cash dividends, if any, will be dividends paid to the
Company by the Bank, and liquid investments of funds which are not invested in
the Bank or otherwise required to be maintained under the terms of the Company's
subordinated debt. Dividends from the Bank are subject to applicable regulatory
limitations. See "Use of Proceeds; Purpose of Offering" and "Risk
Factors--Sources of Funds for Dividends on Common Stock."
Unlike the Bank, the Company is not subject to regulatory restrictions
on the payment of dividends to its stockholders. However, it is subject to the
requirements of Delaware law, which generally limits dividends to the amount of
a corporation's net assets less paid-in capital.
In addition, the Company's ability to pay dividends is subject to
certain restrictions under the Indenture. The Indenture prohibits the payment of
dividends and other capital distributions by the Company if any of the following
conditions exists: (i) a default or event of default under the Indenture shall
have occurred and be continuing; (ii) the dollar amount of such distribution
when combined with the dollar amount of all other distributions declared, set
apart or made after May 13, 1994 exceeds 66-2/3% of the Company's aggregate
11
<PAGE>
consolidated net income (reduced by the Company's consolidated net loss for any
fiscal year subsequent to May 13, 1994) subsequent to May 13, 1994, plus 66-2/3%
of the net proceeds received from issuance of equity securities other than upon
exercise of Warrants subsequent to May 13, 1994; (iii) the Bank is not in
compliance with its regulatory capital requirements; and (iv) the Company is not
in compliance with the reserve maintenance requirements described in the next
sentence. The Indenture requires the Company to maintain at all times, on an
unconsolidated basis, liquid assets in an amount equal to 150% of the aggregate
interest expense on the subordinated debt issued pursuant to the Indenture and
all other indebtedness of the Company for the 12 full calendar months
immediately following each interest payment date, provided that after such time
as the Bank's aggregate cumulative consolidated net income for six consecutive
fiscal quarters (reduced by the amount of any consolidated net loss during such
period) equals or exceeds 200% of the aggregate annual interest expense on the
subordinated debt outstanding at the end of such period, the Company is required
to maintain at all times, on an unconsolidated basis, liquid assets in an amount
equal to at least 100% of the aggregate interest expense on the subordinated
debt and all other indebtedness of the Company for the 12 full calendar months
immediately following each interest payment date.
Tax Considerations
Earnings appropriated for bad debt reserves and deducted for federal
income tax purposes cannot be used by the Bank to pay cash dividends to the
Company without the payment of federal income taxes by the Bank at the then
current income tax rate on the amount deemed distributed, which would include
the amount of any federal income taxes attributable to the distribution. Thus,
any dividends to the Company that would reduce amounts appropriated to the
Bank's bad debt reserves and deducted for federal income tax purposes could
create a significant tax liability for the Bank.
MARKET FOR THE COMMON STOCK
There is no established market for the Common Stock. The Company does
not intend to list the Common Stock on any securities exchange or have them
included for quotation by any quotation system. FBR has indicated that it
intends to continue to make a market in the Common Stock, however, FBR is not
obligated to make a market, and any market making may be discontinued at any
time at the sole discretion of FBR. Making a market involves maintaining bid and
asked quotations and being able, as principal, to effect transactions in
reasonable quantities at those quoted prices, subject to various securities laws
and other regulatory requirements. The absence or discontinuance of a market for
the Common Stock may have an adverse impact on the price and liquidity of the
Common Stock.
12
<PAGE>
CAPITALIZATION
The following table sets forth as of December 31, 1995, the historical
and pro forma capitalization of the Company. The pro forma capitalization gives
effect to the issuance of 345,000 shares of Common Stock in the Offering and the
receipt of the estimated net aggregate proceeds therefrom; however, there can be
no assurances that all outstanding Warrants will be exercised by the holders
thereof and that the Company will receive any proceeds from the sale of the
Common Stock being offered hereby. The information set forth in the table should
be read in conjunction with the Consolidated Financial Statements of the Bank
and the related notes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 1995. See also "Use of Proceeds; Purpose of
Offering."
<TABLE>
<CAPTION>
At December 31, 1995
--------------------
As Adjusted
Actual for Sale of
(Company) Common Stock
--------- ------------
(Dollars in thousands)
<S> <C> <C>
Deposits.................................. $ 306,500 $ 306,500
=========== ===========
Borrowings:
FHLB advances........................... 105,500 105,500
Securities sold under agreements to
repurchase............................. 93,905 93,905
Subordinated debt, net of original
issue discount......................... 16,496 16,496
----------- -----------
Total borrowings....................... $ 215,901 $ 215,901
=========== ===========
Stockholders' equity:
Common stock, par value $.01 per share,
3,500,000 shares authorized, 2,049,500
shares outstanding, 2,394,500 shares
outstanding, as adjusted............... 20 23
Additional paid-in capital.............. 14,637 17,250
Retained earnings....................... 5,353 5,353
Unrealized gain on securities
available for sale..................... 1,555 1,555
----------- -----------
Total stockholders' equity............. $ 21,565 $ 24,181
=========== ===========
Bank regulatory capital ratios (unaudited) (a):
Total risk-based capital................ 11.74% 12.62% (b)
Core capital............................ 5.31 5.81 (b)
Tangible capital........................ 5.36 5.81 (b)
<FN>
(a) Calculated in accordance with OTS regulations. See "Regulation--Savings
Institution Regulation--Capital Requirements."
(b) Assumes investment of $2.6 million of net proceeds of the Offering in the
Bank.
</FN>
</TABLE>
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<PAGE>
DILUTION
As of December 31, 1995, the Company had a net tangible book value of
$21,149,000, or $10.32 per share of Common Stock based on 2,049,500 shares
issued and outstanding. Net tangible book value is the value of the Company's
tangible assets less total liabilities. Dilution per share represents the
difference between the amount paid per share by purchasers in this Offering and
the pro forma net tangible book value per share after the Offering.
After giving effect to the sale by the Company of Common Stock offered
hereby and the application of the estimated $2.6 million of net proceeds
thereof, the pro forma tangible book value of the Company as of December 31,
1995 would have been approximately $23,765,000, or $9.92 per share. This
represents a decrease in net tangible book value per share of $0.40 to the
Company's existing stockholders. In addition, giving effect to the exercise of
the 271,730 outstanding employee and director stock options, the pro forma
tangible book value of the Company as of December 31, 1995 would be $25,487,000,
or $9.56 per share. No stock options are anticipated to be granted prior to or
concurrently with the Offering; however, an additional 53,145 shares are
reserved for future issuance under the Company's stock option plan. Additional
dilution may occur in the future by reason of the issuance of additional shares
of Common Stock by the Company. Holders of the Common Stock will not be entitled
to preemptive rights with respect to any shares which may be issued. See
"Description of the Common Stock--Capital Stock."
The following table sets forth on a pro forma basis as of December 31,
1995, positions of the Company's existing stockholders and new stockholders with
respect to the number of shares of Common Stock purchased from the Company, the
total equity to the Company and the average equity per share.
<TABLE>
<CAPTION>
Shares Purchased Equity
------------------- -------------------------
Average Equity
Number % Amount % Per Share
----------- ------ ------------- ------- ---------
<S> <C> <C> <C> <C> <C>
New stockholders.................... 345,000 14.4% $ 2,616,406 13.3% $ 7.58
Existing stockholders............... 2,049,500 85.6 17,028,000 86.7 8.31
----------- ------ ------------- ------- ------
Total...................... 2,394,500 100.0% $ 19,644,406 100.0% $ 8.20
=========== ====== ============= ======= ======
</TABLE>
14
<PAGE>
DESCRIPTION OF THE COMMON STOCK
Capital Stock
The authorized capital stock of the Company consists of 3,500,000
shares of Common Stock, par value $.01 per share, and 500,000 shares of
preferred stock, par value $.01 per share. Immediately prior to this Offering
there were 2,049,500 shares of Common Stock issued and outstanding, 1,299,500 of
which were held of record by MET Holdings. No shares of preferred stock have
been issued. The aggregate par value of the issued shares will constitute the
capital account of the Company on a consolidated basis. The balance of the
purchase price of the Common Stock will be reflected as paid-in capital on a
consolidated basis. See "Capitalization."
The Common Stock of the Company will represent non-withdrawable capital
and will not be of an insurable type or insured by the FDIC.
Under Delaware law, the holders of the Common Stock will possess
exclusive voting power in the Company. Each stockholder will be entitled to one
vote for each share held on all matters voted upon. If the Company issues
preferred stock, holders of the preferred stock may also possess voting powers.
In the unlikely event of any liquidation or dissolution of the Company,
the holders of its Common Stock will be entitled to receive -- after payment or
provision for payment of all debts and liabilities of the Company (including all
deposits in the Bank and accrued interest thereon) -- all assets of the Company
available for distribution, in cash or in kind. If preferred stock has been
issued subsequently, the holders thereof may have a priority over the holders of
the Common Stock in the event of liquidation or dissolution.
Holders of the Common Stock will not be entitled to preemptive rights
with respect to any shares which may be issued. The Common Stock will not be
subject to call for redemption and, upon receipt by the Company of the full
purchase price therefor, each share of the Common Stock will be duly authorized,
fully paid and nonassessable.
The Board of Directors of the Company is authorized to issue preferred
stock in series and to fix and state the voting powers, designations,
preferences and relative, participating, optional or other special rights of the
shares of each such series and the qualifications, limitations and restrictions
thereof. Preferred stock may rank prior to the Common Stock as to dividend
rights, liquidation preferences or both, and may have full or limited, multiple,
fractional or no voting rights. The holders of preferred stock will be entitled
to vote as a separate class or series under certain circumstances, regardless of
any other voting rights which such holders may have.
Except in connection with the Company's Option Plan, the Company has no
present plans for the issuance of additional authorized shares of Common Stock
or for the issuance of any shares of preferred stock. In the future, the
authorized but unissued and unreserved shares of Common Stock will be available
for general corporate purposes including, but not limited to, possible issuance
as stock dividends or stock splits, in future mergers or acquisitions, under a
cash dividend reinvestment and stock purchase plan, in a future underwritten or
other public offering, or under an employee stock ownership plan. The authorized
but unissued shares of preferred stock will similarly be available for issuance
in future mergers or acquisitions, in a future underwritten public offering or
private placement or for other general corporate purposes. Except as described
above or as otherwise required to approve the transaction in which the
additional authorized shares of Common Stock or authorized shares of preferred
stock would be issued, no stockholder approval will be required for the issuance
of these shares. Accordingly, the Board of Directors of the Company, without
stockholder approval, is able to issue preferred stock with voting rights which
could adversely affect the voting power of the holders of Common Stock.
Delaware Law and Certain Charter and Bylaw Provisions
Directors. Certain provisions of the Company's Amended and Restated
Certificate of Incorporation (the "Certificate of Incorporation") and Bylaws
will impede changes in majority control of the Board of Directors. The Company's
Certificate of Incorporation provides that its Board of Directors will be
divided into three classes, with
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<PAGE>
directors in each class elected for three-yearstaggered terms. Thus, assuming a
Board of six directors as is currently the case, it would take two annual
elections to replace a majority of the Company's Board. The Certificate of
Incorporation provides that the size of the Board of Directors may be increased
or decreased only by a two-thirds vote of the Board or by a vote of two-thirds
of the shares eligible to be voted at a duly constituted meeting of stockholders
called for such purpose. The Certificate of Incorporation provides that any
vacancy occurring in the Board of Directors, including a vacancy created by an
increase in the number of directors, shall be filled for the remainder of the
unexpired term by a majority vote of the directors then in office. Finally, the
Bylaws impose certain restrictions on the nomination by stockholders of
candidates for election to the Board of Directors or the proposal by
stockholders of business to be acted upon at an annual meeting of stockholders.
The Certificate of Incorporation provides that a director may only be
removed for cause and then only by the affirmative vote of two-thirds of the
total shares eligible to vote at a duly constituted meeting of the stockholders
called expressly for that purpose. Furthermore, 30 days' written notice must be
provided to any director or directors whose removal is to be considered at a
stockholders' meeting called for such purpose.
Special Meetings. The Certificate of Incorporation provides that all
actions taken by the stockholders must be taken at an annual or special meeting
of stockholders or by unanimous written consent. It also provides that a special
meeting of stockholders may be called at any time by the Chairman of the Board,
a majority of the Board of Directors or by a majority vote of the total votes
eligible to be voted by the stockholders.
Authorization of Preferred Stock. The Company is authorized to issue
preferred stock from time to time in one or more series subject to applicable
provisions of law. The Board of Directors, without stockholder approval, is
authorized to fix the designations, powers, preferences, and relative,
participating, optional and other special rights of such shares, including
voting rights (which could be multiple or as a separate class), which could
adversely affect the voting power of the common stockholders. In the event of a
proposed merger, tender offer or other attempt to gain control of the Company of
which management does not approve, it might be possible for the Board of
Directors to authorize the issuance of a series of preferred stock with rights
and preferences that could impede the completion of such a transactions. In
addition, if the Board of Directors decides at some future date to adopt and
implement a share purchase rights plan, the Board of Directors could authorize
the issuance of a series of preferred stock in connection with such plan. An
effect of the possible issuance of preferred stock, therefore, may be to deter a
future takeover attempt. The Board of Directors has no present plans or
understandings for the issuance of any preferred stock and does not intend to
issue any preferred stock except on terms which the Board deems to be in the
best interest of the Company and its stockholders.
Approval of Acquisitions of Control. The Company's Certificate of
Incorporation provides that no person may acquire 10% or more of the Company's
voting stock without obtaining prior approval of the offer by a two-thirds vote
of the Company's Board of Directors or alternatively, obtaining approval of the
acquisition from, as applicable, the OTS and the FDIC. These provisions do not
apply to the purchase of shares by underwriters in connection with a public
offering or by any employee stock purchase plan, pension plan, profit sharing
plan or other employee benefit plan of the Company or any of its subsidiaries,
or by MET Holdings or any successor thereto, and shall be effective only so long
as the Bank (or any successor institution) is a majority-owned subsidiary of the
Company. Shares acquired in excess of these limitations are not entitled to vote
or take other stockholder action or be counted in determining the total number
of outstanding shares of voting stock in connection with any matter involving
stockholder action. Such excess shares are also subject to transfer to a trustee
(selected by the Company) for sale on the open market or otherwise, with the
expenses of such trustee to be paid out of the proceeds of such sale.
Limitation on Control Share Acquisitions. The Company's Certificate of
Incorporation provides that any person who acquires shares of stock in the
Company that would increase such person's voting power in the Company above any
of three thresholds (20%, 33-1/3% or 50%) must receive the approval of the other
stockholders of the Company before such person can vote that stock. The
practical effect of this requirement is to condition the acquisition of control
of the Company on the approval of a majority of the pre-existing disinterested
stockholders. In general, the provision requires the person who acquires, or
seeks to acquire, Company shares in excess of the three thresholds to send a
disclosure statement regarding the acquisition to the Company and provide for a
special
16
<PAGE>
meeting of stockholders to vote on the proposal. It also provides for appraisal
rights for dissenting stockholders in the event the proposal is approved. The
purpose of the control share provision is to provide stockholders with an
opportunity to vote on an acquisition that may lead to or result in a change of
control. The control share provision does not affect the terms an acquiring
person must offer to the stockholders. Certain acquisitions are exempt from
these restrictions, including, but not limited to, acquisitions that are (i)
consummated before March 31, 1994, (ii) pursuant to satisfaction of a pledge or
other security interest, (iii) pursuant to a merger, plan of share exchange,
tender or exchange offer if the Company is a party to an agreement relating
thereto, or (iv) by MET Holdings or any successor thereto. By providing an
opportunity for collective action by stockholders, however, the control share
provision should eliminate coercive multi-step offers and ensure that any
premium paid for control of the Company is shared by all stockholders.
Amendment to Certificate of Incorporation and Bylaws. Amendments to the
Company's Certificate of Incorporation must be approved by a two-thirds vote of
the Company's Board of Directors and also by a majority of the outstanding
shares of the Company's voting stock, provided, however, that approval by
two-thirds of the outstanding voting stock generally is required for amending
certain provisions (relating to number, classification, election and removal of
directors; limitation on control share acquisitions; call of special stockholder
meetings; offer to acquire and acquisitions of control; criteria for evaluating
certain offers; certain business combinations; stockholder action without a
meeting; and amendments to the Certificate of Incorporation and Bylaws). A
majority of the Board of Directors may amend the Bylaws.
Business Combination Provision. The Company may be subject to the
provisions of Section 203 of the Delaware General Corporation Law ("Delaware
Law"). Under Section 203, a resident domestic corporation may not engage in a
business combination with an interested stockholder for a period of three years
after the date such person became an interested stockholder, unless (i) prior to
such date the Board of Directors approved either the business combination or the
transaction which resulted in the stockholder becoming an interested
stockholder, (ii) upon consummation of the transaction which resulted in such
person becoming an interested stockholder, the interested stockholder owned at
least 85% of the corporation's voting stock outstanding at the time the
transaction commenced (excluding for determining the number of shares
outstanding shares owned by (a) persons who are directors and officers and (b)
employee stock plans, in certain instances), or (iii) on or subsequent to such
date the business combination is approved by the Board of Directors and
authorized by the affirmative vote of at least two-thirds of the outstanding
voting stock which is not owned by the interested stockholder. Section 203
defines the term "business combination" to encompass a wide variety of
transactions with or caused by an interested stockholder in which the interested
stockholder receives or could receive a benefit on other than a pro rata basis
with other stockholders, including certain mergers, consolidations, asset sales,
transfers and other transactions resulting in financial benefit to the
interested stockholder. "Interested stockholder" means a person who owns (or
within three years prior, did own) 15% or more of the corporation's outstanding
stock, and the affiliates and associates of such person.
In addition, the Certificate of Incorporation provides that certain
business combinations with interested stockholders or affiliates must be
approved by at least 80% of the shares entitled to vote. The higher vote is not
required, however, when the business combination has been approved by two-thirds
of the board, provided that certain fair-price requirements are also met.
Criteria for Evaluating Offers. The Company's Certificate of
Incorporation authorizes the Board of Directors, when evaluating a tender offer,
merger or acquisition proposal, to take into account factors in addition to
potential economic benefits to the stockholders, including, without limitation,
the economic effects of acceptance of the offer on depositors, borrowers and
employees of the insured institution subsidiary or subsidiaries of the Company
and on the communities in which such subsidiary or subsidiaries operate or are
located as well as on the ability of such subsidiary or subsidiaries to fulfill
the objective of an insured institution under applicable federal statutes and
regulations.
17
<PAGE>
Other Restrictions on the Acquisition of Stock
Federal Law and Regulation. Federal law provides that no
company, "directly or indirectly or acting in concert with one or more persons,
or through one or more subsidiaries, or through one or more transactions," may
acquire "control" of a savings association at any time without the prior
approval of the OTS. In addition, any company that acquires such control becomes
a "savings and loan holding company" subject to registration, examination and
regulation as a savings and loan holding company. See "Regulation--Savings and
Loan Holding Company Regulation." "Control" in this context means ownership of,
control of, or holding proxies representing more than 25% of the voting shares
of a savings association or the power to control in any manner the election of a
majority of the directors of such institution.
Federal law also provides that no "person," acting directly or
indirectly or through or in concert with one or more persons, may acquire
"control" of a savings association unless at least 60 days' prior written notice
has been given to the OTS and the OTS has not objected to the proposed
acquisition. "Control" is defined for this purpose as the power, directly or
indirectly, to direct the management or policies of a savings association or to
vote more than 25% of any class of voting securities of a savings association.
Under federal law (as well as the regulations referred to below) the term
"savings association" includes state- and federally-chartered SAIF-insured
institutions, federally-chartered savings and loans and savings banks whose
accounts are insured by the FDIC and holding companies thereof.
Federal regulations require that, prior to obtaining control of an
insured institution, a person, other than a company, must give 60 days' notice
to the OTS and have received no OTS objection to such acquisition of control; a
company must apply for and receive OTS approval of the acquisition. Control, as
defined under federal law, involves a 25% voting stock test, control in any
manner of the election of a majority of the institution's directors, or a
determination by the OTS that the acquirer has the power to direct, or directly
or indirectly to exercise a controlling influence over, the management or
policies of the institution. Acquisition of more than 10% of an institution's
voting stock, if the acquirer also is subject to any one of either "control
factors," constitutes a rebuttable determination of control under the
regulations. The determination of control may be rebutted by submission to the
OTS, prior to the acquisition of stock or the occurrence of any other
circumstances giving rise to such determination, of a statement setting forth
facts and circumstances which would support a finding that no control
relationship will exist and containing certain undertakings. The regulations
provide that persons or companies which acquire beneficial ownership exceeding
10% or more of any class of a savings association's stock after the effective
date of the regulations must file with the OTS a certification that the holder
is not in control of such institution, is not subject to a rebuttable
determination of control and will take no action which would result in a
determination or rebuttable determination of control without prior notice to or
approval of the OTS, as applicable.
Limitation on Liability
As permitted under Delaware Law, the Certificate of Incorporation
provides that no director of the Company will be liable for monetary damages for
breach of fiduciary duty as a director, except (i) for any breach of the
director's duty of loyalty to the Company or its stockholders, (ii) for acts or
omissions not in good faith or involving intentional misconduct or knowing
violation of law, (iii) for approval of certain unlawful dividends or stock
purchases or redemptions and (iv) for any transaction from which the director
derived an improper personal benefit. In appropriate circumstances, equitable
remedies such as an injunction or other forms of non-monetary relief would
remain available under Delaware Law.
Transfer Agent and Registrar
Wilmington Trust Company is the transfer agent and registrar for the
Common Stock.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 2,394,500 shares
of Common Stock outstanding. In addition, an aggregate of up to 271,730 shares
of Common Stock have been reserved for issuance upon exercise of outstanding
options. Of the shares outstanding, 1,095,000 shares will be freely transferable
without restriction under the Securities Act, unless they are held by
"affiliates" of the Company as that term is used under the Securities Act and
the regulations promulgated thereunder.
Pursuant to the Warrant Agreement, no later than May 27, 1995, the
Company is required to register or otherwise qualify the shares of Common Stock
issuable upon exercise of the Warrants pursuant to the Securities Act, and
pursuant to applicable state securities laws. So long as any unexpired Warrants
remain outstanding, the Company also is required to file such amendments and/or
supplements to any registration statement under the Securities Act or under any
state securities laws covering the issuance of such shares, and supplement and
keep current any prospectus forming a part of such registration statement as may
be necessary to permit the Company to deliver to each person exercising a
Warrant a prospectus meeting the requirements of the Securities Act and the
regulations thereunder, and as may be necessary to comply with any applicable
state securities laws.
The 1,299,500 shares of Common Stock held by MET Holdings were issued
by the Company in reliance on exemptions from the registration requirements of
the Securities Act and are "restricted" securities within the meaning of Rule
144 under the Securities Act. Such securities may be sold only pursuant to an
effective registration statement under the Securities Act or in reliance on an
exemption from registration. There are no agreements or other arrangements
pursuant to which MET Holdings has the right to require that its shares be
registered for resale. In general, under Rule 144 as currently in effect, a
person (or persons whose shares are aggregated), including an affiliate of the
Company, who has beneficially owned shares for at least two years (including the
holding period of any prior owner other than an affiliate) is entitled to sell,
within any three-month period commencing 90 days after the date of this
Prospectus, a number of shares that does not exceed the greater of (i) 1% of the
then outstanding shares of Common Stock or (ii) the average weekly trading
volume in the Common Stock during the four calendar weeks preceding such sale,
subject to the filing of a Form 144 with respect to such sale and certain other
limitations and restrictions. In addition, a person who is not deemed to have
been an affiliate of the Company at any time during the 90 days preceding a
sale, and who has beneficially owned the shares proposed to be sold for at least
three years (including the holding period of any prior owner other than an
affiliate), would be entitled to sell such shares under Rule 144(k) without
regard to any of the restrictions described above.
There is no public market for the Common Stock. Any sale of substantial
amounts in the open market may adversely affect the market price of the Common
Stock offered hereby.
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PLAN OF DISTRIBUTION
The shares of Common Stock offered hereby will be sold directly by the
Company for cash upon exercise of a Warrant, and in accordance with the terms of
such Warrant. Shares of Common Stock are issuable by the Company upon surrender
to the Warrant Agent at its principal office of the certificate evidencing such
Warrant, together with a duly completed and executed election to exercise the
Warrant and payment of the exercise price. Upon such surrender of a Warrant
certificate and payment of the exercise price, the Warrant Agent will cause to
be issued to the holder of such Warrant certificate for the shares of Common
Stock issuable upon exercise of the Warrant.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby has been
passed upon for the Company by Hogan & Hartson L.L.P., Washington, D.C.
EXPERTS
The financial statements incorporated by reference in this Prospectus
and elsewhere in the Registration Statement, to the extent and for the periods
indicated in their reports, have been audited by Arthur Andersen LLP and KPMG
Peat Marwick LLP, independent public accountants, and are included herein in
reliance upon the authority of said firms as experts in giving said reports.
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No dealer, salesperson, or other
person has been authorized to give any
information or to make any
representation in connection with this
offering other than those contained in
this Prospectus, and, if given or
made, such information and
representations must not be relied
upon as having been authorized by the 345,000 Shares
Company or any Underwriter. This of
Prospectus does not constitute an Common Stock
offer to sell or a solicitation of an
offer to buy any securities other than
the registered securities to which it
relates, or an offer to or
solicitation of any person in any
jurisdiction where such offer or
solicitation is unlawful. Neither the
delivery of this Prospectus nor any
sale made hereunder shall, under any
circumstances, create any implication
that there has been no change in the
information contained herein since the
respective dates as of which such
information is given herein or the
date hereof.
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TELEBANC FINANCIAL
CORPORATION
TABLE OF CONTENTS
Page
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Available Information............. 2
Incorporation of Certain Documents
by Reference................. 2
The Company..........................3
Recent Developments..................3
Risk Factors.........................5
Use of Proceeds;Purpose of Offering.11
Dividend Policy.................... 11
Market for the Common Stock.........12 The date of the Prospectus is
Capitalization......................13 May 6 , 1996
Dilution............................14
Description of the Common Stock.....15
Shares Eligible for Future Sale....19
Plan of Distribution................20
Legal Matters.......................20
Experts.............................20
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