As filed with the Securities and Exchange Commission on November 17, 1997
Registration No. 333-______
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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<S> <C>
TELEBANC FINANCIAL CORPORATION TELEBANC CAPITAL TRUST I
(Exact name of registrant as specified in its charter) (Exact name of registrant as specified in its charter)
Delaware Delaware
(State of incorporation) (State of incorporation)
6712 6719
(Primary Standard Industrial Classification Code No.) (Primary Standard Industrial Classification Code No.)
13-3759196 applied for
(I.R.S. Employer Identification No.) (I.R.S. Employer Identification No.)
</TABLE>
1111 North Highland Street
Arlington, VA 22201
(703) 247-3700
(Address, including zip code, and telephone number, including area code,
of registrants' principal executive offices)
Aileen Lopez Pugh Aileen Lopez Pugh
TeleBanc Financial Corporation TeleBanc Capital Trust I
1111 North Highland Street 1111 North Highland Street
Arlington, VA 22201 Arlington, VA 22201
(703) 247-3700 (703) 247-3700
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to:
Stuart G. Stein, Esq.
Hogan & Hartson L.L.P.
555 Thirteenth Street, N.W.
Washington, D.C. 20004
(202) 637-8575
Approximate date of commencement of proposed sale of the securities to
the public: As soon as practicable after this Registration Statement becomes
effective.
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CALCULATION OF REGISTRATION FEE
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Proposed Proposed maximum
maximum aggregate
Amount to be offering price offering price Amount of
Title of each class of securities to be registered registered per unit (1) (1) registration fee
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<S> <C> <C> <C> <C>
Exchange Capital Securities of TeleBanc Capital Trust I $10,000,000 100% $10,000,000 $3,030.30
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Exchange Junior Subordinated Debentures of TeleBanc
Financial Corporation (2)
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TeleBanc Financial Corporation Exchange Guarantee with
respect to Exchange Capital Securities (2)
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Total (3) $10,000,000 (4) 100% $10,000,000 (4) $3,030.30
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(1) Estimated solely for the purpose of computing the registration fee.
(2) No separate consideration will be received for the Exchange Junior
Subordinated Debentures of TeleBanc Financial Corporation distributed upon
any liquidation of TeleBanc Capital Trust I, and no separate consideration
will be received for the TeleBanc Financial Corporation Exchange Guarantee.
(3) This Registration Statement is deemed to cover rights of holders of Exchange
Junior Subordinated Debentures under the Indenture, the rights of holders of
Exchange Capital Securities under an Amended and Restated Declaration of
Trust, and the rights of holders of such Exchange Capital Securities under
the Exchange Guarantee and certain backup undertakings as described herein.
(4) Such amount represents the liquidation amount of the Capital Securities to
be exchanged hereunder and the principal amount of Exchange Junior
Subordinated Debentures that may be distributed to holders of such Capital
Securities upon any liquidation of TeleBanc Capital Trust I.
The registrants hereby amend this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission acting pursuant to said section 8(a),
may determine.
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</TABLE>
<PAGE>
The information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
<PAGE>
SUBJECT TO COMPLETION, DATED ______, 1997
PROSPECTUS
TELEBANC CAPITAL TRUST I
OFFER TO EXCHANGE ITS
11.00% EXCHANGE CAPITAL SECURITIES
(LIQUIDATION AMOUNT $1,000 PER EXCHANGE CAPITAL SECURITY)
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
FOR ANY AND ALL OF ITS OUTSTANDING
11.00% ORIGINAL CAPITAL SECURITIES
(LIQUIDATION AMOUNT $1,000 PER ORIGINAL CAPITAL SECURITY)
FULLY AND UNCONDITIONALLY GUARANTEED, AS DESCRIBED HEREIN, BY
TELEBANC FINANCIAL CORPORATION
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME ON ________, 1997, UNLESS EXTENDED.
TeleBank Capital Trust I, a trust formed under the laws of the state of
Delaware (the "Trust"), hereby offers, upon the terms and subject to the
conditions set forth in this prospectus (as the same may be amended or
supplemented from time to time, the "Prospectus") and in the accompanying Letter
of Transmittal (which together constitute the "Exchange Offer"), to exchange up
to $10,000,000 aggregate Liquidation Amount of its 11.00% Exchange Capital
Securities (the "Exchange Capital Securities"), which have been registered under
the Securities Act of 1933, as amended (the "Securities Act"), pursuant to a
Registration Statement of which this Prospectus constitutes a part, for a like
Liquidation Amount of its outstanding 11.00% Capital Securities (the "Original
Capital Securities"), of which $10,000,000 aggregate Liquidation Amount are
issued and outstanding. Pursuant to the Exchange Offer, TeleBanc Financial
Corporation, a Delaware corporation (the "Corporation" or "TeleBanc"), is also
offering to exchange (i) its guarantee of payments of cash distributions and
payments on liquidation of the Trust or redemption of the Original Capital
Securities (the "Original Guarantee") for a like guarantee in respect of the
Exchange Capital Securities (the "Exchange Guarantee") and (ii) $10,000,000
aggregate principal amount of its 11.00% Junior Subordinated Deferrable Interest
Debentures due June 1, 2027 (the "Original Junior Subordinated Debentures") for
a
(Continued on next page)
This Prospectus and the Letter of Transmittal are first being mailed to
all holders of Original Capital Securities on or about ______, 1997.
SEE "RISK FACTORS" BEGINNING ON PAGE 17 FOR CERTAIN INFORMATION THAT
SHOULD BE CONSIDERED BY HOLDERS IN DECIDING WHETHER TO TENDER ORIGINAL CAPITAL
SECURITIES IN THE EXCHANGE OFFER.
THE SECURITIES OFFERED HEREBY ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF A BANK
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.
The date of this Prospectus is ____, 1997
<PAGE>
(Continued from the previous page)
like aggregate principal amount of its 11.00% Exchange Deferrable Interest
Debentures due June 1, 2027 (the "Exchange Junior Subordinated Debentures"),
which Exchange Guarantee and Exchange Junior Subordinated Debentures also have
been registered under the Securities Act. The Original Capital Securities, the
Original Guarantee and the Original Junior Subordinated Debentures are
collectively referred to herein as the "Original Securities" and the Exchange
Capital Securities, the Exchange Guarantee and the Exchange Junior Subordinated
Debentures are collectively referred to herein as the "Exchange Securities."
The terms of the Exchange Securities are identical in all material
respects to the respective terms of the Original Securities, except that (i) the
Exchange Securities have been registered under the Securities Act and therefore
will not be subject to certain restrictions on transfer applicable to the
Original Securities, (ii) the Exchange Capital Securities will not provide for
any increase in the Distribution rate thereon, and (iii) the Exchange Junior
Subordinated Debentures will not provide for any liquidated damages thereon. See
"Description of Exchange Securities" and "Description of Original Securities."
The Exchange Capital Securities are being offered for exchange in order to
satisfy certain obligations of the Corporation and the Trust under the
Registration Rights Agreement dated June 5, 1997 (the "Registration Rights
Agreement") among the Corporation, the Trust and Sandler O'Neill & Partners,
L.P. (the "Initial Purchaser"). In the event that the Exchange Offer is
consummated, any Original Capital Securities that remain outstanding after
consummation of the Exchange Offer and the Exchange Capital Securities issued in
the Exchange Offer will vote together as a single class for purposes of
determining whether holders of the requisite percentage in outstanding
Liquidation Amount thereof have taken certain actions or exercised certain
rights under the Trust Agreement (as defined herein).
The Exchange Capital Securities and the Original Capital Securities
(together, the "Capital Securities") represent beneficial interests in the
assets of the Trust. The Corporation is the owner of all of the beneficial
interests represented by common securities of the Trust (the "Common
Securities," and together with the Capital Securities, the "Trust Securities").
Wilmington Trust Company is the Property Trustee (the "Property Trustee") of the
Trust. The Trust exists for the sole purpose of issuing the Trust Securities and
investing the proceeds thereof in the Junior Subordinated Debentures. The
Exchange Junior Subordinated Debentures will mature on June 1, 2027 (the "Stated
Maturity Date"). The Exchange Capital Securities will have a preference over the
Common Securities under certain circumstances with respect to cash distributions
and amounts payable on liquidation, redemption or otherwise. See "Description of
Exchange Securities--Description of Exchange Capital Securities--Subordination
of Common Securities."
As used herein, (i) the "Indenture" means the Indenture, dated as of
June 9, 1997, as amended and supplemented from time to time, between the
Corporation and Wilmington Trust Company, as trustee (the "Debenture Trustee"),
relating to the Junior Subordinated Debentures, (ii) the "Trust Agreement" means
the Amended and Restated Declaration of Trust relating to the Trust among the
Corporation, as Sponsor, Wilmington Trust Company, as Property Trustee,
Wilmington Trust Company, as Delaware Trustee (the "Delaware Trustee"), and the
Administrative Trustees named therein (collectively, with the Property Trustee
and Delaware Trustee, the "Issuer Trustees"), (iii) the "Guarantee" means the
Capital Securities Guarantee Agreement relating to the Original Capital
Securities between the Corporation and Wilmington Trust Company, as Guarantee
Trustee (the "Guarantee Trustee") and (iv) the "Common Guarantee" means the
Common Securities Guarantee Agreement relating to the Common Securities by the
Corporation. In addition, as the context may require, (i) "Junior Subordinated
Debentures" includes the Original Junior Subordinated Debentures and the
Exchange Junior Subordinated Debentures and (ii) "Guarantee" includes the
Original Guarantee and the Exchange Guarantee.
Holders of the Trust Securities will be entitled to receive cumulative
cash distributions arising from the payment of interest on the Exchange Junior
Subordinated Debentures, accumulating from June 9, 1997, and payable
semi-annually in arrears on June 1 and December 1 of each year, commencing
December 1, 1997, at the annual rate of 11.00% of the Liquidation Amount of
$1,000 per Trust Security
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("Distributions"). So long as no Debenture Event of Default has occurred and is
continuing, the Corporation has the right to defer payments of interest on the
Exchange Junior Subordinated Debentures for a period not exceeding 10
consecutive semi-annual periods with respect to each deferral period (each, an
"Extension Period"), provided that an Extension Period must end on an Interest
Payment Date and may not extend beyond the Stated Maturity Date. Distributions
to which holders of the Trust Securities are entitled during any such Extension
Period will accumulate additional Distributions thereon at the rate per annum of
11.00% thereof, compounded semi-annually from the relevant Distribution Date,
but not exceeding the interest rate then accruing on the Exchange Junior
Subordinated Debentures. The term "Distributions," as used herein, shall include
any such additional Distributions.
Upon the termination of any such Extension Period and the payment of
all amounts then due, the Corporation may elect to begin a new Extension Period,
subject to the requirements set forth herein. If and for so long as interest
payments on the Exchange Junior Subordinated Debentures are so deferred,
Distributions on the Trust Securities also will be deferred, and the Corporation
will not be permitted, subject to certain exceptions described herein, to
declare or pay any cash distributions with respect to the Corporation's capital
stock or to make any payment with respect to debt securities of the Corporation
that rank pari passu with or junior to the Exchange Junior Subordinated
Debentures. During an Extension Period, interest on the Exchange Junior
Subordinated Debentures will continue to accrue (and the amount of Distributions
to which holders of the Trust Securities are entitled will continue to
accumulate) at the rate of 11.00% per annum, compounded semi-annually, and
holders of Trust Securities will be required to include deferred interest income
in their gross income for U.S. federal income tax purposes prior to the receipt
of the cash attributable to such income. See "Description of Exchange
Securities--Description of Exchange Junior Subordinated Debentures--Option to
Extend Interest Payment Date" and "Certain Federal Income Tax
Consequences--Interest Income and Original Issue Discount."
The Corporation has, through the Guarantee, the Common Guarantee, the
Trust Agreement, the Junior Subordinated Debentures and the Indenture guaranteed
all of the Trust's obligations under the Trust Securities. See "Relationship
Among the Exchange Capital Securities, the Exchange Junior Subordinated
Debentures and the Exchange Guarantee--Full and Unconditional Guarantee." The
Exchange Guarantee and the Common Guarantee will guarantee payments of
Distributions and payments upon liquidation of the Trust or redemption of the
Trust Securities, but in each case only to the extent that the Trust has funds
legally available therefor and has failed to make such payments, as described
herein. See "Description of Exchange Securities--Description of Exchange
Guarantee." If the Corporation fails to make a required payment on the Exchange
Junior Subordinated Debentures, the Trust will not have sufficient funds to make
the related payments, including Distributions, on the Trust Securities. The
Exchange Guarantee and the Common Guarantee will not cover any such payment when
the Trust does not have sufficient funds legally available therefor. In such
event, a holder of Exchange Capital Securities may institute a legal proceeding
directly against the Corporation to enforce its rights in respect of such
payment. See "Description of Exchange Securities--Description of Exchange Junior
Subordinated Debentures--Enforcement of Certain Rights by Holders of Exchange
Capital Securities." The obligations of the Corporation under the Exchange
Guarantee, the Common Guarantee, and the Exchange Junior Subordinated Debentures
will be unsecured and will rank subordinate and junior in right of payment to
all Senior Indebtedness (as defined in "Description of Exchange
Securities--Description of Exchange Junior Subordinated
Debentures--Subordination"). See "Risk Factors--Ranking of Subordinated
Obligations under the Exchange Guarantee and the Exchange Junior Subordinated
Debentures; Limitation on Source of Funds."
The Trust Securities will be subject to mandatory redemption in a Like
Amount, (i) in whole but not in part, on the Stated Maturity Date upon repayment
of the Exchange Junior Subordinated Debentures at a redemption price equal to
the principal amount of, plus accrued and unpaid interest on, the Exchange
Junior Subordinated Debentures (the "Maturity Redemption Price"), (ii) in whole
but not in part, at any time prior to June 1, 2007 (the "Initial Optional
Redemption Date"), contemporaneously with the optional prepayment of the
Exchange Junior Subordinated Debentures by the Corporation, upon the occurrence
and continuation of a Special Event at a redemption price equal to the Special
Event Prepayment Price (the "Special Event Redemption Price"), and (iii) in
whole or in part, on or after the Initial Optional Redemption Date,
contemporaneously with the optional prepayment by the Corporation of
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all or part of the Exchange Junior Subordinated Debentures, at a redemption
price equal to the Optional Prepayment Price (the "Optional Redemption Price").
Any of the Maturity Redemption Price, the Special Event Redemption Price and the
Optional Redemption Price may be referred to herein as the "Redemption Price."
See "Description of Exchange Securities--Description of Exchange Capital
Securities--Redemption."
Subject to the Corporation having received any required regulatory
approvals, the Exchange Junior Subordinated Debentures will be prepayable prior
to the Stated Maturity Date at the option of the Corporation (i) on or after the
Initial Optional Redemption Date, in whole or in part, at a price (the "Optional
Prepayment Price") equal to 105.500% of the principal amount thereof on the
Initial Optional Redemption Date, declining ratably on each June 1, thereafter
to 100% on or after June 1, 2017, plus accrued and unpaid interest thereon,
including Compounded Interest and Additional Sums, if any, to the date of
prepayment or (ii) at any time prior to the Initial Optional Redemption Date, in
whole but not in part, upon the occurrence and continuation of a Special Event,
at a prepayment price (the "Special Event Prepayment Price") equal to the
Make-Whole Amount. The "Make-Whole Amount" shall be equal to the greater of (a)
100% of the principal amount thereof or (b) the sum, as determined by a
Quotation Agent, of the present values of the remaining scheduled payments of
principal and interest on the Exchange Junior Subordinated Debentures,
discounted to the prepayment date on a semi-annual basis (assuming a 360-day
year consisting of twelve 30-day months) at the Adjusted Treasury Rate plus, in
the case of each of clauses (a) and (b), accrued and unpaid interest thereon,
including Compounded Interest and Additional Sums, if any, to the date of
prepayment. Either of the Optional Prepayment Price or the Special Event
Prepayment Price may be referred to herein as the "Prepayment Price." See
"Description of Exchange Securities--Description of Exchange Junior Subordinated
Debentures--Optional Prepayment" and "--Special Event Prepayment."
The Corporation has the right at any time to terminate the Trust and,
after satisfaction of liabilities of creditors of the Trust as required by
applicable law, to cause a Like Amount of the Exchange Junior Subordinated
Debentures to be distributed to the holders of the Trust Securities in
liquidation of the Trust, subject to (i) the Administrative Trustees having
received an opinion of counsel to the effect that such distribution will not
cause the holders of Exchange Capital Securities to recognize gain or loss for
federal income tax purposes and (ii) the receipt by the Corporation of any
required regulatory approvals. Unless the Exchange Junior Subordinated
Debentures are distributed to the holders of the Trust Securities, in the event
of a liquidation of the Trust as described herein, after satisfaction of
liabilities to creditors of the Trust as required by applicable law, the holders
of the Trust Securities generally will be entitled to receive a Liquidation
Amount of $1,000 per Trust Security plus accumulated and unpaid Distributions
thereon to the date of payment. See "Description of Exchange
Securities--Description of Exchange Capital Securities--Liquidation of the Trust
and Distribution of Exchange Junior Subordinated Debentures."
THE CAPITAL SECURITIES, INCLUDING THE EXCHANGE CAPITAL SECURITIES, MAY
BE TRANSFERRED ONLY IN A BLOCK HAVING A LIQUIDATION AMOUNT OF NOT LESS THAN
$100,000 (100 CAPITAL SECURITIES). ANY TRANSFER OF EXCHANGE CAPITAL SECURITIES
IN A BLOCK HAVING A LIQUIDATION AMOUNT OF LESS THAN $100,000 SHALL BE DEEMED TO
BE VOID AND OF NO LEGAL EFFECT WHATSOEVER. ANY SUCH TRANSFEREE SHALL BE DEEMED
NOT TO BE THE HOLDER OF SUCH EXCHANGE CAPITAL SECURITIES FOR ANY PURPOSE,
INCLUDING BUT NOT LIMITED TO THE RECEIPT OF DISTRIBUTIONS ON SUCH EXCHANGE
CAPITAL SECURITIES, AND SUCH TRANSFEREE SHALL BE DEEMED TO HAVE NO INTEREST
WHATSOEVER IN SUCH EXCHANGE CAPITAL SECURITIES.
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The Trust is making the Exchange Offer of the Exchange Capital
Securities in reliance on the position of the staff of the Division of
Corporation Finance (the "Staff") of the Securities and Exchange Commission (the
"Commission") as set forth in certain interpretive letters addressed to third
parties in other transactions. However, neither the Corporation nor the Trust
has sought its own interpretive letter and there can be no assurance that the
Staff of the Commission would make a similar determination with
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respect to the Exchange Offer as it has in such interpretive letters to third
parties. Based on these interpretations by the Staff of the Commission, and
subject to the two immediately following sentences, the Corporation and the
Trust believe that Exchange Capital Securities issued pursuant to this Exchange
Offer in exchange for Original Capital Securities may be offered for resale,
resold and otherwise transferred by a holder thereof (other than a holder who is
a broker-dealer) without further compliance with the registration and prospectus
delivery requirements of the Securities Act, provided that such Exchange Capital
Securities are acquired in the ordinary course of such holder's business and
that such holder is not participating, and has no arrangement or understanding
with any person to participate, in a distribution (within the meaning of the
Securities Act) of such Exchange Capital Securities. However, any holder of
Original Capital Securities who is an "affiliate" of the Corporation or the
Trust or who intends to participate in the Exchange Offer for the purpose of
distributing Exchange Capital Securities, or any broker-dealer who purchased
Original Capital Securities from the Trust to resell pursuant to Rule 144A under
the Securities Act ("Rule 144A") or any other available exemption under the
Securities Act, (i) will not be able to rely on the interpretations of the Staff
of the Commission set forth in the above-mentioned interpretive letters, (ii)
will not be permitted or entitled to tender such Original Capital Securities in
the Exchange Offer and (iii) must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any sale or other
transfer of such Original Capital Securities unless such sale is made pursuant
to an exemption from such requirements. In addition, as described herein, if any
broker-dealer holds Original Capital Securities acquired for its own account as
a result of market-making or other trading activities and exchanges such
Original Capital Securities for Exchange Capital Securities, then such
broker-dealer must deliver a prospectus meeting the requirements of the
Securities Act in connection with any resales of such Exchange Capital
Securities.
Each holder of Original Capital Securities who wishes to exchange
Original Capital Securities for Exchange Capital Securities in the Exchange
Offer will be required to represent that (i) it is not an "affiliate" of the
Corporation or the Trust, (ii) any Exchange Capital Securities to be received by
it are being acquired in the ordinary course of its business, (iii) it has no
arrangement or understanding with any person to participate in a distribution
(within the meaning of the Securities Act) of such Exchange Capital Securities,
and (iv) if such holder is not a broker-dealer, such holder is not engaged in,
and does not intend to engage in, a distribution (within the meaning of the
Securities Act) of such Exchange Capital Securities. In addition, the
Corporation and the Trust may require such holder, as a condition to such
holder's eligibility to participate in the Exchange Offer, to furnish to the
Corporation and the Trust (or an agent thereof) in writing information as to the
number of "beneficial owners" (within the meaning of Rule 13d-3 under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")), on behalf of
whom such holder holds the Original Capital Securities to be exchanged in the
Exchange Offer. Each broker-dealer that receives Exchange Capital Securities for
its own account pursuant to the Exchange Offer must acknowledge that it acquired
the Original Capital Securities for its own account as the result of
market-making activities or other trading activities and must agree that it will
deliver a prospectus meeting the requirements of the Securities Act in
connection with any resale of such Exchange Capital Securities. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. Based on the position taken by the Staff of the
Commission in the interpretive letters referred to above, the Corporation and
the Trust believe that broker-dealers who acquired Original Capital Securities
for their own accounts, as a result of market-making activities or other trading
activities ("Participating Broker-Dealers"), may fulfill their prospectus
delivery requirements with respect to the Exchange Capital Securities received
upon exchange of such Original Capital Securities (other than Original Capital
Securities which represent an unsold allotment from the initial sale of the
Original Capital Securities) with a prospectus meeting the requirements of the
Securities Act, which may be the prospectus prepared for an exchange offer so
long as it contains a description of the plan of distribution with respect to
the resale of such Exchange Capital Securities. Each broker-dealer that receives
Exchange Capital Securities for its own account pursuant to the Exchange Offer
must acknowledge that it will deliver a prospectus in connection with any resale
of such Exchange Capital Securities. The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
This Prospectus, as it may be amended or supplemented from time to time, may be
used by a broker-dealer in connection with resales of Exchange Capital
Securities received in exchange for Original Capital Securities acquired by such
broker-dealer as a result of market-making
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activities or other trading activities. The Trust and the Corporation have
agreed that, ending on the close of business on the 180th day following the
Expiration Date, it will make this Prospectus available to any broker-dealer for
use in connection with any such resale. See "Plan of Distribution." However, a
Participating Broker-Dealer who intends to use this Prospectus in connection
with the resale of Exchange Capital Securities received in exchange for Original
Capital Securities pursuant to the Exchange Offer must notify the Corporation or
the Trust, or cause the Corporation or the Trust to be notified, on or prior to
the Expiration Date, that it is a Participating Broker-Dealer. Such notice may
be given in the space provided for that purpose in the Letter of Transmittal or
may be delivered to Wilmington Trust Company (the "Exchange Agent") at the
address set forth herein under "The Exchange Offer--Exchange Agent." Any
Participating Broker-Dealer who is an "affiliate" of the Corporation or the
Trust may not rely on such interpretive letters and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. See "The Exchange Offer--Resales of
Exchange Capital Securities."
In that regard, each Participating Broker-Dealer who surrenders
Original Capital Securities pursuant to the Exchange Offer will be deemed to
have agreed, by execution of the Letter of Transmittal, that upon receipt of
notice from the Corporation or the Trust of the occurrence of any event or the
discovery of any fact that makes any statement contained or incorporated by
reference in this Prospectus untrue in any material respect or that causes this
Prospectus to omit to state a material fact necessary in order to make the
statements contained or incorporated by reference herein, in light of the
circumstances under which they were made, not misleading or of the occurrence of
certain other events specified in the Registration Rights Agreement, such
Participating Broker-Dealer will suspend the sale of Exchange Capital Securities
(or the Exchange Guarantee or the Exchange Junior Subordinated Debentures, as
applicable) pursuant to this Prospectus until the Corporation or the Trust has
amended or supplemented this Prospectus to correct such misstatement or omission
and has furnished copies of the amended or supplemented Prospectus to such
Participating Broker-Dealer, or the Corporation or the Trust has given notice
that the sale of the Exchange Capital Securities (or the Exchange Guarantee or
the Exchange Junior Subordinated Debentures, as applicable) may be resumed, as
the case may be. If the Corporation or the Trust gives such notice to suspend
the sale of the Exchange Capital Securities (or the Exchange Guarantee or the
Exchange Junior Subordinated Debentures, as applicable), it shall extend the
180-day period referred to above during which Participating Broker-Dealers are
entitled to use this Prospectus in connection with the resale of Exchange
Capital Securities by the number of days during the period from and including
the date of the giving of such notice to and including the date when
Participating Broker-Dealers shall have received copies of the amended or
supplemented Prospectus necessary to permit resales of the Exchange Capital
Securities or to and including the date on which the Corporation or the Trust
has given notice that the sale of Exchange Capital Securities (or the Exchange
Guarantee or the Exchange Junior Subordinated Debentures, as applicable) may be
resumed, as the case may be.
Prior to the Exchange Offer, there has been only a limited secondary
market and no public market for the Original Capital Securities. The Exchange
Capital Securities will be a new issue of securities for which there currently
is no market. Although the Initial Purchaser has informed the Corporation and
the Trust that it currently intends to make a market in the Exchange Capital
Securities, it is not obligated to do so, and any such market making may be
discontinued at any time without notice. Accordingly, there can be no assurance
as to the development or liquidity of any market for the Exchange Capital
Securities. The Corporation and the Trust currently do not intend to apply for
listing of the Exchange Capital Securities on any securities exchange or for
quotation through the Nasdaq Stock Market, Inc.
Any Original Capital Securities not tendered and accepted in the
Exchange Offer will remain outstanding and will be entitled to all the same
rights and will be subject to the same limitations applicable thereto under the
Trust Agreement (except for those rights which terminate upon consummation of
the Exchange Offer). Following consummation of the Exchange Offer, the holders
of Original Capital Securities will continue to be subject to all of the
existing restrictions upon transfer thereof and neither the Corporation nor the
Trust will have any further obligation to such holders (other than under certain
limited circumstances) to provide for registration under the Securities Act of
the Original Capital Securities held by them. To the extent that Original
Capital Securities are tendered and accepted in the Exchange Offer, a holder's
ability to sell untendered Original Capital Securities could be
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adversely affected. See "Risk Factors--Consequences of a Failure to Exchange
Original Capital Securities."
THIS PROSPECTUS AND THE RELATED LETTER OF TRANSMITTAL CONTAIN IMPORTANT
INFORMATION. HOLDERS OF ORIGINAL CAPITAL SECURITIES ARE URGED TO READ THIS
PROSPECTUS AND THE RELATED LETTER OF TRANSMITTAL CAREFULLY BEFORE DECIDING
WHETHER TO TENDER THEIR ORIGINAL CAPITAL SECURITIES PURSUANT TO THE EXCHANGE
OFFER.
Original Capital Securities may be tendered for exchange on or prior to
5:00 p.m., New York City time, on ________________, 1997 (such time on such date
being hereinafter called the "Expiration Date"), unless the Exchange Offer is
extended by the Corporation or the Trust (in which case the term "Expiration
Date" shall mean the latest date and time to which the Exchange Offer is
extended). Tenders of Original Capital Securities may be withdrawn at any time
on or prior to the Expiration Date. The Exchange Offer is not conditioned upon
any minimum Liquidation Amount of Original Capital Securities being tendered for
exchange. However, the Exchange Offer is subject to certain events and
conditions which may be waived by the Corporation or the Trust and to the terms
and provisions of the Registration Rights Agreement. Original Capital Securities
may be tendered in whole or in part having an aggregate Liquidation Amount of
not less than $100,000 (100 Capital Securities) or any integral multiple of
$1,000 Liquidation Amount (one Capital Security) in excess thereof. The
Corporation has agreed to pay all expenses of the Exchange Offer. See "The
Exchange Offer--Fees and Expenses." Holders of the Original Capital Securities
whose Original Capital Securities are accepted for exchange will not receive
Distributions on such Original Capital Securities and will be deemed to have
waived the right to receive any Distributions on such Original Capital
Securities accumulated from and after June 9, 1997. See "The Exchange
Offer--Distributions on the Exchange Capital Securities."
Neither the Corporation nor the Trust will receive any cash proceeds
from the issuance of the Exchange Capital Securities offered hereby. No
dealer-manager is being used in connection with this Exchange Offer. See "Use of
Proceeds" and "Plan of Distribution."
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THIS EXCHANGE
OFFER AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE CORPORATION OR THE TRUST. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCE CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS
OF THE CORPORATION OR THE TRUST SINCE THE DATE HEREOF. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER OR A SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH
OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR ANYONE TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION.
----------------------------
AVAILABLE INFORMATION
The Corporation is subject to certain informational requirements
pursuant to Section 13 of the Exchange Act and in accordance therewith, files
reports and other information with the Commission. Such reports and other
information may be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the Commission's regional offices at 7 World Trade Center,
13th Floor, Suite 1300, New York, New York 10048 and Suite 1400, Citicorp
Center, 500 West Madison Street, Chicago, Illinois 60661. Copies of such
material may also be obtained by mail from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates. If available, such information also may be
7
<PAGE>
accessed through the Commission's electronic data gathering, analysis and
retrieval system ("EDGAR") via electronic means, including the Commission's home
page on the Internet (http://www.sec.gov). The Corporation's common stock is
traded over-the-counter.
No separate financial statements of the Trust have been included
herein. The Corporation and the Trust do not consider that such financial
statements would be material to holders of the Exchange Capital Securities
because the Trust is a newly-formed special purpose entity, has no operating
history or independent operations and is not engaged in and does not propose to
engage in any activity other than holding as trust assets the Junior
Subordinated Debentures, issuing the Trust Securities and engaging in incidental
activities. See "TeleBanc Capital Trust I," "Description of Exchange
Securities--Description of Exchange Capital Securities," "Description of
Exchange Securities--Description of Exchange Junior Subordinated Debentures" and
"Description of Exchange Securities--Description of Exchange Guarantee." In
addition, the Corporation does not expect that the Trust will file reports,
proxy statements and other information under the Exchange Act with the
Commission.
This Prospectus constitutes a part of a registration statement on Form
S-4 (the "Registration Statement") filed by the Corporation and the Trust with
the Commission under the Securities Act. This Prospectus does not contain all
the information set forth in the Registration Statement, certain parts of which
are omitted in accordance with the rules and regulations of the Commission, and
reference is hereby made to the Registration Statement and to the exhibits
relating thereto for further information with respect to the Corporation and the
Capital Securities. Any statements contained herein concerning the provisions of
any document are not necessarily complete, and, in each instance, reference is
made to the copy of such document filed as an exhibit to the Registration
Statement or otherwise filed with the Commission. Each such statement is
qualified in its entirety by such reference.
SUMMARY
The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus. Reference is made to, and
this summary is qualified in its entirety by, the more detailed information and
financial statements, including the notes thereto, contained elsewhere in this
Prospectus and in documents incorporated by reference hereto.
TELEBANC FINANCIAL CORPORATION
TeleBanc Financial Corporation is the holding company parent of
TeleBank (sometimes referred to as "Bank"), a federally chartered, FDIC insured
savings bank headquartered in Arlington, Virginia, and TeleBanc Capital Markets,
Inc. ("TCM"), an investment adviser, fund manager and broker-dealer. The
Corporation was organized by its majority owner, MET Holdings Corporation ("MET
Holdings"), to become in March 1994 the direct holding company of the Bank,
which had been acquired by MET Holdings in 1989. At September 30, 1997, the
Corporation had total assets of $838.5 million, total deposits of $445.2 million
and stockholders' equity of $45.3 million.
The primary business of the Corporation is the business of the Bank.
The Bank's operating strategy seeks to minimize operating expenses through
efficient deposit gathering, borrowing and asset generation. The Bank offers
FDIC insured products to retail customers on a nationwide basis through the
Bank's branchless, direct marketing strategy. The Bank does not rely on a
traditional branch network but instead services customers almost exclusively by
telephone and mail, using cost savings to offer premium yields on deposit
products. The Bank's marketing strategy is based on a consumer products model,
and focuses on pursuing customers through brand building, target marketing,
national affinity programs and customer service. While the Bank utilizes various
target marketing techniques, including print and other media advertisements, the
Bank does not solicit deposits by telephone from persons who have not previously
contacted the Bank about its products. By utilizing a sophisticated client
tracking software program, the Bank can maintain a detailed data base of
incoming inquiries and process deposits with a small staff of well trained
telebankers.
8
<PAGE>
The effectiveness of the Bank's marketing efforts and attention to
customer service can be measured by the conversion of inquiries into deposit
relationships and the percent of new accounts acquired through referrals by
existing customers. For the nine months ended September 30, 1997, the Bank
estimates that the conversion ratio of inquiries into deposit relationships was
approximately 40% and approximately 10% of all new accounts were the result of
referrals by existing customers of the Bank.
The Bank does not directly originate loans. Rather, the Bank's asset
acquisition strategy focuses on the purchase of pools of mortgages secured by
one- to four-family residences and mortgage-related securities. Among the
mortgage assets actively sought by the Bank are pools of whole loans which
typically are purchased at a discount as a result of non-standard
characteristics such as credit enhancements, mid-month payment dates and
documentation deficiencies. In purchasing such loans, the Bank views a portion
of the discount as being available to cover potential credit risks, thereby
reducing the level of reserves the Bank believes is required to provide for loan
losses. By purchasing rather than originating mortgage assets, the Bank is able
to eliminate the general and administrative expenses associated with the typical
loan origination function. The Bank also believes it is able to minimize credit
quality risks by purchasing a seasoned and geographically diverse portfolio.
Through TCM, the Corporation is involved in trading mortgage-backed
securities principally with other broker-dealers and government sponsored
enterprises, and in fund management. Other Corporation operations include recent
joint venture investments through the Bank in AGT Mortgage Services, LLC ("AGT
Mortgage") and AGT PRA, LLC ("AGT PRA"). AGT Mortgage is engaged in loan
servicing and loan workouts for troubled or defaulted loans. AGT PRA owns a
majority interest in Portfolio Recovery Associates, LLC, which acquires and
collects delinquent consumer debt obligations for its own portfolio.
The Corporation's executive offices and the Bank's home office are
located at 1111 North Highland Street, Arlington, Virginia 22201, telephone
(703) 247-3700.
TELEBANC CAPITAL TRUST I
The Trust is a statutory business trust formed under Delaware law
pursuant to (i) the Trust Agreement and (ii) the filing of a certificate of
trust with the Delaware Secretary of State. The Trust's business and affairs are
conducted pursuant to the Trust Agreement by the Issuer Trustees: the Property
Trustee, the Delaware Trustee, and the three individual Administrative Trustees,
who are officers or other employees of the Corporation. The Trust exists for the
exclusive purposes of (i) issuing and selling the Trust Securities, (ii) using
the proceeds from the sale of the Trust Securities to acquire the Junior
Subordinated Debentures issued by the Corporation and (iii) engaging in only
those other activities necessary, advisable or incidental thereto, including the
Exchange Offer. Accordingly, the Junior Subordinated Debentures are the sole
assets of the Trust and payments under the Junior Subordinated Debentures are
the sole revenue of the Trust. All of the Common Securities are owned by the
Corporation.
THE EXCHANGE OFFER
The Exchange Offer................Up to $10,000,000 aggregate Liquidation Amount
of Exchange Capital Securities are being
offered in exchange for a like aggregate
Liquidation Amount of Original Capital
Securities. Original Capital Securities may be
tendered for exchange in whole or in part in a
Liquidation Amount of $100,000 (100 Capital
Securities) or any integral multiple of $1,000
(one Capital Security) in excess thereof. The
Corporation and the Trust are making the
Exchange Offer in order to satisfy their
obligations under the Registration Rights
Agreement relating to the Original Capital
Securities. For a description of the
procedures for tendering Original Capital
Securities, see "The Exchange
Offer--Procedures for Tendering Original
Capital Securities."
9
<PAGE>
Expiration Date................. 5:00 p.m., New York City time, on _________,
1997 unless the Exchange Offer is extended by
the Corporation and the Trust (in which case
the Expiration Date will be the latest date
and time to which the Exchange Offer is
extended). See "The Exchange Offer--Terms of
the Exchange Offer."
Conditions to the Exchange
Offer.............................The Exchange Offer is subject to certain
conditions, which may be waived by the
Corporation and the Trust in their sole
discretion. The Exchange Offer is not
conditioned upon any minimum Liquidation
Amount of Original Capital Securities being
tendered. See "The Exchange Offer--Conditions
to the Exchange Offer."
Terms of the Exchange Offer.......The Corporation and the Trust reserve the
right in their sole and absolute discretion,
subject to applicable law, at any time and
from time to time, (i) to delay the acceptance
of the Original Capital Securities, (ii) to
terminate the Exchange Offer if certain
specified conditions have not been satisfied,
(iii) to extend the Expiration Date of the
Exchange Offer and retain all Original Capital
Securities tendered pursuant to the Exchange
Offer, subject, however, to the right of
holders of Original Capital Securities to
withdraw their tendered Original Capital
Securities, or (iv) to waive any condition or
otherwise amend the terms of the Exchange
Offer in any respect. See "The Exchange
Offer--Terms of the Exchange Offer."
Withdrawal........................Rights Tenders of Original Capital Securities
may be withdrawn at any time on or prior to
the Expiration Date by delivering a written
notice of such withdrawal to the Exchange
Agent in conformity with certain procedures as
set forth herein under "The Exchange
Offer--Withdrawal Rights."
Procedures for Tendering
Original Capital Securities.......Certain brokers, dealers, commercial banks,
trust companies and other nominees who hold
Original Capital Securities through The
Depository Trust Company ("DTC") must effect
tenders by book-entry transfer through DTC's
Automated Tender Offer Program ("ATOP").
Beneficial owners of Original Capital
Securities registered in the name of a broker,
dealer, commercial bank, trust company or
other nominee are urged to contact such person
promptly if they wish to tender Original
Capital Securities pursuant to the Exchange
Offer. Tendering holders of Original Capital
Securities that do not use ATOP must complete
and sign a Letter of Transmittal in accordance
with the instructions contained therein and
forward the same by mail, facsimile
transmission or hand delivery, together with
any other required documents, to the Exchange
Agent, either with the certificates of the
Original Capital Securities to be tendered or
in compliance with the specified procedures
for guaranteed delivery of Original Capital
Securities. Tendering holders of Original
Capital Securities that use ATOP will, by so
doing, acknowledge that they are bound by the
terms of the Letter of Transmittal. See "The
Exchange Offer--Procedures for Tendering
Original Capital Securities."
Letters of Transmittal and certificates
representing Original Capital Securities
should not be sent to the Corporation or
Trust. Such documents should only be sent to
the Exchange Agent.
10
<PAGE>
Resales of Exchange
Capital Securities................The Corporation and the Trust are making the
Exchange Offer in reliance on the position of
the Staff of the Commission as set forth in
certain interpretive letters addressed to
third parties in other transactions. However,
neither the Corporation nor the Trust has
sought its own interpretive letter and there
can be no assurance that the Staff of the
Commission would make a similar determination
with respect to the Exchange Offer as it has
in such interpretive letters to third parties.
Based on these interpretations by the Staff of
the Commission, and subject to the two
immediately following sentences, the
Corporation and the Trust believe that
Exchange Capital Securities issued pursuant to
this Exchange Offer in exchange for Original
Capital Securities may be offered for resale,
resold and otherwise transferred by a holder
thereof (other than a holder who is a
broker-dealer) without further compliance with
the registration and prospectus delivery
requirements of the Securities Act, provided
that such Exchange Capital Securities are
acquired in the ordinary course of such
holder's business and that such holder is not
participating, and has no arrangement or
understanding with any person to participate,
in a distribution (within the meaning of the
Securities Act) of such Exchange Capital
Securities. However, any holder of Original
Capital Securities who is an "affiliate" of
the Corporation or the Trust or who intends to
participate in the Exchange Offer for the
purpose of distributing the Exchange Capital
Securities, or any broker-dealer who purchased
the Original Capital Securities from the Trust
to resell pursuant to Rule 144A or any other
available exemption under the Securities Act,
(i) will not be able to rely on the
interpretations of the Staff of the Commission
set forth in the above-mentioned interpretive
letters, (ii) will not be permitted or
entitled to tender such Original Capital
Securities in the Exchange Offer and (iii)
must comply with the registration and
prospectus delivery requirements of the
Securities Act in connection with any sale or
other transfer of such Original Capital
Securities unless such sale is made pursuant
to an exemption from such requirements. In
addition, as described herein, if any
broker-dealer holds Original Capital
Securities acquired for its own account as a
result of market-making or other trading
activities and exchanges such Original Capital
Securities for Exchange Capital Securities,
then such broker-dealer must deliver a
prospectus meeting the requirements of the
Securities Act in connection with any resales
of such Exchange Capital Securities.
Each holder of Original Capital Securities who
wishes to exchange Original Capital Securities
for Exchange Capital Securities in the
Exchange Offer will be required to represent
that (i) it is not an "affiliate" of the
Corporation or the Trust, (ii) any Exchange
Capital Securities to be received by it are
being acquired in the ordinary course of its
business, (iii) it has no arrangement or
understanding with any person to participate
in a distribution (within the meaning of the
Securities Act) of such Exchange Capital
Securities, and (iv) if such holder is not a
broker-dealer, such holder is not engaged in,
and does not intend to engage in, a
distribution (within the meaning of the
Securities Act) of such Exchange Capital
Securities. Each broker-dealer that receives
Exchange Capital Securities for its own
account in exchange for
11
<PAGE>
Original Capital Securities, where such
Original Capital Securities were acquired by
such broker-dealer as a result of
market-making activities or other trading
activities, must acknowledge that it will
deliver a prospectus meeting the requirements
of the Exchange Act in connection with any
resale of such Exchange Capital Securities.
See "Plan of Distribution." The Letter of
Transmittal states that, by so acknowledging
and by delivering a prospectus, a
broker-dealer will not be deemed to admit that
it is an "underwriter" within the meaning of
the Securities Act. Based on the position
taken by the Staff of the Commission in the
interpretive letters referred to above, the
Corporation and the Trust believe that
Participating Broker-Dealers who acquired
Original Capital Securities for their own
accounts as a result of market-making
activities or other trading activities may
fulfill their prospectus delivery requirements
with respect to the Exchange Capital
Securities received upon exchange of such
Original Capital Securities (other than
Original Capital Securities that represent an
unsold allotment from the initial sale of the
Original Capital Securities) with a prospectus
meeting the requirements of the Securities
Act, which may be the prospectus prepared for
an exchange offer so long as it contains a
description of the plan of distribution with
respect to the resale of such Exchange Capital
Securities. Accordingly, this Prospectus, as
it may be amended or supplemented from time to
time, may be used by a Participating
Broker-Dealer in connection with resales of
Exchange Capital Securities received in
exchange for Original Capital Securities where
such Original Capital Securities were acquired
by such Participating Broker-Dealer for its
own account as a result of market-making or
other trading activities. Subject to certain
provisions set forth in the Registration
Rights Agreement and to the limitations
described herein under "The Exchange
Offer--Resales of Exchange Capital
Securities," the Corporation and the Trust
have agreed that this Prospectus, as it may be
amended or supplemented from time to time, may
be used by a Participating Broker-Dealer in
connection with resales of such Exchange
Capital Securities for a period ending 180
days after the Expiration Date (subject to
extension under certain limited circumstances)
or, if earlier, when all such Exchange Capital
Securities have been disposed of by such
Participating Broker-Dealer. See "Plan of
Distribution." Any Participating Broker-Dealer
who is an "affiliate" of the Corporation or
the Trust may not rely on such interpretive
letters and must comply with the registration
and prospectus delivery requirements of the
Securities Act in connection with any resale
transaction. See "The Exchange Offer--Resales
of Exchange Capital Securities."
Exchange Agent....................The Exchange Agent with respect to the
Exchange Offer is Wilmington Trust Company.
The address, and telephone and facsimile
number of the Exchange Agent are set forth in
"The Exchange Offer--Exchange Agent" and in
the Letter of Transmittal.
Use of Proceeds...................Neither the Corporation nor the Trust will
receive any cash proceeds from the issuance of
the Exchange Capital Securities offered
hereby. See "Use of Proceeds."
12
<PAGE>
Federal Income Tax
Considerations....................The exchange of Original Capital Securities
for Exchange Capital Securities will not be a
taxable exchange for federal income tax
purposes, and holders should not recognize any
taxable gain or loss or any interest income as
a result of such exchange. See "Certain
Federal Income Tax Consequences--Exchange of
Capital Securities."
ERISA Considerations..............Holders of Original Capital Securities should
review the information set forth under "ERISA
Considerations" prior to tendering Original
Capital Securities in the Exchange Offer.
THE EXCHANGE CAPITAL SECURITIES
Securities Offered................Up to $10,000,000 aggregate Liquidation Amount
of Exchange Capital Securities (Liquidation
Amount $1,000 per Exchange Capital Security)
will have been registered under the Securities
Act. The Exchange Capital Securities will be
issued and the Original Capital Securities
were issued under the Trust Agreement. The
Exchange Capital Securities and any Original
Capital Securities that remain outstanding
after consummation of the Exchange Offer will
vote together as a single class for purposes
of determining whether holders of the
requisite percentage in outstanding
Liquidation Amount thereof have taken certain
actions or exercised certain rights under the
Trust Agreement. See "Description of Exchange
Securities--Description of Exchange Capital
Securities--Voting Rights; Amendment of the
Trust Agreement." The terms of the Exchange
Capital Securities are identical in all
material respects to the terms of the Original
Capital Securities, except that the Exchange
Capital Securities have been registered under
the Securities Act, will not be subject to
certain restrictions on transfer applicable to
the Original Capital Securities and will not
provide for any increase in the Distribution
rate thereon. See "The Exchange Offer--Purpose
and Effect of the Exchange Offer,"
"Description of Exchange Securities" and
"Description of Original Securities."
Distribution Dates................June 1 and December 1 of each year, commencing
December 1, 1997.
Extension Periods.................So long as no Debenture Event of Default has
occurred and is continuing, Distributions on
Exchange Capital Securities will be deferred
for the duration of any Extension Period
elected by the Corporation with respect to the
payment of interest on the Exchange Junior
Subordinated Debentures. No Extension Period
will exceed 10 consecutive semi-annual
periods, end on a date other than an Interest
Payment Date or extend beyond the Stated
Maturity Date. See "Description of Exchange
Securities--Description of Exchange Junior
Subordinated Debentures--Option to Extend
Interest Payment Date" and "Certain Federal
Income Tax Consequences--Interest Income and
Original Issue Discount."
Ranking...........................The Exchange Capital Securities will rank pari
passu, and payments thereon will be made pro
rata, with the Original Capital Securities and
the Common Securities except as described
under "Description of Exchange
Securities--Description of Exchange
13
<PAGE>
Capital Securities--Subordination of Common
Securities." The Exchange Junior Subordinated
Debentures will rank pari passu with the
Original Junior Subordinated Debentures and
all other junior subordinated debentures (if
any) issued by the Corporation (the "Other
Debentures"), which are issued and sold (if at
all) to other trusts to be established by the
Corporation (if any), in each case similar to
the Trust ("Other Trusts"), and will
constitute unsecured obligations of the
Corporation and will rank subordinate and
junior in right of payment to all Senior
Indebtedness to the extent and in the manner
set forth in the Indenture. See "Description
of Exchange Securities--Description of
Exchange Junior Subordinated Debentures." The
Exchange Guarantee will rank pari passu with
the Original Guarantee and all other
guarantees (if any) issued by the Corporation
with respect to capital securities (if any)
issued by Other Trusts ("Other Guarantees")
and will constitute an unsecured obligation of
the Corporation and will rank subordinate and
junior in right of payment to all Senior
Indebtedness to the extent and in the manner
set forth in the Guarantee Agreement. See
"Description of Exchange Securities --
Description of Exchange Guarantee." In
addition, because the Corporation is a holding
company, the Exchange Junior Subordinated
Debentures and the Exchange Guarantee will be
effectively subordinated to all existing and
future liabilities of the Corporation's
subsidiaries, including the Bank's deposit
liabilities. See "Description of Exchange
Securities-- Description of Exchange Junior
Subordinated Debentures--Subordination."
Redemption........................The Trust Securities are subject to mandatory
redemption in a Like Amount, (i) in whole but
not in part, on the Stated Maturity Date upon
repayment of the Exchange Junior Subordinated
Debentures, (ii) in whole but not in part, at
any time prior to June 1, 2007 (the "Initial
Optional Redemption Date"), contemporaneously
with the optional prepayment of the Exchange
Junior Subordinated Debentures by the
Corporation upon the occurrence and
continuation of a Special Event and (iii) in
whole or in part, on or after the Initial
Optional Redemption Date, contemporaneously
with the optional prepayment by the
Corporation of all or part of the Exchange
Junior Subordinated Debentures, in each case
at the applicable Redemption Price. See
"Description of Exchange Securities --
Description of Exchange Capital Securities --
Redemption" and "--Description of Exchange
Junior Subordinated Debentures -- Special
Event Prepayment."
Transfer Restrictions.............The Exchange Capital Securities will be
issued, and may be transferred, only in blocks
having a Liquidation Amount of not less than
$100,000 (100 Exchange Capital Securities).
See "Description of Exchange Securities --
Description of Exchange Capital Securities --
Restrictions on Transfer." Any such transfer
of Exchange Capital Securities in a block
having a Liquidation Amount of less than
$100,000 shall be deemed to be void and of no
legal effect whatsoever.
ERISA Considerations..............Prospective purchasers must carefully consider
the restrictions on purchase set forth under
"ERISA Considerations."
14
<PAGE>
Absence of Market for the
Exchange Capital Securities.......The Exchange Capital Securities will be a new
issue of securities for which there currently
is no market. Although the Initial Purchaser
has informed the Corporation and the Trust
that it currently intends to make a market in
the Exchange Capital Securities, the Initial
Purchaser is not obligated to do so, and any
such market making may be discontinued at any
time without notice. Accordingly, there can be
no assurance as to the development or
liquidity of any market for the Exchange
Capital Securities. The Trust and the
Corporation do not intend to apply for listing
of the Exchange Capital Securities on any
securities exchange or for quotation through
the Nasdaq Stock Market, Inc. See "Plan of
Distribution."
Risk Factors......................For a discussion of the considerations
relevant to an investment in the Capital
Securities or the exchange of Original Capital
Securities for Exchange Capital Securities,
see "Risk Factors."
15
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected financial data set forth below for the five-year ended
period ended December 31, 1996 have been derived from the consolidated financial
statements of the Corporation, and should be read in conjunction with the
Corporation's financial statements, including the related notes thereto and
discussion thereof, included in the Corporation`s 1996 Annual Report on Form
10-K, as amended, for the year ended December 31, 1996 and its Quarterly Report
on Form 10-Q for the quarter ended September 30, 1997. See "Appendix." The
selected financial data set forth below for the nine month periods ended
September 30, 1997 and 1996 have been derived from the unaudited consolidated
financial statements of the Corporation and include all adjustments, consisting
only of normal recurring accruals, which management considers necessary for a
fair presentation of such financial information for those periods. The results
for these nine-month periods are not necessarily indicative of the results which
may be expected for any other interim or annual period. See "Available
Information." Financial and other data as of and for all periods prior to March
1994 represent the consolidated data of the Bank only.
SELECTED CONSOLIDATED FINANCIAL DATA--THE CORPORATION
<TABLE>
<CAPTION>
AT SEPT. 30, AT DECEMBER 31,
1997 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
FINANCIAL CONDITION DATA:
Total assets $838,533 $ 647,965 $ 553,943 $ 427,292 $ 220,301 $229,374
Loans receivable, net............................. 495,311 351,821 248,492 154,742 100,859 93,605
Allowance for loan losses......................... 3,181 2,957 2,311 925 835 659
Investment securities (1)......................... 65,750 78,826 40,058 12,444 18,110 13,570
Mortgage-backed securities (1).................... 240,091 184,743 234,385 236,464 80,782 87,164
Deposits 445,241 390,486 306,500 212,411 113,132 130,100
FHLB advances..................................... 170,000 144,800 105,500 96,000 61,000 53,750
Securities sold under agreements to repurchase.... 122,408 57,581 93,905 79,613 29,642 29,642
Subordinated debt, net of original issue discount. 29,556 16,586 16,496 16,390 -- --
Stockholders' equity.............................. 45,260 24,658 21,565 17,028 12,378 10,715
AT OR FOR THE
NINE MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- -------- ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Interest income.............................. $ 42,933 $ 34,367 $ 45,800 $ 40,511 $ 22,208 $16,667 $ 19,425
Interest expense............................. 33,291 25,840 34,815 31,946 17,513 11,828 13,896
-------- -------- -------- -------- -------- -------- --------
Net interest income.......................... 9,642 8,527 10,985 8,565 4,695 4,839 5,529
Provision for loan losses.................... 671 744 919 1,722 492 211 972
-------- -------- -------- -------- -------- -------- --------
Net interest income after provision for loan
losses..................................... 8,971 7,783 10,066 6,843 4,203 4,628 4,557
Non-interest income.......................... 2,935 1,436 2,756 3,777 175 1,157 1,014
Non-interest expense......................... 6,896 7,344 9,075(2) 6,240 3,656 3,736 3,627
-------- -------- -------- -------- --------- -------- --------
Income before income taxes, minority interest
and cumulative change........................ 5,010 1,875 3,747 4,380 722 2,049 1,944
Income taxes................................. 1,682 528 1,195 1,660 182 842 857
Minority interest in subsidiary.............. (353) -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Income before cumulative change.............. 2,975 1,347 2,552 2,720 540 1,207 1,087
Cumulative change............................ -- -- -- -- -- 170 --
-------- -------- -------- -------- -------- -------- --------
Net income................................... 2,975 1,347 2,552 2,720 540 1,377 1,087
Preferred stock dividends.................... 384 -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income after preferred stock dividends... $ 2,591 $ 1,347 $ 2,552 $ 2,720 $ 540 $ 1,377 $ 1,087
======== ======== ======== ======== ======== ======== ========
Net income per common share:
Primary................................... $ 0.94 $ 0.63 $ 1.12 $ 1.33 $ 0.31 $ 1.06 $ 0.84
Fully Diluted............................. 0.93 0.63 1.09 1.33 0.31 1.06 0.84
</TABLE>
- ---------
(1) Includes securities available for sale, held to maturity, and held for sale.
(2) Includes a one time pre-tax charge of $1.7 million ($1.1 million after tax)
in connection with the recapitalization of the Savings Association Insurance
Fund ("SAIF").
16
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE
NINE MONTHS
ENDED
SEPTEMBER 30, AT OR FOR THE YEAR ENDED DECEMBER 31,
1997 1996 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL RATIOS:
Return on average assets..................... 0.43% 0.53%(1) 0.61%(1) 0.53% 0.17% 0.61% 0.45%
Return on average stockholders' equity....... 8.89 14.65(1) 16.50 (1) 14.10 3.17 11.79 10.51
Interest rate spread......................... 1.53 1.92 1.84 1.72 1.51 2.21 2.32
Net interest margin.......................... 1.61 2.01 1.94 1.88 1.62 2.37 2.42
General and administrative expenses to
total assets.............................. 0.99 1.08(1) 1.03(1) 1.00 0.82 1.36 1.04
Stockholders' equity to total assets......... 5.40 3.84 3.81 3.89 3.99 5.62 4.67
ASSET QUALITY DATA:
Non-performing loans......................... $11,071(2) $ 8,949(2)$10,250(2) $ 5,153 $ 2,066 $ 2,554 $ 4,060
Allowance for loan losses to non-performing 28.73% 29.31% 28.85% 44.85% 44.77% 32.69% 16.23%
loans
Non-performing assets........................ $11,578(2) $10,074(2)$11,550(2)$ 6,156 $ 2,951 $ 3,995 $ 5,588
Non-performing assets to total assets........ 1.38% 1.62% 1.78% 1.11% 0.70% 1.70% 2.40%
TELEBANK CAPITAL RATIOS:
Tangible capital............................. 6.15% 5.07% 5.07% 5.36% 6.35% 5.38% 4.32%
Core capital................................. 6.15 5.07 5.08 5.31 6.27 5.39 4.42
Tier 1 risk-based............................ 12.62 9.82 9.69 11.08 15.48 14.09 11.57
Total risk-based............................. 13.37 10.50 10.40 11.74 15.96 14.75 11.99
OTHER DATA:
Deposit accounts............................. 19,402 16,728 16,506 12,919 8,564 2,932 3,568
Full-time equivalent employees............... 60 35 39 30 29 18 17
Assets per employee.......................... $ 13,976 $ 17,758 $16,614 $ 18,465 $ 14,734 $ 12,239 $ 13,493
Tangible book value per share................ 14.27 11.33 11.85 10.32 8.08 9.09 7.61
</TABLE>
- ---------
(1) Excludes the one time pre-tax charge of $1.7 million ($1.1 million after
tax) to recapitalize the SAIF. Giving effect to the charge, return on
average assets, return on average stockholders' equity, and general and
administrative expenses to total assets for the year ended 1996 was 0.42%,
11.46%, and 1.29%, respectively, and for the nine months ended September
30, 1996 was 0.29%, 8.06%, and 1.44%, respectively.
(2) Year-end 1996 non-performing assets increased by $5.5 million or 93.3%
over non-performing assets at year end 1995. Approximately 51% of this
increase is attributed to the acquisition of one- to four-family mortgage
loans that were either non-performing or in bankruptcy at the time of
purchase. As of December 31, 1996 and September 30, 1997, assets that were
either non-performing or in bankruptcy at the time of purchase accounted
for $2.8 million or 24.7% and $3.0 million or 26.0%, respectively, of
total non-performing assets.
RISK FACTORS
Prospective investors should consider carefully, in addition to the
other information contained in this Prospectus, the following factors in
connection with the Exchange Offer and the Exchange Capital Securities offered
hereby. This Prospectus contains certain forward-looking statements and
information relating to the Corporation that are based on the beliefs of
management as well as assumptions made by and information currently available to
management. The words "believes," "expects," "may," "will," "should,"
"projected," "contemplates" or "anticipates" or the negative thereof or other
variations thereon or comparable terminology, as they relate to the Corporation
or the Corporation's management, are intended to identify forward-looking
statements. See, e.g., "Summary--TeleBanc Financial Corporation" and "TeleBanc
Financial Corporation" Such statements reflect the current views of the
Corporation with respect to future events and are subject to certain risks,
uncertainties and assumptions, including the risk factors described in this
Prospectus. No assurance can be given that the future results covered by the
forward-looking statements will be achieved. The following matters constitute
cautionary statements identifying important factors with respect to such
forward-looking statements, including certain risks and uncertainties, that
could cause actual results to vary materially from the future results covered in
such forward-looking statements. Other factors, such as the general state of the
economy, could also cause actual results to vary materially from the future
results covered in such forward-looking statements. Should one or more of these
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those described herein as
anticipated, believed, estimated or expected, or by other comparable
terminology. The Corporation does not intend to update these forward-looking
statements.
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<PAGE>
RANKING OF SUBORDINATED OBLIGATIONS UNDER THE EXCHANGE GUARANTEE AND THE
EXCHANGE JUNIOR SUBORDINATED DEBENTURES; LIMITATIONS ON SOURCE OF FUNDS
The obligations of the Corporation under the Exchange Guarantee issued
by the Corporation for the benefit of the holders of Exchange Capital
Securities, as well as under the Exchange Junior Subordinated Debentures, are
unsecured and rank subordinate and junior in right of payment to all Senior
Indebtedness to the extent and in the manner set forth in the Exchange Guarantee
and the Indenture, respectively. No payment may be made of the principal of, or
premium, if any, or interest on the Exchange Junior Subordinated Debentures, or
in respect of any redemption, retirement, purchase or other acquisition of any
of the Exchange Junior Subordinated Debentures, at any time when (i) there shall
have occurred and be continuing a default in any payment in respect of any
Senior Indebtedness, or there has been an acceleration of the maturity thereof
because of a default, or (ii) in the event of the acceleration of the maturity
of the Exchange Junior Subordinated Debentures, until payment has been made on
all Senior Indebtedness. At September 30, 1997, the Corporation had $29.6
million face amount of Senior Indebtedness outstanding. In addition to
outstanding Senior Indebtedness, the Corporation also had outstanding at
September 30, 1997 $16.2 million face amount of 4.0% cumulative preferred stock.
The terms of the Senior Indebtedness and the cumulative preferred stock include
various covenants and other restrictions, including significant financial
penalties, upon default of payment of interest or dividends, as applicable.
Under such a default circumstance, these restrictions may have a material impact
on the ability of the Corporation to satisfy its obligations with respect to the
Capital Securities. At September 30, 1997, the annual interest expense to
service the Senior Indebtedness was $3.3 million and the annual dividend
requirement on the cumulative preferred stock was $648,000.
As a holding company, the Corporation's operations are conducted
primarily by its subsidiaries, TeleBank and TCM. Presently, dividends from the
Bank are the primary source of funds for the Corporation. There are regulatory
limitations on the payment of dividends to the Corporation from the Bank, and
federally chartered, FDIC insured savings banks generally are required to
provide their Regional Director of the Office of Thrift Supervision (the "OTS")
with no less than 30 days notice of any proposed dividend. At September 30,
1997, the Bank had approximately $14.1 million available under OTS regulations
for payment of dividends to the Corporation. However, the OTS can prohibit
payment of any or all such dividends under certain circumstances, including if
such payment would constitute an unsafe or unsound banking practice. In addition
to restrictions on the payment of dividends, the Bank is subject to restrictions
imposed by federal law on extensions of credit to, and certain other
transactions with, the Corporation and certain other affiliates, and on
investments in stock or other securities. Such restrictions prevent the Bank
from lending to the Corporation and such other affiliates unless the loans are
secured by various types of collateral. Further, such secured loans, other
transactions and investments by the Bank are generally limited in amount as to
the Corporation and each of such other affiliates to 10% of the Bank's capital
and surplus and as to the Corporation and all of such other affiliates to an
aggregate of 20% of the Bank's capital and surplus.
Under terms of the indentures pursuant to which the Senior Indebtedness
was issued, the Corporation presently is required to maintain, on an
unconsolidated basis, liquid assets in an amount equal to or greater than $3.3
million, which represents 100% of the aggregate annual interest expense on the
Senior Indebtedness.
Further, as a holding company, the right of the Corporation to
participate in any distribution of assets of any subsidiary upon such
subsidiary's liquidation or reorganization or otherwise (and thus the ability of
holders of the Exchange Capital Securities to benefit indirectly from such
distribution) is subject to the prior claims of creditors of that subsidiary
(including depositors, in the case of the Bank), except to the extent that the
Corporation may itself be recognized as a creditor of that subsidiary. At
September 30, 1997, the subsidiaries of the Corporation had total liabilities
(excluding liabilities owed to the Corporation) of $737.9 million. Accordingly,
the Exchange Junior Subordinated Debentures effectively will be subordinated to
all existing and future liabilities of the Corporation's subsidiaries (including
the Bank's deposit liabilities, which aggregated $457.2 million at September 30,
1997) and holders of Exchange Junior Subordinated Debentures should look only to
the assets of the Corporation for payments on the Exchange Junior Subordinated
Debentures. The Exchange Guarantee will constitute an unsecured
18
<PAGE>
obligation of the Corporation and will rank subordinate and junior in right of
payment to all Senior Indebtedness in the same manner as the Exchange Junior
Subordinated Debentures.
None of the Indenture, the Exchange Guarantee or the Trust Agreement
places any limitation on the amount of secured or unsecured debt, including
Senior Indebtedness, that may be incurred by the Corporation or any of its
subsidiaries. See "Description of Exchange Securities--Description of Exchange
Junior Subordinated Debentures--General," "--Subordination" and "Description of
Exchange Securities--Description of Exchange Guarantee--Status of the Exchange
Guarantee."
The ability of the Trust to pay amounts due on the Exchange Capital
Securities is solely dependent upon the Corporation making payments on the
Exchange Junior Subordinated Debentures as and when required.
OPTION TO EXTEND INTEREST PAYMENT PERIOD; TAX CONSEQUENCES; MARKET PRICE
CONSEQUENCES
So long as no Debenture Event of Default has occurred and is
continuing, the Corporation has the right under the Indenture to defer payments
of interest on the Exchange Junior Subordinated Debentures for a period not
exceeding 10 consecutive semi-annual periods with respect to each Extension
Period, provided that an Extension Period must end on an Interest Payment Date
and may not extend beyond the Stated Maturity Date. As a consequence of any such
deferral, semi-annual Distributions on the Trust Securities will be deferred
from the relevant payment date for such Distributions during any such Extension
Period (and the amount of Distributions to which holders of the Trust Securities
are entitled will accumulate additional Distributions thereon at the rate of
11.00% per annum, compounded semi-annually, but not exceeding the interest rate
then accruing on the Exchange Junior Subordinated Debentures). During an
Extension Period, the Corporation generally will be prohibited from (i)
declaring or paying dividends on the Corporation's capital stock, (ii) making
any payments of principal, premium, if any, or interest on, or repaying,
repurchasing or redeeming any debt securities ranking pari passu with or junior
in right of payment to the Exchange Junior Subordinated Debentures or (iii)
making any guarantee payments with respect to debt securities of any subsidiary
of the Corporation if such guarantee ranks pari passu with or junior in right of
payment to the Exchange Junior Subordinated Debentures, subject to certain
exceptions. See "Description of Exchange Securities--Description of Exchange
Capital Securities--Distributions."
Before the end of an Extension Period, the Corporation may further
extend such Extension Period, provided that such extension does not cause such
Extension Period to exceed 10 consecutive semi-annual periods, end on a date
other than an Interest Payment Date or extend beyond the Stated Maturity Date.
Upon the termination of any Extension Period and the payment of all interest
then accrued and unpaid on the Exchange Junior Subordinated Debentures (together
with interest thereon at the annual rate of 11.00%, compounded semi-annually, to
the extent permitted by applicable law), the Corporation may begin a new
Extension Period, subject to the above requirements. There is no limitation on
the number of times that the Corporation may begin an Extension Period. See
"Description of Exchange Securities--Description of Exchange Capital
Securities--Distributions" and "--Description of Exchange Junior Subordinated
Debentures--Option to Extend Interest Payment Date."
The Corporation has no plan to exercise its right to defer payments of
interest on the Exchange Junior Subordinated Debentures. However, should the
Corporation exercise its right to defer payments of interest on the Junior
Subordinated Debentures, each holder of Trust Securities will be required to
accrue income (as original issue discount ("OID")) in respect of the deferred
stated interest allocable to its Trust Securities for U.S. federal income tax
purposes, which will be allocated but not distributed to holders of Trust
Securities. As a result, each holder of Capital Securities will recognize income
for U.S. federal income tax purposes in advance of the receipt of cash and will
not receive the cash related to such income from the Trust if the holder
disposes of the Capital Securities prior to the record date for the payment of
Distributions thereafter. See "Certain Federal Income Tax Consequences--Interest
Income and Original Issue Discount" and "--Sales of Capital Securities."
19
<PAGE>
If the Corporation exercises its right to defer payments of interest on
the Exchange Junior Subordinated Debentures, the market price of the Exchange
Capital Securities is likely to be affected. A holder that disposes of its
Exchange Capital Securities during an Extension Period, therefore, might not
receive the same return on its investment as a holder that continues to hold its
Exchange Capital Securities. In addition, the mere existence of the
Corporation's right to defer payments of interest on the Exchange Junior
Subordinated Debentures may cause the market price of the Exchange Capital
Securities to be more volatile than the market prices of other securities on
which OID accrues and that are not subject to such deferrals.
SPECIAL EVENT REDEMPTION
If a Special Event, including a Tax Event or a Regulatory Capital Event
(in each case as defined under "Description of Exchange Securities--Description
of Exchange Junior Subordinated Debentures--Special Event Prepayment"), occurs
before June 1, 2007, the Corporation will have the right to prepay the Exchange
Junior Subordinated Debentures in whole, but not in part, at the Special Event
Prepayment Price within 90 days following the occurrence of such Special Event
and therefore cause a mandatory redemption of the Trust Securities at the
Special Event Redemption Price. The exercise of such right is subject to the
Corporation having received any required regulatory approvals. See "Description
of Exchange Securities--Description of Exchange Capital Securities--Redemption."
PROPOSED LEGISLATIVE ELIMINATION OF THE THRIFT CHARTER
Legislation which would generally require federally chartered savings
banks, such as TeleBank, to convert to a national or state bank charter has been
proposed in Congress. In addition, such legislation would require that all
savings and loan holdings companies, such as the Corporation, convert to bank
holding companies. It is uncertain if and to what extent existing powers of
savings banks, such as TeleBank, and savings and loan holding companies, such as
the Corporation, would be "grandfathered." No assurance can be given whether
such legislation will be passed, and, if passed, the form in which it would be
passed and the effect such legislation might have on the Corporation and/or
TeleBank. In addition, if, as a result of enactment of such legislation,
TeleBank is required to convert to a national or state bank charter and the
Corporation is subjected to a regulatory framework similar to that for bank
holding companies, it is possible that the Corporation could become subject to
the holding company level capital adequacy guidelines of the Board of Governors
of the Federal Reserve System (the "Federal Reserve Board") or similar
guidelines (collectively, the "Holding Company Capital Rules"). If bank
regulatory counsel experienced in such matters delivers to the Corporation and
the Trust its opinion that the Corporation is subject to the Holding Company
Capital Rules and that the Corporation is not entitled to treat the Capital
Securities as Tier 1 capital (or its then equivalent) under the Holding Company
Capital Rules, then the Corporation would be permitted to cause a redemption of
the Capital Securities at the Special Event Redemption Price by electing to
prepay the Junior Subordinated Debentures at the Special Event Prepayment Price.
See "Description of Exchange Capital Securities -- Redemption" and "Description
of Exchange Junior Subordinated Debentures -- Special Event Prepayment."
LIQUIDATION DISTRIBUTION OF EXCHANGE JUNIOR SUBORDINATED DEBENTURES
The Corporation will have the right to terminate the Trust and, after
satisfaction of liabilities of creditors of the Trust as required by applicable
law, to cause the Exchange Junior Subordinated Debentures to be distributed to
the holders of the Trust Securities in liquidation of the Trust. Under current
U.S. federal income tax law, a distribution of Exchange Junior Subordinated
Debentures upon the dissolution of the Trust would not be a taxable event to
holders of the Exchange Capital Securities. Upon the occurrence of a Special
Event, however, a dissolution of the Trust in which holders of the Exchange
Capital Securities receive cash would be a taxable event to such holders. See
"Certain Federal Income Tax Considerations--Receipt of Exchange Junior
Subordinated Debentures or Cash Upon Liquidation of the Trust."
20
<PAGE>
POSSIBLE ADVERSE EFFECT ON MARKET PRICES
There can be no assurance as to the market prices for Exchange Capital
Securities or the Exchange Junior Subordinated Debentures that may be
distributed in exchange for Exchange Capital Securities if a termination of the
Trust were to occur. Accordingly, the Exchange Capital Securities or the
Exchange Junior Subordinated Debentures may trade at a discount from the price
that the investor paid to purchase the Exchange Capital Securities offered
hereby. Because holders of Exchange Capital Securities may receive Exchange
Junior Subordinated Debentures in liquidation of the Trust and because
Distributions are otherwise limited to payments on the Exchange Junior
Subordinated Debentures, prospective purchasers of Exchange Capital Securities
are also making an investment decision with regard to the Exchange Junior
Subordinated Debentures and should carefully review all the information
regarding the Exchange Junior Subordinated Debentures contained herein. See
"Description of Exchange Securities--Description of Exchange Capital
Securities--Liquidation of the Trust and Distribution of Exchange Junior
Subordinated Debentures" and "--Description of Exchange Junior Subordinated
Debentures."
RIGHTS UNDER THE EXCHANGE GUARANTEE
The Exchange Guarantee guarantees to the holders of the Exchange
Capital Securities the following payments, to the extent not paid by or on
behalf of the Trust: (i) any accumulated and unpaid Distributions required to be
paid on the Exchange Capital Securities, to the extent that the Trust has funds
legally available therefor at such time, (ii) the applicable Redemption Price
with respect to the Exchange Capital Securities called for redemption, to the
extent that the Trust has funds legally available therefor at such time and
(iii) upon a voluntary or involuntary termination, winding up or liquidation of
the Trust (unless the Exchange Junior Subordinated Debentures are distributed to
holders of the Exchange Capital Securities), the lesser of (a) the aggregate of
the Liquidation Amount and all accumulated and unpaid Distributions to the date
of payment, to the extent that the Trust has funds legally available therefor at
such time and (b) the amount of assets of the Trust remaining available for
distribution to holders of the Exchange Capital Securities at such time, after
the satisfaction of liabilities to creditors of the Trust as provided by
applicable law.
The holders of a majority in aggregate Liquidation Amount of the
Exchange Capital Securities have the right to direct the time, method and place
of conducting any proceeding for any remedy available to the Guarantee Trustee
in respect of the Exchange Guarantee or to direct the exercise of any trust
power conferred upon the Guarantee Trustee under the Exchange Guarantee. Any
holder of the Exchange Capital Securities may institute a legal proceeding
directly against the Corporation to enforce its rights under the Exchange
Guarantee without first instituting a legal proceeding against the Trust, the
Guarantee Trustee or any other person or entity. If the Corporation defaults on
its obligation to pay amounts payable under the Exchange Junior Subordinated
Debentures, the Trust would not have sufficient funds for the payment of
Distributions or amounts payable on redemption of the Exchange Capital
Securities or otherwise, and, in such event, holders of the Exchange Capital
Securities would not be able to rely upon the Exchange Guarantee for payment of
such amounts. Instead, if a Debenture Event of Default has occurred and is
continuing and such event is attributable to the failure of the Corporation to
pay the principal of (or premium, if any) or interest (including Additional Sums
and Compounded Interest, if any) or Liquidated Damages, if any, on the Exchange
Junior Subordinated Debentures when such payment is due and payable, then a
holder of Exchange Capital Securities may institute a legal proceeding directly
against the Corporation for enforcement of payment to such holder of the
principal of (or premium, if any) or interest (including Additional Sums and
Compounded Interest, if any) or Liquidated Damages, if any, on such Exchange
Junior Subordinated Debentures having a principal amount equal to the
Liquidation Amount of the Exchange Capital Securities of such holder (a "Direct
Action"). Notwithstanding any payments made to a holder of Exchange Capital
Securities by the Corporation in connection with a Direct Action, the
Corporation shall remain obligated to pay the principal of (and premium, if any)
and interest (including Additional Sums and Compounded Interest, if any) and
Liquidated Damages, if any, on the Exchange Junior Subordinated Debentures, and
the rights of the Corporation shall be subrogated to the rights of the holder of
such Exchange Capital Securities with respect to payments on the Exchange
Capital Securities to the extent of any payments made by the
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<PAGE>
Corporation to such holder in any Direct Action. Except as described herein,
holders of Exchange Capital Securities will not be able to exercise directly any
other remedy available to the holders of the Exchange Junior Subordinated
Debentures or to assert directly any other rights in respect of the Exchange
Junior Subordinated Debentures. See "Description of Exchange
Securities--Description of Exchange Junior Subordinated Debentures--Enforcement
of Certain Rights by Holders of Exchange Capital Securities," "--Debenture
Events of Default" and "Description of Exchange Securities--Description of
Exchange Guarantee." The Trust Agreement provides that each holder of Exchange
Capital Securities by acceptance thereof agrees to the provisions of the
Indenture and the Exchange Guarantee. Wilmington Trust Company will act as
Guarantee Trustee under the Exchange Guarantee and will hold the Exchange
Guarantee for the benefit of the holders of the Exchange Capital Securities.
Wilmington Trust Company also acts as Property Trustee under the Trust Agreement
and as Debenture Trustee under the Indenture.
LIMITED VOTING RIGHTS
Holders of Exchange Capital Securities generally will have voting
rights relating only to the modification of the Exchange Capital Securities and
the exercise of the Trust's rights as holder of Exchange Junior Subordinated
Debentures. Holders of Exchange Capital Securities will not be entitled to vote
to appoint, remove or replace, or to increase or decrease the number of, the
Issuer Trustees, which voting rights are vested exclusively in the holder of the
Common Securities except upon the occurrence of certain events described herein.
The Property Trustee, the Administrative Trustees and the Corporation may amend
the Trust Agreement without the consent of holders of Exchange Capital
Securities to ensure that the Trust will be classified for United States federal
income tax purposes as a grantor trust. Holders of Exchange Capital Securities
will have no voting rights with respect to any matters submitted to a vote of
the Corporation's stockholders. See "Description of Exchange
Securities--Description of Exchange Capital Securities--Voting Rights; Amendment
of the Trust Agreement" and "--Removal of Issuer Trustees."
TRADING CHARACTERISTICS OF THE EXCHANGE CAPITAL SECURITIES
The Exchange Capital Securities may trade at a price that does not
fully reflect the value of accrued but unpaid interest with respect to the
underlying Exchange Junior Subordinated Debentures. A holder who uses the
accrual method of accounting for tax purposes (and a cash method holder, if the
Exchange Junior Subordinated Debentures are deemed to have been issued with OID)
and who disposes of its Exchange Capital Securities between record dates for
payments of Distributions thereon will be required to include accrued but unpaid
interest on the Exchange Junior Subordinated Debentures through the date of
disposition in income as ordinary income (i.e., interest or, possibly, OID), and
to add such amount to its adjusted tax basis in its share of the underlying
Exchange Junior Subordinated Debentures deemed disposed of. If the selling price
is less than the holder's adjusted tax basis (which will include all accrued but
unpaid interest), a holder will recognize a capital loss. Subject to certain
limited exceptions, capital losses cannot be applied to offset ordinary income
for U.S. federal income tax purposes. See "Certain Federal Income Tax
Considerations -- Interest Income and Original Issue Discount" and " --Sales of
Exchange Capital Securities."
CONSEQUENCES OF A FAILURE TO EXCHANGE ORIGINAL CAPITAL SECURITIES
The Original Capital Securities have not been registered under the
Securities Act or any state securities laws and therefore may not be offered,
sold or otherwise transferred except in compliance with the registration
requirements of the Securities Act and any other applicable securities laws, or
pursuant to an exemption therefrom or in a transaction not subject thereto, and
in each case in compliance with certain other conditions and restrictions.
Original Capital Securities that remain outstanding after consummation of the
Exchange Offer will continue to bear a legend reflecting such restrictions on
transfer. In addition, upon consummation of the Exchange Offer, holders of
Original Capital Securities that remain outstanding will not be entitled to any
rights to have such Original Capital Securities registered under the Securities
Act or to any similar rights under the Registration Rights Agreement (subject to
certain limited exceptions). The Corporation and the Trust do not intend to
register under the Securities Act any Original Capital Securities that remain
outstanding after consummation of the
22
<PAGE>
Exchange Offer (subject to such limited exceptions, if applicable). To the
extent that Original Capital Securities are tendered and accepted in the
Exchange Offer, a holder's ability to sell untendered Original Capital
Securities could be adversely affected.
The Exchange Capital Securities and any Original Capital Securities
that remain outstanding after consummation of the Exchange Offer will vote
together as a single class for purposes of determining whether holders of the
requisite percentage in outstanding Liquidation Amount thereof have taken
certain actions or exercised certain rights under the Trust Agreement. See
"Description of Exchange Securities--Description of Exchange Capital
Securities--Voting Rights; Amendment of the Trust Agreement."
The Original Capital Securities provide, among other things, that, if a
registration statement relating to the Exchange Offer has not been declared
effective by December 6, 1997, the Distribution rate borne by the Original
Capital Securities, commencing on December 1, 1997, will increase by 0.25% until
the Exchange Offer is consummated. Upon consummation of the Exchange Offer,
holders of Original Capital Securities will not be entitled to any increase in
the Distribution rate thereon or any further registration rights under the
Registration Rights Agreement, except under limited circumstances. See
"Description of Original Securities."
ABSENCE OF PUBLIC MARKET AND RESTRICTIONS ON RESALE
The Original Capital Securities were issued to, and the Corporation
believes such securities are currently owned by, a relatively small number of
beneficial owners. The Original Capital Securities have not been registered
under the Securities Act and will be subject to restrictions on transferability
if they are not exchanged for the Exchange Capital Securities. Although the
Exchange Capital Securities may be resold or otherwise transferred by the
holders (who are not affiliates of the Corporation or the Trust) without
compliance with the registration requirements under the Securities Act, they
will constitute a new issue of securities with no established trading market.
Capital Securities may be transferred by the holders thereof only in blocks
having a Liquidation Amount of not less than $100,000 (100 Capital Securities).
The Corporation and the Trust have been advised by the Initial Purchaser that
the Initial Purchaser presently intends to make a market in the Exchange Capital
Securities. However, the Initial Purchaser is not obligated to do so and any
market-making activity with respect to the Exchange Capital Securities may be
discontinued at any time without notice. In addition, such market-making
activity will be subject to the limits imposed by the Securities Act and the
Exchange Act and may be limited during the Exchange Offer. Accordingly, no
assurance can be given that an active public or other market will develop for
the Capital Securities, or as to the liquidity of or the trading market for the
Capital Securities. If an active public market does not develop, the market
price and liquidity of the Exchange Capital Securities may be adversely
affected.
If a public trading market develops for the Exchange Capital
Securities, future trading prices will depend on many factors, including, among
other things, prevailing interest rates, the financial condition of the
Corporation and the market for similar securities. Depending on these and other
factors, the Exchange Capital Securities may trade at a discount.
Notwithstanding the registration of the Exchange Capital Securities in
the Exchange Offer, holders who are "affiliates" (as defined under Rule 405 of
the Securities Act) of the Corporation or the Trust may publicly offer for sale
or resell the Exchange Capital Securities only in compliance with the provisions
of Rule 144 under the Securities Act.
Each broker-dealer that receives Exchange Capital Securities for its
own account in exchange for Original Capital Securities, where such Original
Capital Securities were acquired by such broker-dealer as a result of
market-making activities or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of such Exchange Capital
Securities. See "Plan of Distribution."
EXCHANGE OFFER PROCEDURES
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<PAGE>
Subject to conditions set forth under "The Exchange Offer--Conditions
to the Exchange Offer," issuance of the Exchange Capital Securities in exchange
for Original Capital Securities pursuant to the Exchange Offer will be made only
after a timely receipt by the Trust of (i) a book-entry confirmation evidencing
the tender of such Original Capital Securities through ATOP or (ii) certificates
representing such Original Capital Securities, a properly completed and duly
executed Letter of Transmittal, with any required signature guarantees, and all
other required documents. See "The Exchange Offer--Acceptance for Exchange and
Issuance of Exchange Capital Securities" and "--Procedures for Tendering
Original Capital Securities." Therefore, holders of the Original Capital
Securities desiring to tender such Original Capital Securities in exchange for
Exchange Capital Securities should allow sufficient time to ensure timely
delivery. Neither the Corporation nor the Trust is under any duty to give
notification of defects or irregularities with respect to the tenders of
Original Capital Securities for exchange.
LEGISLATIVE AND GENERAL REGULATORY DEVELOPMENTS
The Corporation is subject to federal regulatory oversight as a savings
and loan holding company by the OTS. The Bank is subject to extensive regulation
by the OTS as its primary federal regulator and also to regulation as to certain
matters by the FDIC. The OTS and the FDIC have adopted numerous regulations and
undertaken other regulatory initiatives, and further regulations and initiatives
may be adopted. Future legislation or regulatory developments could have an
adverse effect on the Bank.
As discussed above under "Proposed Legislative Elimination of the
Thrift Charter," if legislation with respect to the development of a common
charter is enacted, the Bank may be required to convert its federal savings bank
charter to either a new federal type of bank charter or to a state depository
institution charter. Future legislation also may result in the Corporation
becoming regulated at the holding company level by the Board of Governors of the
Federal Reserve System (the "Federal Reserve Board") rather than by the OTS.
Regulation by the Federal Reserve Board could subject the Corporation to capital
requirements that are not currently applicable to the Corporation as a holding
company under OTS regulation and may result in statutory limitations on the type
of business activities in which the Corporation may engaged at the holding
company level, which business activities currently are not restricted. The
Corporation is unable to predict whether such legislation will be enacted.
SOURCES OF FUNDS FOR CASH DIVIDENDS
The Corporation has traditionally invested substantially all of its
liquid assets in the Bank. The Corporation's liquidity and ability to pay
dividends to its shareholders is primarily derived from and dependent on the
ability of the Bank to pay dividends to the Corporation. Under current OTS
regulations, because the Bank meets the OTS capital requirements it may pay out
the higher of 100% of net income to date over the calendar year and 50% of
surplus capital existing at the beginning of the calendar year, or 75% of its
net income over the most recent four-quarter period, without regulatory
supervisory approval. In general, the Bank pays dividends to the Corporation
only to the extent that funds are needed to cover operating expenses and
dividends paid to shareholders. At September 30, 1997, the Bank had
approximately $20.6 million in excess capital over the OTS risk-based
requirement, one half of which would be available for declaration of dividends
to the Corporation. The OTS regulations permit the OTS to prohibit capital
distributions under certain circumstances.
TELEBANC FINANCIAL CORPORATION
TeleBanc Financial Corporation is the holding company parent of
TeleBank, a federally chartered, FDIC insured savings bank headquartered in
Arlington, Virginia, and TCM, an investment adviser, fund manager and
broker-dealer. The Corporation was organized by its majority owner, MET
Holdings, to become in March 1994 the direct holding company of the Bank, which
had been acquired by MET Holdings in 1989. At September 30, 1997, the
Corporation had total assets of $838.5 million, total deposits of $445.2 million
and stockholders' equity of $45.3 million.
The primary business of the Corporation is the business of the Bank.
Through TCM, the Corporation also is involved in trading mortgage-backed
securities principally with other broker-dealers
24
<PAGE>
and government sponsored enterprises, and fund management. Other Corporation
operations included recent joint venture investments through the Bank in AGT
Mortgage and AGT PRA. AGT Mortgage is engaged in loan servicing and loan
workouts for troubled or defaulted loans. AGT PRA owns a majority interest in
Portfolio Recovery Associates, LLC, which acquires and collects delinquent
consumer debt obligations for its own portfolio.
For more information regarding the Corporation's business, property,
legal proceedings, and management's discussion and analysis of financial
condition and results of operations, see the Corporation's Annual Report on Form
10-K, as amended, for the year ended December 31, 1996, and its Quarterly Report
on Form 10-Q for the quarter ended September 30, 1997, both of which are set
forth in "Appendix."
The Corporation's executive offices and the Bank's home office are
located at 1111 North Highland Street, Arlington, Virginia 22201, telephone
(703) 247-3700.
TELEBANC CAPITAL TRUST I
The Trust is a statutory business trust formed under Delaware law upon
the filing of a certificate of trust with the Delaware Secretary of State. The
Trust exists for the exclusive purposes of (i) issuing and selling the Trust
Securities, (ii) using the proceeds from the sale of Trust Securities to acquire
the Junior Subordinated Debentures and (iii) engaging in only those other
activities necessary, advisable or incidental thereto, such as registering the
transfer of the Trust Securities and the Exchange Offer. Accordingly, the Junior
Subordinated Debentures are the sole assets of the Trust, and payments under the
Junior Subordinated Debentures are the sole revenues of the Trust. All of the
Common Securities are owned by the Corporation. The Common Securities rank pari
passu, and payments are and will be made thereon pro rata, with the Exchange
Capital Securities, except that if there is an Event of Default under the Trust
Agreement resulting from a Debenture Event of Default, the rights of the
Corporation as holder of the Common Securities to payments in respect of
Distributions and payments upon liquidation, redemption or otherwise will be
subordinated to the rights of the holders of the Exchange Capital Securities.
See "Description of Exchange Capital Securities--Subordination of Common
Securities." The Corporation acquired Common Securities in a Liquidation Amount
equal to at least 3% of the total capital of the Trust. The Trust has a term of
approximately 31 years, but may terminate earlier as provided in the Trust
Agreement. The Trust's business and affairs are conducted by the Issuer
Trustees, each appointed by the Corporation as holder of the Common Securities.
The Issuer Trustees for the Trust are Wilmington Trust Company, as the Property
Trustee, Wilmington Trust Company, as the Delaware Trustee and three individual
Administrative Trustees who are officers or other employees of the Corporation.
Wilmington Trust Company also acts as guarantee trustee under the Guarantee and
as debenture trustee under the Indenture. See "Description of Exchange
Securities--Description of Exchange Guarantee" and "--Description of Exchange
Junior Subordinated Debentures."
The holder of the Common Securities or, if an Event of Default under
the Trust Agreement has occurred and is continuing, the holders of not less than
a majority in Liquidation Amount of the Capital Securities, are entitled to
appoint, remove or replace the Property Trustee and/or the Delaware Trustee. In
no event will the holders of the Exchange Capital Securities have the right to
vote to appoint, remove or replace the Administrative Trustees; such voting
rights will be vested exclusively in the holder of the Common Securities. The
duties and obligations of each Issuer Trustee are governed by the Trust
Agreement. The Corporation, as issuer of the Exchange Junior Subordinated
Debentures, has and will continue pay all fees, expenses, debts and obligations
(other than the payment of principal, interest and premium, if any, on the Trust
Securities) related to the Trust and the offering of the Exchange Capital
Securities and has and will continue pay, directly or indirectly, all ongoing
costs, expenses and liabilities (other than the payment of principal, interest
and premium, if any, on the Trust Securities) of the Trust.
The principal executive office of the Trust is c/o TeleBanc Financial
Corporation, 1111 North Highland Street, Arlington, Virginia 22201, telephone
(703) 247-3700.
USE OF PROCEEDS
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<PAGE>
Neither the Corporation nor the Trust will receive any cash proceeds
from the issuance of the Exchange Capital Securities and the Exchange Guarantee
offered hereby. In consideration for issuing the Exchange Capital Securities in
exchange for Original Capital Securities as described in this Prospectus, the
Trust will receive Original Capital Securities in like Liquidation Amount. The
Original Capital Securities surrendered in exchange for the Exchange Capital
Securities will be retired and canceled.
The proceeds to the Trust (without giving effect to expenses of the
offering payable by the Corporation) from the offering of the Original Capital
Securities was $10,000,000. All of the proceeds from the sale of the Original
Capital Securities were invested by the Trust in the Original Junior
Subordinated Debentures. The Corporation's net proceeds of approximately $9.6
million from the sale of the Original Junior Subordinated Debentures were added
to the general funds of the Corporation and were and may be used for general
corporate purposes, including, without limitation, contributions to the Bank to
fund its operations, the creation and expansion of financial service and product
offerings, such as insurance, financing the acquisition of other banking and
financial service companies, and the redemption of a portion of the
Corporation's outstanding debt. Initially, the net proceeds were used to make
investments in short-term securities. From time to time, the Corporation
investigates and holds discussions and negotiations in connection with possible
transactions with other financial institutions and holding companies thereof. As
of the date of this Prospectus, the Corporation has not entered into any
agreements or definitive understandings with respect to any such acquisitions or
any other material transactions of the type referred to above.
26
<PAGE>
RATIOS OF EARNINGS TO COMBINED FIXED CHARGES
The following table sets forth the ratios of earnings to combined fixed
charges of the Corporation on a consolidated basis for the respective periods
indicated.
<TABLE>
<CAPTION>
NINE
MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to
Combined Fixed Charges:
Excluding interest on deposits................... 1.32x 1.18x 1.28x 1.29x 1.09x 1.50x 1.33x
Including interest on deposits................... 1.14x 1.07x 1.11x 1.14x 1.04x 1.17x 1.14x
</TABLE>
For purposes of computing the ratios of earnings to combined fixed
charges, earnings represent net income (loss) before extraordinary items and
cumulative effect of changes in accounting principles plus applicable income
taxes and fixed charges. Fixed charges, excluding interest on deposits, include
gross interest expense (other than on deposits) and the proportion deemed
representative of the interest factor of rent expense, net of income from
subleases. Fixed charges, including gross interest on deposits, include all
interest expense and the proportion deemed representative of the interest factor
of rent expense, net of income from subleases.
ACCOUNTING TREATMENT
For financial reporting purposes, the Trust is treated as a subsidiary
of the Corporation and, accordingly, the accounts of the Trust are included in
the consolidated financial statements of the Corporation. The Exchange Capital
Securities are shown in the consolidated balance sheets of the Corporation, as
"Corporation-Obligated Mandatorily Redeemable Capital Securities of Subsidiary
Trust Holding Solely Junior Subordinated Debentures of the Corporation," and
appropriate disclosures about the Exchange Capital Securities, the Exchange
Guarantee and the Exchange Junior Subordinated Debentures are included in the
notes to the consolidated financial statements of the Corporation. For financial
reporting purposes, the Corporation records Distributions payable on the
Exchange Capital Securities as a minority interest expense in its consolidated
statements of income.
27
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Corporation as
of September 30, 1997. Consummation of the Exchange Offer will have no effect on
such capitalization. This data should be read in conjunction with the
consolidated financial statements of the Corporation, including the related
notes thereto and discussion thereof.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997
------------------------
(IN THOUSANDS)
<S> <C>
Long-term debt:
9.5% Senior Subordinated Debt..................................... $12,902
11.5% Subordinated Debt........................................... 16,654
-------
Total long-term debt.......................................... 29,556
-------
Corporation-Obligated Mandatory Redeemable Capital Securities of
Subsidiary Trust Holding Solely Junior Subordinated Debentures
of the Corporation (1)............................................ 9,602
Stockholders' equity:
4% Cumulative Preferred Stock, $0.01 par value, 500,000 shares
authorized--
Series A, 18,850 issued and outstanding....................... --
Series B, 4,050 issued and outstanding........................ --
Series C, 7,000 issued and outstanding........................ --
Common Stock, $0.01 par value; 3,500,000 shares authorized (2)
2,211,961 shares issued and outstanding....................... 22
Additional paid-in capital........................................ 31,392
Retained earnings................................................. 10,496
Net unrealized gain on available for sale securities.............. 3,350
-------
Total stockholders' equity.................................... 45,260
-------
Total capitalization..................................... $84,418
=======
</TABLE>
- ---------
(1) As described herein, the sole assets of the Trust, which is a subsidiary
of the Corporation, will be $10,310,000 aggregate principal amount of the
11.00% Junior Subordinated Debentures, which will mature on June 1, 2027.
The Corporation will own all of the Common Securities issued by the
Trust.
(2) In May 1997, the Corporation amended its articles of incorporation to
increase the number of authorized shares of Common Stock to 8,500,000.
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
In connection with the sale of the Original Capital Securities, the
Corporation and the Trust entered into the Registration Rights Agreement with
the Initial Purchaser, pursuant to which the Corporation and the Trust agreed to
file and use commercially reasonable efforts to cause to become effective with
the Commission a registration statement relating to the exchange of the Original
Capital Securities for capital securities with terms identical in all material
respects to the terms of the Original Capital Securities. A copy of the
Registration Rights Agreement has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part.
The Exchange Offer is being made to satisfy the contractual obligations
of the Corporation and the Trust under the Registration Rights Agreement. The
form and terms of the Exchange Capital Securities are the same as the form and
terms of the Original Capital Securities except that the Exchange Capital
Securities have been registered under the Securities Act and will not be subject
to certain restrictions on
28
<PAGE>
transfer applicable to the Original Capital Securities, and will not provide for
any increase in the Distribution rate thereon. In that regard, the Original
Capital Securities provide, among other things, that, if a registration
statement relating to the Exchange Offer has not been declared effective by
December 6, 1997, then the Distribution rate borne by the Original Capital
Securities will increase by .25% per annum until such registration statement is
filed or declared effective, as the case may be. In addition, the Original
Capital Securities provide that, if the Trust has not exchanged Exchange Capital
Securities for all Original Capital Securities validly tendered by the 40th day
after the date on which the registration statement is declared effective, the
Distribution rate borne by the Original Capital Securities will increase by .25%
per annum for the period from the occurrence of such event until the Exchange
Offer has been consummated. Upon consummation of the Exchange Offer, holders of
Original Capital Securities will not be entitled to any increase in the
Distribution rate thereon or any further registration rights under the
Registration Rights Agreement, except under limited circumstances. See "Risk
Factors--Consequences of a Failure to Exchange Original Capital Securities" and
"Description of Original Securities."
The Exchange Offer is not being made to, nor will the Trust accept
tenders for exchange from, holders of Original Capital Securities in any
jurisdiction in which the Exchange Offer or the acceptance thereof would not be
in compliance with the securities or blue sky laws of such jurisdiction.
Unless the context requires otherwise, the term "holder" with respect
to the Exchange Offer means any person in whose name the Original Capital
Securities are registered on the books of the Trust or any other person who has
obtained a properly completed bond power from the registered holder, or any
person whose Original Capital Securities are held of record by DTC who desires
to deliver such Original Capital Security by book-entry transfer at DTC.
Pursuant to the Exchange Offer, the Corporation will exchange as soon
as practicable after the date hereof, the Original Guarantee for the Exchange
Guarantee and the Original Junior Subordinated Debentures, in an amount
corresponding to the Original Capital Securities accepted for exchange, for a
like aggregate principal amount of the Exchange Junior Subordinated Debentures.
The Exchange Guarantee and the Exchange Junior Subordinated Debentures have been
registered under the Securities Act.
TERMS OF THE EXCHANGE OFFER
The Trust hereby offers, upon the terms and subject to the conditions
set forth in this Prospectus and in the accompanying Letter of Transmittal, to
exchange up to $10,000,000 aggregate Liquidation Amount of Exchange Capital
Securities for a like aggregate Liquidation Amount of Original Capital
Securities properly tendered on or prior to the Expiration Date and not properly
withdrawn in accordance with the procedures described herein. The Trust will
issue, promptly after the Expiration Date, an aggregate Liquidation Amount of up
to $10,000,000 of Exchange Capital Securities in exchange for a like principal
amount of outstanding Original Capital Securities tendered and accepted in
connection with the Exchange Offer. Holders may tender their Original Capital
Securities in whole or in part in a Liquidation Amount of not less than $100,000
(100 Original Capital Securities) or any integral multiple of $1,000 Liquidation
Amount (one Capital Security) in excess thereof.
The Exchange Offer is not conditioned upon any minimum Liquidation
Amount of Original Capital Securities being tendered. As of the date of this
Prospectus, $10,000,000 aggregate Liquidation Amount of the Original Capital
Securities is outstanding.
Holders of Original Capital Securities do not have any appraisal or
dissenters' rights in connection with the Exchange Offer. Original Capital
Securities that are not tendered for or are tendered but not accepted in
connection with the Exchange Offer will remain outstanding and be entitled to
the benefits of the Trust Agreement, but will not be entitled to any further
registration rights under the Registration Rights Agreement, except under
limited circumstances. See "Risk Factors--Consequences of a Failure to Exchange
Original Capital Securities" and "Description of Original Securities."
29
<PAGE>
If any tendered Original Capital Securities are not accepted for
exchange because of an invalid tender, the occurrence of certain other events
set forth herein or otherwise, certificates for any such unaccepted Original
Capital Securities will be returned, without expense, to the tendering holder
thereof promptly after the Expiration Date.
Holders who tender Original Capital Securities in connection with the
Exchange Offer will not be required to pay brokerage commissions or fees or,
subject to the instructions in the Letter of Transmittal, transfer taxes with
respect to the exchange of Original Capital Securities in connection with the
Exchange Offer. The Corporation will pay all charges and expenses, other than
certain applicable taxes described herein, in connection with the Exchange
Offer. See "--Fees and Expenses."
NEITHER THE CORPORATION, THE BOARD OF DIRECTORS OF THE CORPORATION NOR
ANY ISSUER TRUSTEE OF THE TRUST MAKES ANY RECOMMENDATION TO HOLDERS OF ORIGINAL
CAPITAL SECURITIES AS TO WHETHER TO TENDER OR REFRAIN FROM TENDERING ALL OR ANY
PORTION OF THEIR ORIGINAL CAPITAL SECURITIES PURSUANT TO THE EXCHANGE OFFER. IN
ADDITION, NO ONE HAS BEEN AUTHORIZED TO MAKE ANY SUCH RECOMMENDATION. EACH
HOLDER OF ORIGINAL CAPITAL SECURITIES MUST DECIDE WHETHER TO TENDER PURSUANT TO
THE EXCHANGE OFFER AND, IF SO, THE AGGREGATE AMOUNT OF ORIGINAL CAPITAL
SECURITIES TO TENDER BASED ON SUCH HOLDER'S OWN FINANCIAL POSITION AND
REQUIREMENTS.
EXPIRATION DATE, EXTENSIONS, AMENDMENTS
The term "Expiration Date" means 5:00 p.m., New York City time, on
_______________, 1997 unless the Exchange Offer is extended by the Corporation
or the Trust (in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended).
The Corporation and the Trust expressly reserve the right in their sole
and absolute discretion, subject to applicable law, at any time and from time to
time, (i) to delay the acceptance of the Original Capital Securities for
exchange, (ii) to terminate the Exchange Offer (whether or not any Original
Capital Securities have theretofore been accepted for exchange) if the Trust
determines, in its sole and absolute discretion, that any of the events or
conditions referred to under "--Conditions to the Exchange Offer" have occurred
or exist or have not been satisfied, (iii) to extend the Expiration Date of the
Exchange Offer and retain all Original Capital Securities tendered pursuant to
the Exchange Offer, subject, however, to the right of holders of Original
Capital Securities to withdraw their tendered Original Capital Securities as
described under "--Withdrawal Rights," and (iv) to waive any condition or
otherwise amend the terms of the Exchange Offer in any respect. If the Exchange
Offer is amended in a manner determined by the Corporation and the Trust to
constitute a material change, or if the Corporation and the Trust waive a
material condition of the Exchange Offer, the Corporation and the Trust will
promptly disclose such amendment by means of a prospectus supplement that will
be distributed to the holders of the Original Capital Securities, and the
Corporation and the Trust will extend the Exchange Offer to the extent required
by Rule 14e-1 under the Exchange Act.
Any such delay in acceptance, extension, termination or amendment will
be followed promptly by oral or written notice thereof to the Exchange Agent and
by making a public announcement thereof, and such announcement in the case of an
extension will be made no later than 9:00 a.m., New York City time, on the next
Business Day after the previously scheduled Expiration Date. Without limiting
the manner in which the Corporation and the Trust may choose to make any public
announcement and subject to applicable laws, the Corporation and the Trust shall
have no obligation to publish, advertise or otherwise communicate any such
public announcement other than by issuing a release to an appropriate news
agency.
30
<PAGE>
ACCEPTANCE FOR EXCHANGE AND ISSUANCE OF EXCHANGE CAPITAL SECURITIES
Upon the terms and subject to the conditions of the Exchange Offer, the
Trust will exchange, and will issue to the Exchange Agent, Exchange Capital
Securities for Original Capital Securities validly tendered and not withdrawn
promptly after the Expiration Date.
In all cases, delivery of Exchange Capital Securities in exchange for
Original Capital Securities tendered and accepted for exchange pursuant to the
Exchange Offer will be made only after timely receipt by the Exchange Agent of
(i) the book-entry confirmation described below under "--Procedures for
Tendering Original Capital Securities--Book-Entry Transfer" or (ii) certificates
representing such Original Capital Securities, the Letter of Transmittal (or
facsimile thereof), properly completed and duly executed, with any required
signature guarantees, and any other documents required by the Letter of
Transmittal.
Subject to the terms and conditions of the Exchange Offer, the Trust
will be deemed to have accepted for exchange, and thereby exchanged, Original
Capital Securities validly tendered and not withdrawn as, if and when the Trust
gives oral or written notice to the Exchange Agent (any such oral notice to be
promptly confirmed in writing) of the Trust's acceptance of such Original
Capital Securities for exchange pursuant to the Exchange Offer. The Exchange
Agent will act as agent for the Trust for the purpose of receiving tenders of
book-entry confirmations or certificates representing Original Capital
Securities, Letters of Transmittal and related documents, and as agent for
tendering holders for the purpose of receiving book-entry confirmations or
certificates representing Original Capital Securities, Letters of Transmittal
and related documents and transmitting Exchange Capital Securities to validly
tendered holders. Such exchange will be made promptly after the Expiration Date.
If for any reason whatsoever, acceptance for exchange or the exchange of any
Original Capital Securities tendered pursuant to the Exchange Offer is delayed
(whether before or after the Trust's acceptance for exchange of Original Capital
Securities) or the Trust extends the Exchange Offer or is unable to accept for
exchange or exchange Original Capital Securities tendered pursuant to the
Exchange Offer, then, without prejudice to the Trust's rights set forth herein,
the Exchange Agent may, nevertheless, on behalf of the Trust and subject to Rule
14e-1(c) under the Exchange Act, retain tendered Original Capital Securities and
such Original Capital Securities may not be withdrawn except to the extent
tendering holders are entitled to withdrawal rights as described under
"--Withdrawal Rights."
Pursuant to the Letter of Transmittal, a holder of Original Capital
Securities will warrant and agree that it has full power and authority to
tender, exchange, sell, assign and transfer Original Capital Securities, that
the Trust will acquire good, marketable and unencumbered title to the tendered
Original Capital Securities, free and clear of all liens, restrictions, charges
and encumbrances, and the Original Capital Securities tendered for exchange are
not subject to any adverse claims or proxies. The holder also will warrant and
agree that it will, upon request, execute and deliver any additional documents
deemed by the Trust or the Exchange Agent to be necessary or desirable to
complete the exchange, sale, assignment, and transfer of the Original Capital
Securities tendered pursuant to the Exchange Offer. Tendering holders of
Original Capital Securities that use ATOP will, by doing so, acknowledge that
they are bound by the terms of the Letter of Transmittal.
PROCEDURES FOR TENDERING ORIGINAL CAPITAL SECURITIES
Valid Tender
Except as set forth herein, in order for Original Capital Securities
to be validly tendered pursuant to the Exchange Offer, a properly completed and
duly executed Letter of Transmittal (or facsimile thereof), with any required
signature guarantees and any other required documents, must be received by the
Exchange Agent at its address set forth under "--Exchange Agent," and either (i)
tendered Original Capital Securities must be received by the Exchange Agent, or
(ii) such Original Capital Securities must be tendered pursuant to the
procedures for book-entry transfer set forth herein and a book-entry
confirmation must be received by the Exchange Agent, in each case on or prior to
the Expiration Date, or (iii) the guaranteed delivery procedures set forth
herein must be complied with.
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<PAGE>
If less than all of the Original Capital Securities are tendered, a
tendering holder should fill in the amount of Original Capital Securities being
tendered in the appropriate box on the Letter of Transmittal or so indicate in
an Agent's Message in lieu of the Letter of Transmittal. The entire amount of
Original Capital Securities delivered to the Exchange Agent will be deemed to
have been tendered unless otherwise indicated.
THE METHOD OF DELIVERY OF THE BOOK-ENTRY CONFIRMATIONS OR CERTIFICATES,
THE LETTER OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT THE OPTION AND
SOLE RISK OF THE TENDERING HOLDER, AND DELIVERY WILL BE DEEMED MADE ONLY WHEN
ACTUALLY RECEIVED BY THE EXCHANGE AGENT. IF DELIVERY IS BY MAIL, REGISTERED
MAIL, RETURN RECEIPT REQUESTED, PROPERLY INSURED, OR AN OVERNIGHT DELIVERY
SERVICE IS RECOMMENDED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO
ENSURE TIMELY DELIVERY.
Book-Entry Transfer
For purposes of the Exchange Offer, the Exchange Agent will establish
an account with respect to the Original Capital Securities at DTC within two
Business Days after the date of this Prospectus. Any tendering financial
institution that is a participant in DTC's book-entry transfer facility system
must make a book-entry delivery of the Original Capital Securities by causing
DTC to transfer such Original Capital Securities into the Exchange Agent's
account at DTC in accordance with DTC's ATOP procedures for transfers. Such
holder of Original Capital Securities using ATOP should transmit its acceptance
to DTC on or prior to the Expiration Date (or comply with the guaranteed
delivery procedures set forth below). DTC will verify such acceptance, execute a
book-entry transfer of the tendered Original Capital Securities into the
Exchange Agent's account at DTC and then send to the Exchange Agent confirmation
of such book-entry transfer, including an agent's message confirming that DTC
has received an express acknowledgment from such holder that such holder has
received and agrees to be bound by the Letter of Transmittal and that the Trust
and the Corporation may enforce the Letter of Transmittal against such holder (a
"book-entry confirmation").
A beneficial owner of Original Capital Securities that are held by or
registered in the name of a broker, dealer, commercial bank, trust company or
other nominee or custodian is urged to contact such entity promptly if such
beneficial owner wishes to participate in the Exchange Offer.
Certificates
If the tender is not made through ATOP, certificates representing
Original Capital Securities, as well as the Letter of Transmittal (or facsimile
thereof), properly completed and duly executed, with any required signature
guarantees, and any other required documents required by the Letter of
Transmittal, must be received by the Exchange Agent at its address set forth
under "--Exchange Agent" on or prior to the Expiration Date in order for such
tender to be effective (or the guaranteed delivery procedure set forth herein
must be complied with).
If less than all of the Original Capital Securities are tendered, a
tendering holder should fill in the amount of Original Capital Securities being
tendered in the appropriate box on the Letter of Transmittal. The entire amount
of Original Capital Securities delivered to the Exchange Agent will be deemed to
have been tendered unless otherwise indicated.
Signature Guarantees
Certificates for the Original Capital Securities need not be endorsed
and signature guarantees on the Letter of Transmittal are unnecessary unless (i)
a certificate for the Original Capital Securities is registered in a name other
than that of the person surrendering the certificate or (ii) such holder
completes the box entitled "Special Issuance Instructions" or "Special Delivery
Instructions" in the Letter of Transmittal. In the case of (i) or (ii) above,
such certificates for Original Capital Securities must be duly endorsed or
accompanied by a properly executed bond power, with the endorsement or signature
on the
32
<PAGE>
bond power and on the Letter of Transmittal guaranteed by a firm or other entity
identified in Rule 17Ad-15 under the Exchange Act as an "eligible guarantor
institution," including (as such terms are defined therein): (a) a bank; (b) a
broker, dealer, municipal securities broker or dealer or government securities
broker or dealer; (c) a credit union; (d) a national securities exchange,
registered securities association or clearing agency; or (e) a savings
association that is a participant in a Securities Transfer Association (an
"Eligible Institution"), unless surrendered on behalf of such Eligible
Institution. See Instruction 1 to the Letter of Transmittal.
Delivery
The method of delivery of the book-entry confirmation or certificates
representing tendered Original Capital Securities, the Letter of Transmittal,
and all other required documents is at the option and sole risk of the tendering
holder, and delivery will be deemed made only when actually received by the
Exchange Agent. If delivery is by mail, registered mail, return receipt
requested, properly insured, or an overnight delivery service is recommended. In
all cases, sufficient time should be allowed to ensure timely delivery.
Notwithstanding any other provision hereof, the delivery of Exchange
Capital Securities in exchange for Original Capital Securities tendered and
accepted for exchange pursuant to the Exchange Offer will in all cases be made
only after timely receipt by the Exchange Agent of (i) a book-entry confirmation
with respect to such Original Capital Securities or (ii) certificates
representing Original Capital Securities and a properly completed and duly
executed Letter of Transmittal (or facsimile thereof), together with any
required signature guarantees and any other documents required by the Letter of
Transmittal. Accordingly, the delivery of Exchange Capital Securities might not
be made to all tendering holders at the same time, and will depend upon when
book-entry confirmations with respect to Original Capital Securities or
certificates representing Original Capital Securities and other required
documents are received by the Exchange Agent.
DELIVERY OF DOCUMENTS TO DTC IN ACCORDANCE WITH DTC'S PROCEDURES DOES
NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
Guaranteed Delivery
If a holder desires to tender Original Capital Securities pursuant to
the Exchange Offer and the certificates for such Original Capital Securities are
not immediately available or time will not permit all required documents to
reach the Exchange Agent on or prior to the Expiration Date, or the procedure
for book-entry transfer cannot be completed on a timely basis, such Original
Capital Securities may nevertheless be tendered, provided that all of the
following guaranteed delivery procedures are complied with:
(i) such tenders are made by or through an Eligible Institution;
(ii) a properly completed and duly executed notice to the Exchange
Agent guaranteeing delivery to the Exchange Agent of either certificates
representing Original Capital Securities or a book-entry confirmation in
compliance with the requirements set forth herein (the "Notice of Guaranteed
Delivery"), substantially in the form accompanying the Letter of Transmittal, is
received by the Exchange Agent, as provided herein, on or prior to Expiration
Date; and
(iii) a book-entry confirmation or the certificates representing all
tendered Original Capital Securities, in proper form for transfer, together with
a properly completed and duly executed Letter of Transmittal (or facsimile
thereof), with any required signature guarantees and any other documents
required by the Letter of Transmittal, are, in any case, received by the
Exchange Agent within three New York Stock Exchange trading days after the date
of execution of such Notice of Guaranteed Delivery.
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The Notice of Guaranteed Delivery may be delivered by hand, or
transmitted by facsimile or mail to the Exchange Agent and must include a
guarantee by an Eligible Institution in the form set forth in such notice.
The Trust's acceptance for exchange of Original Capital Securities
tendered pursuant to any of the procedures described above will constitute a
binding agreement between the tendering holder and the Trust upon the terms and
subject to the conditions of the Exchange Offer.
Determination of Validity
All questions as to the form of documents, validity, eligibility
(including time of receipt) and acceptance for exchange of any tendered Original
Capital Securities will be determined by the Corporation and the Trust, in their
sole discretion, whose determination shall be final and binding on all parties.
The Corporation and the Trust reserve the absolute right, in their sole and
absolute discretion, to reject any and all tenders determined by them not to be
in proper form or the acceptance of which, or exchange for, may, in the opinion
of counsel to the Corporation and the Trust, be unlawful. The Corporation and
the Trust also reserve the absolute right, subject to applicable law, to waive
any of the conditions of the Exchange Offer as set forth under "--Conditions to
the Exchange Offer" or any condition or irregularity in any tender of Original
Capital Securities of any particular holder whether or not similar conditions or
irregularities are waived in the case of other holders.
The interpretation by the Corporation and the Trust of the terms and
conditions of the Exchange Offer (including the Letter of Transmittal and the
instructions thereto) will be final and binding. No tender of Original Capital
Securities will be deemed to have been validly made until all irregularities
with respect to such tender have been cured or waived. None of the Corporation,
the Trust, any affiliates or assigns of the Corporation or the Trust, the
Exchange Agent or any other person shall be under any duty to give any
notification of any irregularities in tenders or incur any liability for failure
to give any such notification.
If any Letter of Transmittal, endorsement, bond power, power of
attorney, or any other document required by the Letter of Transmittal is signed
by a trustee, executor, administrator, guardian, attorney-in-fact, officer of a
corporation or other person acting in a fiduciary or representative capacity,
such person should so indicate when signing, and unless waived by the
Corporation and the Trust, proper evidence satisfactory to the Corporation and
the Trust, in their sole discretion, of such person's authority to so act must
be submitted.
RESALES OF EXCHANGE CAPITAL SECURITIES
The Trust is making the Exchange Offer for the Exchange Capital
Securities in reliance on the position of the Staff of the Commission as set
forth in certain interpretive letters addressed to third parties in other
transactions. However, neither the Corporation nor the Trust sought its own
interpretive letter and there can be no assurance that the Staff of the
Commission would make a similar determination with respect to the Exchange Offer
as it has in such interpretive letters to third parties. Based on these
interpretations by the Staff of the Commission, and subject to the two
immediately following sentences, the Corporation and the Trust believe that
Exchange Capital Securities issued pursuant to this Exchange Offer in exchange
for Original Capital Securities may be offered for resale, resold and otherwise
transferred by a holder thereof (other than a holder who is a broker-dealer)
without further compliance with the registration and prospectus delivery
requirements of the Securities Act, provided that such Exchange Capital
Securities are acquired in the ordinary course of such holder's business and
that such holder is not participating, and has no arrangement or understanding
with any person to participate, in a distribution (within the meaning of the
Securities Act) of such Exchange Capital Securities. However, any holder of
Original Capital Securities who is an "affiliate" of the Corporation or the
Trust or who intends to participate in the Exchange Offer for the purpose of
distributing Exchange Capital Securities, or any broker-dealer who purchased
Original Capital Securities from the Trust to resell pursuant to Rule 144A or
any other available exemption under the Securities Act, (i) will not be able to
rely on the interpretations of the Staff of the Commission set forth in the
above-
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mentioned interpretive letters, (ii) will not be permitted or entitled to tender
such Original Capital Securities in the Exchange Offer and (iii) must comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with any sale or other transfer of such Original Capital
Securities unless such sale is made pursuant to an exemption from such
requirements. In addition, as described herein, if any broker-dealer holds
Original Capital Securities acquired for its own account as a result of
market-making or other trading activities and exchanges such Original Capital
Securities for Exchange Capital Securities, then such broker-dealer must deliver
a prospectus meeting the requirements of the Securities Act in connection with
any resales of such Exchange Capital Securities.
Each holder of Original Capital Securities who wishes to exchange
Original Capital Securities for Exchange Capital Securities in the Exchange
Offer will be required to represent that (i) it is not an "affiliate" of the
Corporation or the Trust, (ii) any Exchange Capital Securities to be received by
it are being acquired in the ordinary course of its business, (iii) it has no
arrangement or understanding with any person to participate in a distribution
(within the meaning of the Securities Act) of such Exchange Capital Securities,
and (iv) if such holder is not a broker-dealer, such holder is not engaged in,
and does not intend to engage in, a distribution (within the meaning of the
Securities Act) of such Exchange Capital Securities. In addition, the
Corporation and the Trust may require such holder, as a condition to such
holder's eligibility to participate in the Exchange Offer, to furnish to the
Corporation and the Trust (or an agent thereof) in writing information as to the
number of "beneficial owners" (within the meaning of Rule 13d-3 under the
Exchange Act) on behalf of whom such holder holds the Original Capital
Securities to be exchanged in the Exchange Offer. Each broker-dealer that
receives Exchange Capital Securities for its own account pursuant to the
Exchange Offer must acknowledge that it acquired the Original Capital Securities
for its own account as the result of market-making activities or other trading
activities and must agree that it will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of such
Exchange Capital Securities. The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
Based on the position taken by the Staff of the Commission in the interpretive
letters referred to above, the Corporation and the Trust believe that
Participating Broker-Dealers who acquired Original Capital Securities for their
own accounts as a result of market-making activities or other trading activities
may fulfill their prospectus delivery requirements with respect to the Exchange
Capital Securities received upon exchange of such Original Capital Securities
(other than Original Capital Securities which represent an unsold allotment from
the initial sale of the Original Capital Securities) with a prospectus meeting
the requirements of the Securities Act, which may be the prospectus prepared for
an exchange offer so long as it contains a description of the plan of
distribution with respect to the resale of such Exchange Capital Securities.
Accordingly, this Prospectus, as it may be amended or supplemented from time to
time, may be used by a Participating Broker-Dealer during the period referred to
below in connection with resales of Exchange Capital Securities received in
exchange for Original Capital Securities where such Original Capital Securities
were acquired by such Participating Broker-Dealer for its own account as a
result of market-making or other trading activities. Subject to certain
provisions set forth in the Registration Rights Agreement, the Corporation and
the Trust have agreed that this Prospectus, as it may be amended or supplemented
from time to time, may be used by a Participating Broker-Dealer in connection
with resales of such Exchange Capital Securities for a period ending 180 days
after the Expiration Date (subject to extension under certain limited
circumstances described herein) or, if earlier, when all such Exchange Capital
Securities have been disposed of by such Participating Broker-Dealer. See "Plan
of Distribution." However, a Participating Broker-Dealer who intends to use this
Prospectus in connection with the resale of Exchange Capital Securities received
in exchange for Original Capital Securities pursuant to the Exchange Offer must
notify the Corporation or the Trust, or cause the Corporation or the Trust to be
notified, on or prior to the Expiration Date, that it is a Participating
Broker-Dealer. Such notice may be given in the space provided for that purpose
in the Letter of Transmittal or may be delivered to the Exchange Agent at its
address set forth herein under "--Exchange Agent." Any Participating
Broker-Dealer who is an "affiliate" of the Corporation or the Trust may not rely
on such interpretive letters and must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale transaction.
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In that regard, each Participating Broker-Dealer who surrenders
Original Capital Securities pursuant to the Exchange Offer will be deemed to
have agreed, by execution of the Letter of Transmittal, that upon receipt of
notice from the Corporation or the Trust of the occurrence of any event or the
discovery of (i) any fact that makes any statement contained or incorporated by
reference in this Prospectus untrue in any material respect or (ii) any fact
that causes this Prospectus to omit to state a material fact necessary in order
to make the statements contained or incorporated by reference herein, in light
of the circumstances under which they were made, not misleading, or (iii) of the
occurrence of certain other events specified in the Registration Rights
Agreement, such Participating Broker-Dealer will suspend the sale of Exchange
Capital Securities (or the Exchange Guarantee or the Exchange Junior
Subordinated Debentures, as applicable) pursuant to this Prospectus until the
Corporation or the Trust has amended or supplemented this Prospectus to correct
such misstatement or omission and has furnished copies of the amended or
supplemented Prospectus to such Participating Broker-Dealer, or the Corporation
or the Trust has given notice that the sale of the Exchange Capital Securities
(or the Exchange Guarantee or the Exchange Junior Subordinated Debentures, as
applicable) may be resumed, as the case may be. If the Corporation or the Trust
gives such notice to suspend the sale of the Exchange Capital Securities (or the
Exchange Guarantee or the Exchange Junior Subordinated Debentures, as
applicable), it shall extend the 180-day period referred to above during which
Participating Broker-Dealers are entitled to use this Prospectus in connection
with the resale of Exchange Capital Securities by the number of days during the
period from and including the date of the giving of such notice to and including
the date when Participating Broker-Dealers shall have received copies of the
amended or supplemented Prospectus necessary to permit resales of the Exchange
Capital Securities or to and including the date on which the Corporation or the
Trust has given notice that the sale of Exchange Capital Securities (or the
Exchange Guarantee or the Exchange Junior Subordinated Debentures, as
applicable) may be resumed, as the case may be.
WITHDRAWAL RIGHTS
Except as otherwise provided herein, tenders of Original Capital
Securities may be withdrawn at any time on or prior to the Expiration Date.
In order for a withdrawal to be effective a written, telegraphic or
facsimile transmission of such notice of withdrawal must be timely received by
the Exchange Agent at its address set forth under "--Exchange Agent" on or prior
to the Expiration Date. Any such notice of withdrawal must specify the name of
the person who tendered the Original Capital Securities to be withdrawn, the
aggregate principal amount of Original Capital Securities to be withdrawn, and
(if certificates for such Original Capital Securities have been tendered) the
name of the registered holder of the Original Capital Securities as set forth on
the such certificates if different from that of the person who tendered such
Original Capital Securities. If certificates representing Original Capital
Securities have been delivered or otherwise identified to the Exchange Agent,
then prior to the physical release of such certificates, the tendering holder
must submit the serial numbers shown on the particular certificates to be
withdrawn and the signature on the notice of withdrawal must be guaranteed by an
Eligible Institution, except in the case of Original Capital Securities tendered
for the account of an Eligible Institution. If Original Capital Securities have
been tendered pursuant to the procedures for book-entry transfer set forth in
"--Procedures for Tendering Original Capital Securities--Book-Entry Transfer,"
the notice of withdrawal must specify the name and number of the account at DTC
to be credited with the withdrawal of Original Capital Securities. Withdrawals
of tenders of Original Capital Securities may not be rescinded. Original Capital
Securities properly withdrawn will not be deemed validly tendered for purposes
of the Exchange Offer, but may be retendered at any subsequent time on or prior
to the Expiration Date by following any of the procedures described above under
"--Procedures for Tendering Original Capital Securities."
All questions as to the validity, form and eligibility (including time
of receipt) of such withdrawal notices will be determined by the Trust, in its
sole discretion, whose determination shall be final and binding on all parties.
None of the Corporation, the Trust, any affiliates or assigns of the Corporation
or the Trust, the Exchange Agent or any other person shall be under any duty to
give any notification of any irregularities in any notice of withdrawal or incur
any liability for failure to give any such notification.
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Any Original Capital Securities that have been tendered but are withdrawn will
be returned to the holder thereof promptly after withdrawal.
DISTRIBUTIONS ON THE EXCHANGE CAPITAL SECURITIES
Holders of Original Capital Securities whose Original Capital
Securities are accepted for exchange will not receive Distributions on such
Original Capital Securities and will be deemed to have waived the right to
receive any Distributions on such Original Capital Securities accumulated from
and after June 9, 1997. Accordingly, holders of Exchange Capital Securities (as
of the record date) for the payment of Distributions on December 1, 1997 will be
entitled to receive Distributions accumulated from and after June 9, 1997.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provisions of the Exchange Offer, or any
extension of the Exchange Offer, the Corporation and the Trust will not be
required to accept for exchange, or to exchange, any Original Capital Securities
for any Exchange Capital Securities, and, as described herein, may terminate the
Exchange Offer (whether or not any Original Capital Securities have theretofore
been accepted for exchange) or may waive any conditions to or amend the Exchange
Offer, if any of the following conditions have occurred or exists or have not
been satisfied:
(i) there shall occur a change in the current interpretation by the
Staff of the Commission that permits the Exchange Capital Securities issued
pursuant to the Exchange Offer in exchange for Original Capital Securities to be
offered for resale, resold and otherwise transferred by holders thereof (other
than broker-dealers and any such holder that is an "affiliate" of the
Corporation or the Trust within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery provisions
of the Securities Act, provided that such Exchange Capital Securities are
acquired in the ordinary course of such holders' business and such holders have
no arrangement or understanding with any person to participate in the
distribution of such Exchange Capital Securities; or
(ii) any law, statute, rule or regulation shall have been adopted or
enacted which, in the judgment of Corporation or the Trust, would reasonably be
expected to impair its ability to proceed with the Exchange Offer; or
(iii) a stop order shall have been issued by the Commission or any
state securities authority suspending the effectiveness of the Registration
Statement, or proceedings shall have been initiated or, to the knowledge of the
Corporation or the Trust, threatened for that purpose, or any governmental
approval has not been obtained, which approval the Corporation or the Trust
shall, in its sole discretion, deem necessary for the consummation of the
Exchange Offer as contemplated hereby; or
(iv) the Corporation determines in good faith (i) that there is a
reasonable likelihood that, or a material uncertainty exists as to whether,
consummation of the Exchange Offer would result in an adverse tax consequence to
the Trust or the Corporation and (ii) that such condition exists on the 240th
day following the Closing Date.
If the Corporation or the Trust determine in its sole and absolute
discretion that any of the foregoing events or conditions has occurred or exists
or has not been satisfied, it may, subject to applicable law, terminate the
Exchange Offer (whether or not any Original Capital Securities have theretofore
been accepted for exchange) or may waive any such condition or otherwise amend
the terms of the Exchange Offer in any respect. If such waiver or amendment
constitutes a material change to the Exchange Offer, the Corporation or the
Trust will promptly disclose such waiver or amendment by means of a prospectus
supplement that will be distributed to the registered holders of the Original
Capital Securities and will extend the Exchange Offer to the extent required by
Rule 14e-1 under the Exchange Act.
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EXCHANGE AGENT
Wilmington Trust Company has been appointed as Exchange Agent for the
Exchange Offer. Delivery of the Letters of Transmittal and any other required
documents, questions, requests for assistance, and requests for additional
copies of this Prospectus or of the Letter of Transmittal should be directed to
the Exchange Agent as follows:
BY HAND, OVERNIGHT DELIVERY, REGISTERED OR CERTIFIED MAIL:
Wilmington Trust Company
Rodney Square North
1100 North Market Street
Wilmington, Delaware 19890-0001
Attention: Corporate Trust Department
Confirm by Telephone: (302) 651-1000
Facsimile Transmissions: (302) 651-8882
(ELIGIBLE INSTITUTIONS ONLY)
Delivery to other than the above address or facsimile number will not
constitute a valid delivery.
FEES AND EXPENSES
The Corporation has agreed to pay the Exchange Agent reasonable and
customary fees for its services and will reimburse it for its reasonable
out-of-pocket expenses in connection therewith. The Corporation will also pay
brokerage houses and other custodians, nominees and fiduciaries the reasonable
out-of-pocket expenses incurred by them in forwarding copies of this Prospectus
and related documents to the beneficial owners of Original Capital Securities,
and in handling or tendering for their customers.
Holders who tender their Original Capital Securities for exchange will
not be obligated to pay any transfer taxes in connection therewith. If, however,
Exchange Capital Securities are to be delivered to, or are to be issued in the
name of, any person other than the registered holder of the Original Capital
Securities tendered, or if a transfer tax is imposed for any reason other than
the exchange of Original Capital Securities in connection with the Exchange
Offer, then the amount of any such transfer taxes (whether imposed on the
registered holder or any other persons) will be payable by the tendering holder.
If satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted with the Letter of Transmittal, the amount of such transfer taxes will
be billed directly to such tendering holder.
Neither the Corporation nor the Trust will make any payment to brokers,
dealers or others soliciting acceptances of the Exchange Offer.
The Registration Rights Agreement is governed by, and construed in
accordance with, the laws of the State of New York. The summary herein of
certain provisions of the Registration Rights Agreement does not purport to be
complete and is subject to, and is qualified in its entirety by reference to,
all the provisions of the Registration Rights Agreement, a form of which is
available upon request to the Corporation. See "Incorporation of Certain
Documents by Reference." In addition, the information set forth above concerning
certain interpretations of and positions taken by the Staff of the Commission is
not intended to constitute legal advice, and prospective investors should
consult their own legal advisors with respect to such matters.
DESCRIPTION OF EXCHANGE SECURITIES
DESCRIPTION OF EXCHANGE CAPITAL SECURITIES
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Pursuant to the terms of the Trust Agreement, the Issuer Trustees on
behalf of the Trust will issue the Exchange Capital Securities. The Exchange
Capital Securities will represent beneficial interests in the Trust and the
holders thereof will be entitled to a preference over the Common Securities in
certain circumstances with respect to Distributions and amounts payable on
redemption of the Trust Securities or liquidation of the Trust. See
"--Subordination of Common Securities." The Trust Agreement has been qualified
under the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act").
This summary of certain provisions of the Exchange Capital Securities, the
Common Securities and the Trust Agreement does not purport to be complete and is
subject to, and is qualified in its entirety by reference to, all the provisions
of the Trust Agreement, including the definitions therein of certain terms.
GENERAL
The Exchange Capital Securities will be limited to $10,000,000
aggregate Liquidation Amount at any one time outstanding. The Exchange Capital
Securities will rank pari passu, and payments will be made thereon pro rata,
with the Common Securities except as described under "--Subordination of Common
Securities." Legal title to the Exchange Junior Subordinated Debentures will be
held by the Property Trustee on behalf of the Trust in trust for the benefit of
the holders of the Trust Securities. The Exchange Guarantee will not guarantee
payment of Distributions or amounts payable on redemption of the Exchange
Capital Securities or liquidation of the Trust when the Trust does not have
funds legally available for such payments. See "--Description of Exchange
Guarantee."
DISTRIBUTIONS
Distributions on the Exchange Capital Securities will be cumulative,
will accumulate from June 9, 1997, the date of original issuances and will be
payable semi-annually in arrears on June 1 and December 1 of each year,
commencing December 1, 1997, at the annual rate of 11.00% of the Liquidation
Amount to the holders of the Exchange Capital Securities on the relevant record
dates. The record dates will be the 15th day of the month preceding the month in
which the relevant Distribution Date falls. The first Distribution Date for the
Exchange Capital Securities will be December 1, 1997. The amount of
Distributions payable for any period will be computed on the basis of a 360-day
year of twelve 30-day months and, for any period of less than a full calendar
month, the number of days elapsed in such month. In the event that any date on
which Distributions are payable on the Exchange Capital Securities is not a
Business Day, payment of the Distribution payable on such date will be made on
the next succeeding day that is a Business Day (and without any interest or
other payment in respect to any such delay), except that if such next succeeding
Business Day falls in the next succeeding calendar year, such payment shall be
made on the immediately preceding Business Day, in each case with the same force
and effect as if made on such date (each date on which Distributions are payable
in accordance with the foregoing, a "Distribution Date"). A "Business Day" shall
mean any day other than a Saturday or a Sunday, or a day on which banking
institutions in New York, New York, Wilmington, Delaware, or Arlington, Virginia
are authorized or required by law or executive order to remain closed.
So long as no Debenture Event of Default has occurred and is
continuing, the Corporation has the right under the Indenture to elect to defer
the payment of interest on the Exchange Junior Subordinated Debentures at any
time or from time to time for a period not exceeding 10 consecutive semi-annual
periods with respect to each Extension Period, provided that no Extension Period
shall end on a date other than an Interest Payment Date or extend beyond the
Stated Maturity Date. Upon any such election, semi-annual Distributions on the
Trust Securities will be deferred by the Trust during such Extension Period.
Distributions to which holders of the Trust Securities are entitled during any
such Extension Period will accumulate additional Distributions thereon at the
rate per annum of 11.00% thereof, compounded semi-annually from the relevant
Distribution Date, but not exceeding the interest rate then accruing on the
Exchange Junior Subordinated Debentures. The term "Distributions," as previously
defined, includes any such additional Distributions.
Prior to the termination of any such Extension Period, the Corporation
may further extend such Extension Period, provided that such extension does not
cause such Extension Period to exceed 10 consecutive semi-annual periods, to end
on a date other than an Interest Payment Date or to extend
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beyond the Stated Maturity Date. Upon the termination of any such Extension
Period and the payment of all amounts then due on any Interest Payment Date, the
Corporation may elect to begin a new Extension Period, subject to the above
requirements. No interest shall be due and payable during an Extension Period,
except at the end thereof. The Corporation must give the Property Trustee, the
Administrative Trustees and the Debenture Trustee notice of its election of any
such Extension Period (or an extension thereof) at least five Business Days
prior to the earlier of (i) the date the Distributions on the Exchange Capital
Securities would have been payable except for the election to begin such
Extension Period and (ii) the date the Trust is required to give notice to any
automated quotation system or to holders of such Exchange Capital Securities of
the record date or the date such Distributions are payable, but in any event not
less than five Business Days prior to such record date. There is no limitation
on the number of times that the Corporation may elect to begin an Extension
Period. See "--Description of Exchange Junior Subordinated Debentures--Option to
Extend Interest Payment Date" and "Certain Federal Income Tax
Consequences--Interest Income and Original Issue Discount."
During any such Extension Period, the Corporation may not (i) declare
or pay any dividends or distributions on, or redeem, purchase, acquire, or make
a liquidation payment with respect to, any of the Corporation's capital stock,
(ii) make any payment of principal of, premium, if any, or interest on or repay,
repurchase or redeem any debt securities of the Corporation (including Other
Debentures) that rank pari passu with or junior in right of payment to the
Exchange Junior Subordinated Debentures or (iii) make any guarantee payments
with respect to any guarantee by the Corporation of the debt securities of any
subsidiary of the Corporation (including Other Guarantees) if such guarantee
ranks pari passu with or junior in right of payment to the Exchange Junior
Subordinated Debentures (other than (a) dividends or distributions in shares of,
or options, warrants or rights to subscribe for or purchase shares of, common
stock of the Corporation, (b) any declaration of a dividend in connection with
the implementation of a stockholders' rights plan, or the issuance of stock
under any such plan in the future, or the redemption or repurchase of any such
rights pursuant thereto, (c) payments under the Exchange Guarantee, (d) the
purchase of fractional shares resulting from a reclassification of the
Corporation's capital stock, (e) the purchase of fractional interests in shares
of the Corporation's capital stock pursuant to the conversion or exchange
provisions of such capital stock or the security being converted or exchanged
and (f) purchases of common stock of the Corporation related to the issuance of
such common stock or rights under any of the Corporation's benefit or
compensation plans for its directors, officers or employees or any of the
Corporation's dividend reinvestment plans).
The Corporation has no current intention to exercise its option to
defer payments of interest on the Exchange Junior Subordinated Debentures.
The revenue of the Trust available for distribution to holders of the
Capital Securities will be limited to payments under the Junior Subordinated
Debentures in which the Trust has invested the proceeds from the issuance and
sale of the Trust Securities. See "--Description of Exchange Junior Subordinated
Debentures--General." After the Exchange Offer, if the Corporation does not make
interest payments on the Exchange Junior Subordinated Debentures, the Property
Trustee will not have funds available to pay Distributions on the Exchange
Capital Securities. The payment of Distributions (if and to the extent the Trust
has funds legally available for the payment of such Distributions) will be
guaranteed by the Corporation on a limited basis as set forth herein under
"--Description of Exchange Guarantee."
REDEMPTION
Upon the repayment on the Stated Maturity Date or prepayment in whole
or in part prior to the Stated Maturity Date of the Exchange Junior Subordinated
Debentures (other than following the distribution of the Exchange Junior
Subordinated Debentures to the holders of the Trust Securities), the proceeds
from such repayment or prepayment shall be applied by the Property Trustee to
redeem a Like Amount of the Trust Securities, upon not less than 30 nor more
than 60 days' notice of a date of redemption (the "Redemption Date"), at the
applicable Redemption Price, which shall be equal to (i) in the case of the
repayment of the Exchange Junior Subordinated Debentures on the Stated Maturity
Date, the Maturity Redemption Price (equal to the principal of, and accrued and
unpaid interest on, the Exchange Junior Subordinated Debentures), (ii) in the
case of the optional prepayment of the Exchange Junior
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Subordinated Debentures before the Initial Optional Redemption Date upon the
occurrence and continuation of a Special Event, the Special Event Redemption
Price (equal to the Special Event Prepayment Price in respect of the Exchange
Junior Subordinated Debentures) and (iii) in the case of the optional prepayment
of the Exchange Junior Subordinated Debentures on or after the Initial Optional
Redemption Date, the Optional Redemption Price (equal to the Optional Prepayment
Price in respect of the Exchange Junior Subordinated Debentures). See
"--Description of Exchange Junior Subordinated Debentures--Optional Prepayment"
and "--Special Event Prepayment." If less than all of the Exchange Junior
Subordinated Debentures are to be prepaid on a Redemption Date, then the
proceeds of such prepayment shall be allocated pro rata to the Trust Securities.
"Like Amount" means (i) with respect to a redemption of the Trust
Securities, Trust Securities having a Liquidation Amount equal to the principal
amount of Exchange Junior Subordinated Debentures to be paid in accordance with
their terms and (ii) with respect to a distribution of Exchange Junior
Subordinated Debentures upon the liquidation of the Trust, Exchange Junior
Subordinated Debentures having a principal amount equal to the Liquidation
Amount of the Trust Securities of the holder to whom such Exchange Junior
Subordinated Debentures are distributed.
The Corporation will have the option to prepay the Exchange Junior
Subordinated Debentures, (i) in whole or in part, on or after the Initial
Optional Redemption Date, at the applicable Optional Prepayment Price and (ii)
in whole but not in part, at any time prior to the Initial Optional Redemption
Date, upon the occurrence of a Special Event, at the Special Event Prepayment
Price, in each case subject to the receipt of any required regulatory approval.
See "--Description of Exchange Junior Subordinated Debentures--Optional
Prepayment" and "--Special Event Prepayment."
LIQUIDATION OF THE TRUST AND DISTRIBUTION OF EXCHANGE JUNIOR SUBORDINATED
DEBENTURES
The Corporation will have the right at any time to terminate the Trust
and, after satisfaction of liabilities to creditors of the Trust as required by
applicable law, to cause the Exchange Junior Subordinated Debentures to be
distributed to the holders of the Trust Securities in liquidation of the Trust.
Such right is subject to (i) the Administrative Trustees having received an
opinion of counsel to the effect that such distribution will not cause the
holders of Exchange Capital Securities to recognize gain or loss for federal
income tax purposes and (ii) the Corporation having received any required
regulatory approval.
The Trust shall automatically terminate upon the first to occur of: (i)
certain events of bankruptcy, dissolution or liquidation of the Corporation;
(ii) the distribution of a Like Amount of the Exchange Junior Subordinated
Debentures to the holders of the Trust Securities, if the Corporation, as
Sponsor, has given written direction to the Property Trustee to terminate the
Trust (which direction is optional and, except as described above, wholly within
the discretion of the Corporation, as Sponsor); (iii) redemption of all of the
Trust Securities as described under "--Redemption;" (iv) expiration of the term
of the Trust; and (v) the entry of an order for the dissolution of the Trust by
a court of competent jurisdiction.
If a termination occurs as described in clause (i), (ii), (iv), or (v)
above, the Trust shall be liquidated by the Issuer Trustees as expeditiously as
the Issuer Trustees determine to be possible by distributing, after satisfaction
of liabilities to creditors of the Trust as provided by applicable law, to the
holders of the Trust Securities a Like Amount of the Exchange Junior
Subordinated Debentures, unless such distribution is determined by the Property
Trustee not to be practicable, in which event such holders will be entitled to
receive out of the assets of the Trust legally available for distribution to
holders, after satisfaction of liabilities to creditors of the Trust as provided
by applicable law, an amount equal to the aggregate of the Liquidation Amount
plus accumulated and unpaid Distributions thereon to the date of payment (such
amount being the "Liquidation Distribution"). If such Liquidation Distribution
can be paid only in part because the Trust has insufficient assets legally
available to pay in full the aggregate Liquidation Distribution, then the
amounts payable directly by the Trust on the Trust Securities shall be paid on a
pro rata basis, except that if a Debenture Event of Default has occurred and is
continuing, the Exchange Capital Securities shall have a priority over the
Common Securities. See "--Subordination of
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Common Securities." If an early termination occurs, the Exchange Junior
Subordinated Debentures will be subject to optional prepayment, in whole or in
part, on or after the Initial Optional Redemption Date, unless such termination
relates to the circumstances described in clause (v) above, in which case the
Junior Subordinated Debentures will be subject to optional prepayment, in whole
but not in part, on or after the Initial Optional Redemption Date.
After the liquidation date is fixed for any distribution of Exchange
Junior Subordinated Debentures to holders of the Trust Securities, (i) the
Exchange Capital Securities will no longer be deemed to be outstanding, (ii) DTC
or its nominee, as the record holder of the Exchange Capital Securities, will
receive a registered global certificate or certificates representing the
Exchange Junior Subordinated Debentures to be delivered upon such distribution
with respect to Exchange Capital Securities held by DTC or its nominee and (iii)
any certificates representing Exchange Capital Securities not held by DTC or its
nominee will be deemed to represent Exchange Junior Subordinated Debentures
having a principal amount equal to the Liquidation Amount of such Exchange
Capital Securities, and bearing accrued and unpaid interest in an amount equal
to the accumulated and unpaid Distributions on such Exchange Capital Securities
until such certificates are presented to the Corporation or its agent for
cancellation, whereupon the Corporation will issue to such holder, and the
Debenture Trustee will authenticate, a certificate representing such Exchange
Junior Subordinated Debentures.
There can be no assurance as to the market prices for the Exchange
Capital Securities or the Exchange Junior Subordinated Debentures that may be
distributed in exchange for the Trust Securities if a dissolution and
liquidation of the Trust were to occur. Accordingly, the Exchange Capital
Securities that an investor may purchase, or the Exchange Junior Subordinated
Debentures that the investor may receive on dissolution and liquidation of the
Trust, may trade at a discount to the price that the investor paid to purchase
the Exchange Capital Securities offered hereby.
REDEMPTION PROCEDURES
If applicable, Trust Securities shall be redeemed at the applicable
Redemption Price with the proceeds from the contemporaneous repayment or
prepayment of the Exchange Junior Subordinated Debentures. Any redemption of
Trust Securities shall be made and the applicable Redemption Price shall be
payable on the Redemption Date only to the extent that the Trust has funds
legally available for the payment of such applicable Redemption Price. See
"--Subordination of Common Securities."
If the Trust gives a notice of redemption for the Exchange Capital
Securities, then, by 12:00 noon, New York City time, on the Redemption Date, to
the extent funds are legally available, with respect to the Exchange Capital
Securities held in global form by DTC or its nominees, the Property Trustee will
deposit or cause the Paying Agent to deposit irrevocably with DTC funds
sufficient to pay the applicable Redemption Price. See "--Form, Denomination,
Book-Entry Procedures and Transfer." With respect to the Exchange Capital
Securities held in certificated form, the Property Trustee, to the extent funds
are legally available, will irrevocably deposit with the Paying Agent for the
Exchange Capital Securities funds sufficient to pay the applicable Redemption
Price and will give the Paying Agent irrevocable instructions and authority to
pay the applicable Redemption Price to the holders thereof upon surrender of
their certificates evidencing the Exchange Capital Securities. See "--Payment
and Paying Agency." Notwithstanding the foregoing, Distributions payable on or
prior to the Redemption Date shall be payable to the holders of such Exchange
Capital Securities on the relevant record dates for the related Distribution
Dates. If notice of redemption shall have been given and funds deposited as
required, then upon the date of such deposit, all rights of the holders of the
Exchange Capital Securities called for redemption will cease, except the right
of the holders of such Exchange Capital Securities to receive the applicable
Redemption Price, but without interest on such Redemption Price, and such
Exchange Capital Securities will cease to be outstanding. In the event that any
Redemption Date of Exchange Capital Securities is not a Business Day, then the
applicable Redemption Price payable on such date will be paid on the next
succeeding day that is a Business Day (and without any interest or other payment
in respect of any such delay), except that, if such next succeeding Business Day
falls in the next calendar year, such payment shall be made on the immediately
preceding Business Day. In the event that payment of the applicable Redemption
Price is improperly withheld or refused and not paid either by the Trust or by
the
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Corporation pursuant to the Exchange Guarantee as described under "--Description
of Exchange Guarantee," (i) Distributions on Exchange Capital Securities will
continue to accumulate at the then-applicable rate, from the Redemption Date
originally established by the Trust to the date such applicable Redemption Price
is actually paid and (ii) the actual payment date will be the Redemption Date
for purposes of calculating the applicable Redemption Price.
Subject to applicable law (including, without limitation, United States
federal securities law), the Corporation or its subsidiaries may at any time and
from time to time purchase outstanding Exchange Capital Securities by tender, in
the open market or by private agreement.
Notice of any redemption will be mailed at least 30 days but not more
than 60 days prior to the Redemption Date to each holder of Trust Securities at
its registered address. Unless the Corporation defaults in payment of the
applicable Redemption Price on, or in the repayment of, the Exchange Junior
Subordinated Debentures, on and after the Redemption Date, Distributions will
cease to accrue on the Trust Securities called for redemption.
SUBORDINATION OF COMMON SECURITIES
Payment of Distributions on, and the Redemption Price of, the Trust
Securities, as applicable, shall be made pro rata based on the Liquidation
Amount of the Trust Securities; provided, however, that if on any Distribution
Date or Redemption Date a Debenture Event of Default shall have occurred and be
continuing, no payment of any Distribution on, or applicable Redemption Price
of, any of the Common Securities, and no other payment on account of the
redemption, liquidation or other acquisition of the Common Securities, shall be
made unless payment in full in cash of all accumulated and unpaid Distributions
on all of the outstanding Exchange Capital Securities for all Distribution
periods terminating on or prior thereto, or in the case of payment of the
applicable Redemption Price the full amount of such Redemption Price, shall have
been made or provided for, and all funds available to the Property Trustee shall
first be applied to the payment in full in cash of all Distributions on, or
Redemption Price of, the Exchange Capital Securities then due and payable.
In the case of any Event of Default under the Trust Agreement, the
Corporation as holder of the Common Securities will be deemed to have waived any
right to act with respect to such Event of Default until the effect of such
Event of Default shall have been cured, waived or otherwise eliminated. Until
any such Event of Default has been so cured, waived or otherwise eliminated, the
Property Trustee shall act solely on behalf of the holders of the Capital
Securities and not on behalf of the Corporation as holder of the Common
Securities, and only the holders of the Capital Securities will have the right
to direct the Property Trustee to act on their behalf.
EVENTS OF DEFAULT; NOTICE
The occurrence of a Debenture Event of Default (see "--Description of
Exchange Junior Subordinated Debentures--Debenture Events of Default")
constitutes an "Event of Default" under the Trust Agreement.
Within 10 Business Days after the occurrence of any Event of Default
actually known to the Property Trustee, the Property Trustee shall transmit
notice of such Event of Default to the holders of the Exchange Capital
Securities, the Administrative Trustees and the Corporation, as Sponsor, unless
such Event of Default shall have been cured or waived. The Corporation, as
Sponsor, and the Administrative Trustees are required to file annually with the
Property Trustee a certificate as to whether or not they are in compliance with
all the conditions and covenants applicable to them under the Trust Agreement.
If a Debenture Event of Default has occurred and is continuing, the
Exchange Capital Securities shall have a preference over the Common Securities
as described under "--Liquidation of the Trust and Distribution of Exchange
Junior Subordinated Debentures" and "--Subordination of Common Securities."
REMOVAL OF ISSUER TRUSTEES
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Unless a Debenture Event of Default shall have occurred and be
continuing, any Issuer Trustee may be removed at any time by the holder of the
Common Securities. If a Debenture Event of Default has occurred and is
continuing, the Property Trustee and the Delaware Trustee may be removed at such
time by the holders of a majority in Liquidation Amount of the outstanding
Capital Securities. In no event will the holders of the Exchange Capital
Securities have the right to vote to appoint, remove or replace the
Administrative Trustees, which voting rights are vested exclusively in the
Corporation as the holder of the Common Securities. No resignation or removal of
an Issuer Trustee and no appointment of a successor trustee shall be effective
until the acceptance of appointment by the successor trustee in accordance with
the provisions of the Trust Agreement.
CO-TRUSTEES AND SEPARATE PROPERTY TRUSTEE
Unless a Debenture Event of Default shall have occurred and be
continuing, at any time or times, for the purpose of meeting the legal
requirements of the Trust Indenture Act or of any jurisdiction in which any part
of the Trust's property may at any time be located, the Property Trustee shall
have power to appoint one or more persons either to act as a co-trustee, jointly
with the Property Trustee, of all or any part of such Trust's property, or to
act as separate trustee of any such property, in either case with such powers as
may be provided in the instrument of appointment, and to vest in such person or
persons in such capacity any property, title, right or power deemed necessary or
desirable, subject to the provisions of the Trust Agreement.
MERGER OR CONSOLIDATION OF ISSUER TRUSTEES
Any Person into which the Property Trustee, the Delaware Trustee or any
Administrative Trustee that is not a natural person may be merged or converted
or with which it may be consolidated, or any Person resulting from any merger,
conversion or consolidation to which such Issuer Trustee shall be a party, or
any Person succeeding to all or substantially all the corporate trust business
of such Issuer Trustee, shall be the successor of such Issuer Trustee under the
Trust Agreement, provided such Person shall be otherwise qualified and eligible.
MERGERS, CONSOLIDATIONS, AMALGAMATIONS OR REPLACEMENTS OF THE TRUST
The Trust may not merge with or into, consolidate, amalgamate, or be
replaced by, or convey, transfer or lease its properties and assets as an
entirety or substantially as an entirety to any corporation or other Person,
except as described herein or as otherwise described under "--Liquidation of the
Trust and Distribution of Exchange Junior Subordinated Debentures." The Trust
may, at the request of the Corporation, as Sponsor, with the consent of the
Administrative Trustees but without the consent of the holders of the Exchange
Capital Securities, merge with or into, consolidate, amalgamate, or be replaced
by or convey, transfer or lease its properties and assets as an entirety or
substantially as an entirety to a trust organized as such under the laws of any
state; provided, that (i) such successor entity either (a) expressly assumes all
of the obligations of the Trust with respect to the Trust Securities or (b)
substitutes for the Trust Securities other securities having substantially the
same terms as the Trust Securities (the "Successor Securities") so long as the
Successor Securities rank the same as the Trust Securities rank in priority with
respect to distributions and payments upon liquidation, redemption and
otherwise, (ii) the Corporation expressly appoints a trustee of such successor
entity possessing the same powers and duties as the Property Trustee with
respect to the Exchange Junior Subordinated Debentures, (iii) the Successor
Securities are listed, or any Successor Securities will be listed upon
notification of issuance, on any national securities exchange or other
organization on which the Trust Securities are then listed or quoted, if any,
(iv) if the Exchange Capital Securities (including any Successor Securities) are
rated by any nationally recognized statistical rating organization prior to such
transaction, such merger, consolidation, amalgamation, replacement, conveyance,
transfer or lease does not cause the Exchange Capital Securities (including any
Successor Securities) or, if the Exchange Junior Subordinated Debentures are so
rated, the Exchange Junior Subordinated Debentures, to be downgraded by any such
nationally recognized statistical rating organization, (v) such merger,
consolidation, amalgamation, replacement, conveyance, transfer or lease does not
adversely affect the rights, preferences and privileges of the holders of the
Trust Securities (including any Successor Securities) in any material respect,
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(vi) such successor entity has a purpose identical to that of the Trust, (vii)
prior to such merger, consolidation, amalgamation, replacement, conveyance,
transfer or lease, the Corporation has received an opinion from independent
counsel to the Trust experienced in such matters to the effect that (a) such
merger, consolidation, amalgamation, replacement, conveyance, transfer or lease
does not adversely affect the rights, preferences and privileges of the holders
of the Trust Securities (including any Successor Securities) in any material
respect (other than any dilution of such holders' interests in the new entity)
and (b) following such merger, consolidation, amalgamation, replacement,
conveyance, transfer or lease, neither the Trust nor such successor entity will
be required to register as an investment company under the Investment Company
Act of 1940, as amended (the "Investment Company Act"), and (viii) the
Corporation or any permitted successor or assignee owns all of the common
securities of such successor entity and guarantees the obligations of such
successor entity under the Successor Securities at least to the extent provided
by the Exchange Guarantee and the Common Guarantee. Notwithstanding the
foregoing, the Trust shall not, except with the consent of holders of 100% in
Liquidation Amount of the Trust Securities, consolidate, amalgamate, merge with
or into, or be replaced by or convey, transfer or lease its properties and
assets as an entirety or substantially as an entirety to any other entity or
permit any other entity to consolidate, amalgamate, merge with or into, or
replace it, if such consolidation, amalgamation, merger, replacement,
conveyance, transfer or lease would cause the Trust or the successor entity not
to be classified as a grantor trust for United States federal income tax
purposes.
VOTING RIGHTS; AMENDMENT OF THE TRUST AGREEMENT
Except as provided herein and under "--Mergers, Consolidations,
Amalgamations or Replacements of the Trust" and "--Description of Exchange
Guarantee--Amendments and Assignment" and as otherwise required by law and the
Trust Agreement, the holders of the Exchange Capital Securities will have no
voting rights.
The Trust Agreement may be amended from time to time by the
Corporation, the Property Trustee and the Administrative Trustees, without the
consent of the holders of the Trust Securities (i) to cure any ambiguity,
correct or supplement any provision in the Trust Agreement that may be
inconsistent with any other provision, or to make any other provisions with
respect to matters or questions arising under the Trust Agreement, which shall
not be inconsistent with the other provisions of the Trust Agreement, or (ii) to
modify, eliminate or add to any provisions of the Trust Agreement to such extent
as shall be necessary to ensure that the Trust will be classified for U.S.
federal income tax purposes as a grantor trust at all times that any Trust
Securities are outstanding or to ensure that the Trust will not be required to
register as an "investment company" under the Investment Company Act; provided,
however, that in each such case such action shall not adversely affect in any
material respect the interests of the holders of the Trust Securities. Any
amendments of the Trust Agreement pursuant to the foregoing shall become
effective when notice thereof is given to the holders of the Trust Securities.
The Trust Agreement may be amended by the Issuer Trustees and the Corporation
(i) with the consent of holders representing a majority (based upon Liquidation
Amount) of the outstanding Trust Securities and (ii) upon receipt by the Issuer
Trustees of an opinion of counsel experienced in such matters to the effect that
such amendment or the exercise of any power granted to the Issuer Trustees in
accordance with such amendment will not affect the Trust's status as a grantor
trust for U.S. federal income tax purposes or the Trust's exemption from status
as an "investment company" under the Investment Company Act, provided that,
without the consent of each holder of Trust Securities, the Trust Agreement may
not be amended to (i) change the amount or timing of any Distribution on the
Trust Securities or otherwise adversely affect the amount of any Distribution
required to be made in respect of the Trust Securities as of a specified date or
(ii) restrict the right of a holder of Trust Securities to institute suit for
the enforcement of any such payment on or after such date. The Exchange Capital
Securities and any Original Capital Securities that remain outstanding after
consummation of the Exchange Offer will vote together as a single class for
purposes of determining whether holders of the requisite percentage in
outstanding Liquidation Amount thereof have taken certain actions or exercised
certain rights under the Trust Agreement.
So long as any Exchange Junior Subordinated Debentures are held by the
Property Trustee, the Issuer Trustees shall not (i) direct the time, method and
place of conducting any proceeding for any remedy available to the Debenture
Trustee, or execute any trust or power conferred on the Debenture
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Trustee with respect to the Exchange Junior Subordinated Debentures, (ii) waive
certain past defaults under the Indenture, (iii) exercise any right to rescind
or annul a declaration of acceleration of the maturity of the principal of the
Exchange Junior Subordinated Debentures or (iv) consent to any amendment,
modification or termination of the Indenture or the Exchange Junior Subordinated
Debentures, where such consent shall be required, without, in each case,
obtaining the prior approval of the holders of a majority in Liquidation Amount
of all outstanding Capital Securities; provided, however, that where a consent
under the Indenture would require the consent of each holder of Exchange Junior
Subordinated Debentures affected thereby, no such consent shall be given by the
Property Trustee without the prior approval of each holder of the Exchange
Capital Securities. The Issuer Trustees shall not revoke any action previously
authorized or approved by a vote of the holders of the Exchange Capital
Securities except by subsequent vote of such holders. The Property Trustee shall
notify each holder of Exchange Capital Securities of any notice of default it
receives with respect to the Exchange Junior Subordinated Debentures. In
addition to obtaining the foregoing approvals of such holders of the Exchange
Capital Securities, prior to taking any of the foregoing actions, the Issuer
Trustees shall obtain an opinion of counsel experienced in such matters to the
effect that the Trust will continue to be classified as a grantor trust, and not
as an association taxable as a corporation, for U.S. federal income tax purposes
on account of such action.
Any required approval of holders of Exchange Capital Securities may be
given at a meeting of such holders convened for such purpose or pursuant to
written consent. The Property Trustee will cause a notice of any meeting at
which holders of Exchange Capital Securities are entitled to vote, or of any
matter upon which action by written consent of such holders is to be taken, to
be given to each holder of record of Exchange Capital Securities in the manner
set forth in the Trust Agreement.
No vote or consent of the holders of Exchange Capital Securities will
be required for the Trust to redeem and cancel the Exchange Capital Securities
in accordance with the Trust Agreement.
Notwithstanding that holders of the Exchange Capital Securities are
entitled to vote or consent under any of the circumstances described above, any
of the Exchange Capital Securities that are owned by the Corporation or any
affiliate of the Corporation shall, for purposes of such vote or consent, be
treated as if they were not outstanding.
FORM, DENOMINATION, BOOK-ENTRY PROCEDURES AND TRANSFER
The Exchange Capital Securities initially will be represented by one or
more Exchange Capital Securities in registered, global form (collectively, the
"Global Capital Securities"). The Global Capital Securities will be deposited
upon issuance with the Property Trustee as custodian for DTC, in New York, New
York, and registered in the name of DTC or its nominee, in each case for credit
to an account of a direct or indirect participant in DTC as described herein.
In the event that Exchange Capital Securities are issued in
certificated form, the Exchange Capital Securities will be in blocks having a
Liquidation Amount of not less than $100,000 (100 Exchange Capital Securities)
and may be transferred or exchanged on in such blocks in the manner described
herein.
Except as set forth herein, the Global Capital Securities may be
transferred, in whole and not in part, only to another nominee of DTC or to a
successor of DTC or its nominee and only in amounts that would not cause a
holder to own less than 100 Exchange Capital Securities. Beneficial interests in
the Global Capital Securities may not be exchanged for Exchange Capital
Securities in certificated form except in the limited circumstances described
herein. See "--Exchange of Book-Entry Capital Securities for Certificated
Capital Securities."
DEPOSITORY PROCEDURES
DTC has advised the Trust and the Corporation that DTC is a
limited-purpose trust company organized under the laws of the state of New York,
a member of the Federal Reserve System, a "clearing
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corporation" within the meaning of the Uniform Commercial Code and a "clearing
agency" registered pursuant to the provisions of Section 17A of the Exchange
Act. DTC was created to hold securities for its participating organizations
(collectively, the "Participants") and to facilitate the clearance and
settlement of transactions in those securities between Participants through
electronic book-entry changes in accounts of its Participants, thereby
eliminating the need for physical movement of certificates. Participants include
securities brokers and dealers (including the Initial Purchaser), banks, trust
companies, clearing corporations and certain other organizations. Indirect
access to DTC's system is also available to other entities such as banks,
brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly (collectively,
the "Indirect Participants"). Persons who are not Participants may beneficially
own securities held by or on behalf of DTC only through the Participants or the
Indirect Participants. The ownership interest and transfer of ownership interest
of each actual purchaser of each security held by or on behalf of DTC are
recorded on the records of the Participants and Indirect Participants.
DTC has also advised the Trust and the Corporation that, pursuant to
procedures established by it, (i) upon deposit of the Global Capital Securities,
DTC will credit the accounts of Participants designated by the Initial Purchaser
with portions of the principal amount of the Global Capital Securities and (ii)
ownership of such interests in the Global Capital Securities will be shown on,
and the transfer of ownership thereof will be effected only through, records
maintained by DTC (with respect to the Participants) or by the Participants and
the Indirect Participants (with respect to other owners of beneficial interests
in the Global Capital Securities).
Investors in the Global Capital Securities may hold their interests
therein directly through DTC if they are Participants, or indirectly through
organizations that are Participants. All interests in a Global Capital Security
will be subject to the procedures and requirements of DTC. The laws of some
states require that certain persons take physical delivery in certificated form
of securities that they own. Consequently, the ability to transfer beneficial
interests in a Global Capital Security to such persons will be limited to that
extent. Because DTC can act only on behalf of Participants, which in turn act on
behalf of Indirect Participants and certain banks, the ability of a person
having beneficial interests in a Global Capital Security to pledge such
interests to persons or entities that do not participate in the DTC system, or
otherwise take actions in respect of such interests, may be affected by the lack
of a physical certificate evidencing such interests. For certain other
restrictions on the transferability of the Exchange Capital Securities, see
"--Exchange of Book-Entry Capital Securities for Certificated Capital
Securities."
EXCEPT AS DESCRIBED HEREIN, OWNERS OF INTERESTS IN THE GLOBAL CAPITAL
SECURITIES WILL NOT HAVE EXCHANGE CAPITAL SECURITIES REGISTERED IN THEIR NAMES,
WILL NOT RECEIVE PHYSICAL DELIVERY OF EXCHANGE CAPITAL SECURITIES IN
CERTIFICATED FORM AND WILL NOT BE CONSIDERED THE REGISTERED OWNERS OR HOLDERS
THEREOF UNDER THE TRUST AGREEMENT FOR ANY PURPOSE.
Payments in respect of the Global Capital Security registered in the
name of DTC or its nominee will be payable by the Property Trustee to DTC in its
capacity as the registered holder under the Trust Agreement. Under the terms of
the Trust Agreement, the Property Trustee will treat the persons in whose names
the Exchange Capital Securities, including the Global Capital Securities, are
registered as the owners thereof for the purpose of receiving such payments and
for any and all other purposes whatsoever. Consequently, neither the Property
Trustee nor any agent thereof has or will have any responsibility or liability
for (i) any aspect of DTC's records or any Participant's or Indirect
Participant's records relating to, or payments made on account of, beneficial
ownership interests in the Global Capital Securities, or for maintaining,
supervising or reviewing any of DTC's records or any Participant's or Indirect
Participant's records relating to the beneficial ownership interests in the
Global Capital Securities or (ii) any other matter relating to the actions and
practices of DTC or any of its Participants or Indirect Participants. DTC has
advised the Trust and the Corporation that its current practice, upon receipt of
any payment in respect of securities such as the Exchange Capital Securities, is
to credit the accounts of the relevant Participants with the payment on the
payment date, in amounts proportionate to their respective holdings in
Liquidation Amount of beneficial interests in the relevant security as shown on
the records of DTC unless DTC has reason to believe it will not receive payment
on such payment date. Payments by the Participants and the Indirect Participants
to the beneficial owners of Exchange Capital
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Securities will be governed by standing instructions and customary practices and
will be the responsibility of the Participants or the Indirect Participants and
will not be the responsibility of DTC, the Property Trustee, the Trust or the
Corporation. None of the Trust, the Corporation or the Property Trustee will be
liable for any delay by DTC or any of its Participants in identifying the
beneficial owners of the Exchange Capital Securities, and the Trust, the
Corporation and the Property Trustee may conclusively rely on and will be
protected in relying on instructions from DTC or its nominee for all purposes.
Interests in the Global Capital Securities will trade in DTC's Same-Day
Funds Settlement System and secondary market trading activity in interests in
the Global Capital Securities will settle in immediately available funds,
subject in all cases to the rules and procedures of DTC and its Participants.
Transfers between Participants in DTC will be effected in accordance with DTC's
procedures, and will settle in same-day funds.
DTC has advised the Trust and the Corporation that it will take any
action permitted to be taken by a holder of Exchange Capital Securities
(including, without limitation, the presentation of Exchange Capital Securities
for exchange as described herein) only at the direction of one or more
Participants to whose account with DTC interests in the Global Capital
Securities are credited and only in respect of such portion of the aggregate
Liquidation Amount of the Exchange Capital Securities as to which such
Participant or Participants has or have given such direction. However, if there
is an Event of Default under the Trust Agreement, DTC reserves the right to
exchange the Global Capital Securities for legended Exchange Capital Securities
in certificated form and to distribute such Exchange Capital Securities to its
Participants.
So long as DTC or its nominee is the registered owner of the Global
Capital Securities, DTC or such nominee, as the case may be, will be considered
the sole owner or holder of the Exchange Capital Securities represented by the
Global Capital Security for all purposes under the Trust Agreement.
Although DTC has agreed to the foregoing procedures to facilitate
transfers of interest in the Global Capital Securities among Participants in
DTC, it is under no obligation to perform or to continue to perform such
procedures, and such procedures may be discontinued at any time. None of the
Trust, the Corporation or the Property Trustee will have any responsibility for
the performance by DTC or its Participants or Indirect Participants of their
respective obligations under the rules and procedures governing its operations.
The information in this section concerning DTC and its book-entry
system has been obtained from sources that the Trust and the Corporation believe
to be reliable, but neither the Trust nor the Corporation takes responsibility
for the accuracy thereof.
EXCHANGE OF BOOK-ENTRY CAPITAL SECURITIES FOR CERTIFICATED CAPITAL SECURITIES
A Global Capital Security is exchangeable for Exchange Capital
Securities in registered certificated form if (i) DTC (a) notifies the Trust
that it is unwilling or unable to continue as Depository for the Global Capital
Security or (b) has ceased to be a clearing agency registered under the Exchange
Act, and the Trust thereupon fails to appoint a successor Depository within 90
days, (ii) the Trust in its sole discretion elects to cause the issuance of the
Exchange Capital Securities in certificated form or (iii) there shall have
occurred and be continuing an Event of Default or any event which after notice
or lapse of time or both would be an Event of Default under the Trust Agreement.
In addition, beneficial interests in a Global Capital Security may be exchanged
by or on behalf of DTC for certificated Exchange Capital Securities upon request
by DTC, but only upon at least 20 days' prior written notice given to the
Property Trustee in accordance with DTC's customary procedures. In all cases,
certificated Exchange Capital Securities delivered in exchange for any Global
Capital Security or beneficial interests therein will be registered in the
names, and issued in any approved denominations, requested by or on behalf of
the Depository (in accordance with its customary procedures).
PAYMENT AND PAYING AGENCY
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Payments in respect of the Exchange Capital Securities held in global
form shall be made to the Depository, which shall credit the relevant accounts
at the Depository on the applicable Distribution Dates or in respect of the
Exchange Capital Securities that are not held by the Depository, such payments
shall be made by check mailed to the address of the holder entitled thereto as
such address shall appear on the register. The paying agent (the "Paying Agent")
shall initially be the Property Trustee and shall include any co-paying agent
chosen by the Property Trustee that is acceptable to the Administrative Trustees
and the Corporation. The Paying Agent shall be permitted to resign as Paying
Agent upon 30 days' written notice to the Property Trustee, the Administrative
Trustees and the Corporation. In the event that the Property Trustee shall no
longer be the Paying Agent, the Administrative Trustees shall appoint a
successor (which shall be a bank or trust company acceptable to the
Administrative Trustees and the Corporation) to act as Paying Agent.
RESTRICTIONS ON TRANSFER
The Exchange Capital Securities will be issued, and may be transferred,
only in blocks having a Liquidation Amount of not less than $100,000 (100
Exchange Capital Securities) and multiples of $1,000 in excess thereof. Any
attempted sale, transfer or other disposition of Exchange Capital Securities in
a block having a Liquidation Amount of less than $100,000 shall be deemed to be
void and of no legal effect whatsoever. Any such transferee shall be deemed not
to be the holder of such Exchange Capital Securities for any purpose, including
but not limited to the receipt of Distributions on such Exchange Capital
Securities, and such transferee shall be deemed to have no interest whatsoever
in such Exchange Capital Securities.
REGISTRAR AND TRANSFER AGENT
The Property Trustee will act as registrar and transfer agent for the
Exchange Capital Securities.
Registration of transfers of the Exchange Capital Securities will be
effected without charge by or on behalf of the Trust, but upon payment of any
tax or other governmental charges that may be imposed in connection with any
transfer or exchange. The Trust will not be required to register or cause to be
registered the transfer of the Exchange Capital Securities after they have been
called for redemption.
INFORMATION CONCERNING THE PROPERTY TRUSTEE
The Property Trustee, other than during the occurrence and continuance
of an Event of Default, undertakes to perform only such duties as are
specifically set forth in the Trust Agreement and, during the existence of an
Event of Default, must exercise the same degree of care and skill as a prudent
person would exercise or use under the circumstances in the conduct of his or
her own affairs. Subject to this provision, the Property Trustee is under no
obligation to exercise any of the powers vested in it by the Trust Agreement at
the request of any holder of Trust Securities unless it is offered reasonable
indemnity against the costs, expenses and liabilities that might be incurred
thereby. If no Event of Default has occurred and is continuing and the Property
Trustee is required to decide between alternative causes of action, construe
ambiguous provisions in the Trust Agreement or is unsure of the application of
any provision of the Trust Agreement, and the matter is not one on which holders
of the Exchange Capital Securities or the Common Securities are entitled under
the Trust Agreement to vote, then the Property Trustee shall take such action as
is directed by the Corporation and, if not so directed, shall take such action
as it deems advisable and in the best interests of the holders of the Trust
Securities and will have no liability except for its own bad faith, negligence
or willful misconduct.
MISCELLANEOUS
The Administrative Trustees are authorized and directed to conduct the
affairs of and to operate the Trust in such a way that (i) the Trust will not be
deemed to be an "investment company" required to be registered under the
Investment Company Act, (ii) the Trust will be classified as a grantor trust for
United States federal income tax purposes and (iii) the Exchange Junior
Subordinated Debentures will be treated as indebtedness of the Corporation for
United States federal income tax purposes. In this
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connection, the Corporation and the Administrative Trustees are authorized to
take any action, not inconsistent with applicable law or the Trust Agreement,
that the Administrative Trustees determine in their discretion to be necessary
or desirable for such purposes, as long as such action does not materially
adversely affect the interests of the holders of the Trust Securities.
The Trust Agreement provides that (i) holders of the Trust Securities
have no preemptive or similar rights to subscribe for any additional Trust
Securities, and (ii) the issuance of Exchange Capital Securities and the
issuance of Common Securities are not subject to preemptive or similar rights.
The Trust may not borrow money, issue debt, execute mortgages or pledge
any of its assets.
DESCRIPTION OF EXCHANGE JUNIOR SUBORDINATED DEBENTURES
The Original Junior Subordinated Debentures were issued and the
Exchange Junior Subordinated Debentures will be issued under the Indenture. The
Indenture has been qualified under the Trust Indenture Act. This summary of
certain terms and provisions of the Exchange Junior Subordinated Debentures and
the Indenture does not purport to be complete, and where reference is made to
particular provisions of the Indenture, such provisions, including the
definitions of certain terms, some of which are not otherwise defined herein,
are qualified in their entirety by reference to all of the provisions of the
Indenture and those terms made a part of the Indenture by the Trust Indenture
Act.
GENERAL
Concurrently with the issuance of the Original Capital Securities, the
Trust invested the proceeds thereof, together with the consideration paid by the
Corporation for the Common Securities, in Original Junior Subordinated
Debentures issued by the Corporation. The Exchange Junior Subordinated
Debentures, similarly to the Original Junior Subordinated Debentures, will bear
interest at the annual rate of 11.00% of the principal amount thereof, payable
semi-annually in arrears on June 1 and December 1 of each year (each, an
"Interest Payment Date"), commencing December 1, 1997, to the person in whose
name each Exchange Junior Subordinated Debenture is registered, subject to
certain exceptions, at the close of business on the 15th day of the month
preceding the month in which the relevant payment date falls. It is anticipated
that, until the liquidation, if any, of the Trust, each Exchange Junior
Subordinated Debenture will be held in the name of the Property Trustee in trust
for the benefit of the holders of the Trust Securities. The amount of interest
payable for any period will be computed on the basis of a 360-day year of twelve
30-day months and, for any period of less than a full calendar month, the number
of days elapsed in such month. In the event that any date on which interest is
payable on the Exchange Junior Subordinated Debentures is not a Business Day,
then payment of the interest payable on such date will be made on the next
succeeding day that is a Business Day (and without any interest or other payment
in respect of any such delay), except that if such next succeeding Business Day
falls in the next succeeding calendar year, then such payment shall be made on
the immediately preceding Business Day, in each case with the same force and
effect as if made on such date. Accrued interest that is not paid on the
applicable Interest Payment Date will bear additional interest on the amount
thereof (to the extent permitted by law) at the rate per annum of 11.00%
thereof, compounded semi-annually. The term "interest," as used herein, shall
include semi-annual interest payments, interest on semi-annual interest payments
not paid on the applicable Interest Payment Date and Additional Sums, as
applicable.
The Exchange Junior Subordinated Debentures will be issued pursuant to
the Indenture. The Exchange Junior Subordinated Debentures will mature on June
1, 2027 (the "Stated Maturity Date").
The Exchange Junior Subordinated Debentures will be unsecured and will
rank pari passu with the Original Junior Subordinated Debentures and all Other
Debentures and subordinate and junior in right of payment to all Senior
Indebtedness to the extent and in the manner set forth in the Indenture. See
"--Subordination." At September 30, 1997 the Corporation had $29.6 million face
amount of Senior Indebtedness outstanding. In addition to outstanding Senior
Indebtedness, the Corporation also had outstanding at September 30, 1997 $16.2
million face amount of 4.0% cumulative preferred stock. The terms of the Senior
Indebtedness and the cumulative preferred stock include various covenants and
other
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restrictions, including significant financial penalties, upon default of payment
of interest or dividends, as applicable. Under such a default circumstance,
these restrictions may have a material impact on the ability of the Corporation
to satisfy its obligations with respect to the Capital Securities. At September
30, 1997, the annual interest expense to service the Senior Indebtedness was
$3.3 million and the annual dividend requirement on the cumulative preferred
stock was $648,000.
As a holding company, the Corporation's operations are conducted
primarily by its subsidiaries, TeleBank and TCM. Presently, dividends from the
Bank are the primary source of funds for the Corporation. There are regulatory
limitations on the payment of dividends to the Corporation from the Bank, and
federally chartered, FDIC insured savings banks generally are required to
provide their Regional Director of the OTS with no less than 30 days notice of
any proposed dividend. At September 30, 1997 the Bank had approximately $14.1
million available under OTS regulations for payment of dividends to the
Corporation. However, the OTS can prohibit payment of any or all such dividends
under certain circumstances, including if such payment would constitute an
unsafe or unsound banking practice. In addition to restrictions on the payment
of dividends, the Bank is subject to restrictions imposed by federal law on
extensions of credit to, and certain other transactions with, the Corporation
and certain other affiliates, and on investments in stock or other securities.
Such restrictions prevent the Bank from lending to the Corporation and such
other affiliates unless the loans are secured by various types of collateral.
Further, such secured loans, other transactions and investments by the Bank are
generally limited in amount as to the Corporation and each of such other
affiliates to 10% of the Bank's capital and surplus and as to the Corporation
and all of such other affiliates to an aggregate of 20% of the Bank's capital
and surplus.
Under terms of the indentures pursuant to which the Senior Indebtedness
was issued, the Corporation presently is required to maintain, on an
unconsolidated basis, liquid assets in an amount equal to or greater than $3.3
million, which represents 100% of the aggregate annual interest expense on the
Senior Indebtedness.
Further, as a holding company, the right of the Corporation to
participate in any distribution of assets of any subsidiary upon such
subsidiary's liquidation or reorganization or otherwise (and thus the ability of
holders of the Capital Securities to benefit indirectly from such distribution)
is subject to the prior claims of creditors of such subsidiary (including
depositors in the Bank), except to the extent that the Corporation may itself be
recognized as a creditor of that subsidiary. Therefore, the Exchange Junior
Subordinated Debentures effectively will be subordinated to all existing and
future liabilities of the Corporation's subsidiaries (including deposit
liabilities of the Bank). As a result, holders of Exchange Junior Subordinated
Debentures should look only to the assets of the Corporation for payments on the
Exchange Junior Subordinated Debentures. At September 30, 1997, the
Corporation's subsidiaries had total liabilities (excluding liabilities owed to
the Corporation) of $457.2 million.
The Indenture does not limit the incurrence or issuance of other
secured or unsecured debt of the Corporation or any subsidiary, including Senior
Indebtedness. See "--Subordination." The Corporation expects from time to time
that it will incur additional indebtedness constituting Senior Indebtedness and
that its subsidiaries will incur additional liabilities.
FORM, REGISTRATION AND TRANSFER
If the Exchange Junior Subordinated Debentures are distributed to the
holders of the Trust Securities, the Exchange Junior Subordinated Debentures may
be represented by one or more global certificates registered in the name of Cede
& Co., as the nominee of DTC. The depository arrangements for such Exchange
Junior Subordinated Debentures are expected to be substantially similar to those
in effect for the Exchange Capital Securities. For a description of DTC and the
terms of the depository arrangements relating to payments, transfers, voting
rights, redemptions and other notices and other matters, see "--Description of
Exchange Capital Securities--Form, Denomination, Book-Entry Procedures and
Transfer."
PAYMENT AND PAYING AGENTS
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Payment of principal of (and premium, if any) and interest on Exchange
Junior Subordinated Debentures will be made at the office of the Debenture
Trustee in Wilmington, Delaware or at the office of such Paying Agent or Paying
Agents as the Corporation may designate from time to time, except that at the
option of the Corporation payment of any interest may be made, except in the
case of Exchange Junior Subordinated Debentures in global form, (i) by check
mailed to the address of the Person entitled thereto as such address shall
appear in the register for Exchange Junior Subordinated Debentures or (ii) by
transfer to an account maintained by the Person entitled thereto as specified in
such register, provided that proper transfer instructions have been received by
the relevant Record Date. Payment of any interest on any Exchange Junior
Subordinated Debenture will be made to the Person in whose name such Exchange
Junior Subordinated Debenture is registered at the close of business on the
Record Date for such interest, except in the case of defaulted interest. The
Corporation may at any time designate additional Paying Agents or rescind the
designation of any Paying Agent; provided, however, the Corporation will at all
times be required to maintain a Paying Agent in each place of payment for the
Exchange Junior Subordinated Debentures.
Any moneys deposited with the Debenture Trustee or any Paying Agent, or
then held by the Corporation in trust, for the payment of the principal of (and
premium, if any) or interest on any Exchange Junior Subordinated Debenture and
remaining unclaimed for two years after such principal (and premium, if any) or
interest has become due and payable shall, at the request of the Corporation, be
repaid to the Corporation and the holder of such Exchange Junior Subordinated
Debenture shall thereafter look, as a general unsecured creditor, only to the
Corporation for payment thereof.
OPTION TO EXTEND INTEREST PAYMENT DATE
So long as no Debenture Event of Default has occurred and is
continuing, the Corporation has the right under the Indenture to defer the
payment of interest on the Exchange Junior Subordinated Debentures at any time
and from time to time for a period not exceeding 10 consecutive semi-annual
periods with respect to each Extension Period, provided that no Extension Period
shall end on a date other than an Interest Payment Date or extend beyond the
Stated Maturity Date. At the end of such Extension Period, the Corporation must
pay all interest then accrued and unpaid (together with interest thereon at the
annual rate of 11.00%, compounded semi-annually, to the extent permitted by
applicable law ("Compounded Interest")). During an Extension Period, interest
will continue to accrue and holders of Exchange Junior Subordinated Debentures
(or holders of the Trust Securities while Trust Securities are outstanding) will
be required to accrue such deferred interest income for U.S. federal income tax
purposes prior to the receipt of cash attributable to such income. See "Certain
Federal Income Tax Consequences--Interest Income and Original Issue Discount."
During any such Extension Period, the Corporation may not (i) declare
or pay any dividends or distributions on, or redeem, purchase, acquire, or make
a liquidation payment with respect to, any of the Corporation's capital stock,
(ii) make any payment of principal of, premium, if any, or interest on or repay,
repurchase or redeem any debt securities of the Corporation (including Other
Debentures) that rank pari passu with or junior in right of payment to the
Exchange Junior Subordinated Debentures or (iii) make any guarantee payments
with respect to any guarantee by the Corporation of the debt securities of any
subsidiary of the Corporation (including any Other Guarantees) if such guarantee
ranks pari passu with or junior in right of payment to the Exchange Junior
Subordinated Debentures (other than (a) dividends or distributions in shares of,
or options, warrants or rights to subscribe for or purchase shares of, common
stock of the Corporation, (b) any declaration of a dividend in connection with
the implementation of a stockholders' rights plan, or the issuance of stock
under any such plan in the future, or the redemption or repurchase of any such
rights pursuant thereto, (c) payments under the Exchange Guarantee, (d) the
purchase of fractional shares resulting from a reclassification of the
Corporation's capital stock, (e) the purchase of fractional interests in shares
of the Corporation's capital stock pursuant to the conversion or exchange
provisions of such capital stock or the security being converted or exchanged
and (f) purchases of common stock of the Corporation related to the issuance of
such common stock or rights under any of the Corporation's benefit plans for its
directors, officers or employees or any of the Corporation's dividend
reinvestment plans).
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Prior to the termination of any such Extension Period, the Corporation
may further extend such Extension Period, provided that such extension does not
cause such Extension Period to exceed 10 consecutive semi-annual periods, end on
a date other than an Interest Payment Date or extend beyond the Stated Maturity
Date. Upon the termination of any such Extension Period and the payment of all
amounts then due on any Interest Payment Date, the Corporation may elect to
begin a new Extension Period, subject to the above requirements. No interest
shall be due and payable during an Extension Period, except at the end thereof.
The Corporation must give the Property Trustee, the Administrative Trustees and
the Debenture Trustee notice of its election of any Extension Period (or an
extension thereof) at least five Business Days prior to the earlier of (i) the
date the Distributions on the Trust Securities would have been payable except
for the election to begin or extend such Extension Period or (ii) the date the
Trust is required to give notice to any automated quotation system or to holders
of Exchange Capital Securities of the record date or the date such Distributions
are payable, but in any event not less than five Business Days prior to such
record date. The Debenture Trustee shall give notice of the Corporation's
election to begin or extend a new Extension Period to the holders of the
Exchange Capital Securities. There is no limitation on the number of times that
the Corporation may elect to begin an Extension Period.
OPTIONAL PREPAYMENT
The Exchange Junior Subordinated Debentures will be prepayable, in
whole or in part, at the option of the Corporation on or after the Initial
Optional Redemption Date, subject to the Corporation having received any
required regulatory approvals, at a prepayment price (as previously defined, the
"Optional Prepayment Price") equal to the percentage of the outstanding
principal amount of the Exchange Junior Subordinated Debentures specified below,
plus, in each case, accrued and unpaid interest thereon, including Compounded
Interest and Additional Sums, if any, to the date of prepayment if prepaid
during the 12-month period beginning June 1 of the years indicated below:
YEAR PERCENTAGE
---- ----------
2007 105.500%
2008 104.950%
2009 104.440%
2010 103.850%
2011 103.300%
2012 102.750%
2013 102.200%
2014 101.650%
2015 101.100%
2016 100.550%
2017 and thereafter.................................. 100.0%
SPECIAL EVENT PREPAYMENT
Prior to the Initial Option Repayment Date, if a Special Event shall
occur and be continuing, the Corporation may, at its option and subject to
receipt of any required regulatory approvals, prepay the Exchange Junior
Subordinated Debentures in whole (but not in part) at any time within 90 days of
the occurrence of such Special Event, at a prepayment price (as previously
defined, the "Special Event Prepayment Price") equal to, for each Exchange
Capital Security, the Make-Whole Amount for a corresponding $1,000 principal
amount of Exchange Junior Subordinated Debentures together with accrued
Distributions to, but excluding, the date fixed for redemption. The "Make-Whole
Amount" shall be equal to the greater of (i) 100% of the principal amount to be
prepaid or (ii) the sum, as determined by a Quotation Agent, of the present
values of the remaining scheduled payments of principal and interest on the
Exchange Junior Subordinated Debentures, discounted to the prepayment date on a
semi-annual basis (assuming a 360-day year consisting of twelve 30-day months)
at the Adjusted Treasury Rate, plus,
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in the case of each of clauses (i) and (ii), accrued and unpaid interest
thereon, including Compounded Interest and Additional Sums, if any, to the date
of prepayment.
A "Special Event" means a Tax Event or a Regulatory Capital Event, as
the case may be.
A "Tax Event" means the receipt by the Trust and the Corporation of an
opinion of counsel experienced in such matters to the effect that, as a result
of any amendment to, or change (including any announced prospective change) in,
the laws or any regulations thereunder of the United States or any political
subdivision or taxing authority thereof or therein, or as a result of any
official administrative pronouncement or judicial decision interpreting or
applying such laws or regulations, which amendment or change is effective or
which pronouncement or decision is announced on or after June 9, 1997, there is
more than an insubstantial risk that (i) the Trust is, or will be within 90 days
of the date of such opinion, subject to United States federal income tax with
respect to income received or accrued on the Exchange Junior Subordinated
Debentures, (ii) interest payable by the Corporation on the Exchange Junior
Subordinated Debentures is not, or within 90 days of the date of such opinion
will not be, deductible by the Corporation, in whole or in part, for U.S.
federal income tax purposes or (iii) the Trust is, or will be within 90 days of
the date of such opinion, subject to more than a de minimis amount of other
taxes, duties or other governmental charges.
A "Regulatory Capital Event" means the receipt by the Corporation and
the Trust of an opinion of independent bank regulatory counsel experienced in
such matters to the effect that the Corporation is subject to the Holding
Company Capital Rules and is not entitled to treat the Capital Securities as
Tier 1 capital (or its then equivalent) thereunder; provided, however, that the
distribution of the Exchange Junior Subordinated Debentures in connection with
the liquidation of the Trust by the Corporation shall not in and of itself
constitute a Regulatory Capital Event unless such liquidation shall have
occurred in connection with a Tax Event.
"Adjusted Treasury Rate" means, with respect to any prepayment date,
the rate per annum equal to (i) the yield, under the heading which represents
the average for the immediately prior week, appearing in the most recently
published statistical release designated "H.15 (519)" or any successor
publication which is published weekly by the Federal Reserve Board and which
establishes yields on actively traded United States Treasury securities adjusted
to constant maturity under the caption "Treasury Constant Maturities," for the
maturity corresponding to the Remaining Life (if no maturity is within three
months before or after the maturity corresponding to the Remaining Life, yields
for the two published maturities most closely corresponding to the Remaining
Life shall be determined, and the Adjusted Treasury Rate shall be interpolated
or extrapolated from such yields on a straight-line basis, rounding to the
nearest month) or (ii) if such release (or any successor release) is not
published during the week preceding the calculation date or does not contain
such yields, the rate per annum equal to the semi-annual equivalent yield to
maturity of the Comparable Treasury Issue, calculated using a price for the
Comparable Treasury Price for such prepayment date, in each case calculated on
the third Business Day preceding the prepayment date, plus in each case (a)
4.100% if such prepayment date occurs on or prior to June 1, 1998 and (b) 3.550%
in all other cases.
"Comparable Treasury Issue" means the United States Treasury security
selected by the Quotation Agent as having a maturity comparable to the Remaining
Life of the Exchange Junior Subordinated Debentures that would be utilized, at
the time of selection and in accordance with customary financial practice, in
pricing new issues of corporate debt securities of comparable maturity to the
Remaining Life of the Exchange Junior Subordinated Debentures, provided that if
no United States Treasury security has a maturity which is within a period from
three months before to three months after the Remaining Life, the two most
closely corresponding United States Treasury securities shall be used as the
Comparable Treasury Issue, and the Adjusted Treasury Rate shall be interpolated
or extrapolated on a straight-line basis, rounding to the nearest month, using
such securities.
"Quotation Agent" means the Reference Treasury Dealer appointed by the
Corporation. "Reference Treasury Dealer" means a nationally-recognized U.S.
government securities dealer in New York, New York selected by the Corporation.
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"Comparable Treasury Price" means, with respect to any prepayment date,
(i) the average of three Reference Treasury Dealer Quotations for such
prepayment date, after excluding the highest and lowest Reference Treasury
Dealer Quotations, or (ii) if the Debenture Trustee obtains fewer than five
Reference Treasury Dealer Quotations, the average of all such Reference Treasury
Dealer Quotations.
"Reference Treasury Dealer Quotations" means, with respect to each
Reference Treasury Dealer and any prepayment date, the average, as determined by
the Debenture Trustee, of the bid and asked prices for the Comparable Treasury
Issue (expressed in each case as a percentage of its principal amount) quoted in
writing to the Debenture Trustee by such Reference Treasury Dealer at 5:00 p.m.,
New York City time, on the third Business Day preceding such prepayment date.
"Remaining Life" means the term of the Exchange Junior Subordinated
Debentures from the prepayment date to the Stated Maturity Date.
Notice of any prepayment will be mailed not less than 30 days but not
more than 60 days before the prepayment date to each holder of Exchange Junior
Subordinated Debentures to be prepaid at its registered address. Unless the
Corporation defaults in payment of the Prepayment Price, on and after the
prepayment date interest ceases to accrue on such Exchange Junior Subordinated
Debentures called for prepayment.
If the Trust is required to pay any additional taxes, duties or other
governmental charges as a result of a Tax Event, the Corporation will pay as
additional amounts on the Exchange Junior Subordinated Debentures such amounts
as shall be necessary in order that the amount of Distributions then due and
payable by the Trust on the outstanding Trust Securities shall not be reduced as
a result of any additional taxes, duties and other governmental charges to which
the Trust has become subject as a result of a Tax Event ("Additional Sums").
CERTAIN COVENANTS OF THE CORPORATION
The Corporation will also covenant that it will not (i) declare or pay
any dividends or distributions on, or redeem, purchase, acquire, or make a
liquidation payment with respect to, any of the Corporation's capital stock,
(ii) make any payment of principal of, premium, if any, or interest on or repay,
repurchase or redeem any debt securities of the Corporation (including Other
Debentures) that rank pari passu with or junior in right of payment to the
Exchange Junior Subordinated Debentures or (iii) make any guarantee payments
with respect to any guarantee by the Corporation of the debt securities of any
subsidiary of the Corporation (including Other Guarantees) if such guarantee
ranks pari passu with or junior in right of payment to the Exchange Junior
Subordinated Debentures (other than (a) dividends or distributions in shares of,
or options, warrants or rights to subscribe for or purchase shares of, common
stock of the Corporation, (b) any declaration of a dividend in connection with
the implementation of a stockholders' rights plan, or the issuance of stock
under any such plan in the future, or the redemption or repurchase of any such
rights pursuant thereto, (c) payments under the Exchange Guarantee, (d) the
purchase of fractional shares resulting from a reclassification of the
Corporation's capital stock, (e) the purchase of fractional interests in shares
of the Corporation's capital stock pursuant to the conversion or exchange
provisions of such capital stock or the security being converted or exchanged
and (f) purchases of common stock of the Corporation related to the issuance of
such common stock or rights under any of the Corporation's benefit plans for its
directors, officers or employees or any of the Corporation's dividend
reinvestment plans), if at such time (1) there shall have occurred any event of
which the Corporation has actual knowledge that (A) is, or, with the giving of
notice or the lapse of time, or both, would constitute, a Debenture Event of
Default and (B) in respect of which the Corporation shall not have taken
reasonable steps to cure, (2) if such Exchange Junior Subordinated Debentures
are held by the Trust, the Corporation shall be in default with respect to its
payment obligations under the Exchange Guarantee or (3) the Corporation shall
have given notice of its election of its right to commence an Extension Period
as provided in the Indenture and such Extension Period, or any extension
thereof, shall have commenced and be continuing.
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So long as the Trust Securities remain outstanding, the Corporation
also will covenant (i) to maintain 100% direct or indirect ownership of the
Common Securities, provided, however, that any permitted successor of the
Corporation under the Indenture may succeed to the Corporation's ownership of
such Common Securities, (ii) to use commercially reasonable efforts to cause the
Trust (a) to remain a business trust, except in connection with the distribution
of Exchange Junior Subordinated Debentures to the holders of Trust Securities in
liquidation of the Trust, the prepayment of all the Trust Securities of the
Trust, or certain mergers, consolidations or amalgamations, each as permitted by
the Trust Agreement, and (b) to otherwise continue to be classified as a grantor
trust for U.S. federal income tax purposes and (iii) not to cause, as sponsor of
the Trust, or to permit, as Holder of the Common Securities, the dissolution,
winding-up or termination of the Trust, except in connection with a distribution
of the Exchange Junior Subordinated Debentures as provided in the Trust
Agreement and in connection with certain mergers, consolidations or
amalgamations.
MODIFICATION OF INDENTURE
From time to time the Corporation and the Debenture Trustee may,
without the consent of the holders of Exchange Junior Subordinated Debentures,
amend, waive or supplement the Indenture for specified purposes, including,
among other things, curing ambiguities, defects or inconsistencies, provided
that any such action does not materially adversely affect the interest of the
holders of Exchange Junior Subordinated Debentures, and qualifying, or
maintaining the qualification of, the Indenture under the Trust Indenture Act.
The Indenture contains provisions permitting the Corporation and the Debenture
Trustee, with the consent of the holders of a majority in principal amount of
Exchange Junior Subordinated Debentures, to modify the Indenture in a manner
affecting the rights of the holders of Exchange Junior Subordinated Debentures;
provided that no such modification may, without the consent of the holders of
each outstanding Exchange Junior Subordinated Debenture so affected, (i) change
the Stated Maturity Date, or reduce the principal amount of the Exchange Junior
Subordinated Debentures or reduce the amount payable on redemption thereof or
reduce the rate or extend the time of payment of interest thereon except
pursuant to the Corporation's right under the Indenture to defer the payment of
interest as provided therein (see "--Option to Extend Interest Payment Date"),
or change any of the prepayment provisions or make the principal of, or interest
or premium on, the Exchange Junior Subordinated Debentures payable in any coin
or currency other than that provided in the Exchange Junior Subordinated
Debentures, or impair or affect the right of any holder of Exchange Junior
Subordinated Debentures to institute suit for the payment thereof, or (ii)
reduce the percentage of principal amount of Exchange Junior Subordinated
Debentures, the holders of which are required to consent to any such
modification of the Indenture.
DEBENTURE EVENTS OF DEFAULT
The Indenture provides that any one or more of the following described
events with respect to the Exchange Junior Subordinated Debentures constitutes a
"Debenture Event of Default" (whatever the reason for such Debenture Event of
Default and whether it shall be voluntary or involuntary or be effected by
operation of law or pursuant to any judgment, decree or order of any court or
any order, rule or regulation of any administrative or governmental body):
(i) failure for 30 days to pay any interest (including Compounded
Interest and Additional Sums, if any) or Liquidated Damages, if any, on the
Exchange Junior Subordinated Debentures or any Other Debentures, when due
(subject to the deferral of any due date in the case of an Extension
Period); or
(ii) failure to pay any principal or premium, if any, on the Exchange
Junior Subordinated Debentures or any Other Debentures when due whether at
maturity, upon prepayment, by declaration of acceleration of maturity or
otherwise; or
(iii) failure to observe or perform in any material respect any other
agreement or covenants contained in the Indenture for 90 days after written
notice to the Corporation from the Debenture Trustee or the holders of at
least 25% in aggregate outstanding principal amount of the outstanding
Exchange Junior Subordinated Debentures; or
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(iv) certain events in bankruptcy, insolvency or reorganization of the
Corporation.
The holders of a majority in aggregate outstanding principal amount of
the Exchange Junior Subordinated Debentures have, subject to certain exceptions,
the right to direct the time, method and place of conducting any proceeding for
any remedy available to the Debenture Trustee. The Debenture Trustee or the
holders of not less than 25% in aggregate outstanding principal amount of the
Exchange Junior Subordinated Debentures may declare the principal due and
payable immediately upon a Debenture Event of Default. The holders of a majority
in aggregate outstanding principal amount of the Exchange Junior Subordinated
Debentures may annul such declaration and waive the default if the default
(other than the non-payment of the principal of the Exchange Junior Subordinated
Debentures which has become due solely by such acceleration) has been cured and
a sum sufficient to pay all matured installments of interest and principal due
otherwise than by acceleration has been deposited with the Debenture Trustee.
The holders of a majority in aggregate outstanding principal amount of
the Exchange Junior Subordinated Debentures affected thereby may, on behalf of
the holders of all the Exchange Junior Subordinated Debentures, waive any past
default, except a default in the payment of principal of (or premium, if any) or
interest or Liquidated Damages, if any, on the Exchange Junior Subordinated
Debentures (unless such default has been cured and a sum sufficient to pay all
matured installments of interest (and premium, if any) and principal due
otherwise than by acceleration has been deposited with the Debenture Trustee),
or a default in respect of a covenant or provision which under the Indenture
cannot be modified or amended without the consent of the holder of each
outstanding Exchange Junior Subordinated Debenture.
The Indenture requires the annual filing by the Corporation with the
Debenture Trustee of a certificate as to the absence of certain defaults under
the Indenture.
The Indenture provides that the Debenture Trustee may withhold notice
of a Debenture Event of Default from the holders of the Exchange Junior
Subordinated Debentures if the Debenture Trustee considers it in the interest of
such holders to do so.
ENFORCEMENT OF CERTAIN RIGHTS BY HOLDERS OF EXCHANGE CAPITAL SECURITIES
If a Debenture Event of Default shall have occurred and be continuing
and shall be attributable to the failure of the Corporation to pay the principal
of (or premium, if any), or interest (including Compounded Interest and
Additional Sums, if any) or Liquidated Damages, if any, on the Exchange Junior
Subordinated Debentures on the due date, a holder of Exchange Capital Securities
may institute a Direct Action. The Corporation may not amend the Indenture to
remove the foregoing right to bring a Direct Action without the prior written
consent of the holders of all of the Exchange Capital Securities.
Notwithstanding any payments made to a holder of Exchange Capital Securities by
the Corporation in connection with a Direct Action, the Corporation shall remain
obligated to pay the principal of (and premium, if any) and interest (including
Compounded Interest and Additional Sums, if any) and Liquidated Damages, if any,
on the Exchange Junior Subordinated Debentures, and the Corporation shall be
subrogated to the rights of the holder of such Exchange Capital Securities with
respect to payments on the Exchange Capital Securities to the extent of any
payments made by the Corporation to such holder in any Direct Action.
The holders of the Exchange Capital Securities will not be able to
exercise directly any remedies, other than those set forth in the preceding
paragraph, available to the holders of the Exchange Junior Subordinated
Debentures unless there shall have been an Event of Default under the Trust
Agreement. See "--Description of Exchange Capital Securities --Events of
Default; Notice."
CONSOLIDATION, MERGER, SALE OF ASSETS AND OTHER TRANSACTIONS
The Indenture provides that the Corporation shall not consolidate with
or merge into any other Person or convey, transfer or lease its properties as an
entirety or substantially as an entirety to any
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Person, and no Person shall consolidate with or merge into the Corporation or
convey, transfer or lease its properties as an entirety or substantially as an
entirety to the Corporation, unless: (i) in case the Corporation consolidates
with or merges into another Person or conveys or transfers its properties
substantially as an entirety to any Person, the successor Person is organized
under the laws of the United States or any state or the District of Columbia,
and such successor Person expressly assumes the Corporation's obligations on the
Exchange Junior Subordinated Debentures; (ii) immediately after giving effect
thereto, no Debenture Event of Default, and no event which, after notice or
lapse of time or both, would become a Debenture Event of Default, shall have
occurred and be continuing; and (iii) certain other conditions as prescribed in
the Indenture are met.
The general provisions of the Indenture do not afford holders of the
Exchange Junior Subordinated Debentures protection in the event of a highly
leveraged or other transaction involving the Corporation that may adversely
affect holders of the Exchange Junior Subordinated Debentures.
SATISFACTION AND DISCHARGE
The Indenture provides that when, among other things, all Exchange
Junior Subordinated Debentures not previously delivered to the Debenture Trustee
for cancellation (i) have become due and payable or (ii) will become due and
payable at maturity or called for prepayment within one year, and the
Corporation deposits or causes to be deposited with the Debenture Trustee funds,
in trust, for the purpose and in an amount sufficient to pay and discharge the
entire indebtedness on the Exchange Junior Subordinated Debentures not
previously delivered to the Debenture Trustee for cancellation, for the
principal (and premium, if any) and interest to the date of the deposit or to
the Stated Maturity Date, as the case may be, then the Indenture will cease to
be of further effect (except as to the Corporation's obligations to pay all
other sums due pursuant to the Indenture and to provide the officers'
certificates and opinions of counsel described therein), and the Corporation
will be deemed to have satisfied and discharged the Indenture.
SUBORDINATION
In the Indenture, the Corporation has covenanted and agreed that the
payment by the Corporation of the principal of, premium, if any, and interest
(including Compounded Interest and Additional Sums, if any) on all Exchange
Junior Subordinated Debentures issued thereunder will be subordinate and junior
in right of payment to all Senior Indebtedness to the extent provided in the
Indenture. Upon any payment or distribution of assets to creditors upon any
dissolution, winding-up, liquidation or reorganization, whether voluntary or
involuntary or in bankruptcy, insolvency, receivership or other proceedings, all
Senior Indebtedness must be paid in full before the holders of Exchange Junior
Subordinated Debentures will be entitled to receive or retain any payment in
respect thereof.
In the event of the acceleration of the maturity of the Exchange Junior
Subordinated Debentures, the holders of all Senior Indebtedness outstanding at
the time of such acceleration will first be entitled to receive payment in full
of such Senior Indebtedness before the holders of the Exchange Junior
Subordinated Debentures will be entitled to receive or retain any payment in
respect of the Exchange Junior Subordinated Debentures.
No payments on account of principal (or premium, if any) or interest,
if any, in respect of the Exchange Junior Subordinated Debentures may be made if
there shall have occurred and be continuing a default in any payment with
respect to Senior Indebtedness, or an event of default with respect to any
Senior Indebtedness resulting in the acceleration of the maturity thereof, or if
any judicial proceeding shall be pending with respect to any such default.
"Indebtedness" shall mean (i) every obligation of the Corporation for
money borrowed; (ii) every obligation of the Corporation evidenced by bonds,
debentures, notes or other similar instruments, including obligations incurred
in connection with the acquisition of property, assets or businesses; (iii)
every reimbursement obligation of the Corporation with respect to letters of
credit, banker's acceptances or similar facilities issued for the account of the
Corporation; (iv) every obligation of the
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Corporation issued or assumed as the deferred purchase price of property or
services (but excluding trade accounts payable or accrued liabilities arising in
the ordinary course of business); (v) every capital lease obligation of the
Corporation; (vi) all indebtedness of the Corporation whether incurred on or
prior to the date of the Indenture or thereafter incurred, for claims in respect
of derivative products, including interest rate, foreign exchange rate and
commodity forward contracts, options and swaps and similar arrangements; and
(vii) every obligation of the type referred to in clauses (i) through (vi) of
another Person and all dividends of another Person the payment of which, in
either case, the Corporation has guaranteed or is responsible or liable for,
directly or indirectly, as obligor or otherwise.
"Indebtedness Ranking on a Parity with the Exchange Junior Subordinated
Debentures" shall mean (i) Indebtedness, whether outstanding on the date of
execution of the Indenture or thereafter created, assumed or incurred, to the
extent such indebtedness specifically by its terms ranks pari passu with and not
prior to the Exchange Junior Subordinated Debentures in the right of payment
upon the happening of the dissolution or winding-up or liquidation or
reorganization of the Corporation and (ii) all other debt securities, and
guarantees in respect of those debt securities, issued to any other trust, or a
trustee of such trust, partnership or other entity affiliated with the
Corporation that is a financing vehicle of the Corporation (a "financing
entity") in connection with the issuance by such financing entity of equity
securities or other securities guaranteed by the Corporation pursuant to an
instrument that ranks pari passu with or junior in right of payment to the
Guarantee. The securing of any Indebtedness, otherwise constituting Indebtedness
Ranking on a Parity with the Exchange Junior Subordinated Debentures, shall not
be deemed to prevent such Indebtedness from constituting Indebtedness Ranking on
a Parity with the Exchange Junior Subordinated Debentures.
"Indebtedness Ranking Junior to the Exchange Junior Subordinated
Debentures" shall mean any Indebtedness, whether outstanding on the date of
execution of the Indenture or thereafter created, assumed or incurred, to the
extent such indebtedness by its terms ranks junior to and not pari passu with or
prior to the Exchange Junior Subordinated Debentures (and any other Indebtedness
Ranking on a Parity with the Exchange Junior Subordinated Debentures) in right
of payment upon the happening of the dissolution or winding-up or liquidation or
reorganization of the Corporation. The securing of any Indebtedness, otherwise
constituting Indebtedness Ranking Junior to the Exchange Junior Subordinated
Debentures, shall not be deemed to prevent such Indebtedness from constituting
Indebtedness Ranking Junior to the Exchange Junior Subordinated Debentures.
"Senior Indebtedness" shall mean all Indebtedness, whether outstanding
on the date of execution of the Indenture or thereafter created, assumed or
incurred, except Indebtedness Ranking on a Parity with the Exchange Junior
Subordinated Debentures or Indebtedness Ranking Junior to the Exchange Junior
Subordinated Debentures, and any deferrals, renewals or extensions of such
Senior Indebtedness.
At September 30, 1997, the Corporation had $29.6 million face amount of
Senior Indebtedness outstanding. In addition to outstanding Senior Indebtedness,
the Corporation also had outstanding at September 30, 1997 $16.2 million face
amount of 4.0% cumulative preferred stock. The terms of the Senior Indebtedness
and the cumulative preferred stock include various covenants and other
restrictions, including significant financial penalties upon default of payment
of interest or dividends, as applicable. Under such a default circumstance,
these restrictions may have a material impact on the ability of the Corporation
to satisfy its obligations with respect to the Capital Securities. At September
30, 1997, the annual interest expense to service the Senior Indebtedness was
$3.3 million and the annual dividend requirement on the cumulative preferred
stock was $648,000.
As a holding company, the Corporation's operations are conducted
primarily by its subsidiaries, TeleBank and TCM. Presently, dividends from the
Bank are the primary source of funds for the Corporation. There are regulatory
limitations on the payment of dividends to the Corporation from the Bank, and
federally chartered, FDIC insured savings banks generally are required to
provide their Regional Director of the OTS with no less than 30 days notice of
any proposed dividend. At September 30, 1997, the Bank had approximately $14.1
million available under OTS regulations for payment of dividends to the
Corporation. However, the OTS can prohibit payment of any or all such dividends
under certain circumstances, including if such payment would constitute an
unsafe or unsound banking practice.
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In addition to restrictions on the payment of dividends, the Bank is subject to
restrictions imposed by federal law on extensions of credit to, and certain
other transactions with, the Corporation and certain other affiliates, and on
investments in stock or other securities. Such restrictions prevent the Bank
from lending to the Corporation and such other affiliates unless the loans are
secured by various types of collateral. Further, such secured loans, other
transactions and investments by the Bank are generally limited in amount as to
the Corporation and each of such other affiliates to 10% of the Bank's capital
and surplus and as to the Corporation and all of such other affiliates to an
aggregate of 20% of the Bank's capital and surplus.
Under terms of the indentures pursuant to which the Senior Indebtedness
was issued, the Corporation presently is required to maintain, on an
unconsolidated basis, liquid assets in an amount equal to or greater than $3.3
million, which represents 100% of the aggregate annual interest expense on the
Senior Indebtedness.
Further, as a holding company, the right of the Corporation to
participate in any distribution of assets of any subsidiary upon such
subsidiary's liquidation or reorganization or otherwise (and thus the ability of
holders of the Capital Securities to benefit indirectly from such distribution)
is subject to the prior claims of creditors of such subsidiary (including
depositors in the Bank), except to the extent that the Corporation may itself be
recognized as a creditor of that subsidiary. Therefore, the Exchange Junior
Subordinated Debentures effectively will be subordinated to all existing and
future liabilities of the Corporation's subsidiaries (including deposit
liabilities of the Bank). As a result, holders of Exchange Junior Subordinated
Debentures should look only to the assets of the Corporation for payments on the
Exchange Junior Subordinated Debentures. At September 30, 1997, the
Corporation's subsidiaries had total liabilities (excluding liabilities owed to
the Corporation) of $457.2 million.
The Indenture does not limit the amount of secured or unsecured debt,
including Senior Indebtedness, that may be incurred by the Corporation or any of
its subsidiaries. See "--Subordination." The Corporation expects from time to
time that it will incur additional indebtedness constituting Senior Indebtedness
and that its subsidiaries will incur additional liabilities.
RESTRICTIONS ON TRANSFER
The Exchange Junior Subordinated Debentures will be issued, and may be
transferred, only in blocks having an aggregate principal amount of not less
than $100,000 (100 Exchange Junior Subordinated Debentures) and multiples of
$1,000 in excess thereof. Any such transfer of Exchange Junior Subordinated
Debentures in a block having an aggregate principal amount of less than $100,000
shall be deemed to be void and of no legal effect whatsoever. Any such
transferee shall be deemed not to be the holder of such Exchange Junior
Subordinated Debentures for any purpose, including but not limited to the
receipt of payments on such Exchange Junior Subordinated Debentures, and such
transferee shall be deemed to have no interest whatsoever in such Exchange
Junior Subordinated Debentures.
INFORMATION CONCERNING THE DEBENTURE TRUSTEE
Following the Exchange Offer and the qualification of the Indenture
under the Trust Indenture Act, the Debenture Trustee shall have and be subject
to all the duties and responsibilities specified with respect to an indenture
trustee under the Trust Indenture Act. Subject to such provisions, the Debenture
Trustee is under no obligation to exercise any of the powers vested in it by the
Indenture at the request of any holder of Exchange Junior Subordinated
Debentures, unless offered reasonable indemnity by such holder against the
costs, expenses and liabilities which might be incurred thereby. The Debenture
Trustee is not required to expend or risk its own funds or otherwise incur
personal financial liability in the performance of its duties if the Debenture
Trustee reasonably believes that repayment or adequate indemnity is not
reasonably assured to it.
GOVERNING LAW
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The Indenture and the Exchange Junior Subordinated Debentures will be
governed by and construed in accordance with the laws of the state of New York.
DESCRIPTION OF EXCHANGE GUARANTEE
The Exchange Guarantee will be executed and delivered by the
Corporation concurrently with the issuance by the Trust of the Exchange Capital
Securities for the benefit of the holders from time to time of the Exchange
Capital Securities. The terms of the Exchange Guarantee are identical in all
material respects to the terms of the Original Guarantee. Wilmington Trust
Company will act as Guarantee Trustee under the Exchange Guarantee. The Exchange
Guarantee has been qualified under the Trust Indenture Act. This summary of
certain provisions of the Exchange Guarantee does not purport to be complete and
is subject to, and qualified in its entirety by reference to, all of the
provisions of the Exchange Guarantee, including the definitions therein of
certain terms, and the Trust Indenture Act. The Guarantee Trustee will hold the
Exchange Guarantee for the benefit of the holders of the Exchange Capital
Securities.
STATUS OF ORIGINAL GUARANTEE
If not all the Original Capital Securities are exchanged for Exchange
Capital Securities in the Exchange Offer, the Original Guarantee will not
terminate, but will continue to guarantee the obligations of the Corporation for
the benefit of the holders of Original Securities. The Original Guarantee will
terminate upon full payment of the applicable Redemption Price of the Original
Capital Securities, upon full payment of the Liquidation Amount payable upon
liquidation of the Trust or upon distribution of Original Junior Subordinated
Debentures to the holders of the Original Capital Securities. The Original
Guarantee will continue to be effective or will be reinstated, as the case may
be, if at any time any holder of the Original Capital Securities must restore
payment of any sums paid under the Original Capital Securities or the Original
Guarantee.
GENERAL
The Corporation will irrevocably agree to pay in full on a subordinated
basis, to the extent set forth herein, the Guarantee Payments to the holders of
the Exchange Capital Securities, as and when due, regardless of any defense,
right of set-off or counterclaim that the Trust may have or assert other than
the defense of payment. The following payments with respect to the Exchange
Capital Securities, to the extent not paid by or on behalf of the Trust (the
"Guarantee Payments"), will be subject to the Exchange Guarantee: (i) any
accumulated and unpaid Distributions required to be paid on the Exchange Capital
Securities, to the extent that the Trust has funds legally available therefor at
such time, (ii) the applicable Redemption Price with respect to the Exchange
Capital Securities called for redemption, to the extent that the Trust has funds
legally available therefor at such time, and (iii) upon a voluntary or
involuntary dissolution, winding-up or liquidation of the Trust (other than in
connection with the distribution of the Exchange Junior Subordinated Debentures
to holders of the Exchange Capital Securities or the redemption of all Exchange
Capital Securities), the lesser of (a) the Liquidation Distribution, to the
extent the Trust has funds legally available therefor at the time, and (b) the
amount of assets of the Trust remaining available for distribution to holders of
Exchange Capital Securities after satisfaction of liabilities to creditors of
the Trust as required by applicable law. The Corporation's obligation to make a
Guarantee Payment may be satisfied by direct payment of the required amounts by
the Corporation to the holders of the Exchange Capital Securities or by causing
the Trust to pay such amounts to such holders.
The Exchange Guarantee will rank subordinate and junior in right of
payment to all Senior Indebtedness to the extent provided therein. See "--Status
of the Exchange Guarantee." Because the Corporation is a holding company, the
right of the Corporation to participate in any distribution of assets of any
subsidiary upon such subsidiary's liquidation or reorganization or otherwise is
subject to the prior claims of creditors of that subsidiary, except to the
extent the Corporation may itself be recognized as a creditor of that
subsidiary. Accordingly, the Corporation's obligations under the Exchange
Guarantee effectively will be subordinated to all existing and future
liabilities of the Corporation's Subsidiaries (including the Corporation's
Subsidiaries' deposit liabilities), and all liabilities of any future
subsidiaries of
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the Corporation. Claimants should look only to the assets of the Corporation for
payments under the Exchange Guarantee. See "--Description of the Exchange Junior
Subordinated Debentures--General." The Exchange Guarantee does not limit the
incurrence or issuance of other secured or unsecured debt of the Corporation,
including Senior Indebtedness, whether under the Indenture, any other indenture
that the Corporation may enter into in the future or otherwise.
The Corporation will, through the Exchange Guarantee, the Trust
Agreement, the Exchange Junior Subordinated Debentures and the Indenture, taken
together, fully, irrevocably and unconditionally guarantee all of the Trust's
obligations under the Exchange Capital Securities. No single document standing
alone or operating in conjunction with fewer than all of the other documents
constitutes such guarantee. It is only the combined operation of these documents
that has the effect of providing a full, irrevocable and unconditional guarantee
of the Trust's obligations under the Exchange Capital Securities. See
"Relationship Among the Exchange Capital Securities, the Exchange Junior
Subordinated Debentures and the Exchange Guarantee."
STATUS OF THE EXCHANGE GUARANTEE
The Exchange Guarantee will constitute an unsecured obligation of the
Corporation and will rank subordinate and junior in right of payment to all
Senior Indebtedness in the same manner as the Exchange Junior Subordinated
Debentures.
The Exchange Guarantee will rank pari passu with the Original Guarantee
and all Other Guarantees issued by the Corporation after the Issue Date with
respect to capital securities (if any) issued by Other Trusts. The Exchange
Guarantee will constitute a guarantee of payment and not of collection (i.e.,
the guaranteed party may institute a legal proceeding directly against the
Corporation to enforce its rights under the Exchange Guarantee without first
instituting a legal proceeding against any other person or entity). The Exchange
Guarantee will be held for the benefit of the holders of the Exchange Capital
Securities. The Exchange Guarantee will not be discharged except by payment of
the Guarantee Payments in full to the extent not paid by the Trust or upon
distribution to the holders of the Exchange Capital Securities of the Exchange
Junior Subordinated Debentures. The Exchange Guarantee does not place a
limitation on the amount of additional Senior Indebtedness that may be incurred
by the Corporation.
EVENTS OF DEFAULT
An event of default under the Exchange Guarantee will occur upon the
failure of the Corporation to perform any of its payment or other obligations
thereunder, provided, however, that except with respect to a default in payment
of any Guarantee Payment, the Corporation shall have received notice of default
and shall not have cured such default within 60 days after receipt of such
notice.
The holders of not less than a majority in Liquidation Amount of the
Exchange Capital Securities will have the right to direct the time, method and
place of conducting any proceeding for any remedy available to the Guarantee
Trustee in respect of the Exchange Guarantee or to direct the exercise of any
trust or power conferred upon the Guarantee Trustee under the Exchange
Guarantee. Any holder of the Exchange Capital Securities may institute a legal
proceeding directly against the Corporation to enforce its rights under the
Exchange Guarantee without first instituting a legal proceeding against the
Trust, the Guarantee Trustee or any other person or entity.
The Corporation, as guarantor, will be required to file annually with
the Guarantee Trustee a certificate as to whether or not the Corporation is in
compliance with all the conditions and covenants applicable to it under the
Exchange Guarantee.
AMENDMENTS AND ASSIGNMENT
Except with respect to any changes that do not materially adversely
affect the rights of holders of the Exchange Capital Securities (in which case
no consent will be required), the Exchange Guarantee may
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not be amended without the prior approval of the holders of a majority of the
Liquidation Amount of such outstanding Exchange Capital Securities. The manner
of obtaining any such approval will be as set forth under "--Description of
Exchange Capital Securities--Voting Rights; Amendment of the Trust Agreement."
All guarantees and agreements contained in the Exchange Guarantee shall bind the
successors, assigns, receivers, trustees and representatives of the Corporation
and shall inure to the benefit of the holders of the Exchange Capital Securities
then outstanding.
TERMINATION OF THE EXCHANGE GUARANTEE
The Exchange Guarantee will terminate and be of no further force and
effect upon full payment of the applicable Redemption Price of the Exchange
Capital Securities, upon full payment of the Liquidation Amount payable upon
liquidation of the Trust or upon distribution of Exchange Junior Subordinated
Debentures to the holders of the Exchange Capital Securities. The Exchange
Guarantee will continue to be effective or will be reinstated, as the case may
be, if at any time any holder of the Exchange Capital Securities must restore
payment of any sums paid under the Exchange Capital Securities or the Exchange
Guarantee.
INFORMATION CONCERNING THE GUARANTEE TRUSTEE
The Guarantee Trustee, other than during the occurrence and continuance
of a default by the Corporation in performance of the Exchange Guarantee, will
undertake to perform only such duties as are specifically set forth in the
Exchange Guarantee and, in case a default with respect to the Exchange Guarantee
has occurred, must exercise the same degree of care and skill as a prudent
person would exercise or use under the circumstances in the conduct of his or
her own affairs. Subject to this provision, the Guarantee Trustee will be under
no obligation to exercise any of the powers vested in it by the Exchange
Guarantee at the request of any holder of the Exchange Capital Securities unless
it is offered reasonable indemnity against the costs, expenses and liabilities
that might be incurred thereby.
GOVERNING LAW
The Exchange Guarantee will be governed by and construed in accordance
with the laws of the State of New York.
DESCRIPTION OF ORIGINAL SECURITIES
The terms of the Original Securities are identical in all materials
respects to the Exchange Securities, except that (i) the Original Securities
have not been registered under the Securities Act, are subject to certain
restrictions on transfer and are entitled to certain rights under the applicable
Registration Rights Agreement (which rights will terminate upon consummation of
the Exchange Offer, except under limited circumstances), (ii) the Exchange
Capital Securities will not provide for any increase in the Distribution rate
thereon and (iii) the Exchange Junior Subordinated Debentures will not provide
for any liquidated damages thereon. The Original Securities provide that, if a
registration statement relating to the Exchange Offer has not been declared
effective by December 6, 1997, then liquidated damages will accrue at the rate
of 0.25% per annum on the principal amount of the Original Junior Subordinated
Debentures and Distributions will accrue at the rate of 0.25% per annum on the
Liquidation Amount of the Original Capital Securities, for the period from the
occurrence of such event until such time as such registration statement has been
filed or declared effective, as the case may be. In addition, the Original
Capital Securities provide that, if the Trust has not exchanged Exchange Capital
Securities for all Original Capital Securities validly tendered by the 45th day
after the date on which the registration statement is declared effective, the
Distribution rate borne by the Original Capital Securities will increase by
0.25% per annum for the period from the occurrence of such event until such time
as the Exchange Offer has been consummated. The Exchange Securities are not, and
upon consummation of the Exchange Offer, the Original Securities will not be,
entitled to any such additional interest or Distributions. Accordingly, holders
of Original Capital Securities should review the information set forth under
"Risk Factors--Consequences of a Failure to Exchange Original Capital
Securities" and "Description of Exchange Securities."
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RELATIONSHIP AMONG THE EXCHANGE CAPITAL SECURITIES, THE EXCHANGE
JUNIOR SUBORDINATED DEBENTURES AND THE EXCHANGE GUARANTEE
FULL AND UNCONDITIONAL GUARANTEE
Payments of Distributions and other amounts due on the Exchange Capital
Securities (to the extent the Trust has funds legally available for the payment
of such Distributions) will be irrevocably guaranteed by the Corporation as and
to the extent set forth under "Description of Exchange Securities--Description
of Exchange Guarantee." Taken together, the Corporation's obligations under the
Exchange Junior Subordinated Debentures, the Indenture, the Trust Agreement and
the Exchange Guarantee provide, in the aggregate, a full, irrevocable and
unconditional guarantee of payments of Distributions and other amounts due on
the Exchange Capital Securities. No single document standing alone or operating
in conjunction with fewer than all of the other documents constitutes such
guarantee. It is only the combined operation of these documents that has the
effect of providing a full, irrevocable and unconditional guarantee of the
Trust's obligations under the Exchange Capital Securities. If and to the extent
that the Corporation does not make the required payments on the Exchange Junior
Subordinated Debentures, the Trust will not have sufficient funds to make the
related payments, including Distributions, on the Exchange Capital Securities.
The Exchange Guarantee will not cover any such payment when the Trust does not
have sufficient funds legally available therefor. In such event, the remedy of a
holder of Exchange Capital Securities is to institute a Direct Action. The
obligations of the Corporation under the Exchange Guarantee will be subordinate
and junior in right of payment to all Senior Indebtedness.
SUFFICIENCY OF PAYMENTS
As long as payments of interest and other payments are made when due on
the Exchange Junior Subordinated Debentures, such payments will be sufficient to
cover Distributions and other payments due on the Exchange Capital Securities,
primarily because: (i) the aggregate principal amount or Prepayment Price of the
Exchange Junior Subordinated Debentures will be equal to the sum of the
aggregate Liquidation Amount or Redemption Price, as applicable, of the Trust
Securities; (ii) the interest rate and interest and other payment dates on the
Exchange Junior Subordinated Debentures will match the Distribution rate and
Distribution and other payment dates for the Trust Securities; (iii) the
Corporation, as Sponsor, shall pay for all and any costs, expenses and
liabilities of the Trust except the Trust's obligations to holders of Trust
Securities under the Trust Agreement; and (iv) the Trust Agreement further
provides that the Trust is not authorized to engage in any activity that is not
consistent with the limited purposes thereof.
ENFORCEMENT RIGHTS OF HOLDERS OF EXCHANGE CAPITAL SECURITIES
A holder of any Exchange Capital Security may institute a legal
proceeding directly against the Corporation to enforce its rights under the
Exchange Guarantee without first instituting a legal proceeding against the
Guarantee Trustee, the Trust or any other person or entity.
A default or event of default under any Senior Indebtedness would not
constitute a default or Event of Default under the Trust Agreement. However, in
the event of payment defaults under, or acceleration of, Senior Indebtedness,
the subordination provisions of the Indenture provide that no payments may be
made in respect of the Exchange Junior Subordinated Debentures until such Senior
Indebtedness has been paid in full or any payment default thereunder has been
cured or waived. Failure to make required payments on Exchange Junior
Subordinated Debentures would constitute an Event of Default under the Trust
Agreement.
LIMITED PURPOSE OF THE TRUST
The Exchange Capital Securities will represent beneficial interests in
the Trust, and the Trust exists for the sole purpose of issuing and selling the
Trust Securities, using the proceeds from the sale of the Trust Securities to
acquire the Original Junior Subordinated Debentures, exchanging the Original
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Capital Securities and the Original Junior Subordinated Debentures in the
Exchange Offer, and engaging in only those other activities necessary, advisable
or incidental thereto.
RIGHTS UPON TERMINATION
Unless the Exchange Junior Subordinated Debentures are distributed to
holders of the Exchange Capital Securities, upon any voluntary or involuntary
termination, winding-up or liquidation of the Trust, after satisfaction of the
liabilities of creditors of the Trust as required by applicable law, the holders
of the Exchange Capital Securities will be entitled to receive, out of assets
held by the Trust, the Liquidation Distribution in cash. See "Description of
Exchange Securities--Description of Exchange Capital Securities--Liquidation of
the Trust and Distribution of Exchange Junior Subordinated Debentures." Upon any
voluntary or involuntary liquidation or bankruptcy of the Corporation, the
Property Trustee, as holder of the Exchange Junior Subordinated Debentures,
would be a subordinated creditor of the Corporation, subordinated in right of
payment to all Senior Indebtedness as set forth in the Indenture, but entitled
to receive payment in full of principal (and premium, if any) and interest,
before any stockholders of the Corporation receive payments or distributions.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a summary of certain of the material United States
federal income tax consequences associated with the exchange of Original Capital
Securities for Exchange Capital Securities and with the ownership and
disposition of Capital Securities held as capital assets by a holder who
purchased Original Capital Securities upon initial issuance. It does not purport
to deal with all aspects of U.S. federal income taxation that might be relevant
to particular holders in light of their personal investment circumstances or
status, nor does it discuss the U.S. federal income tax consequences to certain
types of holders subject to special treatment under the U.S. federal income tax
laws, such as banks, thrifts, real estate investment trusts, regulated
investment companies, insurance companies, dealers in securities or currencies,
tax-exempt investors, United States Alien Holders engaged in a U.S. trade or
business or persons that will hold the Capital Securities as a position in a
"straddle," as part of a "synthetic security" or "hedge," as part of a
"conversion transaction" or other integrated investment, or as other than a
capital asset. This summary also does not address the tax consequences to
persons that have a functional currency other than the U.S. dollar or the tax
consequences to shareholders, partners or beneficiaries of a holder of Capital
Securities. Further, it does not include any description of any alternative
minimum tax consequences or the tax laws of any state or local government or of
any foreign government that may be applicable to the Capital Securities. This
summary is based on the Internal Revenue Code of 1986, as amended (the "Code"),
Treasury regulations thereunder and the administrative and judicial
interpretations thereof, as of the date hereof, all of which are subject to
change, possibly on a retroactive basis. Hogan & Hartson L.L.P. ("Tax Counsel")
has reviewed this summary and is of the opinion that, to the extent that it
constitutes matters of law or purports to describe certain provisions of the
U.S. federal income tax laws, it is a correct summary in all material respects
of the matters discussed herein.
EXCHANGE OF CAPITAL SECURITIES
The exchange of Original Capital Securities for Exchange Capital
Securities should not be a taxable event to holders for U.S. federal income tax
purposes. The exchange of Original Capital Securities for Exchange Capital
Securities pursuant to the Exchange Offer should not be treated as an "exchange"
for U.S. federal income tax purposes because the Exchange Capital Securities
should not be considered to differ materially in kind or extent from the
Original Capital Securities and because the exchange will occur by operation of
the terms of the Original Capital Securities. Accordingly, the Exchange Capital
Securities should have the same issue price as the Original Capital Securities,
and a holder should have the same adjusted tax basis and holding period in the
Exchange Capital Securities immediately after the exchange as the holder had in
the Original Capital Securities immediately before the exchange.
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CLASSIFICATION OF THE JUNIOR SUBORDINATED DEBENTURES
The Corporation intends to take the position that the Junior
Subordinated Debentures will be classified for U.S. federal income tax purposes
as indebtedness of the Corporation. The Corporation, the Trust and the holders
of the Capital Securities (by acceptance of a beneficial interest in a Capital
Security) will agree to treat the Junior Subordinated Debentures as indebtedness
of the Corporation and the Capital Securities as evidence of a beneficial
ownership interest in the Junior Subordinated Debentures for all U.S. federal
income tax purposes. No assurance can be given, however, that such position will
not be challenged by the Internal Revenue Service (the "IRS") or, if challenged,
that such a challenge will not be successful. The remainder of this discussion
assumes that the Junior Subordinated Debentures will be classified as
indebtedness of the Corporation for U.S. federal income tax purposes.
CLASSIFICATION OF THE TRUST
In connection with the issuance of the Capital Securities, Tax Counsel
is of the opinion generally to the effect that, under then-current law and
assuming full compliance with the terms of the Trust Agreement and the Indenture
(and certain other documents), and based on certain facts and assumptions
contained in such opinion, the Trust will be classified for U.S. federal income
tax purposes as a grantor trust and not as an association taxable as a
corporation. Accordingly, for U.S. federal income tax purposes, each holder of
Capital Securities generally will be considered the owner of an undivided
interest in the Junior Subordinated Debentures, and each holder will be required
to include in its gross income any interest (or OID accrued) with respect to its
allocable share of those Junior Subordinated Debentures.
An opinion of Tax Counsel is not binding on the IRS or the courts. No
rulings have been or are expected to be sought from the IRS with respect to any
of the transactions described herein and no assurance can be given that the IRS
will not take contrary positions. Moreover, no assurance can be given that the
opinion expressed herein will not be challenged by the IRS or, if challenged,
that such a challenge would not be successful.
INTEREST INCOME AND ORIGINAL ISSUE DISCOUNT
Under recently issued Treasury regulations (the "Treasury Regulations")
applicable to debt instruments issued on or after August 13, 1996, a "remote"
contingency that stated interest will not be timely paid will be ignored in
determining whether a debt instrument is issued with OID. The Corporation
believes that the likelihood of its exercising its option to defer payments of
interest is "remote" since exercising that option would, among other things,
prevent the Corporation from declaring dividends on any class of its equity
securities. Accordingly, the Corporation intends to take the position that the
Junior Subordinated Debentures will not be considered to be issued with OID and,
accordingly, stated interest on the Junior Subordinated Debentures generally
will be taxable to a holder as ordinary income at the time it is paid or accrued
in accordance with such holder's method of tax accounting.
Under the Treasury Regulations, if the Corporation were to exercise its
option to defer payments of interest, the Junior Subordinated Debentures would
at that time be treated as issued with OID, and all stated interest on the
Junior Subordinated Debentures would thereafter be treated as OID as long as the
Junior Subordinated Debentures remain outstanding. In such event, all of a
holder's taxable interest income with respect to the Junior Subordinated
Debentures would thereafter be accounted for on an economic accrual basis
regardless of such holder's method of tax accounting, and actual distributions
of stated interest would not be reported as taxable income. Consequently, a
holder of Capital Securities would be required to include in gross income OID
even though the Corporation would not make actual cash payments during an
Extension Period. Moreover, under the Treasury Regulations, if the option to
defer the payment of interest was determined not to be "remote," the Junior
Subordinated Debentures would be treated as having been originally issued with
OID. In such event, all of a holder's taxable interest income with respect to
the Junior Subordinated Debentures would be accounted for on an economic accrual
basis regardless of such holder's method of tax accounting, and actual
distributions of stated interest would not be reported as taxable income.
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The Treasury Regulations have not yet been addressed in any rulings or
other interpretations by the IRS, and it is possible that the IRS could take a
position contrary to the interpretation described herein.
Because income on the Capital Securities will constitute interest or
OID, corporate holders of the Capital Securities will not be entitled to a
dividends-received deduction with respect to any income recognized with respect
to the Capital Securities.
RECEIPT OF JUNIOR SUBORDINATED DEBENTURES OR CASH UPON LIQUIDATION OF THE TRUST
The Corporation will have the right at any time to liquidate the Trust
and cause the Junior Subordinated Debentures to be distributed to the holders of
the Trust Securities. Under current law, such a distribution, for U.S. federal
income tax purposes, would be treated as a nontaxable event to each holder, and
each holder would receive an aggregate tax basis in the Junior Subordinated
Debentures equal to such holder's aggregate tax basis in its Capital Securities.
A holder's holding period in the Junior Subordinated Debentures so received in
liquidation of the Trust would include the period during which the Capital
Securities were held by such holder. If, however, the Trust were characterized
for U.S. federal income tax purposes as an association taxable as a corporation
at the time of its dissolution, the distribution of the Junior Subordinated
Debentures may constitute a taxable event to holders of Capital Securities and a
holder's holding period in Junior Subordinated Debentures would begin on the
date such Junior Subordinated Debentures were received.
Under certain circumstances described herein (see "Description of
Exchange Securities--Description of Exchange Capital Securities"), the Junior
Subordinated Debentures may be redeemed for cash and the proceeds of such
redemption distributed to holders in redemption of their Capital Securities.
Under current law, such a redemption would, for U.S. federal income tax
purposes, constitute a taxable disposition of the redeemed Capital Securities,
and a holder could recognize gain or loss as if it sold such redeemed Capital
Securities for cash. See "--Sales of Capital Securities."
SALES OF CAPITAL SECURITIES
A holder that sells Capital Securities (including a redemption of the
Capital Securities either on the Stated Maturity Date or upon an optional
redemption of the Junior Subordinated Debentures by the Corporation) will
recognize gain or loss equal to the difference between its adjusted tax basis in
Capital Securities and the amount realized on the sale of such Capital
Securities (other than with respect to accrued and unpaid interest which has not
yet been included in income, which will be treated as ordinary income). A
holder's adjusted tax basis in the Capital Securities generally will be its
initial purchase price increased by OID (if any) previously includible in such
holder's gross income to the date of disposition and decreased by payments (if
any) received on the Capital Securities in respect of OID. Such gain or loss
generally will be a capital gain or loss and generally will be a long-term
capital gain or loss if the Capital Securities have been held for more than one
year. On August 5, 1997, legislation was enacted which, among other things,
reduces to 20% the maximum rate of tax on long-term capital gains on most
capital assets held by an individual for more than 18 months. Gain on most
capital assets held by an individual more than one year and up to 18 months is
subject to tax at a maximum rate of 28%.
The Capital Securities may trade at a price that does not accurately
reflect the value of accrued but unpaid interest with respect to the underlying
Junior Subordinated Debentures. A holder who uses the accrual method of
accounting for tax purposes (and a cash method holder, if the Junior
Subordinated Debentures are deemed to have been issued with OID) who disposes of
his Capital Securities between record dates for payments of distributions
thereon will be required to include accrued but unpaid interest on the Junior
Subordinated Debentures through the date of disposition in income as ordinary
income (i.e., interest or, if applicable, OID), and to add such amount to his
adjusted tax basis in his pro rata share of the underlying Junior Subordinated
Debentures deemed disposed of. To the extent the selling price is less than the
holder's adjusted tax basis (which will include all accrued but unpaid interest)
a holder will recognize a capital loss. Subject to certain limited exceptions,
capital losses cannot be applied to offset ordinary income for U.S. federal
income tax purposes.
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UNITED STATES ALIEN HOLDERS
For purposes of this discussion, a "United States Alien Holder" is any
corporation, individual, partnership, estate or trust that is not a U.S. Holder
for U.S. federal income tax purposes.
A "U.S. Holder" is a holder of Capital Securities who or which is (i) a
citizen or individual resident (or is treated as a citizen or individual
resident) of the United States for federal income tax purposes, (ii) a
corporation or partnership created or organized in or under the laws of the
United States or any political subdivision thereof, or (iii) a trust or estate
the income of which is includible in its gross income for federal income tax
purposes without regard to its source. For taxable years beginning after
December 31, 1996 (or for taxable years ending after August 20, 1996, if the
trustee so elects), a trust is a U.S. Holder if, and only if, (a) a court within
the United States is able to exercise primary supervision over the
administration of the trust and (b) one or more United States trustees have the
authority to control all substantial decisions of the trust.
Under present U.S. federal income tax laws: (i) payments by the Trust
or any of its paying agents to any holder of a Capital Security who or which is
a United States Alien Holder will not be subject to U.S. federal withholding
tax; provided that, (a) the beneficial owner of the Capital Security does not
actually or constructively own 10% or more of the total combined voting power of
all classes of stock of the Corporation entitled to vote, (b) the beneficial
owner of the Capital Security is not a controlled foreign corporation that is
related to the Corporation through stock ownership, and (c) either (1) the
beneficial owner of the Capital Security certifies to the Trust or its agent,
under penalties of perjury, that it is not a U.S. holder and provides its name
and address or (2) a securities clearing organization, bank or other financial
institution that holds customers' securities in the ordinary course of its trade
or business (a "Financial Institution"), and holds the Capital Security in such
capacity, certifies to the Trust or its agent, under penalties of perjury, that
such statement has been received from the beneficial owner by it or by a
Financial Institution between it and the beneficial owner and furnishes the
Trust or its agent with a copy thereof; and (ii) a United States Alien Holder of
a Capital Security will not be subject to U.S. federal withholding tax on any
gain realized upon the sale or other disposition of a Capital Security.
Regulations recently issued by the IRS, which will be effective for
payments made after December 31, 1998 (subject to certain transition rules),
make modifications to the certification procedures applicable to United States
Alien Holders. In general, these regulations unify certification procedures and
forms and clarify and modify reliance standards. A United States Alien Holder
should consult with its own advisor regarding the effect of the new Treasury
Regulations.
As discussed above, changes in legislation affecting the U.S. federal
income tax treatment of the Junior Subordinated Debentures are possible, and
could adversely affect the ability of the Corporation to deduct the interest
payable on the Junior Subordinated Debentures. Moreover, any such legislation
could adversely affect United States Alien Holders by characterizing income
derived from the Junior Subordinated Debentures as dividends, generally subject
to a 30% income tax (on a withholding basis) when paid to a United States Alien
Holder, rather than as interest which, as discussed above, is generally exempt
from income tax in the hands of a United States Alien Holder.
INFORMATION REPORTING TO HOLDERS
Generally, income on the Capital Securities will be reported to holders
on Form 1099, which forms should be mailed to holders of Capital Securities by
January 31 following each calendar year.
BACKUP WITHHOLDING
Payments made on, and proceeds from the sale of, the Capital Securities
may be subject to a "backup" withholding tax of 31% unless the holder complies
with certain identification requirements. Any withheld amounts will be allowed
as a credit against the holder's U.S. federal income tax, provided the required
information is provided to the IRS.
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THE UNITED STATES FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS
INCLUDED FOR GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A
HOLDER'S PARTICULAR SITUATION. HOLDERS SHOULD CONSULT THEIR TAX ADVISORS WITH
RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE EXCHANGE OF ORIGINAL CAPITAL
SECURITIES FOR EXCHANGE CAPITAL SECURITIES AND OF THE OWNERSHIP AND DISPOSITION
OF THE CAPITAL SECURITIES, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL,
FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN UNITED STATES
FEDERAL OR OTHER TAX LAWS.
ERISA CONSIDERATIONS
Each of the Corporation (the obligor with respect to the Exchange
Junior Subordinated Debentures held by the Trust), and its affiliates and the
Property Trustee may be considered a "party in interest" (within the meaning of
ERISA) or a "disqualified person" (within the meaning of Section 4975 of the
Code) with respect to many Plans. The purchase and/or holding of Exchange
Capital Securities by a Plan with respect to which the Corporation, the Property
Trustee or any affiliate is a service provider (or otherwise is a party in
interest or a disqualified person) may constitute or result in a prohibited
transaction under ERISA or Section 4975 of the Code, unless such Exchange
Capital Securities are acquired pursuant to and in accordance with an applicable
exemption, such as Prohibited Transaction Class Exemption ("PTCE") 84-14 (an
exemption for certain transactions determined by an independent qualified
professional asset manager), PTCE 91-38 (an exemption for certain transactions
involving bank collective investment funds), PTCE 90-1 (an exemption for certain
transactions involving insurance company pooled separate accounts), PTCE 95-60
(an exemption for transactions involving certain insurance company general
accounts) or PTCE 96-23 (an exemption for certain transactions determined by an
in-house asset manager). In addition, a Plan fiduciary considering the purchase
of Exchange Capital Securities should be aware that the assets of the Trust may
be considered "plan assets" for ERISA purposes. In such event, the Property
Trustee, as well as any other persons exercising discretion with respect to the
Exchange Junior Subordinated Debentures, may become fiduciaries, parties in
interest or disqualified persons with respect to investing Plans. In order to
avoid certain prohibited transactions under ERISA and the Code that could
thereby result, each investing Plan, by purchasing the Exchange Capital
Securities, will be deemed to have directed the Trust to invest in the Exchange
Junior Subordinated Debentures and to have consented to the appointment of the
Property Trustee. In this regard, it should be noted that, in an Event of
Default, the Corporation may not remove the Property Trustee without the
approval of a majority of the holders of the Exchange Capital Securities.
A Plan fiduciary should consider whether the purchase of Exchange
Capital Securities could result in a delegation of fiduciary authority to the
Property Trustee, and, if so, whether such a delegation of authority is
permissible under the Plan's governing instrument or any investment management
agreement with the Plan.
THE SALE OF INVESTMENTS TO PLANS IS IN NO RESPECT A REPRESENTATION BY
THE TRUST, THE CORPORATION, THE PROPERTY TRUSTEE, THE INITIAL PURCHASER OR ANY
OTHER PERSON ASSOCIATED WITH THE SALE OF THE EXCHANGE CAPITAL SECURITIES THAT
SUCH SECURITIES MEET RELEVANT LEGAL REQUIREMENTS WITH RESPECT TO INVESTMENTS BY
PLANS GENERALLY OR ANY PARTICULAR PLAN, OR THAT SUCH SECURITIES ARE OTHERWISE
APPROPRIATE FOR PLANS GENERALLY OR ANY PARTICULAR PLAN. ANY PURCHASER PROPOSING
TO ACQUIRE EXCHANGE CAPITAL SECURITIES WITH ASSETS OF ANY PLAN SHOULD CONSULT
WITH ITS COUNSEL.
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Capital Securities for its
own account pursuant to the Exchange Offer must acknowledge that it will deliver
a prospectus in connection with any resale of such Exchange Capital Securities.
This Prospectus, as it may be amended or supplemented from time to time, may be
used by a broker-dealer in connection with resales of Exchange Capital
Securities received in exchange for Original Capital Securities where such
Original Capital Securities were acquired by such
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broker-dealer as a result of market-making activities or other trading
activities. The Trust and the Corporation have agreed that, starting on the
Expiration Date and ending on the close of business on the 180th day following
the Expiration Date, it will make this Prospectus, as amended or supplemented,
available to any broker-dealer for use in connection with any such resale. In
addition, for a period of 180 days after the Expiration Date, all dealers
effecting transactions in the Exchange Securities may be required to deliver a
prospectus.
The Trust and the Corporation will not receive any proceeds from any
sale of Exchange Capital Securities by broker-dealers. Exchange Capital
Securities received by broker-dealers for their own account pursuant to the
Exchange Offer may be sold from time to time in one or more transactions, in the
over-the-counter market, in negotiated transactions, through the writing of
options on the Exchange Capital Securities or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or at negotiated prices. Any such resale may be
made directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such Exchange Capital Securities. Any
broker-dealer that resells Exchange Capital Securities that were received by it
for its own account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Exchange Capital Securities may be deemed
to be an "underwriter" within the meaning of the Securities Act and any profit
of any such resale of Exchange Capital Securities and any commissions or
concessions received by any such persons may be deemed to be underwriting
compensation under the Securities Act. The Letter of Transmittal states that by
acknowledging that it will deliver and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
For a period of 180 days after the Expiration Date, the Trust and the
Corporation will promptly send additional copies of this Prospectus and any
amendment or supplement to this Prospectus to any broker-dealer that requests
such documents in the Letter of Transmittal. The Trust and the Corporation have
agreed to pay all expenses incident to the Exchange Offer (including the
expenses of one counsel for the holders of the Capital Securities) other than
commissions or concessions of any brokers or dealers and will indemnify the
holders of the Exchange Capital Securities (including any broker-dealers)
against certain liabilities, including liabilities under the Securities Act.
VALIDITY OF EXCHANGE SECURITIES
The validity of the Exchange Capital Securities, the Exchange Guarantee
and the Exchange Junior Subordinated Debentures will be passed upon for the
Corporation by Hogan & Hartson L.L.P., Washington, D.C. Certain matters of
Delaware law relating to the validity of the Exchange Capital Securities will be
passed upon on behalf of the Trust by Morris, James, Hitchens & Williams,
special Delaware counsel to the Trust. Certain matters relating to U.S. federal
income tax considerations will be passed upon for the Corporation by Hogan &
Hartson L.L.P., Washington, D.C.
APPENDICES
APPENDIX I
Annual Report of the Corporation on Form 10-K, as amended, for the Year Ended
December 31, 1996
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1996
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 33-76930
TELEBANC FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 13-3759196
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1111 NORTH HIGHLAND STREET, ARLINGTON, VIRGINIA 22201
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (703) 247-3700.
Securities registered pursuant to Section 12(b) of the Act:
(Not applicable)
Securities registered pursuant to Section 12(g) of the Act:
(Not applicable)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [ X ]
Based upon the closing price of the registrant's common stock as of
March 20, 1997, the aggregate market value of the voting stock held by
non-affiliates of the registrant is $10.4 million.*
The number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date is:
Class: Common Stock, par value $.01 per share.
Outstanding at March 20, 1997: 2,211,961 shares.
DOCUMENTS INCORPORATED BY REFERENCE:
PART I AND II:
Annual report to shareholders for the fiscal year ended December 31,
1996.
PART III:
Portions of the definitive proxy statement for the 1996 Annual Meeting
of Shareholders.
* Solely for purposes of this calculation, all executive officers and
directors of the registrant, Employee Stock Ownership Plan and all
shareholders reporting beneficial ownership of more than 5% of the
registrant's common stock are considered to be affiliates. This reference
to affiliate status is not necessarily a conclusive determination for other
purposes.
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
TeleBanc Financial Corporation (the "Company" or "TeleBanc"), with
headquarters in Arlington, Virginia, had total assets of $647.9 million at the
end of 1996. The primary business of TeleBanc is that of TeleBank (the "Bank")
formerly known as Metropolitan Bank for Savings, F.S.B., whose deposit accounts
are insured by the Savings Association Insurance Fund ("SAIF") of the Federal
Deposit Insurance Corporation ("FDIC"). The Company was organized by its then
majority stockholder, MET Holdings Corporation ("MET Holdings"), to become, in
March 1994, the parent savings and loan holding company for the Bank. All
references to the Company include the business of the Bank. Financial and other
data as of and for all periods prior to March 1994 represent the consolidated
data of the Bank only.
The Company's revenues are derived principally from interest income on
loans, mortgage-backed and related securities, and interest and dividends on
investment securities and interest-bearing deposits. The Company's principal
expenses are interest expense on deposits and borrowings and operating expenses,
such as compensation and employee benefits. The Company's revenues also may be
offset by losses on hedging transactions and other trading account losses as
part of the Company's asset/liability management strategies. Funds for these
activities are provided by deposits, borrowings, principal repayments on
outstanding loans and mortgage-backed and related securities, and sales of
investment securities held for trading. At December 31, 1996, 81.44% of the
Company's total assets were comprised of one- to four-family mortgage loans and
mortgage-backed and related securities.
During the second quarter of 1996, the Bank through its wholly owned
subsidiary TeleBanc Servicing Corporation ("TSC") funded 50% of the capital
commitment for a new entity, AGT Mortgage Services, LLC ("AGT"). AGT services
performing loans and workouts for troubled or defaulted loans for a fee. The
Bank also provided in the second quarter of 1996, 50% of the capital commitment
for an additional new entity, AGT PRA, LLC ("AGT PRA"). The primary business of
AGT PRA is its investment in Portfolio Recovery Associates, LLC ("PRA"). PRA
acquires and collects delinquent consumer debt obligations for its own
portfolio.
On February 28, 1997, the Company consummated the sale of $29.9 million
of units in the form of convertible preferred stock, senior subordinated notes
and warrants and the purchase of the assets of Arbor Capital Partners,
Inc.("Arbor"), a registered investment advisor, funds manager and broker-dealer.
MET Holdings, TeleBanc's majority shareholder, owns a majority of Arbor.
The $29.9 million in units were sold to investment partnerships managed
by Conning & Company, General American Life Insurance Company, CIBC WG Argosy
Merchant Fund 2, LLC, The Progressive Corporation, and The Northwestern Mutual
Life Insurance Company. Representatives from the Conning partnerships and the
CIBC Merchant Fund will serve on the Board. The units consist of $13.7 million
in 9.5% senior subordinated notes with 198,088 detachable warrants, $16.2
million in 4.0% convertible preferred stock, and rights to 205,563 contingent
warrants.
Also as part of the sale of units, the Arbor asset acquisition was
structured as a tax free issuance of 162,461 shares of TeleBanc common stock and
a $500,000 cash payment for the Arbor assets. An independent appraisal valued
the assets to be acquired from Arbor at $3.1 million. Consistent with TeleBanc's
charter, the number of shares issued to Arbor as consideration was limited to 5%
of total market value of outstanding TeleBanc stock at the time of acquisition.
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MARKET AREA AND COMPETITION
From its office in Arlington, Virginia, the Company has a customer base
in all 50 states and the District of Columbia. As a result of the Company's
direct marketing strategy for deposits and reliance upon the secondary market to
purchase mortgage loans and mortgage-backed and related securities, the Company
competes on a nationwide basis for deposits and investments in residential
mortgage products. Generally, the Company faces substantial competition for
deposits from thrifts, commercial banks, credit unions, and other institutions
providing retail investment opportunities. The ability of the Company to attract
and retain deposits depends on its ability to provide an investment opportunity
meeting the requirements of investors as to rate of return, liquidity, risk and
other factors, as well as on the perception of depositors as to the convenience
and quality of its services. Competition in residential mortgage investing comes
primarily from commercial banks, thrift institutions, and purchasers of mortgage
products in the secondary market. The Company competes for residential mortgage
investments principally on the basis of bid price and for loans on the basis of
interest rate, fees it charges, and loan types offered.
LENDING ACTIVITIES
GENERAL. The Company's lending activities consist primarily of the
purchases of whole loans and mortgage-backed and related securities rather than
the production and origination of loans, which entails greater overhead
expenses, commonly found in a traditional thrift or community bank.
LOAN PORTFOLIO COMPOSITION. The Company's net loans receivable totaled
$351.8 million at December 31, 1996, or 54.3% of total assets at that date. At
December 31, 1996, $359.6 million, or 97.6% of the total loan portfolio,
consisted of one- to four-family residential mortgage loans. Prior to 1990, the
Company originated a limited number of loans for the purchase or construction of
multifamily and commercial real estate. However, in the three years ended
December 31, 1996, as part of the Company's general operating strategy, and to
risks associated with multifamily and commercial real estate lending and
prevailing economic conditions, the Company has substantially reduced its
originations and purchases of such loans. At December 31, 1996, multifamily and
commercial and mixed use real estate loans amounted to $6.7 million, or 1.8%, of
the Company's total loan portfolio. The Company's loan portfolio also includes
lease financing at December 31, 1993 and 1992. These loans represent lease
financing assumed by the Company in 1991 upon the default of a commercial loan
to an automobile leasing company which was 33% owned by the Bank's subsidiary,
ARLO Service Corporation ("ARLO"). Currently, the Company originates consumer
loans to a very limited extent, and only as an accommodation to deposit and loan
customers. Such loans, which consist primarily of home equity lines of credit
and loans secured by savings deposits, amounted to $1.5 million, or 0.4% of the
Company's total loan portfolio at December 31, 1996.
<PAGE>
The following table sets forth information concerning the Company's
loan portfolio in dollar amounts and in percentages, by type of loan.
<TABLE>
<CAPTION>
AT DECEMBER 31,
1996 % 1995 % 1994 %
--------- ------- -------- ------ --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family fixed-rate............................ $ 142,211 38.59% $105,750 39.91% $ 67,449 42.54%
One- to four-family adjustable-rate....................... 217,352 58.97 148,928 56.20 79,701 50.27
Multifamily............................................... 1,516 0.41 1,286 0.49 1,114 0.70
Commercial real estate.................................... 4,017 1.09 4,553 1.72 4,385 2.77
Mixed use real estate..................................... 1,180 0.32 1,792 0.68 1,953 1.23
Land...................................................... 781 0.21 384 0.14 387 0.24
Construction.............................................. -- -- -- -- -- --
--------- ------- -------- ------ --------- -------
Total real estate loans................................... 367,057 99.59 262,693 99.14 154,989 97.75
--------- ------- -------- ------ --------- -------
Consumer and other loans:
Lease financing........................................... -- -- -- -- -- --
Home equity lines of credit and second mortgage loans..... 1,208 0.33 2,202 0.83 3,395 2.14
Other (1)................................................. 305 0.08 79 0.03 168 0.11
--------- ------- -------- ------ --------- -------
Total consumer and other loans............................ 1,513 0.41 2,281 0.86 3,563 2.25
--------- ------- -------- ------ --------- -------
Total loans............................................... $ 368,570 100.00% $264,974 100.00% $ 158,552 100.00%
========= ======= ======== ====== ========= =======
Deduct:
Non accrual/cost recovery ................................ (182) -- --
--
Deferred loan fees........................................ (42) (42) (50)
Deferred discounts on loans............................... (13,750) (14,129) (2,835)
Allowance for loan losses................................. (2,957) (2,311) (925)
------------- --------- --------
Total........................................................ (16,749) (16,482) (3,810)
------------- --------- --------
Loans receivable, net........................................ $ 351,821 $248,492 $154,742
============= ========= ========
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
1993 % 1992 %
--------- ------ --------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Real estate loans:
One- to four-family fixed-rate............................ $ 44,450 43.06% $ 40,659 41.88%
One- to four-family adjustable-rate....................... 50,708 49.14 47,529 48.97
Multifamily............................................... 932 0.90 945 0.97
Commercial real estate.................................... 5,912 5.73 5,937 6.12
Mixed use real estate..................................... -- -- -- --
Land...................................................... 16 0.02 46 0.05
Construction.............................................. -- -- 190 0.20
--------- ------ --------- ------
Total real estate loans................................... 102,018 98.85 95,306 98.19
--------- ------ --------- ------
Consumer and other loans:
Lease financing........................................... 17 0.02 121 0.12
Home equity lines of credit and second mortgage loans..... 1,007 0.98 1,396 1.44
Other (1)................................................. 151 0.15 242 0.25
--------- ------ --------- ------
Total consumer and other loans............................ 1,175 1.15 1,759 1.81
--------- ------ --------- ------
Total loans............................................... $ 103,193 100.00% $ 97,065 100.00%
========= ====== ========= ======
Deduct:
Non accrual/cost recovery ................................ -- --
--
Deferred loan fees........................................ (68) (96)
Deferred discounts on loans............................... (1,431) (2,705)
Allowance for loan losses................................. (835) (659)
--------- --------
Total........................................................ (2,334) (3,460)
--------- --------
Loans receivable, net........................................ $ 100,859 $93,605
========= =======
</TABLE>
(1) Includes primarily loans secured by deposit accounts in the Bank, and to a
lesser extent, unsecured consumer credit.
<PAGE>
MATURITY OF LOAN PORTFOLIO. The following table sets forth certain
information at December 31, 1996 regarding the dollar amount of loans maturing
in the Company's portfolio, including scheduled repayments of principal, based
on contractual terms to maturity. Demand loans, loans having no stated schedule
of repayments and no stated maturity, and overdrafts are reported as due within
one year. The table below does not include any estimate of prepayments, which
may significantly shorten the average life of a loan and may cause the Company's
actual repayment experience to differ from that shown below.
<TABLE>
<CAPTION>
DUE IN ONE DUE IN ONE DUE AFTER
YEAR OR LESS TO FIVE YEARS FIVE YEARS TOTAL
------------ ------------- ---------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Real estate loans:
One- to four-family fixed-rate........... $ 1,746 $ 2,285 $ 138,180 $ 142,211
One- to four-family adjustable-rate...... 615 1,769 214,968 217,352
Multifamily.............................. -- 1,152 364 1,516
Mixed use................................ -- 349 831 1,180
Commercial real estate................... 359 1,022 2,636 4,017
Land..................................... -- 400 381 781
Consumer and other loans:
Home equity lines of credit and
second mortgage loans.................. -- 251 957 1,208
Other ................................... -- 305 -- 305
Total.................................. $ 2,720 $ 7,533 $ 358,317 $ 368,570
========= ========= ========== ===========
</TABLE>
The following table sets forth as of December 31, 1996 the dollar
amount of the loans maturing subsequent to December 31, 1997 allocated between
those with fixed interest rates and those with adjustable interest rates.
<TABLE>
<CAPTION>
FIXED RATES ADJUSTABLE RATES TOTAL
----------- ---------------- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Real estate loans:
One- to four-family........................................ $140,465 $ 216,737 $ 357,202
Multifamily................................................ 1,180 336 1,516
Mixed use.................................................. 1,180 -- 1,180
Commercial real estate..................................... 280 3,378 3,658
Land....................................................... 400 381 781
Consumer and other loans:
Home equity lines of credit and second
mortgage loans........................................... 592 616 1,208
Other...................................................... 305 -- 305
---------- ---------- -----------
Total.................................................... $ 144,402 $ 221,448 $ 365,850
=========== =========== ===========
</TABLE>
Scheduled contractual principal repayments of loans may not reflect the
actual life of such assets. The average life of loans may be substantially less
than their contractual terms because of prepayments. In addition, due-on-sale
clauses on loans generally give the Company the right to declare a conventional
loan immediately due and payable in the event, among other things, that the
borrower sells the property. The average life of mortgage loans tends to
increase, however, when current mortgage loan market rates are substantially
higher than rates on existing mortgage loans and, conversely, decreases when
rates on existing mortgage loans are substantially higher than current mortgage
loan market rates.
ORIGINATION, PURCHASE AND SALE OF LOANS. Consistent with the Company's
strategy of minimizing operating expenses, the Company emphasizes the purchase
of loans rather than direct
<PAGE>
originations. The Company purchased $183.1 million, $145.9 million, $85.4
million, $33.4 million, and $21.1 million of loans during the years ended
December 31, 1996, 1995, 1994, 1993, and 1992, respectively. The Company's
mortgage loan originations totaled $462,000, $2.7 million, $4.3 million, $1.8
million and $4.3 million in the years ended December 31, 1996, 1995, 1994, 1993,
and 1992 respectively.
Approximately 55.3% of the loans in the Company's portfolio are
serviced by other lenders other than AGT for which the Company pays a fee
ranging from a minimum of 25 basis points of the principal balance of the loan
per annum to a maximum of $12 per month per loan. The institutions servicing
loans for the Company, among other things, collect and remit loan payments,
maintain escrow accounts, inspect properties and administer foreclosures when
necessary.
The Company sells whole loans to institutional investors and,
accordingly, is a Federal National Mortgage Association ("FNMA") seller/servicer
and a Federal Home Loan Mortgage Corporation ("FHLMC") servicer. The bulk of
loans sold has consisted of long-term, fixed-rate mortgage loans sold to FNMA.
The Company generally sells such loans with servicing retained.
The following table shows loan origination, purchase, sale and
repayment activity of the Company during the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995 1994
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Total loans receivable at beginning of period.............................. $ 248,492 $ 154,742 $ 100,859
Loans purchased:
Real estate loans:
One- to four-family variable rate....................................... 128,171 98,065 41,684
One- to four-family fixed rate.......................................... 53,915 47,845 40,155
Multi-Family ........................................................... 1,000 -- --
Mixed-used.............................................................. -- -- 1,953
Commercial real estate.................................................. -- -- 109
Consumer and other loans................................................ -- -- 1,797
----------- ----------- -----------
Total loans purchased................................................. 183,086 145,910 85,698
Loans originated:
Real estate loans:
One- to four-family variable rate....................................... -- -- 1,764
One- to four-family fixed rate.......................................... 25 80 1,267
Commercial real estate.................................................. -- -- 1,148
Land ................................................................... 400 -- --
Home equity lines of credit and second mortgage loans...................... 37 2,644 75
----------- ----------- -----------
Total loans originated................................................ 462 2,724 4,254
----------- ----------- -----------
Total loans purchased and originated.................................. 183,548 148,634 89,952
Loans sold................................................................. 18,829 6,192 --
Loans securitized.......................................................... 8,275 2,794 --
Loan repayments............................................................ 50,221 32,755 34,343
----------- ----------- -----------
Total loans sold, securitized, and repaid............................... 77,325 41,741 34,343
Net change - TBFC ESOP Note Receivable .................................... 65 -- --
Net change in deferred discounts and loan fees............................. 379 11,286 1,386
Net transfers to REO ...................................................... 1,513 471 250
Net provision for loan losses.............................................. 646 1,386 90
Cost Recovery/Contra Assets ............................................... 41 -- --
Other loan debits/HELOC advances .......................................... 250 -- --
----------- ----------- -----------
Increase (decrease) in total loans receivable.............................. 103,329 93,750 53,883
----------- ----------- -----------
Net loans receivable at end of period...................................... $ 351,821 $ 248,492 $ 154,742
=========== =========== ===========
</TABLE>
The Company's loan purchases during 1996 increased $37.2 million from
fiscal year 1995 as the Company continued to expand the Bank's operations.
During fiscal 1996 and 1995 the Company's loan purchases involved purchases of
whole loans in the secondary market, principally
<PAGE>
from private investors. The Company's loan purchases during fiscal year 1996
included purchases of 35 pools with approximately 1,253 loans and minimal loan
originations consistent with the Company's operating strategy. The Company's
loan purchases during fiscal year 1995 included purchases of 26 pools with
approximately 1,200 loans and minimal loan originations consistent with the
Company's operating strategy. The Company's loan purchases during 1994 increased
$52.0 million from fiscal year 1993 as the Company invested the proceeds from
the initial public offering and expanded the Bank's operations.
ONE-TO-FOUR FAMILY RESIDENTIAL LENDING. The Company originates both
fixed- and adjustable-rate one- to four-family mortgage loans in accordance with
FNMA and FHLMC underwriting guidelines for terms up to 30 years. In 1996, the
Company originated $25,000 of loans secured by one- to four-family residential
properties, excluding home equity lines of credit. The Company will make one- to
four-family mortgage loans with up to a 95% loan-to-value ratio if private
mortgage insurance is obtained on the portion of the principal amount in excess
of 80% of the appraised value.
MULTIFAMILY AND COMMERCIAL REAL ESTATE LENDING. Since 1990, the Company
has not actively pursued multifamily and commercial real estate lending or loans
secured by undeveloped land, and has substantially reduced originations of such
loans. As of December 31, 1996, multifamily, mixed use, commercial real estate
and land loans amounted to $7.5 million, or 2.03% of the Company's total loan
portfolio.
CONSUMER AND OTHER LENDING. The Company does not emphasize consumer or
other loans, but from time to time, originates such loans as an accommodation to
its customers or purchases such loans as part of larger loan packages. Such
lending primarily includes home equity lines of credit and loans secured by
savings deposits. During 1996, the Company originated $37,000 in consumer loans
and $305,000 in other loans. At December 31, 1996, consumer and other loans
totaled $305,000, or 0.08% of the Company's total loan portfolio. At December
31, 1996, total outstanding home equity lines of credit and second mortgage
loans amounted to $1.2 million, or 0.33% of the Company's total loan portfolio.
CRA LENDING ACTIVITIES. The Bank participates in various community
development programs in an effort to meet its responsibilities under the CRA. In
connection with the organization of TeleBanc in 1994, the Bank agreed with the
Office of Thrift Supervision ("OTS") to make a minimum investment of $250,000 in
a local community development corporation for the purpose of financing low and
moderate income housing. In 1995, the OTS lifted the aforementioned requirement
and the Bank has now committed to invest up to $500,000 in an investment tax
credit fund that qualifies for CRA purposes.
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 will submit a request to the OTS to be
designated as a wholesale institution in 1997.
<PAGE>
MORTGAGE-BACKED AND RELATED SECURITIES, AND SECONDARY MARKET ACTIVITIES
The Company maintains a significant portion of mortgage-backed
securities, primarily in the form of privately insured mortgage pass-through
securities, as well as Government National Mortgage Association ("GNMA"), FNMA,
and FHLMC participation certificates, and securities issued by other nonagency
organizations. GNMA certificates are guaranteed as to principal and interest by
the full faith and credit of the United States, while FNMA and FHLMC
certificates are each guaranteed by their respective agencies. Mortgage-backed
securities generally entitle the Company to receive a pro rata portion of the
cash flows from an identified pool of mortgages. The Company has also invested
in collateralized mortgage obligations ("CMOs") which are securities issued by
special purpose entities generally collateralized by pools of mortgage-backed
securities. The cash flows from such pools are segmented and paid in accordance
with a predetermined priority to various classes of securities issued by the
entity. The Company's CMOs are senior tranches collateralized by federal agency
securities or whole loans. The primary issuers of the Company's CMOs at December
31, 1996 include Residential Mortgage Acceptance Corp. and Federal Deposit
Insurance Corporation.......In the fourth quarter of 1995, the Company
reclassified the entire held-to-maturity mortgage-backed security portfolio to
available-for-sale. The following table sets forth the activity in the Company's
mortgage-backed securities held-to-maturity portfolio during the periods
indicated.
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995 1994
---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Mortgage-backed and related securities at beginning
of period (not including available for sale)............... $ 221,005 $ 77,387
Purchases:
Pass-through securities............................. 55,110 129,462
CMOs..................................................... 5,235 --
FNMA..................................................... -- 5,767
GNMA..................................................... -- 19,243
FHLMC.................................................... -- 18,823
Acquired in exchange for loans............................. (10,465) --
Sales (1).................................................. (18,813) (896)
Repayments................................................. (39,155) (28,781)
Transfer to held for sale.................................. (212,917) --
--------- ----------
Mortgage-backed and related securities at
end of period (not including available for sale)............. $ -- $ 221,005
========== ===========
</TABLE>
The following table sets forth the activity in the Company's
mortgage-back securities available for sale portfolio during the period
indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995
------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Mortgage-backed and related securities at beginning
of period ................................................. $ 234,835 $ 15,459
Purchases:
Pass-through securities............................... 109,600 13,183
CMOs..................................................... 30,053 --
FNMA..................................................... 12,102 2,634
GNMA..................................................... 30,687 --
FHLMC.................................................... 14,194 12,810
Transfer from held to maturity............................. -- 212,917
Sales (1).................................................. (185,703) (15,755)
Repayments................................................. (61,805) (6,024)
Transfer to trading........................................ -- (1,650)
Provision for losses on securities............................ (22) --
Mark to market ............................................... 826 811
FASB 122 servicing ........................................... (24) --
------------ -----------
Mortgage-backed and related securities at
end of period ............................................... $ 184,743 $ 234,835
============ ===========
</TABLE>
- ------------------------
(1) Includes mortgage-backed securities on which call options have been
exercised.
<PAGE>
The following table sets forth the scheduled maturities, carrying
values, and current yields for the Company's portfolio of mortgage-backed
securities at December 31, 1996:
<TABLE>
<CAPTION>
AFTER ONE BUT AFTER FIVE BUT
WITHIN FIVE YEARS WITHIN TEN YEARS AFTER TEN YEARS TOTALS
BALANCE WEIGHTED BALANCE WEIGHTED BALANCE WEIGHTED BALANCE WEIGHTED
DUE YIELD DUE YIELD DUE YIELD DUE YIELD
--------- ------ -------- ----- --------- ------ -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Private issuer $ 4,116 7.01% $ 8,337 9.10% $134,157 8.81% $146,610 8.78%
Collateralized mortgage obligations -- -- 368 6.26 25,358 7.55 25,726 7.56
Agencies -- -- -- -- 12,407 8.11 12,407 8.11
--------- ------ -------- ----- --------- ------ -------- ------
$ 4,116 7.01% $ 8,705 8.98% $171,922 8.57% $184,743 8.56%
========= ===== ======== ===== ======== ====== ======== =====
</TABLE>
<PAGE>
In May 1996, the Company formed AGT, a 50% owned subsidiary which
services loans for both the Bank and third parties. The Company entered into a
loan servicing agreement with AGT on May 1, 1996 whereby AGT is paid a fee of $8
to $100 per loan per month depending upon the type of loan and whether it is
performing or non-performing. AGT also receives a fee in its capacity as Master
Servicer for the Company's subserviced portfolio and is reimbursed for any
direct collection expenses including attorney fees, repair costs, etc. During
the eight months ended December 31, 1996, the Company paid AGT a total of
$297,029 in servicing fees and reimbursed the subsidiary for $215,326 in direct
collection expenses.
Most of the loans sold by the Company are sold on a servicing retained
basis. Servicing includes collecting and remitting loan payments, holding escrow
funds for the payment of real estate taxes, contacting delinquent mortgagors, in
some cases advancing to the investor interest when the mortgage is delinquent,
supervising foreclosures in the event of unremedied defaults and generally
administering the loans. Under loan servicing contracts, the Company receives
servicing fees that are withheld from the monthly payments made to investors.
The Company's aggregate loan servicing fees amounted to $790,000, $126,000, and
$61,000 in 1996, 1995, and 1994, respectively.
The following table sets forth information regarding the Company's loan
servicing portfolio at the dates shown.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------------------------------------
1996 1995 1994
------------------------- ------------------------- -------------------------
PERCENT PERCENT PERCENT
OF OF OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
----------- ---------- ----------- ---------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Loans owned and serviced by
the Company....................... $ 164,745 44.7% $ 161,625 61.0% $ 57,491 36.3%
Loans owned by the Company
and serviced by others............ 203,853 55.3 103,349 39.0 101,061 63.7
----------- -------- ----------- ------ ------- ------
Total loans owned by the
Company......................... $ 368,598 100.0% $ 264,974 100.0% $ 158,552 100.0%
=========== ======= =========== ====== =========== ======
Loans serviced for others............ $ 45,856 $ 18,196 $ 9,513
</TABLE>
NON-PERFORMING, DELINQUENT AND OTHER PROBLEM ASSETS
GENERAL. It is management's policy to monitor continually its loan
portfolio to anticipate and address potential and actual delinquencies.
Valuations are periodically performed by management and an allowance for losses
on REO is established by a charge to operations if the fair value of the
property has changed.
NONPERFORMING/UNDERPERFORMING ASSETS. Nonperforming and underperforming
assets consist of loans on which interest is no longer accrued, loans which have
been restructured in order to allow the borrower the ability to maintain control
of the collateral, real estate acquired by foreclosure, real estate upon which
deeds in lieu of foreclosure have been accepted and real estate owned which has
been classified as in-substance foreclosure. Restructured loans and real estate
owned have been written down to estimated fair value, based upon estimates of
cash flow expected from the underlying collateral and appropriately discounted.
<PAGE>
The following table sets forth information with respect the Company's
non-accrual loans, REO and In Substance Foreclosures ("ISF"), and troubled debt
restructuring ("TDRs") at the dates indicated. As of December 31, 1993, the
Company no longer classifies ISF loans as REO, which resulted in a decrease in
REO of $2.2 million at that date as compared to prior periods.
<TABLE>
<CAPTION>
AT DECEMBER 31,
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a non-accrual basis:
Real estate loans:
One- to four-family................ $ 8,979 $ 4,526 $ 1,296 $ 1,570 $ 3,074
Commercial real estate............. 1,217 261 702 902 866
Land............................... -- -- -- -- --
Construction....................... -- -- -- -- --
Home equity lines of credit and
second mortgage loans.............. 54 136 41 47 --
Other................................ -- -- 27 35 120
----------- ----------- ----------- ----------- -----------
Total................................... $ 10,250 $ 4,923 $ 2,066 $ 2,554 $ 4,060
=========== =========== =========== =========== ===========
Accruing loans which are contractu-
ally past due 90 days or more:
Real estate loans:
One- to four-family................ $ -- $ 230 $ -- $ -- $ --
----------- ----------- ----------- ----------- -----------
Total................................... $ -- $ 230 $ -- $ -- $ --
=========== =========== =========== =========== ===========
Total of non-accrual and 90 days
past due loans......................... $ 10,250 $ 5,153 $ 2,066 $ 2,554 $ 4,060
=========== =========== =========== =========== ===========
REO:
One- to four-family.................. $ 1,300 $ 421 $ 98 $ 194 $ 417
Commercial real estate............... -- -- 206 665 529
Land................................. -- 582 581 582 582
----------- ----------- ----------- ----------- -----------
1,300 1,003 885 1,441 1,528
Loss allowance for REO............... (65) (213) (92) (221) (162)
------------ ------------ ----------- ----------- -----------
Total REO, net..................... 1,235 790 793 1,220 1,366
----------- ----------- ----------- ----------- -----------
Total non-performing assets, net........ $ 11,485 $ 5,943 $ 2,859 3,774 $ 5,426
=========== =========== =========== =========== ===========
Total non-performing assets, net,
as a percentage of total assets...... 1.83% 1.07% 0.7% 1.7% 2.4%
============ =========== ============ =========== ===========
Total loss allowance as a percentage
of total non-performing assets,
gross................................ 26.3% 39.53% 34.45% 26.43% 14.69%
============ =========== =========== =========== ===========
TDRs .................................. $ 435 $ 365 $ 688 $ 413 $ 454
============ =========== =========== =========== ===========
</TABLE>
During 1996, non-performing assets increased by $5.5 million or 93.3%.
This increase is attributed to the acquisition of $8.2 million of one-to-four
family mortgage loans that were either non-performing or in bankruptcy at the
time of purchase. The Company acquired these loans at a discount of $1.53
million or 18.6% in order to offset the potential risk. As of December 31, 1996,
assets that were either non-performing or in bankruptcy at the time of purchase
accounted for $2.8 million or 24.7% of total non-performing loans. The remainder
of the growth in non-performing assets is attributed to the overall growth in
the Company's loan portfolio during the year. The Company also uses a stringent
policy for non-accrual loans whereby these loans remain in non-accrual status
until all arrears have been paid and the borrower has demonstrated the ability
to make timely payments. In addition, non-performing loans that were originated
prior to the Bank's acquisition by MET Holdings totaled $1.5 million or 12.9% of
total non-performing assets as of December 31, 1996.
During the years ended December 31, 1996, 1995, 1994, and 1993,
interest income of approximately $789,000, $365,000, $113,000, and $46,000,
respectively, would have been recorded on non-accruing loans had they been
performing in accordance with their terms. No interest on non-accruing loans was
included in income during the years ended December 31, 1996, 1995, 1994,
<PAGE>
and 1993. TDRs are loans to which the Company has granted certain concessions in
light of the borrower's financial difficulty. The objective of the Company in
granting these concessions, through a modification of terms, is to maximize the
recovery of its investment. This modification of terms may include reduction in
stated rate, extension of maturity at a more favorable rate, and/or reduction of
accrued interest. TDRs with concessions totaled approximately $ 435,000,
$365,000, $688,000 and $413,000 at December 31, 1996, 1995, 1994 and 1993,
respectively. TDRs continue to be closely monitored by the Company due to their
inherent risk characteristics. Interest income recorded on TDRs in 1996, 1995,
1994 and 1993 was approximately $28,000, $45,000, $9,000 and $50,000,
respectively.
Loans which are not classified as non-accrual, past due 90 days or more
or TDRs, but where known information about possible credit problems of borrowers
caused management to have serious doubts as to the ability of the borrowers to
comply with present loan repayment terms and may result in disclosure as
non-accrual, past due 90 days or more or TDRs are considered potential problem
loans. At December 31, 1996, loans still accruing interest, but identified by
management as potential problem loans aggregated $2.4 million. The majority of
these loans, identified as "special mention" loans, includes a $2.1 million pool
of single family, non-performing, performing in accordance with a bankruptcy
plan.
ALLOWANCE FOR LOAN LOSSES. In originating and purchasing loans, the
Company recognizes that credit losses will be experienced and that the risk of
loss will vary with, among other things, the type of loan, the creditworthiness
of the borrower over the term of the loan, general economic conditions, and in
the case of a secured loan, the quality of the security for the loan. It is
management's policy to maintain an adequate allowance for loan losses based on,
among other things, the Company's and the industry's historical loan loss
experience, evaluation of economic conditions, and regular reviews of
delinquencies and loan portfolio quality. The Company increases its allowance
for loan losses by charging provisions for possible loan losses against the
Company's income.
The Company's methodology for establishing the allowance for loan
losses takes into consideration probable losses that have been identified in
connection with specific loans as well as losses in the loan portfolio that have
not been identified but can be expected to occur. General allowances are
established by management and approved by the Board of Directors. These
allowances are reviewed monthly based on an assessment of risk in the Company's
loan portfolio as a whole taking into consideration the composition and quality
of the portfolio, delinquency trends, current charge-off and loss experience,
the state of the real estate market and general economic conditions. Additional
provisions for losses on loans may be made in order to bring the allowance to a
level deemed adequate. Additionally, the Company's internal audit consultants
have established an independent internal loan review program which is followed
by bank personnel.
In general, the Company adds provisions to its allowance for loan
losses in amounts equal to 0.20% of on-to-four family mortgages, 0.50% for home
equity lines of credit and second trusts, 1.0% of multifamily and mixed use real
estate loans and 2.0% of commercial and land loans. During 1996, the Company
recorded a $624,000 net increase in the allowance for loan losses in relation to
the $103.4 million increase in the loan portfolio. Of this increase in the
allowance for loan losses, 84.4% of the amount related to the general valuation
allowance ("GVA").
During 1996, the Company purchased $53.2 million of one-to-four family
mortgage loans which had additional credit enhancement available to offset any
potential losses. Two pools of loans totaling $33.5 million had a credit reserve
equal to 2.3% of the unpaid principal balance at the time of purchase available
to offset any losses. One pool totaling $11.7 million has an indemnification
whereby the seller must repurchase any loan that becomes more than four payments
past due at any time during the life of the loan. The final pool of loans
totaling $8.0 million had a credit reserve equal to approximately 10% of the
unpaid principal balance at the time of acquisition. Since the available credit
enhancement associated with these loans exceeds the expected potential losses,
no additional reserves were recorded for them during the year.
<PAGE>
Information regarding movements in the provision for loan losses during
the five year period ending December 31, 1996 is incorporated herein by
reference to the section titled "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Earnings Performance --
Provision for Loan and Security Losses" included in this Form 10-K.
The following table sets forth at December 31, 1996 the aggregate
carrying value of the Company's assets classified as substandard, doubtful,
loss, and special mention according to type.
<TABLE>
<CAPTION>
TOTAL SPECIAL
SUBSTANDARD DOUBTFUL LOSS CLASSIFIED MENTION
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loans:
One- to four-family.................. $ 8,979 $ -- $ 439 $ 9,418 $ 2,138
Commercial real estate............... 1,217 -- 135 1,352 251
Land................................. -- -- -- -- --
Home equity lines of credit and
second mortgage.................... 54 -- 5 59 --
----------- -------- ---------- ----------- ---------
Total loans............................. $ 10,250 $ -- $ 579 $ 10,829 $ 2,389
=========== ======== ========== =========== ==========
REO:
One- to four-family.................. $ 1,235 $ -- $ 65 $ 1,300 $ --
----------- -------- ---------- ----------- ---------
Total REO............................... 1,235 -- 65 1,300 --
----------- -------- ---------- ----------- ---------
Total................................... $ 11,485 $ -- $ 644 $ 12,129 $ 2,389
=========== ======== ========== =========== ==========
</TABLE>
As a result of the declines in regional real estate market values and
the significant losses experienced by many financial institutions, there has
been a greater level of scrutiny by regulatory authorities of the loan
portfolios of financial institutions undertaken as part of the examination of
the institution by the FDIC, OTS, and other state and federal regulators.
Although the Company believes it has established its existing allowances for
losses in accordance with generally accepted accounting principles, there can be
no assurance that regulators, in reviewing the Company's loan portfolio, will
not request the Company to increase its allowance for losses, thereby negatively
affecting the Company's financial condition and earnings.
<PAGE>
The following table allocates the allowance for loan losses by loan
category at the dates indicated. The allocation of the allowance to each
category is not necessarily indicative of future losses and does not restrict
the use of the allowance to absorb losses in any other category.
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------------------------------------------------------------------------
1996 1995 1994 1993
------------------------ ------------------------- -------------------------- -------------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF
LOANS IN EACH LOANS IN EACH LOANS IN EACH LOANS IN EACH
CATEGORY TO CATEGORY TO CATEGORY TO CATEGORY TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
--------- ------------- --------- -------------- --------- ------------- ---------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family..... $ 2,529 97.55% $ 1,939 96.11% $ 603 92.81% $ 468 92.20%
Multifamily............. 15 0.41 13 0.49 11 0.70 9 0.90
Commercial real estate.. 373 1.09 281 1.72 273 2.77 329 5.73
Mixed use............... 12 0.32 18 0.68 -- 1.23 -- --
Land.................... 8 0.21 8 0.14 8 0.24 1 0.02
Construction............ -- -- -- -- -- -- -- --
Lease financing........... -- -- -- -- -- -- 3 0.02
Home equity lines of
credit and second
mortgage loans.......... 20 0.42 28 0.83 16 2.14 5 0.98
Other consumer............ -- -- 24 0.03 14 0.11 20 0.15
--------- ------- --------- -------- -------- ------- --------- -------
Total allowance for
loan losses............. $ 2,957 100.00% $ 2,311 100.00% $ 925 100.00% $ 835 100.00%
========= ======== ========= ======== ======== ======= ========= =======
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------
1992
----------------------------
PERCENT OF
LOANS IN EACH
CATEGORY TO
AMOUNT TOTAL LOANS
--------- ----------------
<S> <C> <C>
Real estate loans:
One- to four-family..... $ 404 90.85%
Multifamily............. 8 0.97
Commercial real estate.. 214 6.12
Mixed use............... -- --
Land.................... 2 0.05
Construction............ -- 0.20
Lease financing........... 18 0.12
Home equity lines of
credit and second
mortgage loans.......... 12 1.44
Other consumer............ 1 0.25
--------- --------
Total allowance for
loan losses............. $ 659 100.00%
========= ========
</TABLE>
<PAGE>
Included in the above amounts are specific reserves totaling $579,000,
$392,000, $201,000, $240,000, and $260,000, at December 31, 1996, 1995, 1994,
1993, and 1992, respectively, related to loans classified as loss.
REO. REO is initially recorded at estimated fair value less selling
costs. Fair value is defined as the estimated amount in cash or cash-equivalent
value of other consideration that a real estate parcel would yield in a current
sale between a willing buyer and a willing seller. Subsequent to foreclosure,
REO is periodically evaluated by management and an allowance for loss is
established if the estimated fair value of the property, less estimated costs to
sell, declines.
As of December 31, 1996, all of the Company's REO consisted of
one-to-four family real estate.
INVESTMENT SECURITIES
The following table sets forth the cost basis and fair value of the
Company's investment portfolio at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
1996 1995 1994
------------------------- ----------------------- -------------------------
COST FAIR COST FAIR COST FAIR
BASIS VALUE BASIS VALUE BASIS VALUE
------- ------- ------- ------- ------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Investment Securities:
Held to maturity:
Corporate debt................. $ -- $ -- $ -- $ -- $ 1,896 $ 1,901
Margin Account ................. 18 18 -- -- -- --
Other investments.............. 1 1 -- -- -- --
Available for sale:
Municipal bonds................ 7,325 7,507 12,360 12,712 10,460 9,722
Corporate debt................. 22,525 23,569 22,850 23,987 823 826
Obligations of U.S.
government agencies.......... 31,139 31,272 3,359 3,359 -- --
Certificate of Deposits ....... 499 499 -- -- -- --
------- ------- ------- ------- ------- ---------
Subtotal............................ 61,505 62,866 38,569 40,058 13,179 12,449
Securities purchased under
agreements to resell........... 1,730 1,730 -- -- 1,181 1,181
Equity securities:
Stock in FHLB Atlanta.......... 7,300 7,300 5,275 5,275 4,900 4,900
Stock in FHLMC ................ 5,000 4,988 -- -- -- --
Stock in FNMA ................. 8,000 8,232 -- -- -- --
Other Corporate Stock ......... 1,011 1,011 -- -- -- --
--------- --------- --------- -------- -------- ---------
Total.......................... $ 84,546 $ 86,127 $ 43,844 $ 45,333 $ 19,260 $ 18,530
========= ========= ========= ======== ======== =========
</TABLE>
<PAGE>
The following table sets forth the scheduled maturities, carrying
values, and current yields for the Company's investment portfolio of debt
securities at December 31, 1995 (dollars in thousands):
<TABLE>
<CAPTION>
AFTER ONE BUT AFTER FIVE BUT
WITHIN ONE YEAR WITHIN FIVE YEARS WITHIN TEN YEARS AFTER TEN YEARS
------------------- ------------------- --------------------- -----------------
BALANCE WEIGHTED BALANCE WEIGHTED BALANCE WEIGHTED BALANCE WEIGHTED
DUE YIELD DUE YIELD DUE YIELD DUE YIELD
------------------ -------- --------- --------- ------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Municipal bonds (a) $ -- -- $ 568 7.42% $ 3,587 7.60% $ 3,351 11.30%
Corporate debt -- -- 1,990 7.17 7,497 6.95 14,083 7.34
Certificates of Deposit -- -- 499 6.92 -- -- -- --
Obligations of U.S. Government Agencies -- -- 989 7.17 -- -- 30,283 6.09
Securities purchased under agreements to resell 1,748 6.19 -- -- -- -- -- --
Equities -- -- -- -- -- -- 14,231 7.31
--------- --------- ------ --------- --------- ------- -------- --------
$ 1,748 6.19% $ 4,046 7.17% $ 11,084 7.16% $61,948 6.94%
========= ======== ======= ========= ========= ======= ======= ========
</TABLE>
TOTALS
----------------------
BALANCE WEIGHTED
DUE YIELD
-------- --------
(DOLLARS IN THOUSANDS)
Municipal bonds (a) $ 7,506 6.01%
Corporate debt 23,570 7.20
Certificates of Deposit 499 6.92
Obligations of U.S. Government Agencies 31,272 6.12
Securities purchased under agreements to resell 1,748 6.25
Equities 14,231 7.55
-------- --------
$ 78,826 6.70%
======== ========
(a) Yields on tax exempt obligations are computed on a tax equivalent basis.
<PAGE>
Deposits and Other Sources of Funds
In 1996, the Bank introduced an Automatic Teller Machine Card ("ATM") associated
with its money market accounts.
Deposits in the Bank as of December 31, 1996 were represented by the
various programs described below:
<TABLE>
<CAPTION>
PERCENT
OF TOTAL
TERM CATEGORY BALANCE DEPOSITS
---- -------- ------- --------
(In thousands)
<S> <C> <C> <C>
None Checking Accounts $ 309 0.08%
None Money Market Accounts 109,835 28.13%
None Passbook Accounts 1,758 0.45%
Certificates of Deposit
3-month Fixed-Term, Fixed-Rate 1,210 0.31%
6-month Fixed-Term, Fixed-Rate 6,408 1.64%
12-month Fixed-Term, Fixed-Rate 39,402 10.09%
18-month Fixed-Term, Fixed-Rate 7,181 1.84%
2-year Fixed-Term, Fixed-Rate 41,443 10.61%
30-month Fixed-Term, Fixed-Rate 46,294 11.86%
3-year Fixed-Term, Fixed-Rate 20,985 5.37%
4-year Fixed-Term, Fixed-Rate 717 0.18%
5-year Fixed-Term, Fixed-Rate 107,289 27.48%
7-year Fixed-Term, Fixed-Rate 4,658 1.19%
10-year Fixed-Term, Fixed-Rate 2,997 0.77%
----------- -----
Total $ 390,486 100.00%
=========== =======
</TABLE>
<PAGE>
The following table sets forth the change in dollar amount of deposits
in the various types of accounts offered by the Company between the dates
indicated:
<TABLE>
<CAPTION>
BALANCE BALANCE
AT PERCENTAGE AT PERCENTAGE
DECEMBER 31, OF INCREASE DECEMBER 31, OF INCREASE
ACCOUNTS 1996 DEPOSIT (DECREASE) 1995 DEPOSITS (DECREASE)
-------- ---- ------- ---------- ---- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Passbook.............................. $ 1,758 .45% $ (262) $ 2,020 0.66% $ (680)
Money market.......................... 109,835 28.13 34,103 75,732 24.71 65,342
Checking.............................. 309 .08 (1,439) 1,748 0.57 1,449
Certificates of deposit............... 278,584 71.34 51,584 227,000 74.06 27,978
------- ----- ------ --------- -------- ---------
Total............................ $ 390,486 100.00% $ 83,986 $306,500 100.00% $ 94,089
======= ====== ====== ======== ====== =========
</TABLE>
BALANCE
AT PERCENTAGE
DECEMBER 31, OF
ACCOUNTS 1994 DEPOSITS
-------- ---- --------
(Dollars in thousands)
Passbook.............................. $ 2,700 1.27%
Money market.......................... 10,390 4.89
Checking.............................. 299 0.14
Certificates of deposit............... 199,022 93.70
--------- -------
Total............................ $ 212,411 100.00%
========= ======
<PAGE>
The following table sets forth certificates of deposit and money market
accounts in the Company classified by rates at the dates indicated.
AT DECEMBER 31,
1996 1995 1994
----------- ----------- -----------
(IN THOUSANDS)
0 - 1.99%..................... $ 5,235 $ -- $ --
2 - 3.99%..................... 148 -- 1,844
4 - 5.99%..................... 210,481 141,750 65,533
6 - 7.99%..................... 170,056 158,375 106,915
8 - 9.99%..................... 1,709 1,817 22,549
10 - 11.99%................... 790 790 2,181
----------- ----------- -----------
388,419 $ 302,732 $ 199,022
=========== =========== ===========
The following table indicates the amount of the Company's certificates
of deposit of $100,000 or more by time remaining until maturity as of December
31, 1996.
CERTIFICATES
OF DEPOSIT
(IN THOUSANDS)
Three months or less........................................ $ 2,144
Three through six months.................................... 6,901
Six through twelve months................................... 4,791
Over twelve months.......................................... 12,366
----------
Total....................................................... $ 26,202
==========
BORROWINGS
Although deposits are the Company's primary source of funds, the Company
also utilizes borrowings from the FHLB of Atlanta and securities sold under
agreements to repurchase as alternative funding sources As a member of the FHLB
System, which, among other things, functions in a reserve credit capacity for
savings institutions, the Company is required to own capital stock in the FHLB
of Atlanta and is authorized to apply for advances on the security of such stock
and certain of its home mortgages and other assets (principally securities which
are obligations of, or guaranteed by, the United States of America) provided
certain creditworthiness standards have been met. See "Regulation."
As of December 31, 1996 the Company had outstanding advances of $144.8
million from the FHLB of Atlanta at interest rates ranging from 5.33% to 6.95%
and at a weighted average rate of 5.94%.
<PAGE>
The Company also borrows funds by entering into sales of securities
under agreements to repurchase the same securities with nationally recognized
investment banking firms. The securities are held in custody by the investment
banking firms with which the Company enters into the repurchase agreement.
Reverse repurchase agreements are treated as borrowings by the Company and are
secured by designated fixed and variable rate securities. The proceeds of these
transactions are used to meet cash flow or asset/liability matching needs of the
Company. The following table sets forth certain information regarding reverse
repurchase agreements for the dates indicated:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Weighted average balance during the year...................... $ 68,920 $ 97,692 $ 45,759
Weighted average interest rate during the year................ 5.77% 6.29% 4.92%
Maximum month-end balance during the year..................... $ 97,416 $ 119,507 $ 79,613
Mortgage-backed securities underlying
the agreements as of the end of the year:
Carrying value, including accrued interest................. 22,856 103,590 93,608
Estimated market value........................................ 22,804 103,891 89,224
Agencies
Carrying value, including accrued interest................. 38,562 10,499 30,794
Estimated market value..................................... 38,621 10,594 29,441
</TABLE>
<PAGE>
The following table sets forth information regarding the weighted
average interest rates and the highest and average month end balances of the
Company's borrowings.
<TABLE>
<CAPTION>
AT OR AT OR
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------------------------------------------- -------------------------------------------------------
WEIGHTED MAXIMUM WEIGHTED AVERAGE WEIGHTED MAXIMUM WEIGHTED AVERAGE
ENDING AVERAGE AMOUNT AT AVERAGE WEIGHTED ENDING AVERAGE AMOUNT AT AVERAGE WEIGHTED
CATEGORY BALANCE RATE MONTH-END BALANCE AVERAGE RATE BALANCE RATE MONTH-END BALANCE AVERAGE RATE
- -------- -------- -------- --------- --------- ------------ -------- -------- --------- ------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Advances from the FHLB
of Atlanta...........$144,800 5.94% $154,500 $120,633 5.91% $ 105,500 5.87% $ 106,800 $104,110 6.06%
Securities sold under
agreement to
repurchase $ 57,581 5.69% $ 97,416 68,920 5.77% $ 93,905 6.06% $ 119,507 $ 97,692 6.29%
</TABLE>
AT OR
FOR THE YEAR ENDED
DECEMBER 31, 1994
-------------------------------------------------------
WEIGHTED MAXIMUM WEIGHTED AVERAGE
ENDING AVERAGE AMOUNT AT AVERAGE WEIGHTED
CATEGORY BALANCE RATE MONTH-END BALANCE AVERAGE RATE
- -------- ------- -------- ---------- --------- ------------
Advances from the FHLB
of Atlanta........... $96,000 5.36% $ 112,000 $82,358 4.64%
Securities sold under
agreement to
repurchase $79,613 5.81% $ 79,613 $45,759 4.92%
<PAGE>
PROPERTIES
During 1996, the Bank operated from the Company's headquarters located
at 1111 North Highland Street, Arlington, Virginia 22201 and from an office that
it subleases from Arbor Capital Partners, Inc., a subsidiary of MET Holdings
("Arbor Capital"), in New York for approximately $58,000 per year.
SUBSIDIARIES
During the second quarter of 1996, the Bank through its wholly owned
subsidiary TeleBanc Servicing Corporation ("TSC") funded 50% of the capital
commitment for a new entity, AGT Mortgage Services, LLC ("AGT"). AGT services
performing loans and workouts for troubled or defaulted loans for a fee. The
Bank also provided in the second quarter of 1996, 50% of the capital commitment
for an additional new entity, AGT PRA, LLC ("AGT PRA"). The primary business of
AGT PRA is its investment in Portfolio Recovery Associates, LLC ("PRA"). PRA
acquires and collects delinquent consumer debt obligations for its own
portfolio.
EMPLOYEES
At December 31, 1996, the Company had approximately 40 full-time
employees. Management considers its relations with its employees to be
excellent. The Bank's employees are not represented by any collective bargaining
group.
REGULATION
GENERAL
The Company, as a savings and loan holding company, and the Bank, as a
federally chartered savings bank, are subject to extensive regulation,
supervision and examination by the OTS as their primary federal regulator. The
Bank also is subject to regulation, supervision and examination by the Federal
Deposit Insurance Corporation (the "FDIC") and as to certain matters by the
Board of Governors of the Federal Reserve System (the "Federal Reserve Board").
See "Management's Discussion and Analysis" and "Notes to Consolidated Financial
Statements" as to the impact of certain laws, rules and regulations on the
operations of the Company and the Bank. Set forth below is a description of
certain recent regulatory developments.
In September 1996, legislation (the "1996 legislation") was enacted to
address the undercapitalization of the SAIF, of which the Bank is a member. As a
result of the 1996 legislation, the FDIC imposed a one-time special assessment
of 0.657% on deposits insured by the SAIF as of March 31, 1995. The Bank
incurred a one-time charge of $1.7 million (before taxes) to pay for the special
assessment based upon its level of SAIF deposits as of March 31, 1995. After the
SAIF was deemed to be recapitalized, the Bank's deposit insurance premiums to
the SAIF were reduced as of September 30, 1996. The Bank expects that its future
deposit insurance premiums will continue to be lower than the premiums it paid
prior to the recapitalization.
The 1996 legislation also contemplates the merger of the SAIF with the
Bank Insurance Fund (the "BIF"), which generally insures deposits in national
and state-chartered banks. The combined deposit insurance fund, which will be
formed no earlier than January 1, 1999, will insure deposits at all FDIC insured
depository institutions. As a condition to the combined insurance fund, however,
no insured depository institution can be chartered as a savings association. The
Secretary of the Treasury is required to report to the Congress no later than
March 31, 1997 with respect to the development of a common charter for all
insured depository institutions. If legislation with respect to the development
of a common charter is enacted, the Bank may be required to convert its federal
<PAGE>
charter to either a new federal type of bank charter or state depository
institution charter. Future legislation also may result in the Company becoming
g regulated as a bank holding company by the Federal Reserve Board rather than a
savings and loan holding company regulated by the OTS. Regulation by the Federal
Reserve Board could subject the Company to capital requirements that are not
currently applicable to the Company as a holding company under OTS regulation
and may result in statutory limitations on the type of business activities in
which the Company may engage at the holding company level, which business
activities currently are not restricted. The Company and the Bank are unable to
predict whether such legislation will be enacted.
The 1996 legislation also contained several provision that could impact
operations of the Bank, including augmenting the Bank's commercial lending
authority by 10% of assets, provided that any loans in excess of 10% are used
for small business loans. Furthermore, the qualified thrift lender test that the
Bank must comply with was liberalized to provide that small business, credit
card and student loans can be included without any limit, and that the Bank can
qualify as a qualified thrift lender by meeting either the test set forth in the
Home Owners' Loan Act or under the definition of a domestic building and loan
association as defined under the Internal Revenue Code of 1086, as amended (the
"IRC").
Separate legislation was enacted in 1996, and is effective for tax
years beginning after December 31, 1995, repealing the thrift bad debt
provisions of Section 593 of the IRC under which qualified savings institutions
calculated their bad debt deduction for federal income tax purposes. As a
result, the Bank will no longer be able to use the "reserve method" for
computing its bad debt deduction and will be allowed to deduct only those bad
debts actually incurred during the taxable year. The bad debt provisions of this
legislation also require thrifts to recapture and pay tax on bad debt reserves
accumulated since 1987 over a six year period, beginning with a thrift's first
taxable year beginning after December 31, 1995. This recapture is suspended for
up to two years, however, if the thrift meets a residential loan origination
test. The legislation exempted from recapture $(264,000) in pre-1988 bad debt
deductions taken by the Bank and will defer up to two years the recapture of an
additional $549,000, subject to the Bank's compliance with the new home mortgage
residential loan origination test.
During 1996, the OTS continued its comprehensive review of its
regulations to eliminate duplicative, unduly burdensome and unnecessary
regulations concerning lending and investments, corporate governance,
subsidiaries and equity investments, conflicts of interest and usurpation of
corporate opportunity. The OTS's revised lending and investments regulation
generally imposes general safety and soundness standards, and also provides that
commercial loans made by a service corporation of a savings association will be
exempted from an institution's overall 10% limit on commercial loans. Such
regulations now allow an institution to use its own cost-of-funds index in
structuring adjustable rate mortgages, and eliminate percentage of assets
limitations on credit card lending.
The OTS's revised subsidiaries and equity investment regulation
consolidated all OTS regulations that apply to various types of subsidiaries of
federal associations and updates the list of pre-approved service corporation
activities with additional activities that the OTS has deemed to be reasonable
related to the activities of federal savings institutions. The revised corporate
governance regulation is intended to prove greater flexibility with respect to
corporate governance of federal savings institutions, such as the Bank.
The OTS also converted its policy statement on conflicts of interest to
a regulation that is intended to be based upon common law principles of "duty of
loyalty" and "duty of care." The new conflicts regulation provides that
directors, officers, employees, person having the power to control the
management or policies of savings associations, and other persons who owe
fiduciary duties to savings associations, and other persons who owe fiduciary
duties to savings institutions will be prohibited from advance their own
personal or business interests, or those of others, at the expense of the
institutions they serve, The "appearance of a conflict of interest" standard was
removed from the scope of the revised rule. The OTS also clarified that "persons
having the power to control
<PAGE>
management or policies of savings associations" includes holding companies such
as the Company. The OTS corporate opportunity regulations and policy statements
also were eliminated and replaced with a standard similar to common law
standards governing usurpation of corporate opportunity. Significantly under the
revised regulation, transfers of a line of business within a holding company
structure will not be deemed to be a usurpation of corporate opportunity if an
institution receives fair market consideration for a line of business
transferred to its holding company or its affiliates. In such transactions, the
OTS will generally defer to decisions made by a holding company, subject to
compliance with Sections 23A or 23B of the Federal Reserve Act and general
safety and soundness principles.
ITEM 2. PROPERTIES
Reference is made to the information set forth under the caption
"Properties" under Item 1. Business of this Annual Report on Form 10-K.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings, other than ordinary
routine litigation incidental to its business, to which the Company or any of
its subsidiaries is a party or of which any of their property is the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of TeleBanc stockholders during the
fourth quarter of the fiscal year ended December 31, 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Information as to the principal market on which the Company's common
stock is traded, the Company's dividend policy and the high and low bid
quotations or sales prices, as applicable, for each calendar quarter since the
Company's initial public offering is incorporated herein by reference to the
section titled "Company Information" in the 1996 Annual Report to Stockholders.
The approximate number of holders of record of the Company's common stock at
December 31, 1996 was less than 200.
ITEM 6. SELECTED FINANCIAL DATA
Selected consolidated financial data for the five years ended December
31, 1996 included in the section titled "Selected Financial Data" in the 1996
Annual Report to Stockholders is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results
of Operations included in the section so titled in the 1996 Annual Report to
Stockholders is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Certain of the information required by this Item is incorporated by
reference to the sections titled "Consolidated Statements of Financial
Condition," "Consolidated Statements of Operations," "Consolidated Statements of
Stockholders' Equity," "Consolidated Statements of Cash Flows" and
<PAGE>
"Notes to Consolidated Financial Statements" in the 1996 Annual Report to
Stockholders. The independent auditors' report of Arthur Andersen LLP with
respect to the Company's consolidated statements of financial condition at
December 31, 1996 and 1995 and the consolidated statements of operations,
changes in stockholders' equity and cash flows for the years ended December 31,
1996 and 1995 is filed as Exhibit 99 and is incorporated herein by reference.
The independent auditors' report of KPMG Peat Marwick LLP with respect to the
Company's consolidated statements of operations, changes in stockholders' equity
and cash flows for the year ended December 31, 1994 is filed as Exhibit 99 and
is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Item 9 is not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to General Instruction G of the Form 10-K, such information
shall be filed as an amendment no later than 120 days from December 31, 1996.
ITEM 11. EXECUTIVE COMPENSATION
Pursuant to General Instruction G of the Form 10-K, such
information shall be filed as an amendment no later than 120 days from December
31, 1996.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Pursuant to General Instruction G of the Form 10-K, such
information shall be filed as an amendment no later than 120 days from December
31, 1996.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to General Instruction G of the Form 10-K, such
information shall be filed as an amendment no later than 120 days from December
31, 1996.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) The following consolidated financial statements of registrant
and its subsidiary and report of independent auditors are included in Item 8
hereof.
Report of Independent Auditors.
Consolidated Statements of Financial Condition - December 31, 1996 and
1995.
Consolidated Statements of Operations - Years Ended December 31, 1996,
1995 and 1994.
Consolidated Statements of Changes in Stockholders' Equity - Years
Ended December 31, 1996, 1995 and 1994.
Consolidated Statements of Cash Flows - Years Ended December 31, 1996,
1995 and 1994.
Notes to Consolidated Financial Statements.
(a)(2) All schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and therefore have
been omitted.
(a)(3) The following exhibits are either filed with this Report or are
incorporated herein by reference:
3.1(a) Amended and Restated Certificate of Incorporation of the
Company.*
3.1(b) Certificate of Designation.***
3.2 Bylaws of the Company.****
4.1 Specimen certificate of shares of Common Stock.**
10.1 1994 Stock Option Plan.**
10.2 Tax Allocation Agreement, dated April 7, 1994, between the
Bank and the Company.*
10.3 Unit Purchase Agreement, dated as of February 19, 1997, among
the Company and the Purchasers identified therein. ***
10.4 Amended and Restated Acquisition Agreement, dated as of
February 19, 1997, among the Company, Arbor Capital Partners,
Inc., MET Holdings Corporation, and William M. Daugherty. ***
11 Statement regarding computation of per share earnings.****
13 1996 Annual Report to Stockholders.****
<PAGE>
21 Subsidiaries of the Registrant.****
23.1 Consent of Arthur Andersen LLP and KPMG Peat Marwick LLP.****
27 Financial Data Schedule.
99.1 Independent auditor's report of Arthur Andersen LLP.****
99.2 Independent auditor's report of KPMG Peat Marwick.****
99.3 Definitive proxy statement for the 1997 Annual Meeting of
Stockholders.*****
(b) The Registrant did not file any Current Reports on Form 8-K during
the fourth quarter of its fiscal year ended December 31, 1996.
(c) Exhibits to this Form 10-K/A are attached.
(d) Not applicable.
- ------------------
* Incorporated by reference to pre-effective Amendment No. 1 to the
Company's registration statement on Form S-1 (File No. 33-76930) filed
with the SEC on May 3, 1994.
** Incorporated by reference to the Company's registration statement on
Form S-1 (File No. 33-76930) filed with the SEC on March 25, 1994.
*** Incorporated by reference from the Company's Current Report on Form
8-K, as filed with the SEC on March 17, 1997.
**** Exhibit was filed as part of the Company's Report on Form 10-K, as
filed with the SEC on March 31, 1997.
***** Exhibit was filed as part of the Company's Report on Form 10-K/A, as
filed with the SEC on April 24, 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized as of the 30th day of
March, 1996.
TELEBANC FINANCIAL CORPORATION
Registrant
By: /s/ Mitchell H. Caplan
--------------------------
Mitchell H. Caplan
President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated as of March 30, 1996.
<TABLE>
<CAPTION>
Signature Title
<S> <C>
/s/ David A. Smilow Chairman of the Board & CEO
- ----------------------------- (principal executive officer)
David A. Smilow
/s/ Mitchell H. Caplan President, Vice Chairman
- ----------------------------- and Director
Mitchell H. Caplan
/s/ Aileen Lopez Pugh Executive Vice President and
- ----------------------------- Chief Financial Officer/Treasurer
Aileen Lopez Pugh (principal financial and accounting officer)
/s/ David DeCamp Director
- -----------------------------
David DeCamp
/s/ Arlen W. Gelbard Director
- -----------------------------
Arlen W. Gelbard
/s/ Dean C. Kehler Director
- -----------------------------
Dean C. Kehler
/s/ Steven F. Piaker Director
- -----------------------------
Steven F. Piaker
/s/ Mark Rollinson Director
- -----------------------------
Mark Rollinson
</TABLE>
<PAGE>
INDEX TO FINANCIALS
Report of Independent Auditors.
Consolidated Statements of Financial Condition - December 31, 1996 and
1995.
Consolidated Statements of Operations - Years Ended December 31, 1996,
1995 and 1994.
Consolidated Statements of Changes in Stockholders' Equity - Years
Ended December 31, 1996, 1995 and 1994.
Consolidated Statements of Cash Flows - Years Ended December 31, 1996,
1995 and 1994.
Notes to Consolidated Financial Statements.
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT NO. EXHIBIT PAGE
----------- ------- -------------
<S> <C>
3.1(a) Amended and Restated Certificate of Incorporation of the Company.*
3.1(b) Certificate of Designation***
3.2 Bylaws of the Company.
4.1 Specimen certificate of shares of Common Stock.**
10.1 1994 Stock Option Plan.**
10.2 Tax Allocation Agreement, dated April 7, 1994, between the Bank and
the Company.*
10.3 Unit Purchase Agreement, dated as of February 19, 1997, among the
Company and the Purchasers identified therein. ***
10.4 Amended and Restated Acquisition Agreement, dated as of February 19,
1997, among the Company, Arbor Capital Partners, Inc., MET Holdings,
Inc., and William M. Daugherty. ***
11 Statement regarding computation of per share earnings.
13 1996 Annual Report to Stockholders, portions of which have been
incorporated by reference into this Form 10-K.
21 Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP and KPMG Peat Marwick LLP.
27 Financial Data Schedule.
99.1 Independent auditor's report of Arthur Andersen LLP.****
99.2 Independent auditor's report of KPMG Peat Marwick.****
99.3 Definitive proxy statement for the 1997 Annual Meeting of
Stockholders.*****
(b) The Registrant did not file any Current Reports on Form 8-K during
the fourth quarter of its fiscal year ended December 31, 1996.
(c) Exhibits to this Form 10-K/A are attached.
(d) Not applicable.
- ------------------
* Incorporated by reference to pre-effective Amendment No. 1 to the
Company's registration statement on Form S-1 (File No. 33-76930) filed
with the SEC on May 3, 1994.
** Incorporated by reference to the Company's registration statement on
Form S-1 (File No. 33-76930) filed with the SEC on March 25, 1994.
*** Incorporated by reference from the Company's Current Report on Form
8-K, as filed with the SEC on March 17, 1997.
**** Exhibit was filed as part of the Company's Report on Form 10-K, as
filed with the SEC on March 31, 1997.
***** Exhibit was filed as part of the Company's Report on Form 10-K/A, as
filed with the SEC on April 24, 1997.
</TABLE>
BYLAWS
OF
TELEBANC FINANCIAL CORPORATION
1. OFFICES.
1.1. REGISTERED OFFICE.
The initial registered office of the Corporation shall be in
Wilmington, Delaware, and the initial registered agent in charge thereof shall
be Corporation Service Company.
1.2. OTHER OFFICES.
The Corporation may also have offices at such other places, both
within and without the State of Delaware, as the Board of Directors may from
time to time determine or as may be necessary or useful in connection with the
business of the Corporation.
2. MEETINGS OF STOCKHOLDERS.
2.1. PLACE OF MEETINGS.
All meetings of the stockholders shall be held at such place as may
be fixed from time to time by the Board of Directors, the Chairman of the Board,
or the President and stated in the notice of meeting or in a duly executed
waiver of notice thereof.
2.2. ANNUAL MEETINGS.
The Corporation shall hold annual meetings of stockholders on the
first Wednesday in May at 11 a.m. or at such other date and time as shall be
designated from time to time by the Board of Directors, the Chairman of the
Board or the President at which stockholders shall elect directors and transact
such other business as may properly be brought before the meeting.
2.3. SPECIAL MEETINGS.
Special meetings of the stockholders for any purpose, unless
otherwise prescribed by statute, may be called only as provided in the
Corporation's Certificate of Incorporation, as amended from time to time (the
"Certificate of Incorporation"). Business transacted at any special meeting of
stockholders shall be limited to the purposes stated in the notice.
<PAGE>
2.4. NOTICE OF MEETINGS.
Notice of any meeting of stockholders, stating the place, date and
hour of the meeting and the purpose or purposes for which the meeting is called,
shall be given to each stockholder entitled to vote at such meeting not less
than 10 days nor more than 60 days before the date of the meeting (except to the
extent that such notice is waived or is not required as provided in the General
Corporation Law of the State of Delaware (the "Delaware General Corporation
Law")). Such notice shall be given in accordance with, and shall be deemed
effective as set forth in, Section 222 (or any successor section) of the
Delaware General Corporation Law.
2.5. WAIVERS OF NOTICE.
Whenever the giving of any notice is required by statute, the
Certificate of Incorporation or these Bylaws, a waiver thereof, in writing and
delivered to the Corporation, signed by the person or persons entitled to said
notice, whether before or after the event as to which such notice is required,
shall be deemed equivalent to notice. Attendance of a stockholder at a meeting
shall constitute a waiver of notice (a) of such meeting, except when the
stockholder at the beginning of the meeting objects to holding the meeting or
transacting business at the meeting, and (b) of consideration of a particular
matter at the meeting that is not within the purpose or purposes described in
the meeting notice, unless the stockholder objects to considering the matter at
the beginning of the meeting.
2.6. BUSINESS AT ANNUAL MEETING.
At an annual meeting of the stockholders, only such business shall
be conducted as shall have been properly brought before the meeting. To be
properly brought before an annual meeting, business must be (a) specified in the
notice of meeting (or any supplement thereto) given by or at the direction of
the Board of Directors, (b) otherwise properly brought before the meeting by or
at the direction of the Board of Directors or (c) otherwise properly brought
before the meeting by a stockholder.
For business to be properly brought before an annual meeting by a
stockholder, the stockholder must have given timely notice thereof in writing to
the Secretary. To be timely, a stockholder's notice must be received at the
principal executive offices of the Corporation no later than the date designated
for receipt of stockholders' proposals in a prior public disclosure made by the
Corporation. If there has been no such prior public disclosure, then to be
timely, a stockholder's notice must be delivered to or mailed and received at
the principal executive offices of the Corporation not less than 60 days nor
more than 90 days prior to the annual meeting; provided, however, that in the
event that less than 70 days' notice of the date of the annual meeting is given
to stockholders or prior public disclosure of the date of the meeting is made,
notice by the stockholder to be timely must be so
<PAGE>
received not later than the close of business on the 10th day following the day
on which such notice of the date of the annual meeting was mailed or such public
disclosure was made. A stockholder's notice to the Secretary shall set forth as
to each matter the stockholder proposes to bring before the annual meeting (a) a
brief description of the business desired to be brought before the annual
meeting and the reasons for conducting such business at the annual meeting, (b)
the name and address, as they appear on the Corporation's books, of the
stockholder proposing such business, (c) the class and number of shares of the
Corporation which are beneficially owned by the stockholder, (d) any material
interest of the stockholder in such business and (e) the same information
required by clauses (b), (c) and (d) above with respect to any other stockholder
that, to the knowledge of the stockholder proposing such business, supports such
proposal. Notwithstanding anything in these Bylaws to the contrary, no business
shall be conducted at an annual meeting except in accordance with the procedures
set forth in this Section 2.6. The Chairman of the Board shall, if the facts
warrant, determine and declare to the annual meeting that a matter of business
was not properly brought before the meeting in accordance with the provisions of
this Section 2.6, and if the Chairman of the Board should so determine, the
Chairman of the Board shall so declare to the meeting and any such business not
properly brought before the meeting shall not be transacted.
2.7. LIST OF STOCKHOLDERS.
After the record date for a meeting of stockholders has been fixed,
at least 10 days before such meeting, the officer who has charge of the stock
ledger of the Corporation shall make a list of all stockholders entitled to vote
at the meeting, arranged in alphabetical order and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
10 days prior to the meeting, either at a place in the city where the meeting is
to be held, which place is to be specified in the notice of the meeting, or at
the place where the meeting is to be held. Such list also shall, for the
duration of the meeting, be produced and kept open to the examination of any
stockholder who is present at the time and place of the meeting.
2.8. STOCK LEDGER.
The stock ledger of the Corporation shall be the only evidence as
to who are the stockholders entitled to examine the list required by Section 2.7
above or to vote in person or by proxy at any meeting of stockholders.
<PAGE>
2.9. QUORUM AT MEETINGS.
Stockholders may take action on a matter at a meeting only if a
quorum exists with respect to that matter. Except as otherwise provided by
statute or by the Certificate of Incorporation, the holders of a majority of the
stock issued and outstanding and entitled to vote at the meeting, and who are
present in person or represented by proxy, shall constitute a quorum at all
meetings of the stockholders for the transaction of business. Once a share is
represented for any purpose at a meeting (other than solely to object (a) to
holding the meeting or transacting business at the meeting or (b) to
consideration of a particular matter at the meeting that is not within the
purpose or purposes described in the meeting notice), it is deemed present for
quorum purposes for the remainder of the meeting and for any adjournment of that
meeting unless a new record date is or must be set for the adjourned meeting.
The holders of a majority of the voting shares represented at a meeting, whether
or not a quorum is present, may adjourn such meeting from time to time. At such
adjourned meeting at which a quorum shall be present or represented, any
business may be transacted which might have been transacted at the meeting as
originally noticed. If the adjournment is for more than 30 days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each stockholder entitled to vote at the
meeting.
2.10. VOTING AND PROXIES.
Unless otherwise provided in the Delaware General Corporation Law
or in the Certificate of Incorporation, and subject to the other provisions of
these Bylaws, each stockholder shall be entitled to one vote on each matter, in
person or by proxy, for each share of the Corporation's capital stock that has
voting power and that is held by such stockholder and such number of votes,
including multiple or fractional votes, as may be provided by resolution of the
Board of Directors for each share of serial preferred stock entitled to vote
thereat held by such stockholder. Proxies solicited on behalf of the Board of
Directors shall be voted as directed by the stockholder or, in the absence of
such direction, as determined by a majority of the Board of Directors. No proxy
shall be voted or acted upon after three years from its date, unless the proxy
provides for a longer period. A duly executed appointment of proxy shall be
irrevocable if the appointment form states that it is irrevocable and if, and
only as long as, it is coupled with an interest sufficient in law to support an
irrevocable power.
2.11. REQUIRED VOTE.
If a quorum exists, any matter brought before any meeting of
stockholders (other than the election of directors) shall be decided by the
affirmative vote of the majority of the votes cast on the matter, unless the
Certificate of Incorporation or the Delaware General Corporation Law or these
Bylaws requires a greater number
<PAGE>
of affirmative votes (in which case such different requirement shall apply).
Directors shall be elected by a plurality of the votes cast by the shares
entitled to vote in the election (provided a quorum exists), and the election of
directors need not be by written ballot. The Board of Directors, in its
discretion, may require that any votes cast at such meeting shall be cast by
written ballot.
2.12. ACTION WITHOUT A MEETING.
Any action required or permitted to be taken by the stockholders of
the Corporation must be effected at a duly called annual or special meeting of
stockholders, and may not be effected by any consent in writing by such
stockholders, unless such written consent is unanimous, and the writing or
writings are delivered to the Corporation for inclusion in the Minute Book of
the Corporation.
2.13. VOTING OF SHARES IN THE NAME OF TWO OR MORE PERSONS.
If shares or other securities having voting power stand of record in
the names of two or more persons, whether fiduciaries, members of a partnership,
joint tenants, tenants in common, tenants by the entirety or otherwise, or if
two or more persons have the same fiduciary relationship respecting the same
shares, unless the secretary of the Corporation is given written notice to the
contrary and is furnished with a copy of the instrument or order appointing them
or creating the relationship wherein it is so provided, their acts with respect
to voting shall have the following effect: (a) if only one votes, his or her act
binds all; (b) if more than one vote, the act of the majority so voting binds
all; (c) if more than one vote, but the vote is evenly split on any particular
matter, each fraction may vote the securities in question proportionally, or any
person voting the shares, or a beneficiary, if any, may apply to the Court of
Chancery of the State of Delaware or such other court as may have jurisdiction
to appoint an additional person to act with the persons so voting the shares,
which shall then be voted as determined by a majority of such persons and the
person appointed by the Court. If the instrument so filed shows that any such
tenancy is held in unequal interests, a majority or even-split for the purposes
of this Section 2.13 shall be a majority or even-split in interest.
2.14. VOTING OF SHARES BY CERTAIN HOLDERS.
Shares standing in the name of another corporation may be voted by
any officer, agent or proxy as the bylaws of such corporation may prescribe, or
in the absence of such provision, as the board of directors of such corporation
may determine. Shares held by an administrator, executor, guardian or
conservator may be voted by him or her, but no trustee shall be entitled to vote
shares held by such trustee without a transfer of such shares into his or her
name. Shares standing in the name of a receiver may be voted by such receiver,
and shares held
<PAGE>
by or under the control of a receiver may be voted by such receiver without the
transfer into his or her name if authority so to do is contained in an
appropriate order of the court or other public authority by which such receiver
was appointed.
A stockholder whose shares are pledged shall be entitled to vote such
shares unless in the transfer by the pledgor on the books of the Corporation
such stockholder has expressly empowered the pledgee to vote thereon, in which
case only the pledgee, or his or her proxy, may represent such stock and vote
thereon.
Neither treasury shares of its own stock held by the Corporation, nor
shares held by another corporation, if a majority of the shares entitled to vote
for the election of directors of such other corporation are held by the
Corporation, shall be voted at any meeting or counted in determining the total
number of outstanding shares at any given time for purposes of any meeting.
2.15. INSPECTORS OF ELECTION.
In advance of any meeting of stockholders, the Chairman of the Board
or the President shall appoint one or more inspectors of election and any
substitute inspectors to act at the meeting or any adjournment thereof. Each
inspector, before entering upon the discharge of his or her duties, shall take
and sign an oath faithfully to execute the duties of inspector at such meeting
with strict impartiality and according to the best of his or her ability. The
inspectors shall determine the number of shares of stock outstanding and the
voting power of each, the shares of stock represented at the meeting, the
existence of a quorum, the validity and effect of proxies and ballots, and shall
receive votes, ballots or consents, hear and determine all challenges and
questions arising in connection with the right to vote, count and tabulate all
votes, ballots or consents, determine the result, determine and retain for a
reasonable period a record of the disposition of any challenges made to any
determination by the inspectors, certify their determination of the number of
shares represented at the meeting, and their count of all votes and ballots, and
do such acts as are proper to conduct the election or vote with fairness to all
stockholders. The inspectors may appoint and retain other persons or entities to
assist the inspectors in the performance of the duties of the inspectors. On
request of the person presiding at the meeting, the inspectors shall make a
report in writing of any challenge, question or matter determined by them and
execute a certificate of any fact found by them.
3. DIRECTORS.
3.1. POWERS.
The business and affairs of the Corporation shall be managed by or
under the direction of the Board of Directors, which may exercise all such
powers of the Corporation and do all such lawful acts and things, subject to any
limitation set
<PAGE>
forth in the Certificate of Incorporation, these Bylaws or agreements among
stockholders which are otherwise lawful.
3.2. NUMBER AND ELECTION.
The number of directors which shall constitute the whole board
shall not be fewer than six nor more than nine. Within the limits above
specified, the number of directors shall be determined by resolution of the
Board of Directors. Directors shall be elected only by stockholders at annual
meetings of stockholders, other than the initial board of directors and except
as provided in Section 3.3 hereof in the case of vacancies and newly created
directorships. Each director elected shall hold office for the term for which
such director is elected and until such director's successor is elected and
qualified or until such director's earlier resignation or removal.
3.3. VACANCIES.
Vacancies and newly created directorships resulting from any
increase in the authorized number of directors shall be filled, for the
unexpired term, by the concurring vote of a majority of the directors then in
office, whether or not a quorum, and any director so chosen shall hold office
for the remainder of the full term of the class of directors in which the new
directorship was created or the vacancy occurred and until such director's
successor shall have been elected and qualified or until such director's earlier
death, resignation or removal.
3.4. CLASSES; TERMS OF OFFICE.
Unless otherwise provided in the Certificate of Incorporation, the
Board of Directors shall divide the directors into three classes; and, when the
number of directors is changed, shall determine the class or classes to which
the increased or decreased number of directors shall be apportioned; provided,
however, that no decrease in the number of directors shall affect the term of
any director then in office. At each annual meeting of stockholders, directors
elected to succeed those whose terms are expiring shall be elected for a term of
office expiring at the annual meeting of stockholders held in the third year
following their election and until their respective successors are elected and
qualified, or until such director's earlier death, resignation or removal.
3.5. NOMINATION OF DIRECTORS.
Nominations of persons for election to the Board of Directors may
be made by the Board of Directors, or by any stockholder of the Corporation
entitled to vote for the election of directors at the annual meeting who
complies with the notice procedures set forth in this Section 3.5. Nominations
by stockholders shall be made pursuant to timely notice in writing to the
Secretary. To be timely, a stockholder's
<PAGE>
notice shall be received at the principal executive offices of the Corporation
no later than the date designated for receipt of stockholders' proposals in a
prior public disclosure made by the Corporation. If there has been no such prior
public disclosure, then to be timely, a stockholder's nomination must be
delivered to or mailed and received at the principal executive offices of the
Corporation not less than 60 days nor more than 90 days prior to the annual
meeting; provided, however, that in the event that less than 70 days' notice of
the date of the meeting is given to stockholders or prior public disclosure of
the date of the meeting is made, notice by the stockholder to be timely must be
so received not later than the close of business on the 10th day following the
day on which such notice of the date of the annual meeting was mailed or such
public disclosure was made. Such stockholder's notice shall set forth (a) as to
each person whom the stockholder proposes to nominate for election or
re-election as a director, (i) the name, age, business address and residence
address of such person, (ii) the principal occupation or employment of such
person, (iii) the class and number of shares of the Corporation which are
beneficially owned by such person, and (iv) any other information relating to
such person that is required to be disclosed in solicitations of proxies for
election of directors, or is otherwise required, in each case pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended (including
without limitation such person's written consent to being named in the proxy
statement as a nominee and to serving as a director if elected); and (b) as to
the stockholder giving notice (i) the name and address, as they appear on the
Corporation's books, of the stockholder proposing such nomination, and (ii) the
class and number of shares of the Corporation which are beneficially owned by
the stockholder. At the request of the Board of Directors, any person nominated
by the Board of Directors for election as a director shall furnish to the
Secretary that information required to be set forth in a stockholder's notice of
nomination which pertains to the nominee. No person shall be eligible for
election as a director of the Corporation unless nominated in accordance with
the procedures set forth in this Section 3.5. The Chairman of the Board shall,
if the facts warrant, determine and declare to the annual meeting that a
nomination was not made in accordance with the provisions of this Section 3.5,
and if the Chairman of the Board should so determine, the Chairman of the Board
shall so declare to the meeting and the defective nomination shall be
disregarded.
3.6. MEETINGS.
(a) REGULAR MEETINGS.
Regular meetings of the Board of Directors may be held without
notice at such time and at such place as shall from time to time be determined
by the Board of Directors.
<PAGE>
(b) SPECIAL MEETINGS.
Special meetings of the Board of Directors may be called by the
Chairman of the Board, President or any two directors on one day's notice to
each director, either personally or by telephone, express delivery service (so
that the scheduled delivery date of the notice is at least one day in advance of
the meeting), telegram or facsimile transmission, and on five days' notice by
mail (effective upon deposit of such notice in the mail). The notice need not
describe the purpose of a special meeting.
(c) TELEPHONE MEETINGS.
Members of the Board of Directors may participate in a meeting of
the Board of Directors by means of conference telephone or similar
communications equipment by means of which all participating directors can
simultaneously hear each other during the meeting. A director participating in a
meeting by this means is deemed to be present in person at the meeting.
(d) ACTION WITHOUT MEETING.
Any action required or permitted to be taken at any meeting of the
Board of Directors may be taken without a meeting if all members of the Board of
Directors consent thereto in writing, and the writing or writings are delivered
to the Corporation for inclusion in the Minute Book of the Corporation.
(e) WAIVER OF NOTICE OF MEETING; PRESUMPTION OF
ASSENT.
A director may waive any notice required by statute, the
Certificate of Incorporation or these Bylaws before or after the date and time
stated in the notice. Except as set forth below, the waiver must be in writing,
signed by the director entitled to the notice, and delivered to the Corporation
for inclusion in the Minute Book of the Corporation. Notwithstanding the
foregoing, a director's attendance at or participation in a meeting waives any
required notice to the director of the meeting unless the director at the
beginning of the meeting objects to holding the meeting or transacting business
at the meeting and does not thereafter vote for or assent to action taken at the
meeting. A director who is present at a meeting is presumed to have assented to
any action taken unless such director enters a dissent or abstention in the
minutes of the meeting or files a written dissent to such action no later than
five days after such director receives a copy of the minutes of the meeting,
provided that the right to dissent shall not apply to a director who votes in
favor of such action.
<PAGE>
(f) QUORUM AND VOTE AT MEETINGS.
At all meetings of the Board of Directors, a quorum of the Board of
Directors consists of a majority of the total number of directors prescribed
pursuant to Section 3.2 hereof (or, if no number is prescribed, the number in
office immediately before the meeting begins). The vote of a majority of the
directors present at any meeting at which there is a quorum shall be the act of
the Board of Directors, except as may be otherwise specifically provided by
statute or by the Certificate of Incorporation or by these Bylaws. In the
absence of a quorum for any meeting of the Board of Directors, a majority of the
directors present thereat may adjourn such meeting from time to time, without
notice other than announcement at the meeting, until a quorum shall be present.
3.7. COMPENSATION OF DIRECTORS.
The Board of Directors shall have the authority to fix the
compensation of directors. The directors may be paid their reasonable expenses,
if any, of attendance at each meeting of the Board of Directors and may be paid
a reasonable fixed sum for actual attendance at each meeting of the Board of
Directors. No such payment shall preclude any director from serving the
Corporation in any other capacity and receiving compensation therefor. Members
of special or standing committees may be allowed like compensation for attending
committee meetings.
3.8. INTERESTED DIRECTORS.
No contract or transaction between the Corporation and one or more
of its directors or officers, or between the Corporation and any other
corporation, partnership, association, or other organization in which one or
more of its directors or officers are directors or officers, or have a financial
interest, shall be void or voidable solely for this reason, or solely because
the director or officer is present at or participates in the meeting of the
Board of Directors or committee thereof which authorizes the contract or
transaction, or solely because his or her or their votes are counted for such
purpose if: (a) the material facts as to his or her or their relationship or
interest and as to the contract or transaction are disclosed or are known to the
Board of Directors or the committee, and the Board of Directors or committee in
good faith authorizes the contract or transaction by the affirmative votes of a
majority of the disinterested directors, even though the disinterested directors
be less than a quorum; or (b) the material facts as to his or her or their
relationship or interest and as to the contract or transaction are disclosed to
or are known by the stockholders entitled to vote thereon, and the contract or
transaction is specifically approved in good faith by vote of the stockholders;
or (c) the contract or transaction is fair as to the Corporation as of the time
it is authorized, approved or ratified by the board of directors, a committee
thereof or the stockholders. Common or interested directors may be counted in
determining the presence of a
<PAGE>
quorum at a meeting of the Board of Directors or of a committee which authorizes
the contract or transaction.
3.9. RESIGNATION.
Any director may resign at any time by sending a written notice of
such resignation to the Chairman of the Board or the President of the
Corporation. Unless otherwise specified therein such resignation shall take
effect upon receipt thereof by the Chairman of the Board or the President. More
than three consecutive absences from regular meetings of the Board of Directors,
unless excused by resolution of the Board of Directors, shall automatically
constitute a resignation, effective when such resignation is accepted by the
Board of Directors.
4. COMMITTEES.
4.1. CREATION OF COMMITTEES.
The Board of Directors may by resolution create one or more
committees and appoint members of the Board of Directors to serve on them. Each
committee may have one or more members, who serve at the pleasure of the Board
of Directors. The Board of Directors shall establish an Audit Committee and a
Stock Option Committee, composed in each case only of directors who are not
employees of the Corporation or any subsidiary thereof. The creation of a
committee and appointment of members to it shall be approved by a majority of
all the directors in office when the action is taken, whether or not a quorum.
The designation of any committee pursuant to this Article 4 and the delegation
of authority thereto shall not operate to relieve the Board of Directors, or any
director, of any responsibility imposed by law or regulation. The same rules
that govern meetings, action without meetings, notice and waiver of notice, and
quorum and voting requirements of the Board of Directors apply to committees and
their members as well.
4.3. EXECUTIVE COMMITTEE.
The Board of Directors may by resolution designate the chief
executive officer and two or more other directors to constitute an Executive
Committee. The chairman of the Executive Committee shall be designated by the
Board of Directors. The Executive Committee may fix its own rules of procedure
which shall not be inconsistent with these Bylaws. It shall keep regular minutes
of its proceedings and report the same to the full Board of Directors for its
information at the meeting thereof held next after the proceedings shall have
taken place. Subject to Section 4.4 below, each member of the Executive
Committee shall hold office until the next annual regular meeting of the Board
of Directors following his or her designation and until his or her successor is
designated as a member of the Executive Committee.
<PAGE>
4.2. EXECUTIVE COMMITTEE AUTHORITY.
The Executive Committee, when the Board of Directors is not in
session, shall have and may exercise all the powers and authority of the Board
of Directors in the management of the business and affairs of the Corporation,
and may authorize the seal of the Corporation to be affixed to all papers which
may require it, except to the extent, if any, that such powers and authority
shall be limited by the resolution appointing the Executive Committee; and
except also that the Executive Committee shall not have the power or authority
of the Board of Directors with reference to amending the Certificate of
Incorporation; adopting an agreement of merger or consolidation; recommending to
the stockholders the sale, lease or exchange of all or substantially all of the
Corporation's property and assets; recommending to the stockholders a
dissolution of the Corporation or a revocation of a dissolution; amending the
Bylaws of the Corporation; filling a vacancy or creating a new directorship; or
approving a transaction in which any member of the such committee, directly or
indirectly, has any material beneficial interest; and unless the resolution or
Bylaws expressly so provide, the Executive Committee shall not have the power or
authority to declare a dividend or to authorize the issuance of stock or
securities convertible into or exercisable for stock.
4.4. RESIGNATION AND REMOVAL.
Any member of the Executive Committee may be removed at any
time with or without cause by resolution adopted by a majority of the full Board
of Directors. Any member of the Executive Committee may resign from the
Executive Committee at any time by giving written notice to the Chairman of the
Board or the President of the Corporation. Unless otherwise specified therein,
such resignation shall take effect upon receipt. The acceptance of such
resignation shall not be necessary to make it effective.
5. OFFICERS.
5.1. POSITIONS.
The officers of the Corporation shall be a Chairman of the Board, a
President, and a Secretary, and such other officers as the Board of Directors
(or an officer authorized by the Board of Directors) from time to time may
appoint, including one or more Vice Chairmen, Executive Vice Presidents, Vice
Presidents, Assistant Secretaries and Assistant Treasurers. Each such officer
shall exercise such powers and perform such duties as shall be set forth below
and such other powers and duties as from time to time may be specified by the
Board of Directors or by any officer(s) authorized by the Board of Directors to
prescribe the duties of such other officers. Any number of offices may be held
by the same person.
<PAGE>
5.2. POWERS.
(a) Each officer shall have, in addition to the duties and powers
set forth herein, such duties and powers as are commonly incident to such
officer's office and such additional duties and powers as the Board of Directors
may from time to time authorize.
(b) Powers of attorney, proxies, waivers of notice of meetings,
consents and other instruments relating to securities or partnership interests
owned by the Corporation may be executed in the name of and on behalf of the
Corporation by the Chairman of the Board, the President or any Vice President,
and any such officer may, in the name of and on behalf of the Corporation, take
all such action as any such officer may deem advisable to vote in person or by
proxy at any meeting of security holders of any corporation in which the
Corporation may own securities, or at any meeting of any partnership in which
the Corporation owns an interest at any such meeting, shall possess and may
exercise any and all rights and powers incident to the ownership of such
securities or partnership interest and which, as the owner thereof, the
Corporation might have possessed and exercised, if present. The Board of
Directors may, by resolution, from time to time confer like powers upon any
other person or persons.
5.3. CHAIRMAN OF THE BOARD.
The Chairman of the Board shall (when present) preside at all
meetings of the Board of Directors and stockholders, and shall ensure that all
orders and resolutions of the Board of Directors and stockholders are carried
into effect. The Chairman of the Board may execute bonds, mortgages and other
contracts, under the seal of the Corporation, if required, except where required
or permitted by law to be otherwise signed and executed and except where the
signing and execution thereof shall be expressly delegated by the Board of
Directors to some other officer or agent of the Corporation.
5.4. PRESIDENT.
The President of the Corporation shall be the chief executive
officer, unless the Board of Directors designates the Chairman of the Board as
the chief executive officer. The President shall have overall responsibility and
authority for management of the operations of the Corporation, subject to the
authority of the Board of Directors and the Chairman of the Board. The President
may execute bonds, mortgages and other contracts, under the seal of the
Corporation, if required, except where required or permitted by law to be
otherwise signed and executed and except where the signing and execution thereof
shall be expressly delegated by the Board of Directors to some other officer or
agent of the Corporation.
<PAGE>
5.5. VICE PRESIDENT.
Any Vice President shall have such duties and powers as shall be
set forth in these Bylaws or as shall be designated from time to time by the
Board of Directors or by the Chairman of the Board or President. In the absence
of the President or in the event of the President's inability or refusal to act,
the Vice President (or in the event there be more than one Vice President, the
Vice Presidents in the order designated, or in the absence of any designation,
then in the order of their election) shall perform the duties of the President,
and when so acting shall have all the powers of, and be subject to all the
restrictions upon, the President. Any Vice President may execute bonds,
mortgages and other documents under the seal of the Corporation, except where
required or permitted by law to be otherwise executed and except where the
execution thereof shall be expressly delegated by the Board of Directors to some
other officer or agent of the Corporation.
5.5. SECRETARY.
The Secretary shall have responsibility for preparation of minutes
of meetings of the Board of Directors and of the stockholders and for
authenticating records of the Corporation. The Secretary shall give, or cause to
be given, notice of all meetings of the stockholders and special meetings of the
Board of Directors. The Secretary or an Assistant Secretary also may attest all
instruments signed by any other officer of the Corporation.
5.6. ASSISTANT SECRETARY.
The Assistant Secretary, or if there be more than one, the
Assistant Secretaries in the order determined by the Board of Directors (or if
there shall have been no such determination, then in the order of their
election), shall, in the absence of the Secretary or in the event of the
Secretary's inability or refusal to act, perform the duties and exercise the
powers of the Secretary.
5.7. TREASURER.
The Treasurer shall have responsibility for the custody of the
corporate funds and securities and shall see to it that full and accurate
accounts of receipts and disbursements are kept in books belonging to the
Corporation. The Treasurer shall render to the Chairman of the Board, the
President, the Vice President, and the Board of Directors, upon request, an
account of all financial transactions and of the financial condition of the
Corporation.
<PAGE>
5.8. ASSISTANT TREASURER.
The Assistant Treasurer, or if there shall be more than one, the
Assistant Treasurers in the order determined by the Board of Directors (or if
there shall have been no such determination, then in the order of their
election), shall, in the absence of the Treasurer or in the event of the
Treasurer's inability or refusal to act, perform the duties and exercise the
powers of the Treasurer.
5.9. TERM OF OFFICE.
The officers of the Corporation shall hold office until their
successors are chosen and qualified or until their death, earlier resignation or
removal. Any vacancy occurring in any office of the Corporation shall be filled
by the Board of Directors. Any officer may resign at any time upon written
notice to the Corporation. Any officer elected or appointed by the Board of
Directors may be removed at any time, with or without cause, by the affirmative
vote of a majority of the Board of Directors. Any officer may be removed by the
Board of Directors whenever in its judgment the best interests of the
Corporation will be served thereby, but such removal, other than for cause,
shall be without prejudice to the contract rights, if any, of the person so
removed.
6. CAPITAL STOCK.
6.1. CERTIFICATES OF STOCK; UNCERTIFICATED SHARES.
The shares of the Corporation shall be represented by certificates,
provided that the Board of Directors may provide by resolution that some or all
of any or all classes or series of the Corporation's stock shall be
uncertificated shares. Any such resolution shall not apply to shares represented
by a certificate until such certificate is surrendered to the Corporation.
Notwithstanding the adoption of such a resolution by the Board of Directors,
every holder of stock represented by certificates, and upon request every holder
of uncertificated shares, shall be entitled to have a certificate (representing
the number of shares registered in certificate form) signed in the name of the
Corporation by the Chairman of the Board, the President, or any Vice President,
and by the Treasurer, Secretary or any Assistant Treasurer or Assistant
Secretary. Any or all the signatures on the certificate may be facsimile. In
case any officer, transfer agent or registrar whose signature or facsimile
signature appears on a certificate shall have ceased to be such officer,
transfer agent or registrar before such certificate is issued, it may be issued
by the Corporation with the same effect as if such person were such officer,
transfer agent or registrar at the date of issue.
<PAGE>
6.2. LOST CERTIFICATES.
The Chairman of the Board, the President, or any Vice President may
direct a new certificate of stock to be issued in place of any certificate
theretofore issued by the Corporation and alleged to have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
that the certificate of stock has been lost, stolen or destroyed. When
authorizing such issuance of a new certificate, such officer may, as a condition
precedent to the issuance thereof, require the owner of such lost, stolen or
destroyed certificate or certificates, or such owner's legal representative, to
advertise the same in such manner as such officer shall require and/or to give
the Corporation a bond, in such sum as such officer may direct as indemnity
against any claim that may be made against the Corporation on account of the
certificate alleged to have been lost, stolen or destroyed or on account of the
issuance of such new certificate or uncertificated shares.
6.3. RECORD DATE.
(a) ACTIONS BY STOCKHOLDERS.
In order that the Corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders (or to take any
other action), the Board of Directors may fix a record date, which record date
shall not precede the date upon which the resolution fixing the record date is
adopted by the Board of Directors and shall not be less than 10 nor more than 60
days before the meeting or action requiring a determination of stockholders.
In order that the Corporation may determine the stockholders
entitled to consent to corporate action without a meeting, the Board of
Directors may fix a record date, which record date shall not precede the date
upon which the resolution fixing the record date is adopted by the Board of
Directors and shall not be more than 10 days after the date upon which the
resolution fixing the record date is adopted by the Board of Directors.
A determination of stockholders of record entitled to notice of or
to vote at a meeting of stockholders shall apply to any adjournment of the
meeting, unless the Board of Directors fixes a new record date.
If no record date is fixed by the Board of Directors, the record
date shall be at the close of business on the day next preceding the day on
which notice is given, or if notice is not required or is waived, at the close
of business on the day next preceding the day on which the meeting is held or
such other action is taken, except that (if no record date is established by the
Board of Directors) the record date for determining stockholders entitled to
consent to corporate action without a meeting is the first date on which a
stockholder delivers a signed written consent to the Corporation for inclusion
in the Minute Book of the Corporation.
<PAGE>
(b) PAYMENTS.
In order that the Corporation may determine the stockholders
entitled to receive payment of any dividend or other distribution or allotment
of any rights or the stockholders entitled to exercise any rights in respect of
any change, conversion or exchange of stock, or for the purpose of any other
lawful action, the Board of Directors may fix a record date, which record date
shall not precede the date upon which the resolution fixing the record date is
adopted, and which record date shall be not more than 60 days prior to such
action. If no record date is fixed, the record date for determining stockholders
for any such purpose shall be at the close of business on the day on which the
Board of Directors adopts the resolution relating thereto.
(c) STOCKHOLDERS OF RECORD.
The Corporation shall be entitled to recognize the exclusive right
of a person registered on its books as the owner of shares to receive dividends,
to receive notifications, to vote as such owner, and to exercise all the rights
and powers of an owner. The Corporation shall not be bound to recognize any
equitable or other claim to or interest in such share or shares on the part of
any other person, whether or not it shall have express or other notice thereof,
except as otherwise may be provided by law.
7. INSURANCE.
The Corporation may purchase and maintain insurance on behalf of
any person who is or was a director, officer, employee or agent of the
Corporation (or is or was serving at the request of the Corporation as a
director, officer, partner, trustee, employee or agent of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise)
against liability asserted against or incurred by such person in such capacity
or arising from such person's status as such (whether or not the Corporation
would have the power to indemnify such person against the same liability).
8. INDEMNIFICATION.
8.1. INDEMNIFICATION IN ACTIONS, SUITS OR PROCEEDINGS
OTHER THAN THOSE BY OR IN RIGHT OF THE
CORPORATION.
(a) The Corporation shall indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, and any appeal therein, whether civil,
criminal, administrative, arbitrative, or investigative (other than an action by
or in right of the Corporation)
<PAGE>
by reason of the fact that such person is or was a director, officer, trustee,
employee, or agent of the Corporation, or is or was serving at the request of
the Corporation as a director, officer, trustee, employee, or agent of another
corporation, association, partnership, joint venture, trust, employee benefit
plan or other enterprise, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by such person in connection with such action, suit or proceeding, and any
appeal therein, if such person acted in good faith and in a manner which such
person reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe that such conduct was unlawful. The termination of
any action, suit or proceeding, and any appeal therein, by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent,
shall not, of itself, create a presumption that the person did not act in good
faith and in a manner which such person reasonably believed to be in or not
opposed to the best interests of the Corporation, and, with respect to any
criminal action or proceeding, had reasonable cause to believe that such conduct
was unlawful.
8.2. INDEMNIFICATION IN ACTIONS, SUITS OR PROCEEDINGS
BY OR IN THE RIGHT OF THE CORPORATION.
(a) The Corporation shall indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding by or in the right of the corporation to
procure a judgment in its favor by reason of the fact that such person is or was
a director, officer, trustee, employee or agent of the Corporation, or is or was
serving at the request of the Corporation as a director, officer, trustee,
employee or agent of another corporation, association, partnership, joint
venture, trust, employee benefit plan or other enterprise, against expenses
(including attorneys' fees) actually and reasonably incurred by such person in
connection with the defense or settlement of such action or suit if such person
acted in good faith and in a manner which such person reasonably believed to be
in or not opposed to the best interests of the Corporation. No such
indemnification shall be made against expenses in respect of any claim, issue or
matter as to which such person shall have been adjudged to be liable to the
Corporation or against amounts paid in settlement unless and only to the extent
that there is a determination (as set forth in Section 8.3 hereof) that, despite
the adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses or
amounts paid in settlement.
8.3. AUTHORIZATION OF INDEMNIFICATION.
Any indemnification under this Article 8 shall be made by the
Corporation only as authorized in the specific case upon a determination that
indemnification of
<PAGE>
the director, officer, employee or agent is proper in the circumstances because
such person or persons have met the applicable standard of conduct set forth in
Sections 8.1 and 8.2 hereof and, if applicable, is fairly and reasonably
entitled to indemnity as set forth in Section 8.2, as the case may be. Such
determination shall be made (a) by the Board of Directors by a majority vote of
a quorum consisting of directors who were not parties to such action, suit or
proceeding, or (b) if such a quorum is not obtainable, or, even if obtainable a
quorum of disinterested directors so directs, by independent legal counsel in a
written opinion, or (c) by a majority of the stockholders entitled to vote
generally in the election of directors. To the extent, however, that a director,
officer, trustee, employee or agent of the Corporation has been successful on
the merits or otherwise in defense of any action, suit or proceeding described
above, or in defense of any claim, issue or matter therein, he or she shall be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by him or her in connection therewith, without the necessity of
authorization in the specific case. No director, officer, trustee, employee or
agent of the Corporation shall be entitled to indemnification in connection with
any action, suit or proceeding voluntarily initiated by such person unless the
action, suit or proceeding was authorized by a majority of the entire Board of
Directors.
8.4. GOOD FAITH DEFINED.
For purposes of any determination under Section 8.3 hereof, a
person shall be deemed to have acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to the best interests of the
Corporation, or, with respect to any criminal action or proceeding, to have had
no reasonable cause to believe his or her conduct was unlawful, if his or her
action is based on the records or books of account of the Corporation or another
enterprise, or on information supplied to him or her by the officers of the
Corporation or another enterprise in the course of their duties, or on the
advice of legal counsel for the Corporation or another enterprise or on
information or records given or reports made to the Corporation or another
enterprise by an independent certified public accountant or by an appraiser or
other expert selected with reasonable care by the Corporation or another
enterprise. The term "another enterprise" as used in this Section 8.4 shall mean
any other corporation or any association, partnership, joint venture, trust or
other enterprise of which such person is or was serving at the request of the
Corporation as a director, officer, trustee, employee or agent. The provisions
of this Section 8.4 shall not be deemed to be exclusive or to limit in any way
the circumstances in which a person may be deemed to have met the applicable
standards of conduct set forth in Sections 8.1 or 8.2 hereof, as the case may
be.
8.5. INDEMNIFICATION BY A COURT.
Notwithstanding any contrary determination in the specific case
under Section 8.3, and notwithstanding the absence of any determination
thereunder, any
<PAGE>
director, officer, trustee, employee or agent may apply to any court of
competent jurisdiction in the State of Delaware for indemnification to the
extent otherwise permissible under Sections 8.1 and 8.2 above. The basis of such
indemnification by a court shall be a determination by such court that
indemnification of the director, officer, trustee, employee or agent is proper
in the circumstances because he or she has met the applicable standards of
conduct set forth in Sections 8.1 and 8.2 above, as the case may be. Notice of
any application for indemnification pursuant to this Section 8.5 shall be given
to the Corporation promptly upon the filing of such application. Notwithstanding
any of the foregoing, unless otherwise required by law, no director, officer,
trustee, employee or agent of the Corporation shall be entitled to
indemnification in connection with any action, suit or proceeding voluntarily
initiated by such person unless the action, suit or proceeding was authorized by
a majority of the entire Board of Directors.
8.6. ADVANCEMENT OF EXPENSES.
The Corporation may advance expenses (including attorneys' fees)
incurred by a director, officer, employee or agent in advance of the final
disposition of such action, suit or proceeding upon the receipt of an
undertaking by or on behalf of such person to repay such amount if it shall
ultimately be determined that such person is not entitled to indemnification
from the Corporation as authorized in this Article 8.
8.7. CONTRACT, NON-EXCLUSIVITY AND SURVIVAL OF INDEMNIFICATION.
The indemnification provided by this Article 8 shall be deemed to
be a contract between the Corporation and each director, officer, employee and
agent who serves in such capacity at any time while this Article 8 is in effect,
and any repeal or modification thereof shall not affect any rights or
obligations then existing with respect to any state of facts then or theretofore
existing or any action, suit or proceeding theretofore or thereafter brought
based in whole or in part upon any such state of facts. Further, the
indemnification and advancement of expenses provided by this Article 8 shall not
be deemed exclusive of any other rights to which those seeking indemnification
and advancement of expenses may be entitled under any certificate of
incorporation, bylaw, agreement, contract, vote of stockholders or disinterested
directors or pursuant to the direction (howsoever embodied) of any court of
competent jurisdiction or otherwise, both as to action in his or her official
capacity and as to action in another capacity while holding such office, it
being the policy of the Corporation that, subject to the limitation in Section
8.3 hereof concerning voluntary initiation of actions, suits or proceedings,
indemnification of the persons specified in Sections 8.1 and 8.2 hereof shall be
made to the fullest extent permitted by law. The provisions of this Article 8
shall not be deemed to preclude the indemnification of any person who is not
specified in Sections 8.1 or 8.2 of this Article 8 but whom the Corporation has
the power or obligation to indemnify under the provisions of the law of the
State of Delaware. The
<PAGE>
indemnification and advancement of expenses provided by, or granted pursuant to,
this Article 8 shall, unless otherwise provided when authorized or ratified,
continue as to a person who has ceased to be a director, officer, trustee,
employee or agent and shall inure to the benefit of the heirs, executors and
administrators of such person.
8.8. MEANING OF "CORPORATION" FOR PURPOSES OF ARTICLE 8.
For purposes of this Article 8, references to "the Corporation"
shall include, in addition to the resulting corporation, any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors, officers and employees
or agents, so that any person who is or was a director, officer, employee or
agent of such constituent corporation, or is or was serving at the request of
such constituent corporation as a director, officer, employee or agent of
another corporation, association, partnership, joint venture, trust or other
enterprise, shall stand in the same position under the provisions of this
Article 8 with respect to the resulting or surviving corporation as he or she
would have with respect to such constituent corporation if its separate
existence had continued.
9. NOTICES.
9.1. NOTICES.
Whenever written notice is required by law, the Certificate of
Incorporation or these Bylaws to be given to any director, member of a committee
or stockholder, such notice may be given by mail, addressed to such director,
member of a committee or stockholder, at his or her address as it appears on the
records of the Corporation, with postage thereon prepaid, and such notice shall
be deemed to be given at the time when the same shall be deposited in the United
States mail. Written notice may also be given personally or by telegram, telex
or telecopy.
9.2. WAIVERS OF NOTICE.
Whenever any notice is required by law, the Certificate of
Incorporation or these bylaws to be given to any director, member of a committee
or stockholder, a waiver thereof in writing, signed by the person or persons
entitled to said notice, whether before or after the time stated therein, shall
be deemed equivalent thereto.
Attendance of a person at a meeting shall constitute a waiver of
notice of such meeting, except when the person attends a meeting with the
express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at nor the purpose of any
regular or special meeting of the stockholders,
<PAGE>
directors, or members of a committee of directors need be specified in any other
waiver of notice unless so required by the Certificate of Incorporation or these
Bylaws.
10. GENERAL PROVISIONS.
10.1. INSPECTION OF BOOKS AND RECORDS.
Any stockholder, in person or by attorney or other agent, shall,
upon written demand under oath stating the purpose thereof, have the right
during the usual hours for business to inspect for any proper purpose the
Corporation's stock ledger, a list of its stockholders, and its other books and
records, and to make copies or extracts therefrom. A proper purpose shall mean a
purpose reasonably related to such person's interest as a stockholder. In every
instance where an attorney or other agent shall be the person who seeks the
right to inspection, the demand under oath shall be accompanied by a power of
attorney or such other writing which authorizes the attorney or other agent to
so act on behalf of the stockholder. The demand under oath shall be directed to
the Corporation at its registered office or at its principal place of business.
10.2. DIVIDENDS.
The Board of Directors may declare dividends upon the capital stock
of the Corporation, subject to the provisions of the Certificate of
Incorporation and the laws of the State of Delaware, and such dividends may be
paid in cash, in property, or in shares of capital stock of the Corporation.
Subject to the Delaware General Corporation Law, such dividends may be paid
either out of surplus, out of the net profits for the fiscal year in which the
dividend is declared and/or the preceding fiscal year.
10.3. RESERVES.
The Board of Directors may set apart, out of the funds of the
Corporation available for dividends, a reserve or reserves for any proper
purpose and may abolish any such reserve.
10.4. EXECUTION OF INSTRUMENTS.
All checks, drafts or other orders for the payment of money, and
promissory notes of the Corporation shall be signed by such officer or officers
or such other person or persons as the Board of Directors may from time to time
designate.
<PAGE>
10.5. FISCAL YEAR.
The fiscal year of the Corporation shall begin on January 1 and end
on December 31.
10.6. SEAL.
The corporate seal shall be in such form as the Board of Directors
shall approve. The seal may be used by causing it or a facsimile thereof to be
impressed or affixed or otherwise reproduced.
11. AMENDMENTS TO BYLAWS.
The Board of Directors may from time to time adopt, amend and
repeal these Bylaws. Such action by the Board of Directors shall require the
affirmative vote of at least a majority of the directors then in office. If
stockholders are entitled to vote with respect thereto to amend or repeal Bylaws
adopted by the Board of Directors as may be provided in the Certificate of
Incorporation or by law, then the affirmative vote of 66-2/3% of the total
number of votes of the then outstanding shares of capital stock of the
Corporation entitled to vote generally in the election of directors, voting
together as a single class, shall be required for the amendment or repeal of
Bylaws by the stockholders of the Corporation. Any amendments to Sections 3.2,
3.4 and 3.5 of the Corporation's Bylaws shall require the affirmative vote of
the stockholders set forth in the preceding sentence.
* * * * *
The foregoing Bylaws were adopted by the Board of Directors on
March 23, 1994.
/s/ David Smilow
---------------------------
Chairman of the Board
Attested:
/s/ Elizabeth Felix
- -------------------
Secretary
These Bylaws reflect amendments adopted in February 1997
TELEBANC FINANCIAL CORPORATION
EXHIBIT 11
SCHEDULE OF COMPUTATION OF NET INCOME PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1996 1995
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PRIMARY
<S> <C> <C>
Net income for primary income per common share $ 2,600 $ 2,720
Weighted average number of common shares outstanding
during the year 2,049,500 2,049,500
Add common equivalent shares 264,864 219
----------- -----------
Weighted average number of shares used in calculating
primary income per share 2,316,616 2,049,719
Primary income per common share $ 1.12 $ 1.33
FULLY DILUTED
Net income for fully diluted net income per share $ 2,552 $ 2,720
Weighted average number of shares used in calculating
of primary income per share 2,314,364 2,049,719
Add (deduct) incremental shares representing:
Shares issuable upon exercise of stock options included
in primary calculation above (264,864) (219)
Shares issuable upon exercise of stock options based on
year-end market price 290,954 19,097
----------- -----------
Weighted average number of shares used in calculating
fully diluted income per share 2,340,454 2,068,597
Fully diluted income per common share $ 1.09 $ 1.31
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
INTRODUCTION
TeleBanc Financial Corporation ("TeleBanc" or the "Company") was organized
by its majority stockholder, MET Holdings Corporation, to become, in March 1994,
the parent savings and loan holding company for TeleBank ("the Bank"), a
federally chartered savings bank. All references to the Company include the
business of the Bank. Financial and other data as of and for all periods prior
to March 1994 represent the consolidated data of the Bank only. Prior to March
1996, the Bank was formerly known as Metropolitan Bank for Savings, F.S.B.
During the second quarter of 1994, TeleBanc completed its initial public
offering, raising $4.6 million through the sale of common stock and an
additional $17.3 million through the issuance of subordinated notes with
warrants. Since completion of the offering, the Company has emphasized growth of
the Bank through careful leveraging of the proceeds. At December 31, 1996,
TeleBanc reported total assets of $648.0 million, total deposits of $390.5
million, and stockholders' equity of $24.7 million, compared to $553.9 million,
$306.5 million, and $21.6 million, respectively, at December 31, 1995.
Since 1989, the Bank has been developing an operating strategy that seeks
to minimize general and administrative expenses through more efficient deposit
gathering, borrowing, and asset generation. From its headquarters in Arlington,
Virginia, the Company attracts primarily low transaction deposit accounts such
as certificates of deposit and money market accounts by advertising and
conducting public relation campaigns in select markets. Unlike traditional
financial institutions, the Company pursues a "branchless" marketing strategy
and thus interacts with its customers primarily through the Company's toll free
telephone number and mail. Company representatives utilize a sophisticated
computer software system to market and process deposits, build a customer
database for future products and provide quality service. Other funding sources
for the Company include borrowings from the Federal Home Loan Bank of Atlanta
("FHLB"), securities sold under agreements to repurchase, and subordinated debt.
The Company's asset acquisition strategy is focused on investing in
one-to-four unit, single-family mortgages and mortgage backed securities
purchased in the secondary market rather than to originate loans. The Company
seeks to manage interest rate risk through matching the maturities of its
deposit solicitations and borrowings as compared with its asset purchases and
the use of certain hedging techniques in order to operate profitably in various
interest rate environments.
On February 28, 1997, the Company consummated the sale of $29.9 million of
units in the form of convertible preferred stock, senior subordinated notes and
warrants and the purchase of the assets of Arbor Capital Partners, Inc.
("Arbor"), a registered investment advisor, funds manager and broker-dealer. MET
Holdings, TeleBanc's majority shareholder, owns a majority of Arbor.
The $29.9 million in units were sold to investment partnerships managed by
Conning & Company, CIBC WG Argosy Merchant Fund 2, LLC, the Progressive
Corporation, and The Northwestern Mutual Life Insurance Company. Representatives
from the Conning partnerships and the CIBC Merchant Fund will serve on the
Board. The units consist of $13.7 million in 9.5% senior subordinated notes with
198,088 detachable warrants, $16.2 million in 4.0% convertible preferred stock,
and rights to 205,563 contingent warrants.
Also in connection with the sale of units, the Arbor asset acquisition was
structured as a tax free issuance of 162,461 shares of TeleBanc common stock and
a $500,000 cash payment for the Arbor assets. An independent appraisal valued
the assets to be acquired from Arbor at $3.1 million. Consistent with TeleBanc's
charter, the number of shares issued to Arbor as consideration is limited to 5%
of total market value of outstanding TeleBanc stock at the time of acquisition.
The following financial review presents management's analysis of the
consolidated financial condition and results of operations of TeleBanc, and
should be read together with the consolidated financial statements and
accompanying notes.
INTEREST RATE SENSITIVITY MANAGEMENT
The Company actively monitors the sensitivity of its assets and liabilities
to various interest rate environments due to repricing in future time periods.
Effective interest rate sensitivity management seeks to ensure that net interest
income is protected from the impact of changes in interest rates.
The Company's strategies are intended to stabilize the Company's net
interest rate spread under a variety of changes in interest rates. In an effort
to manage growth effectively, the Company undertook a slow, yet steady path to
leverage the initial
<PAGE>
public offering proceeds and invest in interest-earning assets. It is
management's intent to leverage the $29.9 million private placement proceeds and
invest in interest-earning assets in a path similar to that of the initial
public offering. This growth was funded by raising deposits and incurring debt,
including FHLB advances and securities sold under agreements to repurchase
("reverse repos"). The Company's deposit gathering strategy tends to rely on
higher yielding money market accounts and certificates of deposit accumulated
through the Bank's branchless banking telephone and mail operations, rather than
relying on higher overhead products such as extensive branch networks and
transaction accounts (i.e., checking accounts). Similarly, the Company tends to
invest its funds in assets purchased in the secondary market rather than
incurring overhead for extensive loan origination operations. As a result, the
Company's interest rate spread may be lower than that of traditional financial
institutions. By seeking to match closely the maturities of its
interest-sensitive assets and liabilities, the Company believes it can maintain
relatively consistent interest rate spreads and mitigate much of the interest
rate risk associated with such assets and liabilities.
The Company utilizes hedging techniques to reduce its overall interest rate
risk exposure over a one-to-seven year period. Management's hedging practices
are directed towards the following risks: interest rate sensitivity gap between
the amount of interest-earning assets and the amount of interest-bearing
liabilities, loan prepayments and premature withdrawal of deposits. A policy
adopted by the Company's Board of Directors prohibits management from
speculative purchases or sales of futures, options, stripped mortgage-backed
securities and other mortgage derivative products.
Interest rate swaps, caps, floors, collars and financial options are used
to manage interest rate exposure by hedging certain assets and liabilities, and
are not used for speculative purposes. The Company's interest rate spread was
1.84%, 1.72%, and 1.51% for 1996, 1995 and 1994, respectively. The Company's
yield on interest-earning assets for such periods was 1.94%, 1.88% and 1.62%,
respectively. Since the initial public offering in May 1994, the Company has
steadily grown both assets and liabilities, with average interest earning assets
growing from $206.9 million for the quarter ended March 31, 1994 to $575.5
million for the year ended December 31, 1996, and average interest bearing
liabilities growing from $206.1 million to $564.3 million over the same period.
The Company's ongoing strategy is to maintain a relatively stable interest rate
margin and interest rate spread.
The Company matches its assets and liabilities by examining the extent to
which such assets and liabilities are "interest rate sensitive" and by
monitoring interest rate sensitivity "gap." An asset or liability is said to be
interest rate sensitive within a specific period if it will mature or reprice
within that period. The interest rate sensitivity gap is defined as the
difference between the amount of interest-earning assets maturing or repricing
within a specific time period and the amount of interest-bearing liabilities
maturing or repricing within the same time period. A gap is considered positive
when the amount of interest rate sensitive assets exceeds the amount of interest
rate sensitive liabilities, and is considered negative when the amount of
interest rate sensitive liabilities exceeds the amount of interest rate
sensitive assets. Generally, during a period of rising interest rates, a
negative gap would adversely affect net interest income while a positive gap
would result in an increase in net interest income; conversely, during a period
of falling interest rates, a negative gap would result in an increase in net
interest income and a positive gap would adversely affect net interest income.
The Company's current asset-liability management strategy is to maintain an
evenly matched one-to-five year gap giving effect to hedging, but depending on
market conditions and related circumstances, a positive or negative one-to-five
year gap of up to 20% may be acceptable. Giving effect to the Company's hedging
activities, the Company's one-year gap at December 31, 1996 is (0.16)%. The
Company's hedge-effected one-to-five year gap at such date is (11.59)%.
The following assumptions were used by management in order to prepare the
Company's gap table set forth on the next page. Non-amortizing investment
securities are shown in the period in which they contractually mature.
Investment securities which contain embedded options such as puts or calls are
shown in the period in which that security is currently expected to be put or
called or to mature. The table assumes that fully-indexed, adjustable-rate,
residential mortgage loans and mortgage-backed securities prepay at an annual
rate between 10% and 15%, based on estimated future prepayment rates for
comparable market benchmark securities and the Company's prepayment history. The
table also assumes that fixed rate, current-coupon residential loans prepay at
an annual rate of between 10% and 15%. The above assumptions were adjusted up or
down on a pool by pool basis to model the effects of product type, coupon rate,
rate adjustment frequency, lifetime cap, net coupon reset margin, and periodic
rate caps upon prevailing annual prepayment rates. Time deposits are shown in
the period in which they contractually mature, and savings deposits are shown to
reprice immediately. The interest rate sensitivity of the Company's assets and
liabilities could vary substantially if different assumptions were used or if
actual experience differs from the assumptions used.
Certain shortcomings are inherent in the method of analysis presented in
the gap table. Although certain assets and liabilities may have similar
maturities or periods of repricing, they may react in different degrees to
changes in market interest rates. The interest rates on certain types of assets
and liabilities may fluctuate in
<PAGE>
advance of changes in market interest rates, while interest rates on other types
of assets and liabilities may lag behind changes in market interest rates.
Certain assets, such as adjustable-rate mortgages, have features which restrict
changes in interest rates on a short-term basis and over the life of the assets.
In the event of a change in interest rates, prepayment rates would likely
deviate significantly from those assumed in calculating the table. The ability
of many borrowers to service their debt may decrease in the event of an interest
rate increase.
Management measures the efficiency of its asset/liability management
strategies by analyzing, on a quarterly basis, the Bank's theoretical Net
Portfolio Value (NPV) and the effect that changes in interest rates are expected
to have on NPV. The Board of Directors has established limits within which such
changes in NPV are expected to be maintained in the event of a change in
interest rates. Under proposed Office of Thrift Supervision ("OTS") regulations,
an institution's interest rate risk exposure is measured based upon a 200 basis
point parallel shift in market interest rates. A savings institution whose
measured interest rate risk exposure is greater than specified levels must
deduct an interest rate risk component from total capital for purpose of
determining regulatory risk-based capital levels. As of December 31, 1996, the
Bank would not have been required to deduct any interest rate risk component
from capital under the proposed OTS interest rate risk capital regulations.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
REPRICING REPRICING REPRICING
WITHIN WITHIN WITHIN REPRICING
BALANCE PERCENT 0-3 4-12 1-5 OVER
(Dollars in Thousands) DECEMBER 31, 1996 OF TOTAL MONTHS MONTHS YEARS 5 YEARS
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net $351,821 56.21% $ 17,339 $140,267 $133,274 $ 60,941
Investment securities
available for sale, interest
bearing accounts & FHLB stock 88,636 14.16 27,654 487 9,908 50,587
Mortgage-backed
securities available for sale 184,743 29.51 49,942 69,131 47,702 17,968
Federal funds sold 750 0.12 750 -- -- --
--------- -------------------------------------------------------------
Total interest-earning assets $625,950 100.00% $ 95,685 $209,885 $190,884 $ 129,496
Non-interest earning assets: 22,015 -------------------------------------------------------------
--------
Total assets $647,965
--------
Interest-bearing liabilities:
Savings deposits $111,843 18.35% $111,843 $ -- $ -- $ --
Time deposits 278,643 45.72 31,739 92,011 151,462 3,431
FHLB advances 144,800 23.76 134,800 10,000 -- --
Other borrowings 57,581 9.45 57,581 -- -- --
Subordinated debt 16,586 2.72 -- -- -- 16,586
--------- -------------------------------------------------------------
Total interest-bearing liabilities $609,453 100.00% $335,963 $102,011 $151,462 $ 20,017
Non-interest bearing liabilities 13,854 -------------------------------------------------------------
--------
Total liabilities $623,307
Stockholders' equity 24,658
Total liabilities and --------
stockholders equity $647,965
Periodic repricing difference
(periodic gap) $ (240,278) $ 107,874 $ 39,422 $ 109,479
Cumulative repricing difference
(cumulative gap) $ (240,278) $ (132,404) $ (92,982) $ 16,497
Cumulative gap to total assets (37.08)% (20.43)% (14.35)% 2.55%
Cumulative gap to total assets
hedge effected (a) (11.40)% (0.16)% (11.59)% 2.55%
--------------------------------------------------------------------------
</TABLE>
(a) The hedge effected cumulative gap to total assets reflects the effect of
hedging instruments on the Company's gap at December 31, 1996. For purposes
of determining the effect of such hedging instruments, interest rate swap
agreements are treated as part of the hedged liability, hence, the cash
flows from the swap and the hedged asset or liability are netted and the
resulting cash flows are used in the gap calculation. Interest rate cap
agreements also are treated as part of the hedged asset or liability and
weighted by market's estimate of the likelihood the cap strike will be met
or exceeded. The net cash flows are used in the gap calculations.
<PAGE>
FINANCIAL CONDITION
The Company's total assets increased by $94.1 million or 17.0% from $553.9
million at December 31, 1995 to $648.0 million at December 31, 1996. The
increase in assets during 1996 primarily reflects continued leveraging of the
Bank's capital. At December 31, 1993, the Bank had stockholders' equity of $12.4
million. Following the Company's initial public offering in May 1994, the
Company increased the Bank's equity by $15.0 million, thereby supporting a
31-month period of growing the Bank from $220.3 million in assets to $648.0
million in assets as of December 31, 1996. Growth in assets is attributable to
increases in mortgage-backed securities and loans receivable. The primary
sources of funds for this growth in assets were deposits and borrowings.
Loans receivable, net and loans receivable held for sale increased $103.3
million or 41.6%, from $248.5 million at December 31, 1995 to $351.8 million at
December 31, 1996. The increase reflects whole loan purchases of $182.0 million
offset by $51.2 million of principal repayments and $27.0 million of loans sold
in 1996. In the second quarter of 1996, the Company reevaluated its loan
investment strategy. The Company determined that the probable sale of loans,
subsequent to a restructuring or credit enhancement, would add value to the
portfolio. Pursuant to this strategy, the Company created a loans held for sale
category with a one-time transfer of loans from the investment portfolio that
have characteristics that make them susceptible to sale after restructuring,
credit enhancement, or other improvements. Loans held for sale are recorded at
the lower of cost or market. Going forward, the Company will maintain loans held
for sale and loans held for investment categories.
Mortgage-backed securities, available-for-sale, decreased $49.6 million, or
21.2%, from $234.4 million at December 31, 1995 to $184.7 million at December
31, 1996. Investment securities, available for sale, increased $38.7 million, or
96.5%, from $40.1 million at December 31, 1995 to $78.8 million at December 31,
1996. These securities are held for liquidity purposes and increased along with
the growth of assets of the Bank in 1996.
Deposits increased $84.0 million, or 27.4%, from $306.5 million at December
31, 1995 to $390.5 million at December 31, 1996, largely as a result of the
Company's marketing efforts to attract money market and certificate of deposit
accounts, as well as the purchase of deposits from a failed institution. During
fiscal year 1996, approximately $21.4 million of interest was credited to the
accounts while deposits exceeded withdrawals by $62.6 million, resulting in a
net change of $84.0 million. During 1996, significant emphasis was also placed
upon raising deposits as a source of funds for asset growth.
FHLB advances increased $39.3 million, or 37.3%, from $105.5 million at
December 31, 1995 to $144.8 million at December 31, 1996. Other borrowings,
composed of securities sold under agreements to repurchase, decreased $36.3
million, or 38.7%, from $93.9 million at December 31, 1995 to $57.6 million at
December 31, 1996. This slight increase in net borrowings reflects the Company's
effort to focus funding efforts on deposits yet maintain additional funds at low
interest rates in order to support asset growth.
Stockholders' equity increased $3.1 million to $24.7 million at December
31, 1996 from $21.6 million at December 31, 1995. The increase reflects $2.6
million in net income and an unrealized gain for the year on securities
available for sale of $541,000, net of taxes, which increases the Company's
stockholders' equity, but does not impact the statement of operations.
The consolidated average balance sheets, along with income and expense and
related interest yields and rates at December 31, 1996 and for each of the
preceding three fiscal years are shown on the following page. The table also
presents information for the periods indicated with respect to the difference
between the weighted average yield earned on interest-earning assets and
weighted average rate paid on interest-bearing liabilities, or "interest rate
spread," which savings institutions have traditionally used as an indicator of
profitability. Another indicator of an institution's profitability is its "net
yield on interest-earning assets," which is its net interest income divided by
the average balance of interest-earning assets. Net interest income is affected
by the interest rate spread and by the relative amounts of interest earning
assets and interest-bearing liabilities. When interest-earning assets equal or
exceed interest-bearing liabilities, any positive interest rate spread will
generate net interest income. As discussed above, the Company's operating
strategy tends to result in lower spreads and margins than other comparable
financial institutions, but the Company believes lower net interest income is
mitigated by savings in general and administrative expenses.
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
1996 1995
Balance Average Interest Average Average Interest Average
(Dollars in thousands) December 31, 1996 Balance Inc./Exp. Yield/Cost Balance Inc./Exp. Yield/Cost
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net(a) $351,821 $279,038 $23,089 8.28% $201,737 $17,726 8.80%
Mortgage-backed &
related securities -- -- -- -- 233,728 18,614 7.96
Investment securities (b)(c) 9,810 12,841 871 6.79 13,627 990 7.27
Mortgage-backed &
related securities, AFS 184,743 221,656 17,955 8.10 19,138 1,597 8.35
Investment securities, AFS 78,826 61,169 3,959 6.47 25,516 2,071 8.12
Federal funds sold 750 842 44 5.22 810 49 6.05
Trading account -- -- -- -- 1,932 166 8.59
-------- ---------------------------- ----------------------------
Total-interest earning assets $625,950 $575,546 $45,918 7.98% $496,488 $41,213 8.31%
Non-interest earning assets 22,015 26,929 15,388
-------- ---------------------------- ----------------------------
Total assets $647,965 $602,475 $511,876
-------- ---------------------------- ----------------------------
Interest-bearing liabilities:
Savings deposits $111,843 $ 99,346 $ 4,815 4.85% $ 41,387 $ 2,111 5.10%
Time deposits 278,643 258,870 16,542 6.39 223,745 14,930 6.67
FHLB advances 144,800 120,678 6,689 5.54 104,142 6,571 6.31
Other borrowings 57,581 68,154 4,569 6.70 97,906 6,230 6.36
Subordinated debt, net 16,586 17,250 2,200 12.75 17,250 2,089 12.11
-------- ---------------------------- ----------------------------
Total interest-bearing liabilities $609,453 $564,298 $34,815 6.14% $484,430 $31,931 6.59%
Non-interest-bearing liabilities 13,854 15,900 8,150
-------- ---------------------------- ----------------------------
Total liabilities $623,307 $580,198 $492,580
Stockholders' equity 24,658 22,277 19,296
-------- ---------------------------- ----------------------------
Total liabilities and stockholders'
equity $647,965 $602,475 $511,876
-------- ---------------------------- ----------------------------
Excess of interest-earning assets
over interest-bearing liabilities/
net interest income/interest rate
spread $ 16,497 $ 11,248 $11,136 1.84% $ 12,058 $ 9,313 1.72%
Net yield on interest earning assets 1.94% 1.88%
Ratio of interest-earning assets
to interest-bearing liabilities 101.99% 102.49%
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
- ------------------------------------------------------------------------
1994
Average Interest Average
(Dollars in thousands) Balance Inc./Exp. Yield/Cost
- ------------------------------------------------------------------------
Interest-earning assets:
Loans receivable, net(a) $127,805 $10,813 8.46%
Mortgage-backed &
related securities 136,304 9,328 6.84
Investment securities (b)(c) 14,627 801 5.48
Mortgage-backed &
related securities, AFS 8,934 645 7.22
Investment securities, AFS 13,705 771 5.63
Federal funds sold 2,092 83 3.97
Trading account -- -- --
-------------------------------
Total-interest earning assets $303,467 $22,441 7.39%
Non-interest earning assets 18,794
-------------------------------
Total assets $322,261
-------------------------------
Interest-bearing liabilities:
Savings deposits $ 17,587 $ 518 2.95%
Time deposits 140,485 9,209 6.56
FHLB advances 82,533 4,278 5.18
Other borrowings 47,715 2,281 4.78
Subordinated debt, net 9,555 1,227 12.84
-------------------------------
Total interest-bearing liabilities $297,875 $17,513 5.88%
Non-interest-bearing liabilities 7,401
-------------------------------
Total liabilities $305,276
Stockholders' equity 16,985
-------------------------------
Total liabilities and stockholders'
equity $322,261
-------------------------------
Excess of interest-earning assets
over interest-bearing liabilities/
net interest income/interest rate
spread $ 5,592 $ 4,928 1.51%
Net yield on interest earning assets 1.62%
Ratio of interest-earning assets
to interest-bearing liabilities 101.88%
- ----------------------------------------------------------------------
- ---------
(a) Includes mortgages held for sale and investments.
(b) Includes interest-bearing deposits, repurchase agreements, investment
securities held to maturity, and FHLB stock.
(c) Interest income and average yields on municipal bonds are presented on a
tax equivalent basis.
LIQUIDITY MANAGEMENT AND FUNDING
Liquidity is a company's ability to maintain sufficient cash flows to fund
operations and meet existing and future obligations, including maturing
liabilities, loan commitments, and depositors' withdrawals. The asset portion of
the balance sheet provides liquidity through short-term investments and
maturities and repayments of loans and investment securities. Other sources of
asset liquidity include sales of loans or securities.
Liquidity is provided through the Company's ability to attract and maintain
sufficient deposits and to access available funding markets. Federal regulations
require that the Bank maintain an average of 5.00% liquidity ratio in relation
to certain borrowings and the deposit base. The Bank exceeded the requirement
throughout 1996 and 1995.
The Company continues to enhance the core deposit base through its
branchless marketing strategy that targets individual savers who deposit an
average of $23,000. Management is developing new deposit products responsive to
our customers needs and cross marketing these services, which should provide
stable funding sources in future periods. In 1995, the Company introduced
callable CDs, money market accounts, and the Refer a Saver(TM) Program. The
callable CDs are redeemable at the option of the Company any time after the
second anniversary of the date of deposit, which allows management to hedge
against prepayment risk. The Refer a Saver(TM) Program rewards current CD
account holders with cash for each new customer referred to the Company.
<PAGE>
The following table shows the changes in deposits for each of the prior
periods:
YEARS ENDED DECEMBER 31,
----------------------------------
(Dollars in thousands) 1996 1995 1994
- ---------------------- ---- ---- ----
Balance at beginning of period $306,500 $212,411 $113,132
Deposits in excess of (less than)
withdrawals 62,629 76,866 91,806
Interest credited on deposits 21,357 17,223 7,473
----------------------------------
Balance at end of period $390,486 $306,500 $212,411
==================================
Management believes that liquidity of bank deposits coupled with FDIC
insurance will continue to encourage depositors to maintain significant portions
of their funds in insured depository accounts. Management also believes that a
high level of service and convenience coupled with a growing acceptance of
electronic and branchless banking will allow the Company to compete efficiently
and effectively against other FDIC insured banks and other non-bank financial
institutuions. Largely as a result of management's marketing efforts in 1996,
the Company experienced an increase in money market account balances, which cost
less than the cost of FHLB advances, other borrowings, and certificates of
deposit accounts. Total deposits increased $84.0 million, or 27.4%, during 1996.
Savings deposits increased $32.4 million, or 40.8%, and certificate of deposit
accounts increased $51.6 million, or 22.7% during 1996.
The Company also relies upon borrowed funds to provide a source of
liquidity at attractive interest rates. Total borrowings increased $3.0 million,
or 1.5%, during 1996. Advances from the FHLB increased $39.3 million, or 37.3%,
during the period largely as a result of attractive interest rates and due to
the various products offered by the FHLB to member institutions. Advances are
collateralized by specific liens on mortgage loans in accordance with an
"Advances, Specific Collateral Pledge and Security Agreement", which requires
the Company to maintain qualified collateral equal to 120 to 160 percent of the
Company's advances. Accordingly, the Company increased single-family residential
mortgage loan collateral to the FHLB to $186.1 million during the year.
Additional borrowings from the FHLB are contingent upon the Company providing
the appropriate collateral. Repurchase agreements decreased $36.3 million, or
38.7%, during 1996. Principally, mortgage-backed securities are pledged as
collateral for the repurchase agreements. As of December 31, 1996, the Bank had
approximately $100.0 million in additional borrowing capacity.
In the second quarter of 1994, TeleBanc completed its initial public
offering, raising an aggregate of $21.9 million through the issuance of common
stock and subordinated notes with warrants. The subordinated debt represents a
very stable, although relatively expensive, source of funds. Upon completion of
the offering, the Company invested $15.0 million of the proceeds as capital of
the Bank. At December 31, 1996, subordinated debt, net was $16.6 million. The
annual expense to service the debt is $2.2 million. Subject to regulatory
approval, the Bank will dividend this balance to the Company to service the
debt. There are various regulatory limitations on the extent to which federally
chartered savings institutions may pay dividends. Also, savings institution
subsidiaries of holding companies generally are required to provide their OTS
Regional Director with no less than 30 days' advance notice of any proposed
declaration on the institution's stock. Under terms of the indenture pursuant to
which the subordinated notes were issued, the Company presently is required to
maintain, on an unconsolidated basis, liquid assets in an amount equal to or
greater than $2.0 million, which represents 100% of the aggregate interest
expense for one year on the subordinated debt. The Company had $2.9 million in
liquid assets at December 31, 1996.
CAPITAL ADEQUACY
The Company's stockholders' equity at December 31, 1996, was $24.7 million.
This represents a $3.1 million, or 14.4%, increase from the prior year. The
increase reflects $2.6 million in net income and an unrealized gain for the year
on securities available-for-sale of $541,000, net of taxes, which pursuant to
SFAS 115 increases the Company's stockholders' equity, but does not impact the
statement of operation. See Note 2 of the Consolidated Financial Statements.
The Bank meets all current and fully phased-in capital requirements as
adjusted for the changes which are effective to the computation of risk-based
capital and core capital at December 31, 1996.
The required and actual amounts and ratios of capital pertaining to the
Bank as of December 31, 1996 are set forth as follows
<TABLE>
<CAPTION>
(dollars in thousands):
- ------------------------------------------------------------------------------------------------------------------------------------
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES: ACTION PROVISIONS:
----------------- ----------------------------------------- ------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total Capital (to risk
weighted assets) $34,104 10.41% greater than $ 26,205 greater than 8.0% greater than $32,756 greater than 10.0%
Tier 1 Capital (to risk
weighted assets) $31,726 9.69% greater than $ 13,102 greater than 4.0% greater than $19,654 greater than 6.0%
Tier 1 Capital (to
average assets) $31,726 5.08% greater than $ 24,999 greater than 4.0% greater than $31,248 greater than 5.0%
Tangible $31,711 5.07% greater than $ 9,374 greater than 1.5% N/A --
As of December 31, 1995:
Total Capital (to risk
weighted assets) $30,680 11.74% greater than $ 20,899 greater than 8.0% greater than $26,264 greater than 10.0%
Tier 1 Capital (to risk
weighted assets) $28,944 11.08% greater than $ 10,450 greater than 4.0% greater than $15,674 greater than 6.0%
Tier 1 Capital (to
average assets) $28,944 5.31% greater than $ 21,798 greater than 4.0% greater than $27,261 greater than 5.0%
Tangible $29,201 5.36% greater than $ 8,178 greater than 1.5% greater than N/A --
</TABLE>
<PAGE>
EARNINGS PERFORMANCE
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1996 , 1995 AND
1994
NET INCOME. Net income for fiscal year 1996 was $2.6 million compared to $2.7
million for fiscal year 1995. Net income for 1996 includes the effect of a
one-time $1.7 million, before tax, assessment to recapitalize the Savings
Association Insurance Fund ("SAIF"). Without such assessment, net income would
have been $3.6 million. Net income for the year ended December 31, 1996
consisted primarily of $11.0 million in net interest income, $1.8 million in net
gains on the sale of loans held for sale and mortgage-backed and investment
securities offset by $9.1 million in non-interest expenses, $919,000 in
provision for loan losses and $1.2 million in income tax expenses. For fiscal
year 1996, the Company's return on average assets and return on average equity
was 0.42% and 11.46%, respectively. Based on 2,316,616 weighted average shares
of common stock issued and outstanding as well as common stock equivalents
earnings per share was $1.12.
Net income increased by $2.2 million, or 407.4%, from $540,000 in fiscal
year 1994, to $2.7 million in fiscal year 1995. Net income for the year ended
December 31, 1995 consisted primarily of $8.6 million in net interest income,
$1.6 million in gains on the sale of mortgage-backed securities available for
sale, $1.1 million in gains on the sale of investment securities available for
sale and $677,000 in profit on trading activities offset by $6.2 million in
total non-interest expenses, $1.7 million in provision for loan losses and $1.7
million in income taxes. The Company's return on average assets and return on
average equity was 0.53% and 14.10%, respectively. Based on 2,068,597 weighted
average shares of common stock issued and outstanding as well as common stock
equivalents, earnings per share was $1.33.
NET INTEREST INCOME. Net interest income is the principal source of a financial
institution's income stream and represents the spread between interest and fee
income generated from earning assets and the interest expense paid on deposits
and borrowed funds. Fluctuations in interest rates as well as volume and
composition changes in interest-earning assets and interest-bearing liabilities
materially affect net interest income.
Net interest income increased by $2.4 million, or 27.9%, from $8.6 million
to $11.0 million for the years ended December 31, 1995 and 1996, respectively.
Interest rate spreads increased from 1.72% to 1.84% for the years ended December
31, 1995 and 1996, respectively. The improvement in spreads reflects a 45 basis
point decline in the costs of interest-bearing liabilities offset by a 33 basis
point decline in the yield of interest-earning assets. Average interest-earning
assets were $575.5 million for 1996 compared to $496.5 million for 1995.
Net interest income increased $3.9 million, or 82.4%, from $4.7 million to
$8.6 million for the years ended December 31, 1994 and 1995, respectively.
Interest rate spreads increased to 1.72% from 1.51% for the years ended December
31, 1995 and 1994, respectively. The improvement in spreads reflects the
repricing of adjustable interest-bearing assets and the slight improvement in
the ratio of interest-earning assets to interest-bearing liabilities to 102.49%
in 1995 from 101.88% in 1994. Average interest-earning assets were $496.5
million for 1995 compared to $303.5 million for 1994.
The following table allocates the period-to-period changes in the Company's
various categories of interest income and expense between changes due to changes
in volume (calculated by multiplying the change in average volume of the related
interest-earning asset or interest-bearing liability category by the prior
year's rate) and changes due to changes in rate (changes in rate multiplied by
prior year's volume). Changes due to changes in rate-volume (change in rate
multiplied by changes in volume) have been allocated proportionately between
changes in volume and changes in rate.
<PAGE>
<TABLE>
<CAPTION>
1996 vs. 1995 1995 vs. 1994
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
-------------------------- --------------------------
(Dollars in thousands) VOLUME RATE TOTAL VOLUME RATE TOTAL
- ---------------------- ------ ---- ----- ------ ---- -----
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net (a) $ 6,333 $ (968) $ 5,365 $ 6,491 $ 452 $ 6,943
Mortgage-backed and related securities (9,307) (9,307) (18,614) 7,555 1,730 9,285
Investment securities (b) (c) 16 (134) (118) (50) 239 189
Mortgage-backed and related securities
available for sale 16,404 (45) 16,359 837 115 952
Investment securities available for sale (c) 2,194 (305) 1,889 859 441 1,300
Federal funds sold 2 (8) (6) (257) 224 (33)
Trading account 17 (185) (168) 167 -- 167
------------------------------- ---------------------------------
Total interest-earning assets $ 15,659 $(10,952) $ 4,707 $ 15,602 $ 3,201 $ 18,803
Interest-bearing liabilities:
Savings deposits $ 2,803 $ (100) $ 2,703 $ 1,034 $ 559 $ 1,593
Time deposits 2,208 (596) 1,612 5,553 168 5,721
FHLB advances 972 (292) 680 1,253 1,040 2,293
Other borrowings (1,778) (446) (2,224) 3,004 946 3,950
Subordinated debt -- 112 112 928 (66) 862
------------------------------- ---------------------------------
Total interest-bearing liabilities 4,205 (1,322) 2,883 11,772 2,647 14,419
------------------------------- ---------------------------------
Change in net interest income $11,454 $ (9,630) $ 1,824 $ 3,830 $ 554 $ 4,384
=============================== =================================
</TABLE>
- ----------
(a) Includes mortgage and other loans.
(b) Includes interest-bearing deposits, repurchase agreements, investment
securities held to maturity, and FHLB stock.
(c) Interest income and average yields on municipal bonds, included in
investment securities, are presented on a tax equivalent basis.
INTEREST INCOME. Total interest income increased $5.3 million, or 13.1%, from
$40.5 million for the year ended December 31, 1995 to $45.8 million for the year
ended December 31, 1996. Interest income on mortgage and other loans increased
$5.4 million or 30.5%. The increase is largely attributed to the $77.3 million
increase in average loan balance. Interest income on mortgage-backed securities
held-to-maturity and available-for-sale decreased by $2.2 million, or 10.9%,
from $20.2 million at December 31, 1995 to $18.0 million at December 31, 1996
largely as a result of a $31.2 million decline in average mortgage backed
securities held-to-maturity and available-for-sale.
Total interest income increased $18.3 million, or 82.4%, from $22.2 million
for the year ended December 31, 1994 to $40.5 million for the year ended
December 31, 1995. Interest income on mortgage and other loans increased $6.9
million or 63.9%. The increase is primarily attributable to an increase in the
average balance of the loans receivable portfolio from $127.8 million for the
year ended December 31, 1994 to $201.7 million for the year ended December 31,
1995 as well as a slight increase in the average yield on the loans receivable
portfolio from 8.46% for the year ended December 31, 1994 to 8.80% for the year
ended December 31, 1995. Similarly, interest income on mortgage-backed and
related securities, including those available for sale, increased by $10.2
million, or 102.0%, from $10.0 million for the year ended December 31, 1994 to
$20.2 million for the year ended December 31, 1995 resulting primarily from an
$107.6 million increase in the average balance and a 113 basis point increase in
the average yield of such securities.
INTEREST EXPENSE. Total interest expense increased by $2.9 million, or 9.1%,
from $31.9 million for the year ended December 31, 1995 to $34.8 million for the
year ended December 31, 1996. The increase is attributable to a $79.9 million
increase in interest bearing liabilities offset by a 47 basis point decline in
interest costs.
<PAGE>
Total interest expense increased by $14.4 million, or 82.3%, from $17.5 million
for the year ended December 31, 1994 to $31.9 million for the year ended
December 31, 1995 as the Company funded its growth with both deposits and
borrowings. The increase in total interest expense was primarily attributable to
a $186.6 million increase in interest bearing liabilities. The increase in total
interest expense reflects a $7.3 million increase and a $6.3 million decrease in
expenses relating to deposits and other borrowings, respectively.
PROVISION FOR LOAN LOSSES. The provision for loan losses is the annual cost of
providing an allowance or reserve for anticipated future losses on the loan
portfolio. The allowance reflects management's judgment as to the level
considered appropriate to absorb such losses based upon a review of factors
including delinquent loan trends, historical loss experience, economic
conditions, loan portfolio mix and the Company's internal credit review process.
Total provisions for loan losses decreased by $800,000, or 47.1% from $1.7
million for the year ended December 31, 1995 to $919,000 for the year ended
December 31, 1996. The decrease in loan loss provisions is attributable to the
Company's acquisition of several pools of credit enhanced mortgage loans which
have correspondingly lower anticipated losses as compared to the product
purchased in 1995. The net loan portfolio at December 31, 1996 includes four
pools of credit enhanced one-to-four family mortgage loans, totaling $53.2
million. Two of these pools, totaling $33.5 million, have a credit reserve from
the seller equal to 2.3% of the unpaid principal balance at the time of purchase
available to offset any losses. One pool, totaling $11.7 million, has an
indemnification whereby the seller must repurchase any loan that becomes more
than four payments past due at any time during the life of the loan. The final
pool of loans, totaling $8.0 million, has a credit reserve from the seller equal
to approximately 10.0% of the unpaid principal balance at the time of
acquisition. Since the available credit enhancement associated with these loans
exceeds the expected potential losses, the provision for loan losses declined
during 1996.
Management considers many factors in determining the required levels of
loan loss reserves, including a detailed analysis of specific loans in the
portfolio, known and inherent risk in the portfolio, estimated value of the
underlying collateral, assessment of general trends in the real estate market,
and current and prospective economic and regulatory conditions. The total loan
loss allowance at December 31, 1996 and 1995 was $3.0 million and $2.3 million,
respectively, which was 0.8% and 0.9%, respectively, of total loans outstanding.
Total loan loss allowance as a percentage of total non-performing assets was
26.3% at December 31, 1996 as compared to 43.4% at December 31, 1995. Management
believes the allowance for loan losses is adequate at December 31, 1996 to cover
potential losses.
Total provisions for loan losses increased $1.2 million, or 243.9%, from
$492,000 for the year ended December 31, 1994 to $1.7 million for the year ended
December 31, 1995. The increase in the provision for loan losses reflects
management's intent to provide prudent reserves for potential loan losses and
for loan acquisitions made during periods of high growth. During the year
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
----------------------------------------------------------------------
1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 2,311 $ 989 $ 835 $ 659 $ 531
Loans charged off, net of recoveries:
Real estate loans:
One-to four family (273) - (338) (19) (172)
Commercial real estate - - - - (235)
Land - - - (1) (178)
Construction - - - - (13)
Consumer and other:
Lease financing - - - - (303)
Other - (400) (15) -
----------------------------------------------------------------------
Total charge-offs (273) (400) (338) (35) (901)
Provision for possible loan losses 919 1,722 492 211 972
Allowance acquired through purchase - - - - 57
----------------------------------------------------------------------
Balance at end of period $2,957 $2,311 $ 989 $ 835 $ 659
----------------------------------------------------------------------
Ratio of net charge-offs to net average
loans outstanding during the period .10% .14% .24% .03% .88%
</TABLE>
<PAGE>
ended December 31, 1995, the Company provided specific reserves for several
single family homes. In addition, the Company provided general reserves on loan
acquisitions of $145.9 million in accordance with the Company's loan loss
reserve policy. The total loan loss allowance at December 31, 1995 and 1994 was
$2.3 million and $989,000 respectively which was 0.9% and 0.6%, respectively of
total loans outstanding. Total loss allowance as a percentage of total
non-performing assets was 46.9% at December 31, 1995 as compared to 44.8% at
December 31, 1994.
NON-INTEREST INCOME. Total non-interest income declined by $1.0 million, or
26.3%, from $3.8 million for fiscal year 1995 to $2.8 million for fiscal year
1996. Loan fees and service charges increased $756,000 due to fees collected on
$2.8 million in purchased mortgage servicing rights. As a result of the newly
created loans held for sale category, the Company recognized non-interest income
on the prepayments of loans held for sale. In the prior year, this income would
have been recognized as interest income. Gains on loans held for sale increased
$642,000. Gains on sales of mortgage-backed securities and investments totaled
$935,000.
Total non-interest income increased by $3.6 million from $175,000 for the
year ended December 31, 1994 to $3.7 million for the year ended December 31,
1995. In order to take advantage of favorable market conditions, the Company
sold six mortgage backed and investment securities held for liquidity purposes,
for a $1.4 million gain in 1995. In addition, the Company realized a $2.0
million gain on the sale of two mortgage-backed securities with underlying
collateral of one-to-four family dwellings largely as a result of management's
ability to analyze, purchase, repackage and sell the undervalued securities.
With the significant growth in loan and deposit balances, loan fees and service
charges as well as other non-interest income increased to $228,000 offset by a
$100,000 loss recorded in connection with the kiting of a deposit. The Company
also recognized a $232,000 gain on the sale of a loan.
NON-INTEREST EXPENSES. Total non-interest expenses increased $2.9 million, or
46.8%, from $6.2 million for fiscal year 1995 to $9.1 million for fiscal year
1996. Non-interest expenses are composed of general and administrative expenses
and other non-interest expenses. General and administrative expenses increased
$2.8 million, or 50.0%, from $5.6 million for the year ended December 31, 1995
to $8.4 million for the year ended December 31, 1996. The increase is primarily
attributed to the effect of a one-time $1.7 million assessment to recapitalize
the SAIF, a $660,000 increase in compensation, employee benefits and $483,000 in
federal insurance premiums and overall administrative costs for a higher deposit
base. As in previous years, it is the Company's compensation policy to pay a
combination of salary and incentive based compensation consisting of bonuses
tied to the overall Company's performance and individual performances consistent
with the improved performance of the Company net of SAIF assessment, bonuses
increased to $1.1 million for 1996 from $775,000 for 1995. Bonuses were $1.1
million and $745,000 for the year ended December 31, 1996 and 1995,
respectively. General and administrative expenses net of bonuses and the SAIF
assessment as a percentage of total assets was 0.86% and 0.87% for the years
ended December 31, 1996 and 1995, respectively. General and administrative
expenses net of the SAIF assessment as a percentage of total assets was 1.03%
and 1.00% for the years ended December 31, 1996 and 1995, respectively. Other
non-interest expense increased $21,000, or 3.1%, from $679,000 at December 31,
1995 to $700,000 at December 31, 1996. The slight increase is attributable to a
$213,000 increase in amortization of purchased mortgage servicing rights offset
by a $192,000 decline in real estate owned expenses.
Total non-interest expenses increased $2.6 million, or 70.7%, from $3.6
million for the year ended December 31, 1994 to $6.2 million for the year ended
December 31, 1995. General and administrative expenses increased $2.1 million,
or 58.7%, from $3.5 million for the year ended December 31, 1994 to $5.6 million
for
<PAGE>
the year ended December 31, 1995. This increase reflects increased expenses for
professional services and other general and administrative expenses related to
the significant growth in loan and deposit balances as well as a $762,000
increase in compensation and employee benefits, a $189,000 increase in federal
insurance premiums due to a higher deposit base and a $40,000 increase in office
occupancy. The Company incurred $300,000 for a marketing campaign which
management believes will ultimately enhance franchise value. General and
administrative expenses net of bonuses as a percentage of total assets was 0.87%
and 0.78% for the years ended December 31, 1995 and 1994, respectively. General
and administrative expenses as a percentage of assets was 1.00% and 0.82% for
the years ended December 31, 1995 and 1994, respectively. Other non-interest
expenses increased by $526,000, or 343.8%, from $153,000 for the year ended
December 31, 1994 to $679,000 for the year ended December 31, 1995. The increase
was primarily due to a $210,000 loss on the sale of a one-to-four family
property sold in conjunction with the unwinding of an unrated mortgage security
and $122,000 amortization of purchased mortgage servicing rights.
INCOME TAX EXPENSE. Income tax expense is computed upon, and generally varies
proportionally with, earnings before income tax expense adjusted for non-taxable
income and non-deductible expense.
The effective tax rate for the year ended December 31, 1996 was 31.9%
compared to 37.9% for 1995. The income tax expense for the year ended December
31, 1996 was $1.2 million as compared with $1.7 million for the year ended
December 31, 1995. The effective tax rate decreased largely as a result of a
decline in general loan provisions which are non-deductible for federal income
tax purposes.
The effective tax rate for 1995 was 37.9% as compared to 25.2% for 1994.
The income tax expense for the year ended December 31, 1995 was $1.7 million, as
compared with $182,000 for the year ended December 31, 1994. The Company's
effective tax rate exceeded the statutory federal income tax rate of 34% due
primarily to the non-deductibility for federal income tax purposes of goodwill
amortization and state taxes.
IMPACT OF INFLATION AND CHANGING PRICES
Since interest rates and inflation rates do not always move in concert, the
effect of inflation on financial institutions may not necessarily be the same as
on other businesses. A bank's asset and liability structure differs
significantly from that of industrial companies in that virtually all assets and
liabilities are of a monetary nature. Management believes that the impact of
inflation on financial results depends upon the Company's ability to manage
interest rate sensitivity and, by such management, reduce the inflationary
impact upon performance. Interest rates do not necessarily move in the same
direction, or in the same magnitude, as the prices of other goods and services.
As discussed above, management seeks to manage the relationship between interest
sensitive assets and liabilities in order to protect against wide interest rate
fluctuations, including those resulting from inflation.
NEW ACCOUNTING STANDARDS
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," which
provides consistent standards for distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings. It also establishes
criteria for the recognition of either a servicing asset or servicing liability
for servicing contracts to service financial assets. This standard is effective
for transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996, and is to be applied
prospectively. The Company believes the adoption of the new standard, effective
January 1, 1997, did not have a material impact on its financial position or
results of operations.
In December 1996, the FASB issued SFAS No. 127 "Deferral of the Effective
Date of Certain Provisions of SFAS 125" which amends the previously issued SFAS
No. 125 and deferred implementation of the standards enumerated in SFAS No. 125
for repurchase agreements and dollar rolls, securities lending and similar
transactions to transfers of financial assets that occur after December 31,
1997.
<PAGE>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 1996 and 1995
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1996 1995
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 3,259 $ 8,965
Investment securities available-for-sale 78,826 40,058
Mortgage-backed securities available-for-sale 184,743 234,385
Loans receivable, net 185,757 248,492
Loans receivable held for sale 166,064 --
Other assets 29,316 22,043
----------------------------
Total assets 647,965 553,943
----------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits 390,486 306,500
Advances from the Federal Home Loan Bank of Atlanta 144,800 105,500
Securities sold under agreements to repurchase 57,581 93,905
Subordinated debt, net of original issue discount 16,586 16,496
Other liabilities 13,854 9,977
----------------------------
Total liabilities 623,307 532,378
----------------------------
Commitments and contingencies -- --
STOCKHOLDERS' EQUITY:
Common stock, $0.01 par value, 3,500,000 shares authorized;
2,049,500 issued and outstanding at December 31,1996 and 1995 20 20
Additional paid-in capital 14,637 14,637
Retained earnings 7,905 5,353
Unrealized gain (loss) on securities available for sale, net of tax 2,096 1,555
----------------------------
Total stockholders' equity 24,658 21,565
----------------------------
Total liabilities and stockholders' equity $647,965 $553,943
----------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data) 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Mortgage loans and other loans $23,089 $ 17,726 $10,813
Mortgage-backed and related securities 17,955 20,205 9,973
Investment securities 4,690 2,347 1,290
Other 66 233 132
-------------------------------------
Total interest income 45,800 40,511 22,208
-------------------------------------
Interest expense:
Deposits 21,357 17,033 9,727
Advances from the Federal Home Loan Bank of Atlanta 6,689 5,985 4,278
Reverse repurchase agreements 4,569 6,839 2,281
Subordinated debt 2,200 2,089 1,227
-------------------------------------
Total interest expense 34,815 31,946 17,513
-------------------------------------
Net interest income 10,985 8,565 4,695
Provision for loan losses 919 1,722 492
-------------------------------------
Net interest income after provision for loan losses 10,066 6,843 4,203
-------------------------------------
Non-interest income:
Gain on sale of securities 935 3,412 118
Gain on sale of loans 874 232 --
Fees, service charges, and other 947 133 57
-------------------------------------
Total non-interest income 2,756 3,777 175
Non-interest expenses:
General and administrative expenses:
Compensation and employee benefits 3,690 3,030 1,807
SAIF assessment 1,671 -- --
Other 3,014 2,531 1,696
-------------------------------------
Total general and administrative expenses 8,375 5,561 3,503
Other non-interest expenses:
Net operating cost of real estate acquired through
foreclosure 238 430 (13)
Amortization of goodwill and other intangibles 462 249 166
-------------------------------------
Total other non-interest expenses 700 679 153
-------------------------------------
Total non-interest expenses 9,075 6,240 3,656
-------------------------------------
Income before income tax expense 3,747 4,380 722
Income tax expense 1,195 1,660 182
-------------------------------------
Net income $ 2,552 $ 2,720 $ 540
-------------------------------------
Earning per share
Primary $ 1.12 $ 1.33 $ 0.31
-------------------------------------
Fully diluted $ 1.09 $ 1.33 $ 0.31
-------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
UNREALIZED
GAINS (LOSSES)
ADDITIONAL ON AVAILABLE-
PREFERRED COMMON PAID-IN RETAINED FOR-SALE
(Dollars in thousands) STOCK STOCK CAPITAL EARNINGS SECURITIES TOTAL
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1993 $ 3 $10 $ 9,488 $2,591 $ 286 $12,378
Dividends Paid ($0.38/share) -- -- -- (498) -- (498)
Stock conversion (3) 3 -- -- -- --
Sale of 750,000 shares
of common stock -- 7 5,149 -- -- 5,156
Net Income for the year ended
December 31, 1994 -- -- -- 540 -- 540
Unrealized Loss on Available-for-
Sale securities, net of tax effect -- -- -- -- (548) (548)
-----------------------------------------------------------------------------
Balances at December 31, 1994 $-- $20 $14,637 $2,633 $ (262) $17,028
Net Income for the year ended
December 31, 1995 -- -- -- 2,720 -- 2,720
Unrealized Gain on Available-for-
Sale securities, net of tax effect -- -- -- -- 1,817 1,817
-----------------------------------------------------------------------------
Balances at December 31, 1995 $-- $20 $14,637 $5,353 $1,555 $21,565
Net Income for the year ended
December 31, 1996 -- -- -- 2,552 -- 2,552
Unrealized Gain on Available-for-
Sale securities, net of tax effect -- -- -- -- 541 541
-----------------------------------------------------------------------------
Balances at December 31, 1996 $-- $20 $14,637 $7,905 $2,096 $24,658
=============================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,552 $ 2,720 $ 540
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in undistributed earnings of subsidiaries 274 -- --
Provision for loan losses 919 1,722 492
Provision for losses on foreclosed real estate 78 213 22
Other gains and losses, net (1,011) (153) (95)
Proceeds from sales of loans held for sale 27,865 -- --
Originations and purchases of loans held for sale (91,943) -- --
Net realized gains on available-for-sale securities and
loans held for sale (935) (3,412) (145)
Increase in accrued interest receivable (2,220) (4,954) (2,919)
Increase in other assets (2,433) (80) (3,621)
Interest credited to deposits 21,361 17,033 7,473
Increase in accrued expenses and other liabilities 4,636 2,134 1,960
Depreciation and amortization (1,516) (2,153) (770)
Deferred income taxes (1,130) -- --
---------------------------------------------------
Net cash (used in) provided by operating activities (43,503) 13,070 2,937
---------------------------------------------------
Cash flows from investing activities:
Net increase in loans (90,717) (98,439) (27,722)
Equity investments in subsidiaries (2,359) -- --
Purchases of available-for-sale securities (356,882) (122,785) (184,678)
Proceeds from sale of available-for-sale securities 220,293 71,084 7,977
Proceeds from maturities of and principal payment
on available-for-sale securities 201,547 39,646 --
Net purchases of premises and equipment (842) (537) (279)
Net expenditures on foreclosed real estate --
Proceeds from sale of foreclosed real estate 1,156 -- 750
---------------------------------------------------
Net cash used in investing activities (27,804) (111,031) (203,952)
---------------------------------------------------
Cash flows from financing activities:
Net increase in non-interest bearing demands, savings,
and NOW deposit accounts 62,625 77,056 91,806
Increase in advances from FHLB 273,500 59,000 207,000
Payments on advances from FHLB (234,200) (49,500) (172,000)
Net increase in securities sold under agreements to repurchase (36,324) 14,292 49,971
Net increase in other borrowed funds -- -- 16,390
Increase in common stock and additional paid in capital -- -- 5,157
Dividends paid on common and preferred stock -- -- (498)
---------------------------------------------------
Net cash provided by financing activities 65,601 100,848 197,826
===================================================
Net increase (decrease) in cash and cash equivalents (5,706) 2,887 (3,189)
Cash and cash equivalents at beginning of period 8,965 6,078 9,267
---------------------------------------------------
Cash and cash equivalents at end of period $ 3,259 $ 8,965 $ 6,078
===================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Supplemental information:
Interest paid on deposits and borrowed funds $32,660 $29,852 $15,728
Income taxes paid 972 950 239
Gross unrealized gain (loss) on marketable securities
available-for-sale 3,512 2,590 (889)
Tax effect of gain (loss) on available-for-sale securities 1,416 1,036 (341)
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
TeleBanc Financial Corporation ("TeleBanc" or the "Company") is a savings
and loan holding company organized under the laws of Delaware in 1994. The
primary business of the Company is the activities conducted by TeleBank (the
"Bank"), formerly known as Metropolitan Bank for Savings, F.S.B. The Bank is a
federally chartered savings bank, which provides deposit accounts insured by the
Federal Deposit Insurance Corporation ("FDIC") to customers nationwide.
During the second quarter of 1996, the Bank, through its wholly owned
subsidiary TeleBanc Servicing Corporation ("TSC"), funded 50% of the capital
commitment for a new entity, AGT Mortgage Services, LLC ("AGT"). AGT services
performing loans and administers workouts for troubled or defaulted loans for a
fee.
The Bank also provided, in the second quarter of 1996, 50% of the capital
commitment for an additional new entity, AGT PRA, LLC ("AGT PRA"). The primary
business of AGT PRA is its investment in Portfolio Recovery Associates, LLC
("PRA"). PRA acquires and collects delinquent consumer debt obligations for its
own portfolio.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
TeleBank and TSC, a wholly owned subsidiary. All significant intercompany
transactions and balances are eliminated in consolidation. In March, 1994,
TeleBanc became the direct savings and loan holding company parent of the Bank.
Accordingly, all financial data as of and for periods subsequent to March, 1994
represent the consolidated financial data of TeleBanc.
The Bank's total investment for the period ended December 31, 1996 through
TSC in AGT was $500,000. As of December 31, 1996 the Bank's equity investment in
AGT was $428,000 and total assets of AGT were $2.0 million. The investment in
AGT through TSC is accounted for under the equity method.
The Bank's total investment for the period ended December, 1996 through TSC
in AGT PRA was $1.9 million. As of December 31, 1996 the Bank's equity
investment in AGT PRA was $1.6 million and total assets of AGT PRA were $2.0
million. The investment in AGT PRA is accounted for under the equity method.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosures of contingent assets and
liabilities and revenues and expenses for the period. Actual results could
differ significantly from those estimates. Material estimates for which a change
is reasonably possible in the near-term relate to the determination of the
allowance for loan losses, the fair value of investments and mortgage-backed
securities available-for-sale, loan receivables held for sale, and the valuation
of real estate acquired in connection with foreclosures.
In addition, the regulatory agencies which supervise the financial services
industry periodically review the Bank's allowance for losses on loans. This
review, which is an integral part of their examination process, may result in
additions to the allowance for loan losses based on judgments with regard to
available information provided at the time of their examinations.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are composed of interest-bearing deposits,
certificates of deposit, funds due from banks, and federal funds sold with
original maturities of three months or less.
INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES
The Company generally classifies its debt and marketable equity securities
in one of three categories: held-to-maturity, trading, or available-for-sale. On
December 15, 1995, the Company reclassified the entire held-to-maturity
investment and mortgage-backed securities portfolios as available-for-sale.
Held-to-maturity securities are those securities that the Company has the
ability and intent to hold until maturity. Held-to-maturity securities are
recorded at amortized cost, adjusted for the amortization or accretion of
premiums or discounts. Trading securities are bought and held principally for
the purpose of selling
<PAGE>
them in the near term. Securities purchased for trading are carried at market
value with the corresponding unrealized gains and losses being recognized by
credits or charges to income. The Company had no assets classified as trading
securities at December 31, 1996 and 1995. All other securities not included in
held-to-maturity or trading are classified as available-for-sale.
Available-for-sale securities are recorded at fair value. Unrealized gains and
losses on available-for-sale securities, net of the related tax effects, are
reported as a separate component of stockholders' equity until realized.
A decline in market value of any held-to-maturity or available-for-sale
asset below its cost, that is deemed other than temporary, is charged to
earnings, resulting in the establishment of a new cost basis for the asset.
Transfers of securities into the available-for-sale category are recorded at
fair value at the date of the transfer. Any unrealized gain or loss at the date
of transfer is recognized as a separate component of stockholders' equity, net
of tax effect.
Premiums and discounts on securities are amortized or accreted over the
life of the related held-to-maturity security as an adjustment to yield using
the effective interest method. Dividend and interest income are recognized when
earned. Realized gains and losses for securities classified as
available-for-sale and trading are included in earnings and are derived using
the specific identification method for determining the cost of the security
sold.
LOANS HELD FOR SALE
Mortgages acquired by the Company and intended for sale in the secondary
market are carried at lower of cost or estimated market value in the aggregate.
Net unrealized losses are recognized through a valuation allowance by a charge
to income. The market value of these mortgage loans is determined by obtaining
market quotes for loans with similar characteristics. As of December 31, 1996,
no valuation allowance was recognized.
LOANS RECEIVABLE
Loans receivable consists of mortgages that management has the intent and
ability to hold for the foreseeable future or until maturity or pay-off and are
carried at amortized cost adjusted for charge-offs, the allowance for loan
losses, any deferred fees or costs on purchased or originated loans, and
unamortized premiums or discounts on purchased loans.
The loan portfolio is reviewed by the Company's management to set
provisions for estimated losses on loans which are charged to earnings in the
current period. In this review, particular attention is paid to delinquent loans
and loans in the process of foreclosure. The allowance and provision for loan
losses are based on several factors, including continuing examinations and
appraisals of the loan portfolio by management, examinations by supervisory
authorities, continuing reviews of problem loans and overall portfolio quality,
analytical reviews of loan loss experience in relation to outstanding loans, and
management's judgment with respect to economic conditions and its impact on the
loan portfolio.
NONPERFORMING/UNDERPERFORMING ASSETS
Nonperforming/underperforming assets consist of loans for which interest is
no longer being accrued, loans which have been restructured in order to afford
the Company a better opportunity to collect amounts due on the loan, real estate
acquired through foreclosure and real estate upon which deeds in lieu of
foreclosure have been accepted. Interest previously accrued but not collected on
nonaccrual loans is reversed against current income when a loan is placed on
nonaccrual status. Accretion of deferred fees is discontinued for nonaccrual
loans. All loans past due ninety days, as well as other loans considered
uncollectible, are placed on non-accrual status. Interest received on nonaccrual
loans is recognized as interest income or, when it is doubtful that full payment
will be collected, interest received is applied to principal. Loans delinquent
more than ninety days are considered impaired by management and accounted for in
accordance with SFAS No.114.
DEPOSITS ACQUISITIONS
On May 2, 1996, TeleBanc entered into an agreement to assume certain
deposit liabilities with First Commonwealth Savings Bank FSB ("First
Commonwealth"), First Commonwealth Financial Corp., and John York, Jr. Pursuant
to this agreement, TeleBanc assumed certain brokered and telephone solicited
deposit accounts of First Commonwealth, which deposits had a current balance of
approximately $53.1 million as of April 30, 1996. In the deposit assumption,
First Commonwealth paid TeleBanc the amount of the deposit liabilities assumed,
plus the amount of the deposit liabilities (less certain renewals) multiplied by
0.25 percent.
LOAN AND COMMITMENT FEES, DISCOUNTS AND PREMIUMS
Loan fees and certain direct loan origination costs are deferred and the
net fee or cost is recognized into interest income using the interest method
over the contractual life of the loans. Premiums and discounts on loans
receivable are amortized or accreted, respectively, into income using the
interest method over the remaining period to contractual maturity and adjusted
for anticipated prepayments. Premiums and discounts on loans held for sale are
not amortized or accreted, respectively. The premium or discount is recognized
as part of the loss or gain upon sale.
<PAGE>
REAL ESTATE ACQUIRED THROUGH FORECLOSURE AND HELD FOR SALE
Real estate properties acquired through foreclosure and held for sale are
recorded at fair value less estimated selling costs at acquisition. Fair value
is determined by appraisal or other appropriate method of valuation. Losses
estimated at the time of acquisition are charged to the allowance for loan
losses. Valuations are periodically performed by management and an allowance for
losses is established through a charge to operations if the carrying value of a
property exceeds its estimated fair value less selling costs.
DEFERRED FINANCING COSTS
Deferred financing costs related to the issuance of the subordinated notes
in May and June 1994 have been capitalized and are being amortized using the
interest method over the life of the subordinated notes.
INCOME TAXES
Effective January 1, 1993, the Bank adopted the provisions of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS No.
109"). Under the asset and liability method of SFAS No. 109, deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
temporary differences between the financial statement carrying amounts of
existing assets and their respective tax basis. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled.
FINANCIAL INSTRUMENTS
Interest rate swaps and caps are used by the Company in the management of
its interest-rate risk. The Company is generally exposed to rising interest
rates because of the nature of the repricing of rate-sensitive assets as
compared with rate-sensitive liabilities. The objective of these financial
instruments is to match estimated repricing periods of rate-sensitive assets and
liabilities to reduce interest rate exposure. These instruments are used only to
hedge specific assets and liabilities, and are not used for speculative
purposes.
The net interest received or paid on these contracts is treated as an
adjustment to the interest expense related to the hedged obligations in the
period in which such amounts are due. Premiums and fees associated with interest
rate caps are amortized to interest expense on a straight-line basis over the
lives of the contracts.
OTHER ASSETS
Other assets include purchased loan servicing rights, premiums paid on
interest rate caps, and prepaid assets.
AGT services the loans underlying these servicing rights. The cost of the
loan servicing rights is amortized in proportion to, and over the period of,
estimated net servicing income. Impairment of mortgage servicing rights is
assessed based on the fair value of those rights. Fair values are estimated
using discounted cash flows based on a current market interest rate. For
purposes of measuring impairment, the rights are stratified based on mortgage
product types. The amount of impairment recognized is the amount by which the
capitalized mortgage servicing rights exceed their fair value in aggregate. As
of December 31, 1996, no valuation allowance was recognized.
EARNINGS PER SHARE
Earnings per share is computed by dividing adjusted net income by the total
of the weighted average number of common and preferred shares outstanding during
the respective period. The Company utilizes the modified treasury stock method
to calculate the weighted average number of common share equivalents, as the
exercise of all warrants and options potentially exercisable could result in a
greater than 20% increase in the number of shares outstanding. The calculation
requires that total proceeds from the exercise of warrants and options are
applied first to the repurchase of outstanding common shares up to a 20% limit
and second to the reduction of existing short-term or long-term debt and the
purchase of securities or commercial paper. The weighted average number of
common share equivalents outstanding in the calculation of primary earnings per
share was 2,316,616, 2,068,597, and 1,748,934 in 1996, 1995 and 1994,
respectively, after giving retroactive effect to a 100 for 1 stock split
consummated in March, 1994. The fully diluted earnings per share includes all
potentially dilutive shares such as employee stock option plan shares, warrants
and options. In addition, for purposes of determining fully diluted earnings per
share, purchases of common stock made from proceeds of the exercise of options
were assumed to have been made at the higher year-end price.
<PAGE>
RECLASSIFICATIONS
Certain reclassifications of the 1995 and 1994 financial statements have
been made to conform to the 1996 presentation.
NEW ACCOUNTING STANDARDS
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," which
provides consistent standards for distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings. It also establishes
criteria for the recognition of either a servicing asset or servicing liability
for servicing contracts to service financial assets. This standard is effective
for transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996, and is to be applied
prospectively. The Company believes the adoption of the new standard, effective
January 1, 1997, did not have a material impact on its financial position or
results of operations.
In December 1996, the FASB issued SFAS No. 127 -"Deferral of the Effective
Date of Certain Provisions of SFAS No. 125", which amends the previously issued
SFAS No. 125 and deferred implementation of the standards enumerated in SFAS No.
125 for repurchase agreements, dollar rolls, securities lending, and similar
transactions to transfers of financial assets that occur after December 31,
1997.
3. CAPITAL REQUIREMENTS AND SUPERVISORY AGREEMENTS
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory-and possibly additional discretionary-actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of total and Tier I
capital to risk-weighted assets, and of Tier I capital to average assets.
Management believes, as of December 31, 1996, that the Bank meets all capital
adequacy requirements to which it is subject.
As of December 31, 1996, the most recent notification from the OTS
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized the Bank must
maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios
as set forth in the table. There are no conditions or events since that
notification that management believes have changed the institution's category.
The Bank's actual capital amounts and ratios are presented in the table
below ($ in thousands):
<TABLE>
<CAPTION>
For Capital
Adequacy
Actual Purposes:
------ ---------
Amount Ratio Amount Ratio
------ ----- ------ -----
<S> <C> <C> <C> <C>
As of December 31, 1996:
Total Capital (to risk
weighted assets) $34,104 10.41% greater than $26,205 greater than 8.0%
Tier I Capital (to risk
weighted assets) $31,726 9.69% greater than $13,102 greater than 4.0%
Tier I Capital (to
average assets) $31,726 5.08% greater than $24,999 greater than 4.0%
Tangible $31,711 5.07% greater than $ 9,374 greater than 1.5%
As of December 31, 1995:
Total Capital (to risk
weighted Assets) $30,680 11.74% greater than $20,899 greater than 8.0%
Tier I Capital (to risk
weighted assets) $28,944 11.08% greater than $10,450 greater than 4.0%
Tier 1 Capital (to average
total assets) $28,944 5.31% greater than $21,798 greater than 4.0%
Tangible $29,201 5.36% greater than $ 8,178 greater than 1.5%
</TABLE>
<PAGE>
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions:
------------------
Amount Ratio
------ -----
As of December 31, 1996:
Total Capital (to risk
weighted assets) greater than $32,756 greater than 10.0%
Tier I Capital (to risk
weighted assets) greater than $19,654 greater than 6.0%
Tier I Capital (to
average assets) greater than $31,248 greater than 5.0%
Tangible N/A --
As of December 31, 1995:
Total Capital (to risk
weighted Assets) greater than $26,264 greater than 10.0%
Tier I Capital (to risk
weighted assets) greater than $15,674 greater than 6.0%
Tier 1 Capital (to average
total assets) greater than $27,261 greater than 5.0%
Tangible N/A --
On August 8, 1996, the OTS terminated the May 1993 Supervisory Agreement
with TeleBank subsequent to the completion of a full scope safety and soundness
examination of the Bank.
<PAGE>
4. Investment Securities
The cost basis and estimated fair values of investment securities
available-for-sale at December 31, 1996 and 1995, by contractual maturity, are
shown below (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUES
---- ----- ------ -----------
<S> <C> <C> <C> <C>
1996:
Due within one year:
Repurchase Agreement $ 1,730 $ -- $ -- $ 1,730
Margin Account 18 -- -- 18
Due within one to five years:
Corporate Debt 2,000 -- (10) 1,990
Agency Notes 988 1 -- 989
Municipal Bonds 565 3 -- 568
Certificate of Deposit 499 -- -- 499
Due within five to ten years:
Corporate Debt 7,436 61 -- 7,497
Municipal Bonds 3,560 27 -- 3,587
Due after ten years:
Agency Notes 30,151 132 -- 30,283
Equities 14,011 220 -- 14,231
Corporate Debt 13,089 994 -- 14,083
Municipal Bonds 3,200 151 -- 3,351
-------- ------- -------- --------
$77,247 $ 1,589 $ (10) $ 78,826
======== ======= ======== ========
1995:
Due within one year:
Agency Notes $ 3,359 $ -- $ -- $ 3,359
Due within one to five years:
Municipal Bonds 2,946 15 -- 2,961
Due within five to ten years:
Corporate Debt 6,162 79 -- 6,241
Municipal Bonds 5,942 74 -- 6,016
Due after ten years:
Corporate Debt 16,688 1,058 -- 17,746
Municipal Bonds 3,472 263 -- 3,735
-------- ------- -------- --------
$ 38,569 $ 1,489 $ -- $ 40,058
======== ======= ======== ========
</TABLE>
The proceeds from sale, gross realized gains and losses on investment
securities available for sale that were sold in 1996 were $25.1 million,
$311,000 and $153,000, respectively. The proceeds from sale, gross realized
gains and losses on investment securities available for sale that were sold in
1995 were $24.1 million, $1.1 million, and $52,000, respectively.
5. MORTGAGE-BACKED AND RELATED SECURITIES
Mortgage-backed and related securities represent participating interests in
pools of long-term first mortgage loans originated and serviced by the issuers
of the securities. The Company has also invested in collateralized mortgage
obligations ("CMOs") which are securities issued by special purpose entities
generally collateralized by pools of mortgage-backed securities. The Company's
CMOs are senior tranches collateralized by federal agency securities or whole
loans. The fair value of mortgage-backed and related securities fluctuate
according to current interest rate conditions and prepayments. Fair value is
estimated using quoted market prices. For illiquid securities, market prices are
estimated by obtaining market price quotes on similar liquid securities and
adjusting the price to reflect differences between the two securities, such as
credit risk, liquidity, term, coupon, payment characteristics, and other
information.
The amortized cost basis and estimated fair values of mortgage-backed
securities available-for-sale at December 31, 1996 and 1995, by contractual
maturity, are shown as follows (in thousands):
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUES
--------- ---------- ---------- -----------
1996:
Due within one to five years:
Private issuer $ 4,172 $ -- $ (56) $ 4,116
Due within five to ten years:
Private issuer 8,262 75 -- 8,337
Collateralized mortgage
obligations 371 -- (3) 368
Due after ten years:
Private issuer 132,791 1,367 -- 134,158
Collateralized mortgage
obligations 24,896 461 -- 25,357
Agency certificates 12,310 97 -- 12,407
$ 182,802 $ 2,000 $ (59) $ 184,743
1995:
Due within one to five years:
Private issuer $ 2,546 $ -- $ (15) $ 2,531
Agency certificates 9,594 62 -- 9,656
Due within five to ten years:
Private issuer 5,993 -- (111) 5,882
Agency certificates 3,085 -- (6) 3,079
Due after ten years:
Private issuer 181,481 260 -- 181,741
Agency certificates 22,252 686 -- 22,938
Collaterlized mortgage
obligations 8,325 233 -- 8,558
$ 233,276 $ 1,241 $ (132) $ 234,385
At December 31, 1996 and 1995, $61.4 million and $108.5 million
respectively, of private issuer mortgage-backed securities were pledged as
collateral for reverse repurchase agreements.
The proceeds from sale, gross realized gains and losses on mortgage-backed
securities available for sale that were sold in 1996 were $185.2 million, $1.4
million and $707,000, respectively. The proceeds from sale and, gross realized
gains and losses on mortgage-backed securities available for sale that were sold
in 1995 were $39.7 million, $1.6 million and $3,000, respectively.
<PAGE>
6. LOANS RECEIVABLE
Loans receivable at December 31, 1996 and 1995 are summarized as follows
(in thousands):
1996 1995
--------- ---------
First mortgage loans (principally conventional):
Secured by one-to-four family residences $ 359,563 $ 254,678
Secured by commercial real estate 4,017 4,553
Secured by mixed-use property 1,180 1,792
Secured by five or more dwelling units 1,516 1,286
Secured by land 781 384
367,057 $ 262,693
Less:
Net deferred loan origination fees (42) (42)
Unamortized discounts, net (13,750) (14,129)
Total first mortgage loans 353,265 248,522
Other loans:
Home equity and second mortgage loans 1,208 2,202
Other 305 79
354,778 250,803
Less: allowance for loan losses (2,957) (2,311)
Net loans receivable $ 351,821 $ 248,492
The mortgage loans are located primarily in New York, California and New
Jersey according to the following percentages 29.2%, 13.9%, and 9.9%,
respectively.
Mortgage loans for which the company owns the servicing rights are serviced
by AGT for a fee. The unpaid principal balance of mortgage loans owned by the
Company but serviced by companies other than AGT was $203,852,788 and
$103,349,000 at December 31, 1996 and 1995, respectively.
Loans past due ninety days or more, and therefore on non-accrual status at
December 31, 1996 and 1995, are summarized as follows (in thousands):
1996 1995
---- ----
First mortgage loans:
Secured by one-to-four family residences $ 8,979 $ 4,526
Secured by commercial real estate 1,217 261
Home equity and second mortgage loans 54 136
Total $10,250 $ 4,923
The interest accrual balance for each loan that enters non-accrual is
reversed from income. If all nonperforming loans had been performing during
1996, 1995 and 1994, the Bank would have recorded $789,000, $365,000, and
$113,000, respectively, in additional interest income. There were no commitments
to lend additional funds to these borrowers as of December 31, 1996 and 1995.
Activity in the allowance for loan losses for the years ended December 31,
1996, 1995 and 1994 is summarized as follows (in thousands):
1996 1995 1994
---- ---- ----
Balance, beginning of the year $ 2,311 $ 989 $ 835
Provision for loan losses 919 1,722 492
Charge-offs, net (273) (400) (338)
Balance, end of year $ 2,957 $ 2,311 $ 989
According to SFAS No. 114, a loan is considered impaired when, based upon
current information and events, it is probable that a creditor will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. The term "all amounts due" includes both the contractual interest and
principal payments of a loan as scheduled in the loan agreement. The Company has
determined that once a loan becomes 90 or more days past due, collection of all
amounts due is no longer probable and is therefore considered impaired. The
amount of impairment is measured based upon the fair value of the underlying
collateral and is reflected through the creation of a valuation allowance.
The table below presents impaired loans as of December 31, 1996 and 1995:
<TABLE>
<CAPTION>
AMOUNT
TOTAL AMOUNT OF OF RECORDED
RECORDED INVESTMENT SPECIFIC INVESTMENT NET OF
DESCRIPTION OF LOANS IN IMPAIRED LOANS RESERVES SPECIFIC RESERVES
- -------------------- ----------------- -------- -----------------
<S> <C> <C> <C>
1996:
Impaired loans:
Commercial real estate $ 1,217 $ 318 $ 899
One-to-four family 9,033 1,492 7,541
Total $ 10,250 $ 1,810 $ 8,440
Restructured loans:
Commercial real estate $ 251 $ 8 $ 243
One-to-four family 184 0 184
Total $ 435 $ 8 $ 427
1995:
Impaired loans:
Commercial real estate $ 261 $ 222 $ 39
One-to four family 4,662 1,070 3,592
Total $ 4,923 $ 1,292 $ 3,631
Restructured loans:
Commercial real estate $ 255 $ 38 $ 217
One-to-four family 110 26 84
Total $ 365 $ 64 $ 301
</TABLE>
<PAGE>
The average recorded investment in impaired loans for the year ended
December 31, 1996 and 1995 was $2.5 million and $1.8 million, respectively. The
related amount of interest income the Company would recognize as additional
interest income for the years ended December 31, 1996, 1995 and 1994 was
$789,000, $365,000 and $113,000, respectively. The Company's charge-off policy
for impaired loans is consistent with its charge-off policy for other loans;
impaired loans are charged-off when, in the opinion of management, all principal
and interest due on the impaired loan will not be fully collected. Consistent
with the Company's method for non-accrual loans, interest received on impaired
loans is recognized as interest income, or when it is doubtful that full payment
will be collected, interest received is applied to principle.
7. REAL ESTATE ACQUIRED THROUGH FORECLOSURE
Real estate acquired through foreclosure at December 31, 1996 was $1.3
million, less the allowance for loan losses of $65,000, resulting in a net
balance of $1.2 million. The real estate acquired through foreclosure at
December 31, 1995 was $1.0 million, less the allowance for loan losses of
$213,000, resulting in a net balance of $787,000.
Activity in the allowance for real estate losses for the years ended
December 31, 1996, 1995, and 1994 is summarized as follows (in thousands):
1996 1995 1994
---- ---- ----
Balance, beginning of year $ 213 $ 92 $ 221
Provision for real estate losses 77 256 22
Charge-offs (225) (135) (151)
Balance, end of year $ 65 $ 213 $ 92
8. LOANS SERVICED FOR OTHERS
Mortgage loans serviced by AGT for others are not included in the
accompanying consolidated statements of financial condition because the related
loans are not owned by the Company or any of its subsidiaries. The unpaid
principal balances of these loans at December 31, 1996 and 1995 are summarized
as follows (in thousands):
1996 1995
---- ----
Mortgage loans underlying pass-through securities:
Federal Home Loan Mortgage Corporation $ 2,843 $ 3,574
Federal National Mortgage Association 11,548 5,307
Subtotal $14,391 8,881
Mortgage loan portfolio serviced for:
Other investors 31,465 9,315
Total $45,856 $18,196
Custodial escrow balances held in connection with the fore-going loans
serviced were approximately $84,422 and $168,000 at December 31, 1996 and 1995,
respectively.
In August 1995, the Bank purchased a loan secured by mortgage servicing
rights that were owned by an affiliate for $2.5 million. The loan was paid off
in October 1995 in conjunction with the Bank's purchase of the underlying
servicing rights for $3.3 million. Purchased mortgage servicing rights of $2.8
million and $3.3 million as of December 31, 1996 and 1995, respectively are
included in other assets.
9. DEPOSITS
The Bank initiates deposits directly with customers through contact on the
phone, the mail, and walk-ins at its headquarters. On May 2, 1996, TeleBanc
entered into an agreement to assume certain deposit liabilities with First
Commonwealth Savings Bank FSB ("First Commonwealth"), First Commonwealth
Financial Corp., and John York, Jr. Pursuant to this agreement, TeleBanc assumed
certain brokered and telephone solicited deposits accounts of First
Commonwealth, which deposits had a current balance of approximately $53.1
million as of April 30, 1996. In the deposit assumption, First Commonwealth paid
TeleBanc the amount of the deposit liabilities assumed, plus the amount of the
deposit liabilities (less certain renewals) multiplied by 0.25 percent. Deposits
at December 31, 1996 and 1995 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE RATE AT
DECEMBER 31 AMOUNT PERCENT
---------------- ------------------ --------------------
1996 1995 1996 1995 1996 1995
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Demand accounts,
non interest-
bearing --% --% $ 309 $ 2,020 --% 0.7%
Money market 5.10 5.23 109,835 75,732 28.1 24.7
Passbook savings 3.00 3.00 1,758 1,748 0.5 0.6
Certificates of
Deposit 6.28 6.53 278,584 227,000 71.4 74.0
---------------------------------------------
Total $390,486 $306,500 100.0% 100.0%
---------------------------------------------
</TABLE>
Certificates of deposit and money market accounts, classified by rates as
of December 31, 1996 and 1995 are as follows (in thousands):
Amount 1996 1995
------ ---- ----
0 - 1.99% $ 5,235 $ --
2 - 3.99% 148 --
4 - 5.99% 210,481 141,750
6 - 7.99% 170,056 158,375
8 - 9.99% 1,709 1,817
10 - 11.99% 790 790
Total $ 388,419 $ 302,732
<PAGE>
At December 31, 1996, scheduled maturities of certificates of deposit and
money market accounts are as follows (in thousands):
<TABLE>
<CAPTION>
LESS THAN
ONE YEAR 1-2 2-3 3-4 4-5 5+
YEARS YEARS YEARS YEARS YEARS YEARS TOTAL
----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
0 - 1.99% $ 5,235 $ -- $ -- $ -- $ -- $ -- $ 5,235
2 - 3.99% 148 -- -- -- -- -- 148
4 - 5.99% 158,566 36,344 13,459 910 1,161 41 210,481
6 - 7.99% 64,828 22,325 54,864 12,002 12,626 3,411 170,056
8 - 9.99% 1,058 543 -- 75 -- 33 1,709
10 - 11.99% 790 -- -- -- -- -- 790
$ 230,625 $ 59,212 $ 68,323 $ 12,987 $ 13,787 $ 3,485 $ 388,419
</TABLE>
The aggregate amount of certificates of deposit with denominations greater
than or equal to $100,000 was $45.1 million and $20.0 million at December 31,
1996 and 1995, respectively.
Interest expense on deposits for the years ended December 31, 1996, 1995,
and 1994 is summarized as follows (in thousands):
1996 1995 1994
---- ---- ----
Money market $ 4,740 $ 2,036 $ 417
Passbook savings 59 78 92
Certificates of deposit 16,558 14,919 9,218
Total $ 21,357 $ 17,033 $ 9,727
Accrued interest payable on deposits at December 31, 1996 and 1995 was
$667,000 and $452,000, respectively.
10. ADVANCES FROM THE FHLB OF ATLANTA
Advances to the Bank from the FHLB of Atlanta at December 31, 1996 and 1995
were as follows (dollars in thousands):
WEIGHTED WEIGHTED
AVERAGE AVERAGE
MATURITY 1996 INTEREST RATE 1995 INTEREST RATE
- -------- ---- ------------- ---- -------------
1996 $ -- 5.52% $ 51,000 5.52%
1997 64,800 5.56 29,500 5.72
1998 41,000 5.53 -- --
1999 39,000 5.60 25,000 5.59
Total $ 144,800 5.56% $ 105,500 5.59%
All advances, except for $2.0 million which matured in November of 1996,
are floating rate advances and adjust quarterly or semi-annually to the London
InterBank Offering Rate ("LIBOR") rate. In 1996 and 1995, the advances were
collateralized by a specific lien on mortgage loans in accordance with an
"Advances, Specific Collateral Pledge and Security Agreement" with the FHLB of
Atlanta, executed September 10, 1980. Under this agreement, the Bank is required
to maintain qualified collateral equal to 120 to 160 percent of the Bank's FHLB
advances, depending on the collateral type. As of December 31, 1996 and 1995,
the Company secured these advances with an assignment of specific mortgage loan
collateral from its loan and mortgage-backed security portfolio. These
one-to-four family whole first mortgage loans and securities pledged as
collateral totaled approximately $186.1 million and $140.2 million at December
31, 1996 and 1995, respectively.
The Company is required to be a member of the FHLB System and to maintain
an investment in the stock of the FHLB of Atlanta at least equal to the greater
of 1 percent of the unpaid principal balance of its residential mortgage loans
or 1 percent of 30 percent of its total assets or 1/20th of its outstanding
advances from the FHLB.
11. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Information concerning borrowings under fixed and variable rate coupon
reverse repurchase agreements is summarized as follows (dollars in thousands):
1996 1995
---- ----
Weighted average balance during the year $ 68,920 $ 97,692
Weighted average interest rate during the year 5.77% 6.29%
Maximum month-end balance during the year $ 97,416 $119,507
Balance at year-end $ 57,581 $ 93,905
Securities underlying the agreements
as of the end of the year:
Carrying value, including accrued interest $ 61,418 $103,590
Estimated market value $ 61,426 $103,891
The securities sold under the reverse repurchase agreements at December 31,
1996 are due in less than one year. The Company enters into sales of securities
under agreements to repurchase the
<PAGE>
same securities. Reverse repurchase agreements are collateralized by fixed and
variable rate mortgage-backed securities or investment grade securities. Reverse
repurchase agreements are treated as financings, and the obligations to
repurchase securities sold are reflected as a liability in the balance sheet.
The dollar amount of securities underlying the agreement remains in the asset
accounts. The securities underlying the agreements are physical and book entry
securities and the brokers retain possession of the securities collateralizing
the reverse repurchase agreements. If the counterparty in a reverse repurchase
agreement were to fail, the Company might incur an accounting loss for the
excess collateral posted with the counterparty. As of December 31, 1996, the
Company's amount at risk did not exceed 10% of the Company's stockholders'
equity with any one counterparty.
12. SUBORDINATED DEBT
In May and June 1994, the Company issued 15,000 units of subordinated debt
at a price of $15.0 million and 2,250 units at a price of $2.3 million,
respectively. The units each consist of $1,000 of 11.5% subordinated notes due
in 2004 and 20 detachable warrants to purchase one share each of TeleBanc common
stock. The notes may not be redeemed prior to May 1, 1999. The notes are
redeemable at the option of the Company after May 1, 1999, at an initial
redemption price of 105.75% of the principal amount plus accrued interest with
the redemption price declining to 104.60%, 103.45%, 102.30%, and 101.15%
annually each year thereafter. Interest is payable semi-annually on May 1 and
November 1, commencing November 1, 1994. The indenture, among other things,
restricts the ability of the Company under certain circumstances to incur
additional indebtedness, limits cash dividends and other capital distributions
by the Company, requires the maintenance of a reserve initially equal to 150% of
the Company's annual interest expense on all indebtedness, restricts disposition
of the Bank or its assets and limits transactions with affiliates.
The total value of the 345,000 warrants was $948,750 which resulted in an
original issue discount on the subordinated debt in the amount of $899,289. The
original issue discount is amortized on a level yield basis over the life of the
debt. The warrants became transferable on November 27, 1994 and are exercisable
on or after May, 27, 1995. The exercise price of each warrant is $7.65625.
13. PENSION PLAN AND EMPLOYEE STOCK OWNERSHIP PLAN
The Company sponsors an Employee Stock Ownership Plan ("ESOP"). All
full-time employees of the Company who meet limited qualifications participate
in the ESOP. Under the ESOP, the Company contributes cash to a separate trust
fund maintained exclusively for the benefit of those employees who have become
participants. Participants will have shares of TeleBanc common stock, valued at
market value, allocated to their personal plan accounts based on a uniform
percentage of wages. At December 31, 1996 and 1995, the Company carried a
$305,000 and $240,000, respectively, note receivable from the ESOP which was
collateralized by the Company's common stock. The ESOP owned 67,600 shares of
the Company's stock with approximately 32,000 and 18,000 shares vested at
December 31, 1996 and 1995, respectively. The Company's contribution to the
ESOP, which is reflected in compensation expense, was $224,000, $210,000 and
$104,000 for the years ended December 31, 1996, 1995, and 1994, respectively.
14. INCOME TAXES
Income tax expense for the years ended December 31, 1996, 1995, and 1994 is
summarized as follows (in thousands):
1996 1995 1994
---- ---- ----
Current: Federal $1,194 $2,038 $ 224
State 225 181 59
1,419 2,219 283
Deferred: Federal (78) (474) (86)
State (146) (85) (15)
(224) (559) (101)
Total: Federal 1,116 1,564 138
State 79 96 44
Total $1,195 $1,660 $ 182
A reconciliation of the statutory Federal income tax rate to the Company's
effective income tax rate for the years ended December 31, 1996, 1995, and 1994
is as follows:
1996 1995 1994
---- ---- ----
Federal income tax at
statutory rate 34.0% 34.0% 34.0%
State taxes, net of
federal benefit 4.2 4.2 4.2
Municipal bond interest,
net of disallowed
interest expense (3.6) (7.0) (18.0)
Other (2.7) 6.7 5.0
Total 31.9% 37.9% 25.2%
<PAGE>
Deferred income taxes result from temporary differences in the recognition
of income and expense for tax versus financial reporting purposes. The sources
of these temporary differences and the related tax effects for the years ended
December 31, 1996 and 1995 are as follows (in thousands):
1996 1995
Deferred Tax Liabilities:
Acquired Loan Servicing Rights $ (12) $ (15)
Purchase Accounting Premium
- Land & Building (37) (37)
Purchase Accounting Premium
on Investments (3) (3)
Depreciation (17) (15)
Tax Reserve in Excess of Base Year (93) (93)
Prepaid Expenses (52) (25)
FHLB Stock Dividends (168) (168)
Total (382) $(356)
Deferred Tax Assets:
Purchase Accounting Discount
on Loan Portfolio 6 4
General Reserves & Real Estate
Owned Losses 819 674
Deferred Loan Fees 14 16
Total 839 694
Net Deferred Tax Asset 457 338
Tax Effect of Securities
Available-for-sale
adjustment to Fair Value
(notes 4 and 5) (1,030) (832)
Adjusted Net Deferred Tax Liability $(573) $(494)
The Company carries an accumulated tax bad debt reserve of $643,000 with
the U.S. Internal Revenue Service for which income taxes have not been provided.
If the Bank were to convert from its thrift charter, the Bank would pay taxes of
approximately $100,000 on this bad debt reserve. In addition, the Bank has
entered into a tax sharing agreement with TeleBanc under which it is allocated
its share of income tax expense or benefit based on its portion of consolidated
income or loss. The net deferred tax liability is recorded in other liabilities
on the balance sheet.
15. FINANCIAL INSTRUMENTS
The Company is party to a variety of interest rate caps and swaps to manage
interest rate exposure. In general, the Company enters into agreements to assume
fixed-rate interest payments in exchange for variable market-indexed interest
payments. The effect of these agreements is to lengthen short-term variable
liabilities into longer term fixed-rate liabilities or to shorten long-term
fixed rate assets into short-term variable rate assets. The net costs of these
agreements are charged to interest expense or interest income, depending on
whether the agreement is designated to hedge a liability or an asset.
Interest rate swap agreements for the years ended December 31, 1996 and
1995 are summarized as follows (dollars in thousands):
1996 1995
---- ----
Weighted average fixed rate payments 5.97% 5.93%
Weighted average original term 5.0 yrs 6.0 yrs
Weighted average variable rate obligation 5.62% 5.63%
Notional amount $130,000 $40,000
-------- --------
The Company enters into interest rate cap agreements to hedge outstanding
FHLB advances and reverse repurchase agreements. Under the terms of the interest
rate cap agreements, the Company generally would receive an amount equal to the
difference between 3 month LIBOR or 6 month LIBOR and the cap's strike rate,
multiplied by the notional amount. The interest rate cap agreements are
summarized as follows (dollars in thousands):
- --------------------------------------------------------------------------------
Effective Notional Maturity
Cap Strike Rate Date Balance Date
- --------------------------------------------------------------------------------
4% July 1992 $10,000 July 1999
5% July 1992 10,000 July 1997
6% October 1996 20,000 October 1999
7% January 1997 10,000 January 2002
7% January 1995 10,000 July 1998
7% July 1995 10,000 July 1997
8% January 1995 10,000 January 1997
9% December 1994 14,000 December 1998
9.5% April 1995 10,000 April 1997
10% April 1995 10,000 January 2002
10% January 1995 10,000 January 1997
The counterparties to the interest rate cap agreements are Goldman Sachs,
Lehman Brothers, Salomon Brothers, and UBS and contain credit risk of $729,000,
$257,000, $165,000, and $855,000, respectively. The credit risk is attributable
to the unamortized cap premium and any amounts due from the counterparty as of
December 31,1996. The total amortization expense for premiums on interest rate
caps was $638,000, $213,000 and $292,000 for the years ended December 31, 1996,
1995 and 1994, respectively.
16. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
The fair value information for financial instruments, which is provided
below, is based on the requirements of Statement of Financial Accounting
Standards No. 107, Disclosure About Fair Value of Financial Instruments ("SFAS
No. 107") and does not
<PAGE>
represent the aggregate net fair value of the Bank. Much of the information used
to determine fair value is subjective and judgmental in nature, therefore, fair
value estimates, especially for less marketable securities, may vary. In
addition, the amounts actually realized or paid upon settlement or maturity
could be significantly different. The following methods and assumptions were
used to estimate the fair value of each class of financial instrument for which
it is reasonable to estimate that value:
CASH AND INTEREST-BEARING DEPOSITS - Fair value is estimated to be carrying
value.
FEDERAL FUNDS SOLD - Fair value is estimated to be carrying value.
SECURITIES PURCHASED UNDER AGREEMENT TO RESELL - Fair value is estimated to be
carrying value.
INVESTMENT SECURITIES - Fair value is estimated by using quoted market prices
for most securities. For illiquid securities, market prices are estimated by
obtaining market price quotes on similar liquid securities and adjusting the
price to reflect differences between the two securities, such as credit risk,
liquidity, term coupon, payment characteristics, and other information.
MORTGAGE-BACKED AND RELATED SECURITIES - Fair value is estimated using quoted
market prices. For illiquid securities, market prices are estimated by obtaining
market price quotes on similar liquid securities and adjusting the price to
reflect differences between the two securities, such as credit risk, liquidity,
term coupon, payment characteristics, and other information.
LOANS RECEIVABLE - For certain residential mortgage loans, fair value is
estimated using quoted market prices for similar types of products. The fair
value of other certain types of loans is estimated using quoted market prices
for securities backed by similar loans.
The fair value for loans which could not be reasonably established using
the previous two methods was estimated by discounting future cash flows using
current rates for similar loans.
Management adjusts the discount rate to reflect the individual
characteristics of the loan, such as credit risk, coupon, term, payment
characteristics, and the liquidity of the secondary market for these types of
loans.
DEPOSITS - For passbook savings, checking and money market accounts, fair value
is estimated at carrying value. For fixed maturity certificates of deposit, fair
value is estimated by discounting future cash flows at the currently offered
rates for deposits of similar remaining maturities.
ADVANCES FROM THE FHLB OF ATLANTA - For adjustable rate advances, fair value is
estimated at carrying value. For fixed rate advances, fair value is estimated by
discounting future cash flows at the currently offered rates for fixed-rate
advances of similar remaining maturities.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE - Fair value is estimated using
carrying value. The securities are repriced on a semiannual basis.
SUBORIDNATED DEBT - For subordinated debt, fair value is estimated using quoted
market prices.
OFF-BALANCE SHEET INSTRUMENTS - The fair value of interest rate exchange
agreements is the net cost to the Company to terminate the agreement as
determined from market quotes.
The fair value of financial instruments as of December 31, 1996 and 1995 is
as follows (in thousands):
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
1996 1996 1995 1995
Carrying Fair Carrying Fair
Value Value Value Value
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS:
Cash and cash equivalents $ 3,259 $ 3,259 $ 8,965 $ 8,965
Investment securities
available-for-sale 78,826 78,826 40,058 40,058
Mortgage-backed securities
available-for-sale 184,743 184,743 234,210 234,210
Loans receivable 351,821 365,401 248,667 261,198
LIABILITIES:
Deposits 390,486 393,820 306,500 311,476
Advances from the
FHLB Atlanta 144,800 144,800 105,500 105,526
Securities sold under
agreements to repurchase 57,581 57,581 93,905 93,905
Subordinated debt, net 16,586 16,625 16,496 16,123
Off-balance sheet
financial instruments -- 1,684 -- 212
Commitments to
purchase loans -- 54,721 -- 24,738
</TABLE>
<PAGE>
17. DISTRIBUTIONS
The Company is subject to certain restrictions on the amount of dividends
it may declare without prior regulatory approval. At December 31, 1996,
approximately $6.4 million of retained earnings were available for dividend
declaration without prior regulatory approval.
18. STOCK BASED COMPENSATION
In 1996, directors, officers and employees were issued 80,500 options to
purchase 80,500 shares of TeleBanc common stock at prices ranging from $7.75 to
$8.875. In 1995, officers and employees were issued 32,000 options to purchase
32,000 shares of TeleBanc common stock at a price of $5.50. As of December 31,
1996 and 1995, 180,438 and 110,392, respectively, of the shares were vested at
exercise prices ranging from $5.50 to $8.875. The options' exercise price was
the market value of the stock at the date of issuance. No options have been
exercised or canceled.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
1996 1995
------------------------------ ----------------------------
WEIGHTED AVG. WEIGHTED AVG.
OPTIONS SHARES EXERCISED PRICE SHARES EXERCISED PRICE
(000's) (000's)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 271 $6.51 242 $6.64
Granted 81 $8.17 32 $5.50
Exercised -- -- -- --
Forfeited -- -- 3 $6.13
Outstanding at end of year 352 $6.89 271 $6.51
Options exercisable at year-end 180 $6.69 110 $6.55
Weighted avg. fair value
of options granted $2.61 $1.81
</TABLE>
The following table summarizes information about fixed options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------- ------------------------------
RANGE OF NUMBER WEIGHTED AVG. NUMBER WEIGHTED AVG.
EXERCISE PRICES OUTSTANDING EXERCISED PRICE EXERCISABLE EXERCISED PRICE
(000's) (000's)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$5.00 - $5.99 32 $5.50 13 $5.50
$6.00 - $6.99 114 $6.13 76 $6.13
$7.00 - $7.99 176 $7.30 85 $7.20
$8.00 - $8.99 30 $8.88 6 $8.88
$5.00 - $8.99 352 $6.89 180 $6.69
</TABLE>
As of December 31, 1996 the fixed options outstanding had a weighted
average remaining contractual life ranging from 7.4 years to 9.6 years. The
Company accounts for this plan under APB No. 25, under which no compensation
cost has been recognized. Had compensation cost for the plan been determined
consistent with SFAS No. 123, the Company's net income and net income per share
would have been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED
12/31/96 12/31/95
- -------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations:
<S> <C> <C>
As reported $ 2,552 $ 2,720
Pro forma 2,342 2,662
Earnings per share:
As reported 1.12 1.33
Pro forma 1.03 1.30
Fully diluted earnings per share:
As reported 1.09 1.33
Pro forma 1.00 1.30
</TABLE>
Because the method of accounting required by SFAS No. 123 has not been
applied to options granted prior to January 1995, the resulting pro forma
compensation cost may not be representative of that to be expected in future
years. The fair value of each option grant is estimated on the date of grant
using the Roll Geske option pricing model with the following weighted average
assumptions for grants; risk-free interest rates of 5.25 percent and 6.00
percent for 1996 and 1995, respectively; expected life of 10 years for all
options granted in 1996 and 1995; expected volatility of 23 percent and 16
percent for 1996 and 1995, respectively.
19. COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Company has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying consolidated financial statements. The principal commitments of the
Company are as follows:
At December 31, 1996, the Company was obligated under an operating lease
for office space with an original term of ten years. Net rent expense under
operating leases was approximately $142,000, $127,000, and $60,000 for the years
ended December 31, 1996, 1995 and 1994, respectively.
The projected minimum rental payments under the terms of the lease are as
follows:
YEARS ENDING DECEMBER 31, AMOUNT
- ------------------------- ------
1997 $ 177,000
1998 165,000
1999 167,000
2000 169,000
2001 171,000
2002 and thereafter 701,000
$ 1,550,000
As of December 31, 1996, the Company had commitments to purchase $54.7
million of mortgage loans.
The Company self-insures for a portion of health insurance expenses paid by
the Company as a benefit to its employees. At December 31, 1996 and 1995, there
was no reserve needed for incurred but not reported claims under this insurance
arrangement.
20. SUBSEQUENT EVENTS
In February 1997, TeleBanc entered into definitive agreements to raise new
capital in the form of convertible preferred stock, senior subordinated notes
and warrants aggregating $29.9 million and to purchase the assets of Arbor
Capital Partners, Inc. ("Arbor"), a registered investment advisor, funds manager
and broker-dealer. MET Holdings, TeleBanc's majority shareholder, owns a
majority of Arbor.
The Board of Directors authorized the sale of $29.9 million in units to
investment partnerships managed by Conning & Company, CIBC WG Argosy Merchant
Fund 2, LLC, The Progressive Corporation and The Northwestern Mutual Life
Insurance Company. Representatives from the Conning partnerships and the CIBC
Merchant Fund will serve on the Board of Directors of the Company. The units
consist of $13.7 million in 9.5% senior subordinated notes with 198,088
detachable warrants, $16.2 million in 4.0% convertible preferred stock, and
rights to 205,563 contingent warrants. The Company finalized this transaction on
February 28, 1997.
Also in connection with the sale of units, the Arbor asset acquisition was
structured as a tax free issuance of 162,461 shares of TeleBanc common stock,
24,201 options, and a $500,000 cash payment for the Arbor assets. An independent
appraisal valued the assets to be acquired from Arbor at $3.1 million.
Consistent with TeleBanc's charter, the number of shares issued to Arbor as
consideration is limited to 5% of total market value of outstanding TeleBanc
stock at the time of acquisition. The Company finalized the sale of the units
and the related Arbor asset acquisition on February 28, 1997.
21. CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY)
Statements of Financial Condition
($ in thousands)
December 31,
------------------
1996 1995
---- ----
ASSETS:
Cash $ 159 $ 210
Investment securities available-for-sale 4,132 4,685
Mortgage-backed securities available-for-sale 14,086 940
Investment securities held-to-maturity -- --
Loans receivable, net 305 240
Equity in net assets of subsidiary 34,130 31,164
Deferred charges 940 1,066
Other assets 1,099 265
Total assets $54,851 $38,570
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Subordinated debt $16,586 $16,496
Securities sold under agreements to repurchase 12,831
Accrued interest payable 357 330
Taxes payable and other liabilities 419 179
Total liabilities $30,193 $17,005
STOCKHOLDERS' EQUITY
Preferred Stock $ -- $ --
Common Stock 20 20
Additional Paid in Capital 14,637 14,637
Retained earnings 7,904 5,352
Unrealized gain/loss on securities available-for-sale 2,097 1,556
Total stockholders' equity 24,658 21,565
Total liabilities and stockholders' equity $54,851 $38,570
STATEMENTS OF OPERATIONS
($ in thousands)
December 31,
------------------------------
1996 1995 1994
---- ---- ----
Interest income $ 531 $ 429 $ 177
Interest expense 2,163 2,111 1,227
Net interest loss (1,632) (1,682) (1,050)
Non interest income 133 92 1
Total general and
administrative expenses 1,393 1,046 320
Non interest expenses 127 126 74
Net loss before equity in
net income of subsidiary
and income taxes (3,019) (2,762) (1,443)
Equity in net income
of subsidiary 6,716 4,434 1,434
Income taxes 1,145 (1,048) (531)
Net Income $ 2,552 $ 2,720 $ 540
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF CASH FLOWS
Year ended December 31,
-------------------------------------
(Dollars in thousands) 1996 1995 1994
- ---------------------- ---- ---- ----
Cash flows from operating activities:
<S> <C> <C> <C>
Net income $ 2,552 $ 2,720 $ 540
Adjustments to reconcile net income to
net cash provided by operating activities:
Equity in undistributed earnings
of subsidiaries (4,426) (4,434) (1,433)
Net realized gains on securities (36) (92) --
(Increase) decrease in other assets (592) 162 (1,362)
Increase in accrued expenses
and other liabilities 267 122 387
Depreciation and amortization (58) (32) --
Net cash provided by operating activities (2,293) (1,554) (1,868)
-------------------------------------
Cash flows from investing activities:
Net (increase) decrease in loan to
Employee Stock Ownership Plan (65) 60 (300)
Net (increase) decrease in equity
investment 2,074 2,089 (13,644)
Purchases of available-for-sale
securities (100,574) (20,771) (4,612)
Proceeds from sale of
available-for-sale securities 11,103 5,170 --
Proceeds from maturities of and
principal payment on
available-for-sale securities 76,910 14,619 --
Net purchases of premises and equipment (37) (21) (6)
Net cash (used in) provided by
investing activities (10,589) 1,146 (18,562)
-------------------------------------
Cash flows from financing activities:
Net increase in securities sold under
agreements to repurchase 12,831 -- --
Increase in subordinated debt -- -- 16,390
Increase in common stock and
additional paid in capital -- -- 5,156
Dividends paid on common and
preferred stock -- -- (498)
-------------------------------------
Net cash provided by (used in)
financing activities 12,831 -- 21,048
Net increase (decrease) in cash and
cash equivalents (51) (408) 618
-------------------------------------
Cash and cash equivalents at
beginning of period 210 618 0
Cash and cash equivalents at
end of period $ 159 $ 210 $ 618
=====================================
</TABLE>
TeleBanc Financial Corporation commenced activities on January 27, 1994,
the effective date of its formation as a holding company of the Bank. The Bank
paid dividends of $2.2 million and $2.1 million to TeleBanc for subordinated
interest expense payments for the years ended December 31, 1996 and 1995,
respectively.
22. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Condensed quarterly financial data for the years ended December 31, 1996
and 1995 is shown as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
(Dollars in thousands except per share data) 1996 1996 1996 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $ 11,131 $ 11,364 $ 11,871 $11,433
Interest expense 8,357 8,449 9,034 8,975
---------------------------------------------------------------
Net interest income 2,774 2,915 2,837 2,458
Provision for loan and lease losses 419 200 125 175
Non-interest income 605 291 540 1,320
General and administrative
expenses 1,679 1,749 3,287 1,660
Other non-interest expenses 300 81 247 71
Income before income taxes 981 1,176 (282) 1,872
Income tax expense 332 417 (220) 667
---------------------------------------------------------------
Net income $ 649 $ 759 $ (62) $ 1,205
---------------------------------------------------------------
Net income per share $ 0.31 $ 0.35 $ (0.03) $ 0.51
===============================================================
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
(Dollars in thousands except per share data) 1995 1995 1995 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $ 8,653 $10,414 $10,681 $10,763
Interest expense 7,155 8,151 8,215 8,425
---------------------------------------------------------------
Net interest income 1,498 2,263 2,466 2,338
Provision for loan and lease losses 309 353 502 558
Non-interest income 630 412 419 2,316
General and administrative
expenses 1,248 1,473 1,401 1,439
Other non-interest expenses 87 79 90 423
Income before income taxes 484 770 892 2,234
Income tax expense 164 264 343 889
---------------------------------------------------------------
Net income $ 320 $ 506 $ 549 $ 1,345
---------------------------------------------------------------
Net income per share $ 0.16 $ 0.25 $ 0.27 $ 0.65
===============================================================
</TABLE>
<PAGE>
Report of the Independent Public Accountants
To the Board of Directors and Stockholders
of TeleBanc Financial Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheets of TeleBanc
Financial Corporation (a Delaware Corporation) and Subsidiaries as of December
31, 1996 and 1995 and the related consolidated statements of income,
stockholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. The consolidated statement of income of the company for the year
ended December 31, 1994 was audited by other auditors whose report dated
February 24, 1995 expressed an unqualified opinion on that statement.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of TeleBanc Financial
Corporation and Subsidiaries as of December 31, 1996 and 1995, and the results
of its operations and its cash flows for the years ended December 31, 1996 and
1995, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Washington, DC
February 14, 1997 (except with respect to the matters discussed in Note 20, as
to which the date is February 28, 1997)
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
BOARD OF DIRECTORS CORPORATE OFFICERS CORPORATE COMMON STOCK
INFORMATION
Mitchell H. Caplan David A. Smilow The Common Stock is
Vice Chairman & President Chairman & CEO TRANSFER AGENT currently traded
TeleBanc Financial AND REGISTRAR "over-the counter"under
Corporation Mitchell H. Caplan Fifth Third Trust & the symbol "TBFC." The
Vice Chairman & President Investment Division following table sets
David R. DeCamp Fifth Third Center forth the closing high
Senior Vice President Laurence P. Greenberg Cincinnati, OH 45263 and low bid prices for
Grubb & Ellis, Co. Executive Vice President (513) 579-5300 the Common Stock for
Marketing the periods indicated.
Arlen W. Gelbard, Esq. FORM 10-K
Partner Aileen Lopez Pugh A copy of the Company's Initial Offering: $6.125
Hofheimer, Gartlir & Gross Executive Vice President Form 10-K for Fiscal
Chief Financial 1996 as filed with the ---------------------------
Steven F. Piaker Officer/Treasurer Securities and Exchange 1995 HIGH LOW
Partner Commission will be ---------------------------
Conning & Company Sang-Hee Yi furnished upon written 1st Q 5.625 5.50
Executive Vice President request to: 2nd Q 6.00 5.00
Dean C. Kehler Chief Operating Officer 3rd Q 6.625 6.0625
Managing Director Aileen Lopez Pugh 4th Q 7.75 6.50
CIBC Wood Gundy Securities Michael H. Aneiro Director of Shareholder
Senior Vice President Relations ---------------------------
Mark Rollinson, Esq. Portfolio Management TeleBanc Financial 1996 HIGH LOW
Attorney Corporation ---------------------------
Catherine M. Gallahan 1111 N. Highland Street 1st Q 8.00 7.50
David A. Smilow Senior Vice President Arlington, Virginia 22201 2nd Q 9.75 8.00
Chairman & CEO Systems (703) 247-3700 3rd Q 10.00 8.875
TeleBanc Financial Corporation 4th Q 13.25 9.75
Michael T. Girouard SPECIAL COUNSEL
Michael A. Smilow Senior Vice President Hogan & Hartson L.L.P. No dividends were paid
Mortgage Finance Consultant Chief Investment Officer Columbia Square in 1995 and 1996. The
555 Thirteenth Street, NW closing per share bid
Steven D. Greenwood Washington, DC 20004-1109 price of the Common
Senior Vice President Stock on December 31,
Product Development INDEPENDENT AUDITORS 1996 was $13.25.
Arthur Andersen LLP
Emidio Morizio 8000 Towers Crescent Drive
Senior Vice President Vienna, VA 22182 ANNUAL MEETING
Operations
The Company's Annual
Michael R. Opsahl Meeting of shareholders
Senior Vice President will be held at 11:00
Chief Credit Officer am on Wednesday, May 7,
1997 at the Corporate
Jane H. Gelman offices of TeleBanc
Vice President Financial Corporation,
Chief Administrative 1111 N. Highland
Officer/Secretary Street, Arlington,
Virginia 22201.
Dennis E. Carlton
General Counsel
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TeleBanc Financial Corporation and subsidiaries
Selected Financial Data
Years ended December 31,
-----------------------------------------------------------------------
(Dollars in thousands, except per share data) 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Interest income $ 45,800 $ 40,511 $ 22,208 $ 16,667 $ 19,425
Interest expense 34,815 31,946 17,513 11,828 13,896
Net interest income 10,985 8,565 4,695 4,839 5,529
Provision for loan and lease losses 919 1,722 492 211 972
Non-interest income 2,756 3,777 175 1,157 1,014
General and administrative expenses 8,375 5,561 3,503 2,997 2,393
Other non-interest operating expenses 700 679 153 739 1,234
Income before income taxes and cumulative
effect of change in accounting principle 3,747 4,380 722 2,049 1,944
Income tax expense 1,195 1,660 182 842 857
Cumulative effect of change in accounting principle -- -- -- 170 --
Net income $ 2,552 $ 2,720 $ 540 $ 1,377 $ 1,087
Earnings per share:
Primary $ 1.12 $ 1.33 $ 0.31 $ 1.06 $ 0.84
Fully diluted $ 1.09 $ 1.33 $ 0.31 $ 1.06 $ 0.84
At December 31,
Total assets $647,965 $553,943 $427,292 $220,301 $229,374
Loans receivable, net 351,821 248,667 154,742 100,859 93,605
Mortgage-backed securities (a) 184,743 234,210 236,464 80,782 87,164
Investment securities (a) 78,826 40,058 12,444 18,110 13,570
Deposits 390,486 306,500 212,411 113,132 130,100
Advances from the FHLB 144,800 105,500 96,000 61,000 53,750
Securities sold under agreements to repurchase 57,581 93,905 79,613 29,642 29,642
Total stockholders equity 24,658 21,565 17,028 12,378 10,715
Financial ratios
Return on average
Total assets 0.61% 0.53% 0.17% 0.61% 0.45%
Stockholders' equity 16.50% 14.10% 3.17% 11.79% 10.51%
Average stockholders' equity to average total assets 3.70% 3.77% 5.27% 5.20% 4.32%
Total general and administrative expenses to total assets (b) 1.03%(c) 1.00% 0.82% 1.36% 1.04%
Number of (b):
Deposit accounts 16,506 12,919 8,564 2,932 3,568
Full-time equivalent employees 39 30 29 18 17
Total assets per employee (b) $ 16,614 $ 18,465 $ 14,734 $ 12,239 $ 13,493
(a) Includes available for sale, held to maturity, and held for sale. (b) At end of period. (c) Excludes SAIF assessment.
</TABLE>
Exhibit 21
SUBSIDIARIES OF REGISTRANT
JURISDICTION OF
NAME OF SUBSIDIARY INCORPORATION
------------------ -------------
TeleBank United States
TeleBanc Servicing Corporation United States
AGT Mortgage Services United States
AGT-PRA United States
Portfolio Recovery Associates United States
The Board of Directors and Stockholders
TeleBanc Financial Corporation:
We consent to incorporation by reference in the registration statement No.
F33-91786 on Form S-1 and on Form S-3 of TeleBanc Financial Corporation and
subsidiary of our report dated February 24, 1995, relating to the consolidated
statement of operations, changes in stockholders' equity, and cash flows for the
year ended December 31, 1994, which report is incorporated by reference in the
December 31, 1996 annual report on Form 10-K of TeleBanc Financial Corporation.
/s/ KPMG Peat Marwick
Washington, D.C.
March 26, 1997
<PAGE>
As independent public accountants, we hereby consent to the incorporation by
reference in this Form 10-K of our report dated February 14, 1997 included in
TeleBanc Financial Corporation's Annual Report for the year ended December 31,
1996. It should be noted that we have not audited any financial statements of
the company subsequent to December 31, 1996 or performed any audit procedures
subsequent to the date of our report.
/s/ Arthur Andersen LLP
Report of Independent Public Accountants
To the Board of Directors and Stockholders
of TeleBanc Financial Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheets of TeleBanc
Financial Corporation (a Delaware Corporation) and Subsidiaries as of December
31, 1996 and 1995 and the related consolidated statements of income,
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of TeleBanc Financial Corporation
and Subsidiaries as of December 31, 1996 and 1995, and the results of its
operations and its cash flows for the years then ended December 31, 1996 and
1995, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Washington, DC
February 14, 1997 (except with respect to the matters discussed in Note 20, as
to which the date is February 28, 1997)
The Board of Directors and Stockholders
TeleBanc Financial Corporation:
We have audited the accompanying consolidated statement of operations, changes
in stockholders' equity, and cash flows of TeleBanc Financial Corporation and
subsidiary for the year ended December 31, 1994. These consolidated financial
statements are the responsibility of TeleBanc Financial Corporation's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects the results of TeleBanc Financial Corporation
and subsidiary's operations and their cash flows for the year ended December 31,
1994, in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick
Washington, D.C.
February 24, 1995
Exhibit 99.3
TELEBANC
FINANCIAL CORPORATION
April 7, 1997
Dear Stockholder:
You are cordially invited to attend the 1997 Annual Meeting of
Stockholders of TeleBanc Financial Corporation. The meeting will be held on
Wednesday, May 7, 1997 at 11:00 a.m. at the Company's headquarters, 1111 North
Highland Street, Arlington, Virginia 22201. I hope that you will be able to join
us.
At this meeting you will be asked to vote, in person or by proxy, to
elect three directors, amend certain provisions of the Company's certificate of
incorporation, adopt the 1997 Stock Option Plan, ratify the appointment of the
Company's independent accountants and act on such other business as may properly
come before the meeting. The Notice of Annual Meeting and Proxy Statement
accompanying this letter describe the business to be transacted at the meeting
It is important that your shares be represented at the meeting,
regardless of the number you may hold. Whether or not you plan to attend the
meeting in person, please sign, date and return the enclosed proxy card as soon
as possible. If you attend the meeting and desire to vote in person, you may do
so even though you have previously returned a proxy to the Company.
Thank you. We look forward to seeing you at the meeting.
Sincerely,
/s/ David A. Smilow
David A. Smilow
Chairman of the Board and
Chief Executive Officer
1111 North Highland Street, Arlington, Virginia 22201
<PAGE>
TELEBANC FINANCIAL CORPORATION
1111 NORTH HIGHLAND STREET
ARLINGTON, VIRGINIA 22201
(703) 247-3700
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 7, 1997
NOTICE IS HEREBY GIVEN that the 1997 Annual Meeting of Stockholders of
TeleBanc Financial Corporation (the "Company") will be held on Wednesday, May 7,
1997, at 11:00 a.m., at the Company's headquarters, 1111 North Highland Street,
Arlington, Virginia 22201, for the following purposes:
1. To elect three directors for terms of three years each;
2. To amend Article 4 of the Company's certificate of
incorporation to increase the number of authorized shares of
the Company's common stock from 3,500,000 to 8,500,000 and to
authorize the issuance of nonvoting common stock;
3. To amend Article 8 of the Company's certificate of
incorporation to reduce the effect of certain anti-takeover
provisions by increasing from 10% to 25% the percentage of the
Company's voting stock which is considered "Control" for
purposes of such Article;
4. To amend Article 11 of the Company's Certificate of
Incorporation to reduce the effect of certain anti-takeover
provisions by making it easier for the Board of Directors to
approve certain business combination transactions with the
approval of the stockholders required by law rather than a
supermajority;
5. To adopt the 1997 Stock Option Plan;
6. To ratify the appointment by the Board of Directors of Arthur
Andersen LLP as the Company's independent accountants for the
fiscal year ending December 31, 1997; and
7. To transact such other business as may properly come before
the Annual Meeting or any adjournments or postponements
thereof.
The Board of Directors has fixed the close of business on March 20,
1997 as the record date for the determination of stockholders entitled to notice
of and to vote at the Annual Meeting. Only stockholders of record at the close
of business on that date will be entitled to notice of and to vote at the Annual
Meeting or any adjournments or postponements thereof.
By order of the Board of Directors,
/s/ David A. Smilow
David A. Smilow
Chairman of the Board and
Chief Executive Officer
Arlington, Virginia
April 7, 1997
- --------------------------------------------------------------------------------
YOUR VOTE IS IMPORTANT. PLEASE RETURN YOUR PROXY PROMPTLY. WHETHER OR NOT YOU
PLAN TO ATTEND THE ANNUAL MEETING IN PERSON, PLEASE SIGN, DATE AND COMPLETE THE
ENCLOSED PROXY AND RETURN IT IN THE ENVELOPE PROVIDED. IF YOU ATTEND THE MEETING
AND DESIRE TO VOTE IN PERSON, YOU MAY DO SO EVEN THOUGH YOU HAVE PREVIOUSLY
RETURNED YOUR PROXY.
- --------------------------------------------------------------------------------
<PAGE>
TELEBANC FINANCIAL CORPORATION
1111 NORTH HIGHLAND STREET
ARLINGTON, VIRGINIA 22201
PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
MAY 7, 1997
SOLICITATION, VOTING AND REVOCABILITY OF PROXIES
This Proxy Statement and the accompanying Notice of Annual Meeting and
proxy card are being furnished to the stockholders of TeleBanc Financial
Corporation, a Delaware corporation (the "Company" or "TeleBanc"), in connection
with the solicitation of proxies by the Board of Directors of the Company for
use at the 1997 Annual Meeting of Stockholders of the Company (the "Annual
Meeting"). The Annual Meeting will be held at the headquarters of TeleBanc
located at 1111 North Highland Street, Arlington, Virginia 22201, on Wednesday,
May 7, 1997, at 11:00 a.m., and at any adjournment or postponement thereof. The
Annual Meeting has been called for the purposes set forth in the Notice of
Annual Meeting.
If the enclosed proxy is properly signed and returned to TeleBanc and
not revoked prior to its use, the shares represented thereby will be voted at
the Annual Meeting in accordance with the instructions thereon. EXECUTED BUT
UNMARKED PROXIES WILL BE VOTED: (1) FOR THE ELECTION OF THE THREE NOMINEES OF
THE BOARD OF DIRECTORS TO SERVE AS DIRECTORS; (2) FOR THE AMENDMENT OF ARTICLE 4
OF THE COMPANY'S AMENDED AND RESTATED CERTIFICATE OF INCORPORATION (THE
"CERTIFICATE OF INCORPORATION") TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF
THE COMPANY'S COMMON STOCK (THE "COMMON STOCK") FROM 3,500,000 TO 8,500,000 AND
TO AUTHORIZE THE ISSUANCE OF NONVOTING COMMON STOCK (THE "NONVOTING COMMON
STOCK"); (3) FOR THE AMENDMENT OF ARTICLE 8 OF THE CERTIFICATE OF INCORPORATION
TO INCREASE FROM 10% TO 25% THE PERCENTAGE OF THE COMPANY'S VOTING STOCK WHICH
IS CONSIDERED "CONTROL" FOR PURPOSES OF SUCH ARTICLE; (4) FOR THE AMENDMENT OF
ARTICLE 11 OF THE CERTIFICATE OF INCORPORATION TO MAKE IT EASIER FOR THE BOARD
OF DIRECTORS TO APPROVE CERTAIN BUSINESS COMBINATION TRANSACTIONS WITH THE
APPROVAL OF THE STOCKHOLDERS REQUIRED BY LAW RATHER THAN A SUPERMAJORITY; (5)
FOR THE ADOPTION OF THE 1997 STOCK OPTION PLAN; AND (6) FOR THE RATIFICATION OF
ARTHUR ANDERSEN LLP AS THE COMPANY'S INDEPENDENT ACCOUNTANTS. If any other
matters are properly brought before the Annual Meeting, proxies will be voted in
the discretion of the proxy holders. TeleBanc is not aware of any such matters
that are proposed to be presented at the Annual Meeting.
The cost of soliciting proxies in the form enclosed herewith will be
borne by the Company. In addition to the solicitation of proxies by mail,
directors, officers and regular employees of TeleBanc, without extra
remuneration, may solicit proxies personally, by telephone, telegram, or
otherwise. TeleBanc will also utilize the services of its transfer agent, Fifth
Third Trust, to provide broker search and proxy distribution services at an
estimated cost of $3,000. TeleBanc will request persons, firms and corporations
holding shares in their name or in the names of their nominees, which are
beneficially owned by others, to send proxy materials to and obtain proxies from
the beneficial owners and will reimburse the holders for their reasonable
expenses in doing so. It is anticipated that this Proxy Statement and the
enclosed proxy will be mailed to stockholders on or about April 7, 1997.
In February 1997, the Company entered into a $29,900,000 Unit Purchase
Agreement with two investment partnerships managed by Conning & Company and with
General American Life Insurance Company, CIBC WG Argosy Merchant Fund 2, LLC, PC
Investment Company and The Northwestern Mutual Life Insurance Company (the "Unit
Purchase Agreement"). Pursuant to the Unit Purchase Agreement, the Company
issued and sold 29,900 Units, which in the aggregate
<PAGE>
consist of (i) $13,703,469 in aggregate principal amount of the Company's Senior
Subordinated Notes due March 31, 2004, (ii) 29,900 shares of serial preferred
stock, (iii) warrants to purchase 198,088 shares of Common Stock (the
"Warrants"), and (iv) contingent warrants to purchase up to 205,563 shares of
Common Stock (the "Contingent Warrants"). The serial preferred stock issued in
connection with this transaction consists of 18,850 shares of Series A Voting
Convertible Preferred Stock ("Series A Preferred Stock"), 4,050 shares of Series
B Nonvoting Convertible Preferred Stock ("Series B Preferred Stock"), and 7,000
shares of Series C Nonvoting Convertible Preferred Stock ("Series C Preferred
Stock," and collectively with the Series A Preferred Stock and the Series B
Preferred Stock, the "Preferred Stock").
In connection with the Unit Purchase Agreement, certain holders of the
Series A Preferred Stock are entitled to designate two persons to serve as
directors of the Company, who shall be nominated for election by the Company
(subject to certain exceptions). Such nominees to the Board of Directors, Dean
C. Kehler and Steven F. Piaker, were elected to the Board of Directors effective
upon the closing of the sale of the Units by the Company on February 28, 1997.
The Unit Purchase Agreement also contains an affirmative covenant by the Company
that it will obtain stockholder approval of the proposed amendments to the
Certificate of Incorporation that are presented as Proposals Two and Three in
this Proxy Statement.
In connection with the Unit Purchase Agreement, certain amendments were
made to the Company's Bylaws so that the number of directors on the Board of
Directors may not exceed nine members, any two directors have the right to call
a meeting of the Board of Directors and the affirmative vote of 66-2/3% of the
total number of votes of the then outstanding shares of capital stock of the
Company entitled generally to vote in the election of directors, voting together
as a single class, is required to amend the Bylaw provisions regarding the
number and selection process of the Board of Directors.
Also as part of the sale of Units pursuant to the Unit Purchase
Agreement, the Company entered into an agreement with Arbor Capital Partners,
Inc. ("Arbor"), a registered investment advisor, funds manager and
broker-dealer, MET Holdings Corporation ("MET Holdings") and William M.
Daugherty (the "Acquisition Agreement"), pursuant to which the Company purchased
substantially all of the assets and liabilities of Arbor. MET Holdings,
TeleBanc's largest stockholder, also owns a majority of the capital stock of
Arbor. This acquisition involved the tax-free issuance of 162,461 shares of the
Company's Common Stock and a $500,000 cash payment for the Arbor assets. Since
consummation of the Acquisition Agreement, Arbor has distributed the 162,461
shares of TeleBanc Common Stock that it received in the acquisition to its two
stockholders, MET Holdings and William M. Daugherty. As a result of this
distribution, Arbor no longer beneficially owns any of the capital stock of the
Company.
The securities that can be voted at the Annual Meeting consist of the
outstanding shares of Common Stock as well as the shares of Series A Preferred
Stock of the Company sold pursuant to the Unit Purchase Agreement. Each share of
Common Stock entitles its holder to one vote on each matter presented to the
stockholders. Each share of Series A Preferred Stock entitles its holder to that
number of votes equal to the largest number of whole shares of Common Stock into
which such holder's shares of Series A Preferred Stock could be converted on the
Record Date (as defined below) pursuant to the provisions of the Company's
Certificate of Incorporation.
The close of business on March 20, 1997 has been fixed by the Board of
Directors as the record date (the "Record Date") for the determination of
stockholders entitled to notice of and to vote at the Annual Meeting. On the
Record Date, there were approximately 220 holders of Common Stock and five
holders of Series A Preferred Stock. The number of shares of Common Stock
outstanding on the Record Date was 2,211,961, and the total number of shares of
Common Stock into which the Series A Preferred Stock would convert on that date
was 756,360. The Common Stock and the Series A Preferred Stock, which will vote
together as one class with respect to the proposals presented for stockholder
approval in this Proxy Statement, are collectively referred to as the
2
<PAGE>
"Company's Voting Securities," and references to percentages of the Company's
Voting Securities are calculated on the basis of 2,968,321 shares of Common
Stock, the sum of the 2,211,961 outstanding shares of Common Stock and the
756,360 shares of Common Stock into which the outstanding Series A Preferred
Stock could be converted on the Record Date. On the Record Date, the Company's
largest stockholder, MET Holdings, held 1,433,081 shares of Common Stock, or
64.8% of the outstanding shares of Common Stock and 48.75% of the Company's
Voting Securities outstanding on that date.
The presence, in person or by proxy, of at least a majority of the
stock of the Company issued and outstanding and entitled to vote at the meeting
is necessary to constitute a quorum at the Annual Meeting. Stockholders' votes
will be tabulated by the person appointed by the Board of Directors to act as
inspector of election for the Annual Meeting. Under the Company's Bylaws,
directors are elected by a plurality of votes cast by the shares entitled to
vote in the election of directors. Unless otherwise required by the General
Corporation Law of the State of Delaware, the Certificate of Incorporation or
the Bylaws, the Company's Bylaws provide that any other matter put to a
stockholder vote shall be decided by the affirmative vote of a majority of the
votes cast on the matter. As discussed below, certain proposals to be voted upon
by the Company's stockholders that are presented in this Proxy Statement require
a higher vote for stockholder approval.
Pursuant to the Company's Certificate of Incorporation, amendment of
Article 4 of the Certificate of Incorporation requires the affirmative vote of
the holders of at least a majority of the outstanding shares of stock of the
Company entitled to vote thereon at the Annual Meeting. MET Holdings has advised
the Company that it intends to vote all shares of Common Stock beneficially
owned by it in favor of the proposal amending Article 4 of the Certificate of
Incorporation. Each of the holders of the Series A Preferred Stock is obligated
by the terms of the Unit Purchase Agreement to vote in favor of this proposal.
MET Holdings and the holders of the Series A Preferred Stock collectively
beneficially own 73.8% of the Company's Voting Securities entitled to vote at
the Annual Meeting. Consequently, approval of this amendment of the Certificate
of Incorporation is assured.
Pursuant to the Company's Certificate of Incorporation, amendment of
Article 8 of the Certificate of Incorporation requires the affirmative vote of
the holders of at least 66-2/3 percent of the outstanding shares of stock of the
Company entitled to vote thereon at the Annual Meeting. MET Holdings has advised
the Company that it intends to vote all shares of Common Stock beneficially
owned by it in favor of the proposal amending Article 8 of the Certificate of
Incorporation. Each of the holders of the Series A Preferred Stock is obligated
by the terms of the Unit Purchase Agreement to vote in favor of this proposal.
MET Holdings and the holders of the Series A Preferred Stock collectively
beneficially own 73.8% of the Company's Voting Securities entitled to vote at
the Annual Meeting. Consequently, approval of this amendment of the Certificate
of Incorporation is assured.
Pursuant to the Company's Certificate of Incorporation, amendment of
Article 11 of the Certificate of Incorporation requires the affirmative vote of
the holders of at least 80 percent of the outstanding shares of stock of the
Company entitled to vote thereon at the Annual Meeting. MET Holdings has advised
the Company that it intends to vote all shares of Common Stock beneficially
owned by it in favor of the proposal amending Article 11 of the Certificate of
Incorporation. The holders of the Series A Preferred Stock are not obligated by
the terms of the Unit Purchase Agreement to vote in favor of this proposal. MET
Holdings beneficially owns 48.75% of the Company's Voting Securities entitled to
vote at the Annual Meeting.
Abstentions and broker non-votes will be treated as shares that are
present, or represented, and entitled to vote for purposes of determining the
presence of a quorum at the Annual Meeting. Broker non-votes and abstentions
will not be counted in determining the number of votes cast in connection with
any matter presented at the Annual Meeting.
3
<PAGE>
The presence of a stockholder at the Annual Meeting will not
automatically revoke the stockholder's proxy. However, any stockholder may
revoke a proxy at any time prior to its exercise by filing with the Secretary of
TeleBanc a written notice of revocation, by delivering to TeleBanc a duly
executed proxy bearing a later date, or by attending the Annual Meeting and
giving the Secretary notice of his or her intention to vote in person.
A copy of the Annual Report to Stockholders for the fiscal year ended
December 31, 1996 accompanies this Proxy Statement, and is incorporated by
reference herein. TeleBanc has filed an Annual Report on Form 10-K for its
fiscal year ended December 31, 1996 with the Securities and Exchange Commission
(the "Commission"). Stockholders may obtain, free of charge, a copy of the
Annual Report on Form 10-K by writing to TeleBanc Financial Corporation, 1111
North Highland Street, Arlington, Virginia 22201, Attention: Investor Relations.
STOCK OWNED BY MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
The following tables set forth certain information regarding the
beneficial ownership of the Company's Common Stock and Series A Preferred Stock
as of the Record Date by (i) any person known to the Company to be the
beneficial owner of more than 5% of any class of the Company's voting
securities, (ii) each director and person nominated to be a director, (iii) the
Chief Executive Officer and each of the other executive officers whose total
annual salary and bonus exceeded $100,000 during the year ended December 31,
1996 (the "Named Executive Officers"), and (iv) all directors and executive
officers as a group. The tables also reflect the options that have been
previously granted, including those granted under the Company's 1997 Stock
Option Plan, which is subject to stockholder approval at the Annual Meeting.
The information in the tables is based on information from the named
persons regarding ownership of Common Stock and Series A Preferred Stock. Unless
otherwise indicated, each stockholder has sole voting and investment power as to
all shares listed as beneficially owned by such person.
Under the rules of the Commission, a person is deemed a "beneficial
owner" of a security if such person has or shares the power to vote or direct
the voting of such security or the power to dispose or direct the disposition of
such security. A person is also deemed to be a beneficial owner of any
securities of which that person has the right to acquire beneficial ownership
within 60 days. More than one person may be deemed to be a beneficial owner of
the same securities.
4
<PAGE>
SECURITY OWNERSHIP OF THE COMPANY'S SECURITIES
<TABLE>
<CAPTION>
AMOUNT AND PERCENTAGE OF: CLASS
NATURE OF OUTSTANDING/
TITLE BENEFICIAL COMPANY'S
OF CLASS NAME OF BENEFICIAL OWNER OWNERSHIP VOTING SECURITIES (a)
- -------- ------------------------ --------- ---------------------
<S> <C> <C> <C>
Series A Conning Insurance Capital Limited 4,719 25.03% / 6.38%
Preferred Partnership III
Stock c/o Conning & Company
CityPlace II, 185 Asylum Street
Hartford, CT 06103
Conning Insurance Capital International 667 3.54% / 0.90%
Partners III, L.P.
c/o Conning & Company
CityPlace II, 185 Asylum Street
Hartford, CT 06103
General American Life Insurance Company 1,539 8.16% / 2.08%
700 Market Street
St. Louis, MO 63101
PC Investment Company 6,925 36.74% / 9.36%
401 Theodore Fremd Avenue
Rye, NY 10580
The Northwestern Mutual Life Insurance 5,000 26.53% / 6.76%
Company
720 East Wisconsin Avenue
Milwaukee, WI 53202
</TABLE>
- ----------
(a) For purposes of voting at the Annual Meeting, each share of Series A
Preferred Stock has 40.12519 votes, based on its conversion into an
equivalent number of shares of Common Stock. Accordingly, the percentages
reflected include (i) the percentage of Series A Preferred Stock
outstanding and (ii) the percentage of the Company's Voting Securities
beneficially owned, giving effect to the voting rights held by the owners
of Series A Preferred Stock for purposes of voting at the Annual Meeting.
5
<PAGE>
<TABLE>
<CAPTION>
Amount and Percentage of: Class
Nature of Outstanding/
Title Beneficial Company's
of Class Name of Beneficial Owner Ownership Voting Securities (a)
- -------- ------------------------ --------- ---------------------
<S> <C> <C> <C> <C>
Common MET Holdings Corporation 1,433,081 64.78% / 48.28%
Stock 405 Park Avenue, Suite 1104
New York, NY 10022 (b)
David A. Smilow 205,365 (c) 8.50% / 6.48%
Mitchell H. Caplan 205,365 (c) 8.50% / 6.48%
David R. DeCamp 16,000 (d) * / *
Arlen W. Gelbard 10,000 (d) * / *
Dean C. Kehler -- (e) n/a / n/a
Steven F. Piaker -- (f) n/a / 7.28%
Mark Rollinson 18,000 (d) * / *
Michael A. Smilow -- (g) * / *
Aileen Lopez Pugh 42,100 (h) 1.87% / 1.40%
Directors and Executive Officers as a group
(9 individuals) 496,830 (i) 18.42% / 20.64% (j)
TeleBanc Employee Stock Ownership Plan 67,600 3.06% / 2.28%
</TABLE>
- ----------
* Less than 1%.
(a) For purposes of voting at the Annual Meeting, each share of Series A
Preferred Stock has 40.12529 votes, based on its conversion into an
equivalent number of shares of Common Stock. Accordingly, the percentages
reflected include (i) the percentage of Common Stock outstanding and (ii)
the percentage of the Company's Voting Securities beneficially owned,
giving effect to the voting rights held by the owners of Series A Preferred
Stock for purposes of voting at the Annual Meeting.
(b) MET Holdings is the predecessor savings and loan holding company of
Metropolitan Bank for Savings, F.S.B. ("Metropolitan Bank"). MET Holdings
organized the Company so that it could become, in March 1994, the holding
company for Metropolitan Bank as part of the Company's initial public
offering of debt and equity securities in 1994. Metropolitan Bank was
renamed "TeleBank" in March 1996, and is a wholly owned subsidiary of the
Company.
(c) Consists solely of options to acquire Common Stock, of which 63,219 are
exercisable within 60 days of March 20, 1996. Messrs. D. Smilow and Caplan,
including their affiliates, also hold significant ownership positions in
the outstanding securities of MET Holdings. See "Security Ownership of the
Company's Parent by Management."
(d) For each of Messrs. DeCamp and Rollinson, includes options to acquire
15,000 shares of Common Stock, 7,000 of which are exercisable within 60
days of March 20, 1997, and for Mr. Gelbard, includes options to acquire
10,000 shares of Common Stock, 2,000 of which are exercisable within 60
days of March 20, 1997.
(e) Dean C. Kehler is the designated director for CIBC WG Argosy Merchant Fund
2, LLC.
(f) Steven F. Piaker is the designated director for Conning Insurance Capital
Limited Partnership III and Conning Insurance Capital International
Partners III, L.P., which collectively own 5,386 shares of Series A
Preferred Stock.
(g) Michael A. Smilow owns 110 shares, or 1.1%, of the Class A Common Stock of
MET Holdings and 117 shares, or 1.4%, of the Class B Common Stock of MET
Holdings.
(h) Includes options to acquire 35,000 shares of Common Stock.
(i) Includes options to acquire 485,730 shares of Common Stock.
(j) Includes an additional 216,114 of the Company's Voting Securities, based on
the 5,386 shares of Series A Preferred Stock collectively owned by Conning
Insurance Capital Limited Partnership III and Conning Insurance Capital
International Partners III, L.P., for which Steven A. Piaker is the
designated director.
6
<PAGE>
ELECTION OF DIRECTORS
(PROPOSAL ONE)
The Company's Bylaws provide that the Board of Directors shall consist
of not fewer than six nor more than nine members. Pursuant to the Certificate of
Incorporation and the Bylaws, a majority of the directors then in office may
vote to fill any vacancies on the Board or any newly-created directorships. In
April 1996, the Board of Directors elected Arlen W. Gelbard to fill one of the
two vacancies on the Board of Directors. As discussed above, pursuant to the
Unit Purchase Agreement certain holders of Series A Preferred Stock have the
right to designate for nomination two members of the Board of Directors.
Effective February 28, 1997, the date of the closing of the sale of Units by the
Company, Dean C. Kehler and Steven F. Piaker, the designees of the holders of
the Series A Preferred Stock, were appointed to fill the remaining vacancy and
one newly-created directorship. Messrs. Gelbard, Kehler and Piaker are members
of the class of directors whose terms expire at the 1999 annual meeting of
stockholders. In March 1997, the Board of Directors created a directorship with
a term expiring at this Annual Meeting, and appointed Michael A. Smilow to fill
this newly-created directorship. Michael A. Smilow is the father of David A.
Smilow. The Company's Board of Directors currently consists of eight members.
The Board of Directors consists of three classes of directors with
overlapping three-year terms. One class of directors is to be elected each year
with terms expiring at the third succeeding annual meeting of stockholders after
such election. At the Annual Meeting, three directors will be elected to hold
office for three-year terms which will expire at the 2000 annual meeting of
stockholders.
Unless otherwise instructed on the proxy, it is the intention of the
persons named in the proxy to vote the shares represented by each properly
executed proxy for the election of the nominee directors listed below. The Board
of Directors believes that the nominees will stand for election and will serve
if elected. However, if any person nominated by the Board of Directors fails to
stand for election or is unable to accept election, proxies will be voted by the
proxy holders for the election of such other person or persons as the Board of
Directors may recommend. There is no cumulative voting for the election of
directors. Assuming the presence of a quorum at the Annual Meeting, directors
will be elected by a plurality of the votes cast by the shares entitled to vote
in the election of directors.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE
ELECTION OF ITS NOMINEES AS DIRECTORS OF THE COMPANY.
The following table sets forth the names of the persons nominated by
the Board of Directors for election as directors and the current directors whose
terms do not expire until subsequent annual meetings. Also set forth is certain
information with respect to each person's age at the Record Date, the periods
during which such person has served as a director of the Company and its wholly
owned subsidiary, TeleBank, and positions currently held with the Company and
TeleBank. The table also sets forth certain information with respect to the
Company's sole executive officer who does not also serve as a director.
<TABLE>
<CAPTION>
POSITION(S) HELD WITH DIRECTOR FOR TERM
NAME AGE THE COMPANY AND TELEBANK SINCE TO EXPIRE
- ---- --- ------------------------ ----- ---------
THE NOMINEES:
<S> <C> <C> <C> <C>
David R. DeCamp (1)(2) 37 Director of the Company and TeleBank 1993 (3) 2000
Mark Rollinson (1) 60 Director of the Company and TeleBank 1992 (3) 2000
Michael A. Smilow 59 Director of the Company and TeleBank 1997 2000
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
POSITION(S) HELD WITH DIRECTOR FOR TERM
NAME AGE THE COMPANY AND TELEBANK SINCE TO EXPIRE
- ---- --- ------------------------ ----- ---------
CONTINUING DIRECTORS:
<S> <C> <C> <C>
David A. Smilow 35 Chairman of the Board and Chief Executive 1989 (3) 1998
Officer of the Company; Chairman of the Board
and Chief Risk Management Officer of TeleBank
Mitchell H. Caplan 39 Vice Chairman of the Board and President of 1994 1998
the Company; Vice Chairman, President and
Chief Executive Officer of TeleBank
Arlen W. Gelbard (1)(2) 39 Director of the Company and TeleBank 1996 1999
Dean C. Kehler (1)(2)(4) 40 Director of the Company and TeleBank 1997 1999
Steven F. Piaker (1)(2)(4) 34 Director of the Company and TeleBank 1997 1999
EXECUTIVE OFFICER:
Aileen Lopez Pugh 29 Executive Vice President - Chief Financial
Officer/Treasurer of the Company and TeleBank
</TABLE>
- ----------
(1) Member of the compensation committees of the Company and TeleBank
(together, the "Compensation Committee") and the stock option committee of
the Company (the "Stock Option Committee").
(2) Member of the audit and compliance committees of the Company and TeleBank
(together, the "Audit and Compliance Committee").
(3) For the years prior to 1994, includes service as a director of TeleBank.
(4) Nominated as a director pursuant to the Unit Purchase Agreement, as
described above.
Director Nominees
David R. DeCamp has been a director of the Company since its formation
in 1994, and a director of TeleBank since 1992. Mr. DeCamp, a Senior Vice
President of Grubb & Ellis, is currently employed as a commercial real estate
broker. From 1988 to 1996, Mr. DeCamp was employed as a commercial real estate
broker by Cassidy & Pinkard, Inc. Mr. DeCamp is the Chairman of the audit and
compliance committees of the Company and TeleBank.
Mark Rollinson has been a director of the Company since its formation
in 1994, and a director of TeleBank since 1992. He is a self-employed attorney,
and has been practicing law in the Leesburg, Virginia area since 1982.
Michael A. Smilow has been a director of the Company and TeleBank since
March 1997. Mr. Smilow served as the Executive Vice President of Fannie Mae from
1984 to 1993, and also served as Chief Credit Officer and Chief Operating
Officer. He was responsible for establishing and monitoring credit policies for
Fannie Mae's product and customer relationships. He also served as a member of
Fannie Mae's policy and management committees. Mr. Smilow currently serves as a
mortgage consultant.
Continuing Directors and Executive Officer
David A. Smilow is the Chairman of the Board and Chief Executive
Officer of the Company and MET Holdings and the Chairman of the Board and Chief
Risk Management Officer of TeleBank. Prior to January 1994, Mr. Smilow served as
President of TeleBank. Since 1992, Mr. Smilow has been a director and the
Treasurer of Arbor. Between 1987 and 1989, Mr. Smilow was an associate in
8
<PAGE>
Goldman Sachs' Mortgage Capital Markets Group. From 1984 to 1987, Mr. Smilow
worked as a bond trader with Drexel Burnham Lambert.
Mitchell H. Caplan is the Vice Chairman of the Board and President of
the Company and MET Holdings and Vice Chairman, President and Chief Executive
Officer of TeleBank. He is also a co-founder of Arbor, where he has served as
Vice President and director since Arbor's inception in 1992. From 1990 until
December 1993, Mr. Caplan was a member of the law firms of Danziger & Caplan and
Zuckerman & Gore, where he represented and advised private and public commercial
institutions, including MET Holdings. From 1985-1990, he practiced law with
Shearman & Sterling in New York City.
Arlen W. Gelbard is a member of the law firm of Hofheimer Gartlir &
Gross, LLP, New York, New York where he has specialized in transactional real
estate, lending, leasing, foreclosures and workouts since 1982. Mr. Gelbard is a
member of the New York State Bar Association and American Bar Association. Mr.
Gelbard has been a director of the Company since April 1996, when he was elected
by the Company's Board of Directors to fill one of the vacancies on the Board of
Directors of the Company and TeleBank. Mr. Gelbard is the Chairman of the
compensation committees of the Company and TeleBank.
Dean C. Kehler has been a Managing Director of CIBC Wood Gundy
Securities and co-head of the High Yield Group since August 1995. From February
1990, Mr. Kehler was a founding partner and Managing Director of The Argosy
Group, L.P., which was acquired by CIBC Wood Gundy in August 1995. Mr. Kehler
has extensive experience in all areas of high yield finance, mergers and
acquisitions and corporate restructuring.
Steven F. Piaker is a Senior Vice President and Partner of Conning &
Company, a provider of asset management, private equity capital, corporate
finance services and research to the insurance and financial services industry.
Prior to joining Conning & Company, he was a Senior Vice President of Conseco
where he was involved in the formation of Conseco, the raising of funds,
leveraged buyouts and private placement investments.
Aileen Lopez Pugh serves as Executive Vice President - Chief Financial
Officer/Treasurer of the Company and TeleBank. Prior to joining management, Ms.
Pugh served as a director from 1993 to 1994. From December 1993 to May 1994, she
served as a consultant to MET Holdings in connection with the organization of
the Company and its initial public offering. From 1989 through 1992, Ms. Pugh, a
certified public accountant, was an auditor with KPMG Peat Marwick.
BOARD OF DIRECTORS' COMMITTEES AND NOMINATIONS BY SHAREHOLDERS
Each of the Board of Directors of the Company and TeleBank has a
compensation committee and an audit and compliance committee. The committees of
the Boards of the Company and TeleBank are comprised of the same members and
meet simultaneously. In 1996, the members of the Compensation Committee of the
Company and TeleBank were David R. DeCamp and Mark Rollinson and as of April
1996, Arlen W. Gelbard. In 1996, the members of the Audit and Compliance
Committee of the Company and TeleBank were David R. DeCamp and Arlen W. Gelbard.
Effective February 28, 1997, Dean C. Kehler and Steven F. Piaker were elected as
members of the Compensation Committee and Audit and Compliance Committee of the
Company and TeleBank. In addition, the Company has a Stock Option Committee,
which consists of the same members as the Compensation Committee, to administer
the 1997 Stock Option Plan. The Compensation Committee establishes compensation
for directors, reviews compensation for all executive officers on an annual
basis and reviews the overall bonus plan offered to all employees of the Company
and TeleBank. The Audit and Compliance Committee reviews TeleBank's compliance
with regulatory matters and reviews the scope of the internal auditors and the
independent annual audit. It also reviews the independent accountants' letter to
management concerning the effectiveness of the Company's internal financial and
accounting controls and management's
9
<PAGE>
response to the letter. In addition, the Audit and Compliance Committee reviews
and recommends to the Board of Directors the firm to be engaged as the Company's
independent accountants. The Audit and Compliance Committee may also examine and
consider other matters relating to the financial affairs of the Company and
TeleBank as it determines appropriate. In 1996, the Compensation Committee and
the Audit and Compliance Committee met five and four times, respectively.
During the year ended December 31, 1996 the Board of Directors of the
Company held 11 meetings. No director attended fewer than 75 percent of the
aggregate of the total number of meetings of the Board of Directors held during
the period for which he was a director and the total number of meetings held by
all committees of the Board of Directors on which he served during the periods
that he served.
The Board of Directors acts as a nominating committee for selecting
nominees for election as directors. TeleBanc's Bylaws also permit stockholders
eligible to vote for the election of directors at the Annual Meeting to make
nominations for directors if such nominations are made pursuant to timely notice
in writing to the Secretary of the Company. To be timely, notice must be
delivered to, or mailed to and received at, the principal executive offices of
the Company no later than the date designated for receipt of stockholder
proposals in a prior public disclosure by the Company. If there has been no such
prior public disclosure, notice must be delivered or mailed to and received at
the Company's principal executive offices not less than 60 days nor more than 90
days prior to the date of the meeting, provided that at least 70 days' notice or
prior public disclosure of the date of the meeting is given or made to
stockholders. If less than 70 days' notice or prior public disclosure of the
date of the Annual Meeting is given or made to stockholders, notice by the
stockholder to be timely must be received by the Company not later than the
close of business on the 10th day following the day on which such notice of the
date of the Annual Meeting was mailed or such public disclosure was made. A
stockholder's notice of nomination must also set forth certain information
specified in Section 3.5 of TeleBanc's Bylaws concerning each person the
stockholder proposes to nominate for election and the nominating stockholder.
COMPENSATION OF DIRECTORS
Non-employee directors of the Company receive $750 for each Company
board and committee meeting attended, and non-employee directors of TeleBank
receive $750 for each TeleBank board or committee meeting attended. In addition,
non-employee directors are reimbursed for travel costs and other out-of-pocket
expenses incurred in attending such meeting. Annual directors' fees are capped
at $3,000 per board member of the Company, and $12,000 per board member of
TeleBank.
10
<PAGE>
EXECUTIVE COMPENSATION AND OTHER INFORMATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table sets forth the compensation earned during the
periods indicated for the Named Executive Officers. The Company does not have
any stock appreciation rights ("SARs").
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
SECURITIES
NAME AND UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY ($)(a) BONUS ($) OPTIONS (#) COMPENSATION ($)(b)
- ------------------ ---- ------------- --------- ----------- -------------------
<S> <C> <C> <C> <C> <C>
David A. Smilow, Chairman and
Chief Executive Officer of the
Company and Chairman and 1996 $ 205,000 $ 188,000 --- $ 15,000
Chief Risk Management Officer 1995 205,000 150,000 --- 15,000
of TeleBank 1994 180,000 75,000(c) 105,365 15,000
Mitchell H. Caplan, Vice Chairman
and President of the Company and 1996 205,000 188,000 --- 15,000
Vice Chairman, President and 1995 205,000 150,000 --- 15,000
Chief Executive Officer of TeleBank 1994 180,000 125,000(c) 105,365 15,000
Aileen Lopez Pugh, Executive Vice 1996 75,000 60,000 15,000 13,500
President - Chief Financial Officer/ 1995 75,000 60,000 5,000 13,500
Treasurer of the Company 1994 18,735(d) 10,000 5,000 ---
and TeleBank
</TABLE>
- ----------
(a) Salary earned from the Company and TeleBank.
(b) Dollar value of contributions by TeleBank to each officer's account in the
Company's ESOP (defined below).
(c) Mr. D. Smilow's and Mr. Caplan's 1994 bonuses reflects $75,000 for bonuses
not paid until the first quarter of 1995 as they were contingent upon the
successful completion of the restructuring of an asset. Mr. Caplan also
received a $50,000 bonus from TeleBank in 1994 upon becoming President.
(d) Ms. Pugh joined the Company and TeleBank in August 1994.
11
<PAGE>
STOCK OPTIONS
Option Grants. The following table contains information with respect to
grants of stock options for Common Stock to the sole Named Executive Officer who
received options during 1996. All such grants were made under the Company's 1994
Stock Option Plan. The Company does not have any SARs.
<TABLE>
<CAPTION>
OPTION GRANTS IN 1996
Potential Realizable Value
at Assumed Annual Rates of
Stock Price Appreciation for
Individual Grants (a) Option Term (b)
- --------------------------------------------------------------------------------------------------------------------
% of Total Options
Number of Granted
Securities Underlying to Employees Exercise or Base Expiration
Name Options Granted (#) in Fiscal Year Price ($/Sh) Date 5% ($) 10% ($)
- ---- ------------------- ------------------------------ ------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
Aileen Lopez Pugh 15,000 29.7% $7.75 2/15/06 $73,109 $185,273
</TABLE>
- ----------
(a) Option grants were made on February 15, 1996, with 20% immediately
exercisable and 20% becoming exercisable in each subsequent year through
2000.
(b) The dollar amounts under these columns are the result of calculations at
the 5% and 10% assumed annual growth rates mandated by the Commission and,
therefore, are not intended to forecast possible future appreciation, if
any, in the Company's Common Stock price.
Option Exercises and Holdings. The Named Executive Officers did not
exercise any stock options during 1996. The following table presents information
with respect to outstanding options held by the Named Executive Officers at
year-end 1996. There are no outstanding SARs.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Options Value of Unexercised
at In-the-Money Options
FY-End (#) at FY-End ($) (1)
---------- -----------------
Shares
Acquired on Value
Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- ---- ------------ ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
David A. Smilow --- --- 63,219 42,146 $ 412,787 $ 275,191
Mitchell H. Caplan --- --- 63,219 42,146 412,787 275,191
Aileen Lopez Pugh --- --- 9,000 16,000 60,500 96,375
</TABLE>
- ----------
(1) Based on last reported sale price of the Company's Common Stock on December
31, 1996 of $13.25 per share and applicable per share exercise price for
the options. The option grants with respect to the Named Executive Officers
were granted with 20% immediately exercisable and 20% becoming exercisable
in each subsequent year for five years. For each of Messrs. D. Smilow and
Caplan, 42,617 options were granted on April 28, 1994 with an exercise
price of $6.125, with the remainder having an exercise price equal to
$7.125. The options expire in April 2004. As for Ms. Pugh, the Company has
granted a total of 25,000 options with 5,000 options granted on April 28,
1994 with an exercise price of $6.125, 5,000 options granted on February
15, 1995 with an exercise price of $5.50 and 15,000 options granted on
February 15, 1996 with an exercise price of $7.75. The options expire in
April 2004, February 2005 and February 2006, respectively.
12
<PAGE>
PENSION PLAN AND EMPLOYEE STOCK OWNERSHIP PLAN
The Company has adopted and is the sponsor of a combined stock bonus
and money purchase pension plan that constitutes an "employee stock ownership
plan" under applicable law (the "ESOP"), that was originally established by MET
Holdings. Employees of TeleBank who have completed six months of service are
eligible to participate in the ESOP. The Company's and TeleBank's total
contributions to the ESOP, which are reflected in compensation expense, were
$224,000, $210,000 and $104,000 for the years ending December 31, 1996, 1995 and
1994, respectively.
Under the ESOP, each Employer (defined to include the Company,
TeleBank, and MET Holdings) is obliged annually to contribute 10% of the
aggregate compensation that such Employer pays to eligible participants. The
required contribution is allocated to the individual ESOP accounts of eligible
participants based on a uniform percentage of compensation. A participant who is
not an employee of the Employer on the last day of the plan year (December 31)
or who completes less than 500 hours of service during the plan year is not an
eligible participant. The Employer is also required to make contribution to the
extent necessary to pay debt service on any funds borrowed by the ESOP to
finance the purchase of Employer stock. Otherwise, additional contributions are
at the discretion of the Board of Directors.
Contributions may be paid either in cash or in common stock of the
Company or MET Holdings. From time to time, the ESOP may purchase additional
shares of common stock of the Company or MET Holdings through the purchase of
outstanding shares in the market or from individual stockholders, upon the
original issuance of additional shares, or upon the sale of treasury shares, by
the Company or MET Holdings. Under its terms, the ESOP may borrow funds to
finance purchases of common stock. As of December 31, 1996, the Company had
notes receivable of $305,000 to the ESOP to finance the purchase of
approximately 60,000 shares of TeleBanc common stock and 310 preferred shares of
MET Holdings.
The Board of Directors of the Company appointed a committee to
administer the ESOP. On major corporate issues, participants in the ESOP are
permitted to direct the trustees as to the voting of shares of MET Holdings
common stock allocated to their accounts; otherwise the trustees of the Plan
have sole discretion as to the voting of such stock held by the ESOP, so long as
such stock is not required to be registered under section 12 of the Securities
Exchange Act of 1934. Shares of TeleBanc Common Stock have been allocated to
participants' accounts and are voted by the trustees in accordance with the
directions of participants on all matters. Unallocated shares will be voted by
the trustees in their sole discretion. Messrs. D. Smilow, Caplan and Emidio
Morizio, an employee of TeleBanc Capital Markets, Inc., a wholly-owned
subsidiary of the Company, serve as trustees of the ESOP. Participant accounts
vest at the rate of 20% for each year of service, so that accounts become 100%
vested after five years of service. Vesting will be accelerated upon retirement,
death, disability, or when the participant reaches the age of 65. The Company,
MET Holdings or the ESOP may have a right of first refusal as to MET Holdings
common stock distributed to participants, and participants will have the right
to "put" to MET Holdings shares of MET Holdings stock that are distributed to
them under the ESOP, so long as such stock is not publicly traded on an
established securities market.
REPORT OF THE COMPENSATION COMMITTEE
The Company's and TeleBank's compensation program is administered by
the Compensation Committee comprised of five non-employee members of the
Company's and TeleBank's Board of Directors. Two members of the Compensation
Committee, Messrs. Kehler and Piaker, were elected to that committee effective
February 28, 1997. All decisions by the Compensation Committee in relation to
the compensation of executive officers are reviewed by the full Board. The
Company's and TeleBank's executive compensation program provides competitive
levels of compensation designed to correlate pay with the Company's and
TeleBank's annual and long term performance goals. Underlying this objective are
the following concepts: supporting an individual pay-for-performance
13
<PAGE>
policy that differentiates compensation levels based on corporate, business
unit, and individual performance; motivating key senior officers to achieve
strategic business objectives and rewarding them for that achievement; providing
compensation opportunities which are competitive to those offered in the
marketplace, thus allowing the Company to compete for and retain talented
executives who are critical to the Company's and TeleBank's long term success;
and aligning the interest of executives with the long term interests of the
Company's stockholders.
Executive compensation consists of three components: base salary;
annual incentive bonus; and stock options. It is the Company's compensation
policy to pay a combination of salary and highly incentive-based compensation
consisting of bonuses based on overall Company performance and individual
performances.
During the fourth quarter of 1996, the Compensation Committee reviewed
in detail the base salaries for executive officers for fiscal 1997. In light of
TeleBank's performance and the salary levels of institutions with similar
operations, the Compensation Committee recommended that TeleBank should continue
its policy of compensation based on a combination of salary and highly
incentivized additional compensation consisting of bonuses based on overall
Company and individual performance.
The Compensation Committee awards bonuses, which bonuses are awarded
annually based on overall corporate performance and include financial results
and regulatory compliance. All Company and TeleBank employees are eligible for
bonus awards under this plan except for Messrs. D. Smilow and Caplan, whose
bonuses, if any, are determined according to the discretion of the Compensation
Committee. In addition, the Compensation Committee reviews the compensation of
all executive and senior officers.
Base salaries and bonuses for executive officers were reviewed in
detail by the Compensation Committee at its January 1997 meeting. In determining
the base salaries, the Compensation Committee considered various industry
sources such as Don Richards Associates' Washington Area Accounting Compensation
Survey and SNL Executive Compensation Reviews for Thrift Institutions and for
Commercial Banks. In addition, the Compensation Committee considered the
improved financial performance in 1996 and expectations for 1997 in setting 1997
base salaries.
The Company maintains a stock option plan to provide long-term
incentives to key employees, including executive officers, through the grant of
stock options. The grant of stock options is intended to foster management team
cohesion and align management and stockholder interests. Stock option grants
provide an additional means to provide incentives for executive officers. The
Company believes that the grant of stock options can be used to encourage
performance that can result in enhanced stockholder value.
In addition to the compensation paid to executive officers as described
above, executive officers receive, along with and on the same terms as other
employees, contributions by the Company and TeleBank pursuant to the ESOP and
group term life insurance on the same terms as other employees, as well as
certain other perquisites.
CEO Compensation. David A. Smilow's 1995 and 1996 salary remained
stable at $205,000, equally paid by the Company and TeleBank. The allocation
reflects Mr. D. Smilow's duties on behalf of the Company including capital
market strategies and maintaining the Company's investments of the funds raised
thereby. The Compensation Committee increased Mr. D. Smilow's 1996 bonus
14
<PAGE>
$38,000 over 1995 levels based on Company performance as measured by the 1995
and 1996 increases in net income, return on assets and return on stockholders'
equity, excluding the government mandated insurance assessment. No options were
granted to David A. Smilow in 1996.
Respectfully submitted,
Compensation Committee
----------------------
Arlen W. Gelbard, Chairman
David R. DeCamp
Mark Rollinson
COMPARATIVE COMPANY PERFORMANCE
The following chart compares the yearly percentage change in the
cumulative total stockholder return on the Company's Common Stock since the
initial public offering completed in May 1994 with the cumulative total return
on the NASDAQ Bank Index and all NASDAQ US Stocks. The comparison assumes $100
was invested on May 27, 1994 in the Company's Common Stock and in each of the
foregoing indices and assumes reinvestment of dividends.
[GRAPHIC OMITTED]
<TABLE>
<CAPTION>
PERIOD ENDING
----------------------------------------------------------
INDEX 5/27/94 12/31/94 6/30/95 12/31/95 6/30/96 12/31/96
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
TELEBANC FINANCIAL CORPORATION 100.00 91.84 93.84 126.53 159.18 216.33
NASDAQ TOTAL RETURN INDEX 100.00 103.43 128.97 146.27 165.60 179.92
NASDAC BANKS INDEX 100.00 93.82 113.41 139.73 147.70 184.71
</TABLE>
15
<PAGE>
INTERESTS OF CERTAIN PERSONS
Subject to stockholder approval of the 1997 Stock Option Plan, David A.
Smilow, Mitchell H. Caplan and William M. Daugherty, a Vice President of
TeleBanc Capital Markets, Inc., each have been granted an option to purchase
40,000 shares of the Company's Common Stock at $13.50 per share, which options
will become exercisable in three installments, each consisting of one-third of
the shares covered by the option, with the first installment becoming
exercisable for 30 days on February 28, 1998, and the second and third
installments becoming exercisable for 30 days on February 28, 1999 and February
28, 2000, respectively so long as the optionee continues to be an employee of
TeleBanc or a subsidiary on each such date. The options granted to Messrs.
Caplan and Daugherty were intended to constitute incentive stock options to the
extent permissible under the Internal Revenue Code. The option granted to Mr. D.
Smilow was a nonqualified option. Subject to stockholder approval of the 1997
Stock Option Plan, each of Messrs. D. Smilow and Caplan have also been granted
an option to purchase 60,000 shares of Common Stock at $13.50 per share, with
the option exercisable immediately as to 20% of such shares and as to an
additional 20% of such shares on each of the next four anniversaries of February
25, 1997, so long as the optionee continues to be an employee of TeleBanc or a
subsidiary on each such anniversary.
CERTAIN TRANSACTIONS
The Company's policy is not to enter into any transactions with
officers, directors, or 5% stockholders or other affiliates of the Company
unless the terms are as favorable to the Company as those generally available
from unaffiliated third parties. Transactions between the Company and its
affiliates will require approval by a majority of disinterested directors.
In connection with the sale of Units pursuant to the Unit Purchase
Agreement, the Company entered into the Acquisition Agreement with Arbor, MET
Holdings and William M. Daugherty. MET Holdings, the Company's largest
stockholder, also owns a majority of the capital stock of Arbor. Pursuant to the
Acquisition Agreement, the Company acquired substantially all of the assets and
liabilities of Arbor and the Company issued 162,641 shares of Common Stock to
Arbor and paid Arbor $500,000. The purchase price paid by the Company was based
on an independent appraisal by Corporate Finance of Washington, Inc. that valued
the Arbor assets at $3.1 million. Mr. Daugherty, the other stockholder of Arbor,
is the President of Arbor. Upon the acquisition of the Arbor assets, the Company
issued to Mr. Daugherty an option for 24,201 shares of Common Stock (the
"Daugherty Option"), which has an exercise price of $64,407.69 and is
exercisable for a period of 10 years from February 28, 1997. In addition, Arbor
has distributed the 162,461 shares of TeleBanc Common Stock that it received in
the acquisition to its two stockholders, MET Holdings and Mr. Daugherty. Since
consummation of the Arbor transaction, Mr. Daugherty has served as a Vice
President of TeleBanc Capital Markets, Inc., a wholly-owned subsidiary of the
Company.
As discussed above, in February 1997, the Company completed the sale of
Units pursuant to the Unit Purchase Agreement with two investment partnerships
managed by Conning & Company and with General American Life Insurance Company,
CIBC WG Argosy Merchant Fund 2, LLC, PC Investment Company and The Northwestern
Mutual Life Insurance Company. In connection with the Unit Purchase Agreement,
certain holders of the Series A Preferred Stock are entitled to designate two
persons to serve as directors of the Company, who shall be nominated for
election by the Company (subject to certain exceptions). Such nominees to the
Board of Directors, Dean C. Kehler and Steven F. Piaker, were elected to the
Board of Directors effective upon the closing of the sale of the Units by the
Company on February 28, 1997.
16
<PAGE>
SECURITY OWNERSHIP OF THE COMPANY'S PARENT BY MANAGEMENT
The following table sets forth certain information as of the Record
Date with respect to the beneficial ownership by the management of the Company
of equity securities of the Company's parent, MET Holdings. MET Holdings has
four classes of equity securities, Class A Common Stock, Class B Common Stock,
6% Class A Serial Preferred Stock ("Class A Serial Preferred Stock") and 6%
Class B Serial Preferred Stock ("Class B Serial Preferred Stock"). No shares of
Class A Serial Preferred Stock have been issued. The Class A Serial Preferred
Stock and Class B Serial Preferred Stock have certain limited voting rights.
Unless otherwise required by law, the Class B Common Stock is non-voting.
<TABLE>
<CAPTION>
NAME EQUITY SECURITY OWNED PERCENT OF CLASS
- ---- --------------------- ----------------
<S> <C> <C>
and Chief Executive Officer of the
Company and MET Holdings and 4,091 (Class A Common Stock) (a) 40.7 %
Chairman of the Board and Chief Risk 1,641 (Class B Common Stock) (a) 26.3
Management Officer of TeleBank 2,091 (Class B Serial Preferred Stock) (a) 41.8
Mitchell H. Caplan, Vice Chairman and
President of the Company and MET 987 (Class A Common Stock) (b) 9.8
Holdings and Vice Chairman, President 1,051 (Class B Common Stock) (b) 16.8
and Chief Executive Officer of TeleBank 1,079 (Class B Serial Preferred Stock) (b) 21.6
Michael A. Smilow, Director of the 110 (Class A Common Stock) 1.1
Company and TeleBank 117 (Class B Common Stock) 1.4
Directors and Executive Officers 5,188 (Class A Common Stock) 51.6
of TeleBanc as a group 2,809 (Class B Common Stock) 44.9
(9 individuals) 3,170 (Class B Serial Preferred Stock) 63.4
</TABLE>
- ----------
(a) Includes 1,586 shares of Class A Common Stock, 980 shares of Class B Common
Stock and 893 shares of Class B Serial Preferred Stock owned by Mr. D.
Smilow's wife.
(b) Includes 645 shares of Class A Common Stock, 655 shares of Class B Common
Stock and 1,079 shares of Class B Serial Preferred Stock, with respect to
which Mr. Caplan shares beneficial ownership.
AMENDMENT OF CERTIFICATE OF INCORPORATION TO
INCREASE THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK
AND TO AUTHORIZE THE ISSUANCE OF NONVOTING COMMON STOCK
(PROPOSAL TWO)
Section 4.1 of the Certificate of Incorporation currently provides that
the total number of shares of all classes of stock that the Company shall have
the authority to issue is 4,000,000 shares, consisting of 3,500,000 shares of
Common Stock and 500,000 shares of serial preferred stock. Section 4.2(a) of the
Certificate of Incorporation provides that each share of Common Stock shall be
identical in all respects to all the other shares of Common Stock. The proposed
amendment to Article 4 of the Certificate of Incorporation is to increase the
authorized number of shares of Common Stock from 3,500,000 to 8,500,000 and to
authorize the issuance of Nonvoting Common Stock. The text of the proposed
amendment is set forth at Exhibit A to this Proxy Statement, and the following
discussion of the proposed amendment is qualified in its entirety by reference
to Exhibit A.
Increase in the Number of Shares of Authorized Common Stock
17
<PAGE>
Of the 3,500,000 presently authorized shares of Common Stock, 2,211,961
were issued and outstanding on the Record Date, and a total of 2,385,624 shares
were required to be reserved for issuance for the following purposes: 437,230
for stock options, 345,000 for warrants issued in connection with the Company's
initial public offering in 1994 ("Initial Warrants"), 198,088 for the Warrants,
205,563 the Contingent Warrants and 1,199,743 for the potential conversion of
the Preferred Stock. Accordingly, the Company does not have sufficient Common
Stock to meet all of its existing obligations. Also, subject to the approval by
stockholders of Proposal Five, the Company will be required to reserve an
additional 440,000 shares for options. Of the 500,000 presently authorized
shares of serial preferred stock, on the Record Date, 18,850 shares of Series A
Preferred Stock, 4,050 shares of Series B Preferred Stock and 7,000 shares of
Series C Preferred Stock were issued and outstanding, and 11,050 shares of
Series A Preferred Stock and 25,850 shares of Series B Preferred Stock were
reserved for issuance with respect to the potential conversion of Preferred
Stock. On the Record Date, 470,100 shares of authorized but not outstanding and
unreserved shares of serial preferred stock remained available for future
issuance.
The Company has made an affirmative covenant in the Unit Purchase
Agreement to obtain stockholder approval of this amendment. As discussed above,
the current number of authorized but unissued shares of Common Stock is
insufficient to permit the issuance of all of the shares of Common Stock
(whether voting or nonvoting) called for in connection with stock options, the
exercise of the Initial Warrants, the Warrants and the Contingent Warrants and
the conversion of the Preferred Stock. Additionally, the Board of Directors
believes that the proposed increase in the authorized shares of Common Stock in
excess of the number of shares necessary for a Preferred Stock conversion and
the exercise of the Initial Warrants, the Warrants and the Contingent Warrants
is desirable to enhance the Company's flexibility in connection with possible
future actions, such as use in employee benefit plans, stock splits, stock
dividends, financings, the raising of additional capital through a potential
public offering or private placement, possible future mergers or acquisitions,
and other general corporate purposes. The unissued and unreserved shares of
Common Stock and serial preferred stock will be available for issuance for any
proper corporate purpose, as authorized from time to time by the Board of
Directors, without further approval of stockholders of the Company, except as
otherwise required by law. Elimination of the delay occasioned by the necessity
of obtaining stockholder approval will better enable the Company to engage in
financing transactions and acquisitions which take full advantage of changing
market conditions. The Company is not presently engaged in any negotiations
concerning the issuance of any shares of the additional authorized Common Stock,
nor are there any present arrangements, understandings or plans concerning the
issuance of such shares, apart from the transactions described in this Proxy
Statement.
As a Delaware corporation, the Company is taxed on its authorized
capital stock. In general, the annual franchise tax is $90 on the first 10,000
shares and the further sum of $50 on each 10,000 shares or part thereof.
Currently, the Company's annual franchise tax is $17,540. Increasing the number
of authorized shares of Common Stock to 8,500,000 will result in an annual
franchise tax of $42,540. TeleBanc stockholders do not have any preemptive or
stock purchase rights to purchase additional shares of TeleBanc stock, whether
now or hereafter authorized. Further issuances of additional shares of Common
Stock or serial preferred stock or securities convertible into such stock may
have a dilutive effect on existing 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 shares of
Common Stock or serial preferred stock in a transaction that could have the
effect of frustrating or impeding such takeover attempt. The Board of Directors
has no current intention to issue authorized but unissued shares for such
purpose. The Board of Directors is not aware of any specific effort to
accumulate the Company's capital stock in order to obtain control of the Company
by means of a merger, tender offer or otherwise.
18
<PAGE>
If the proposed amendment is approved, after reservation for stock
options, the exercise of the Initial Warrants, the Warrants and the Contingent
Warrants, and the potential future conversion of the Preferred Stock, 748,651
shares of Common Stock would be available for issuance.
Authorization of Issuance of Nonvoting Common Stock
Pursuant to the Unit Purchase Agreement, the Company has agreed to
obtain stockholder approval of the issuance of authorized shares of the
Company's Common Stock as Nonvoting Common Stock. The Unit Purchase Agreement
and the Certificate of Incorporation provide that Nonvoting Common Stock must be
available for issuance in certain instances in connection with the Preferred
Stock. The purpose of the Nonvoting Common Stock is to permit one of the
purchasers in the Unit Purchase Agreement to convert its shares of Series C
Preferred Stock into a form of Common Stock. That purchaser, CIBC WG Argosy
Merchant Fund 2, LLC, is subject to regulatory limitations as to the ownership
of voting stock. The Company's Certificate of Incorporation provides that shares
of the Company's Series C Preferred Stock may be converted into shares of
Nonvoting Common Stock at any time. The number of shares of Nonvoting Common
Stock into which shares of the Series C Preferred Stock shall be converted is
the product obtained by multiplying the Applicable Conversion Rate (as defined)
by the number of shares being converted at any time. Also, the Certificate of
Incorporation provides that if a dividend is payable in voting Common Stock or
other securities of the Company that are voting securities, the Company must
make available to each holder of Preferred Stock, at such holder's request,
dividends consisting of nonvoting securities of the Company that are otherwise
identical to the voting securities. On the Record Date, there were 18,850 shares
of Series A Preferred Stock, 4,050 shares of Series B Preferred Stock and 7,000
shares of Series C Preferred Stock issued and outstanding. Although the Company
has no specific plans at this time, the Board of Directors could issue Nonvoting
Common Stock in connection with possible acquisitions, dividends, convertible
debt issuances, employee incentive programs and public and private offerings
that are not related to the Unit Purchase Agreement.
Holders of Nonvoting Common Stock will be entitled to receive notice of
meetings of the Company's stockholders, but will have no voting rights on any
matter or thing (including the election of directors) unless otherwise required
by law. Each share of Nonvoting Common Stock may be converted into one fully
paid and nonassessable share of voting Common Stock upon the occurrence of
certain events: (i) any sale to the public in a widely dispersed offering
(including a public offering of stock), (ii) any disposition of no more than 2%
of the Company's outstanding voting securities pursuant to Rule 144 or Rule 144A
promulgated under the Securities Act of 1933, as amended, (iii) certain
transfers pursuant to a right of first refusal set forth in transfer restriction
agreements executed in connection with the Unit Purchase Agreement, or (iv)
certain transfers in a single transaction to an independent third party who
acquires at least a majority of the Company's voting stock without regard to the
transfer of such securities. No stockholder approval would be necessary to
effect the conversion of Nonvoting Common Stock into Common Stock if a holder of
Nonvoting Common Stock were to exercise its conversion privilege.
If the proposed amendment is approved, the Board of Directors may issue
authorized shares of Nonvoting Common Stock without further approval of the
Company's stockholders unless such approval is required for a particular
transaction by applicable law or regulations. Stockholders of the Company do not
have any preemptive rights to subscribe for any shares of Nonvoting Common Stock
that may be issued.
The creation of Nonvoting Common Stock is not intended to have an
anti-takeover effect. The proposed amendment to the Certificate of Incorporation
is not part of a plan by the Board of Directors to adopt a series of
anti-takeover measures. The Company's Board of Directors does not presently
intend to propose any additional measures designed to discourage any unfair or
unnegotiated takeovers apart from the three amendments to the Certificate of
Incorporation proposed in this Proxy Statement and those measures that
previously have been adopted, but
19
<PAGE>
reserves the right to propose and adopt additional measures if the Board of
Directors determines that such measures are in the best interests of the Company
and its stockholders.
VOTE REQUIRED
Adoption of the proposed amendment of Article 4 of the Certificate of
Incorporation requires the affirmative vote of the holders of at least a
majority of the outstanding shares of stock of the Company entitled to vote
thereon at the Annual Meeting. MET Holdings has advised the Company that it
intends to vote all shares of Common Stock beneficially owned by it in favor of
this proposal. Each of the holders of Series A Preferred Stock is required by
the terms of the Unit Purchase Agreement to vote in favor of this proposed
amendment. MET Holdings and the holders of the Series A Preferred Stock
collectively beneficially own 73.8% of the Company's Voting Securities.
Consequently, approval of the amendment of Article 4 of the Certificate of
Incorporation is assured.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE
PROPOSED AMENDMENT TO INCREASE THE AUTHORIZED NUMBER OF SHARES OF THE COMPANY'S
COMMON STOCK AND TO AUTHORIZE THE ISSUANCE OF NONVOTING COMMON STOCK.
AMENDMENT OF CERTIFICATE OF INCORPORATION TO
REVISE TWO CURRENT ANTI-TAKEOVER PROVISIONS
(PROPOSALS THREE AND FOUR )
The Company's Certificate of Incorporation currently includes a number
of provisions, so-called "anti-takeover" provisions, intended to protect the
Company's stockholders in the event of a takeover attempt that, in the opinion
of the Board of Directors, may not be in the best interests of the Company's
stockholders. These proposals are intended to enhance management's bargaining
power against potential bidders. However, they were adopted in connection with
the Company's initial public offering in 1994, and in contemplation of the
Company's securities being widely held. That is not the case. Furthermore, in
the sale of Units pursuant to the Unit Purchase Agreement, the limitations on
the amount of "Voting Stock" which constitutes "Control" for purposes of Article
8 has the effect of limiting the amount of Voting Stock which can be held by a
purchaser thereunder. The Company agreed to amend this limitation in Article 8,
as well as to amend Article 11, because the Board of Directors believes that
these current provisions need to be revised in order to allow the Company a
greater measure of flexibility in corporate financing and business combination
transactions. The text of the proposed amendments of Article 8 and 11 are set
forth as Exhibit B and Exhibit C to this Proxy Statement, respectively, and the
following discussion of the terms of the proposed amendments is qualified in its
entirety by reference to Exhibit B and Exhibit C.
Proposed Amendment of Article 8 (Proposal Three)
Article 8 of the Certificate of Incorporation currently prohibits any
person from acquiring "Control" of the Company unless such acquisition has been
approved in advance by 66-2/3% of the outstanding shares of capital stock of the
Company entitled to vote generally in the election of directors (the "Voting
Stock"). In Section 8.3 of the Certificate of Incorporation, "Control" is
defined as the sole or shared power to vote or direct the voting of, or to
dispose or to direct the disposition of 10 percent or more of the Voting Stock,
subject to certain exceptions. Section 8.2 of the Certificate of Incorporation
provides that, in addition to other penalties, if any person acquires Control in
violation of Article 8, all shares of stock beneficially owned by that person in
excess of 10 percent of the Company's Voting Stock shall lose their voting
power.
The Board of Directors believes that the definition of Control is
unnecessarily restrictive, and should be modified by increasing the Voting Stock
ownership threshold in the definition of Control from 10% to 25%. Such approval
will have the immediate effect of permitting the holders of Series B
20
<PAGE>
Preferred Stock (which generally is nonvoting) to convert such stock to Series A
Preferred Stock (which generally votes with the Common Stock).
Proposed Amendment of Article 11 (Proposal Four)
Article 11 of the Certificate of Incorporation currently prohibits
business combinations with an "Interested Stockholder" or an affiliate or
associate of such person unless such business combination has been approved by
the affirmative vote of at least (i) the holders of 80% of the total number of
outstanding shares of Voting Stock and (ii) the holders of two-thirds of the
voting power of the outstanding shares of the Voting Stock, excluding for
purposes of calculating the affirmative vote and the total number of outstanding
shares under clause (ii) above all shares of Voting Stock owned by the
Interested Stockholder and its affiliates and associates. An "Interested
Stockholder" is defined as any person that is (i) the beneficial owner of 5
percent or more of the then outstanding Voting Stock or (ii) an affiliate of the
Company that, within the two years preceding the date in question, was the
beneficial owner of ten percent or more of the then outstanding Voting Stock.
The Certificate of Incorporation further provides that this higher vote
for a business combination is not required if two conditions are met: (i) that
at least two-thirds of the "Continuing Directors" then in office approve the
business combination and (ii) that certain price and procedure requirements are
met. A "Continuing Director" is defined as a director who is unaffiliated with
the Interested Stockholder and who was a director prior to the time that the
Interested Stockholder became an Interested Stockholder. If the two conditions
are met, the business combination need only be approved by the affirmative vote
required by law and any other provision of the Certificate of Corporation.
Generally, the Delaware General Corporation Law requires approval by a majority
of eligible shares to approve a business combination.
The Board of Directors believes that the higher vote for a business
combination involving an Interested Stockholder may be unnecessarily restrictive
if either one of the two conditions set forth in the paragraph above is met. The
proposed amendment of Article 11 would require the higher vote to approve a
business combination only if the business combination did not meet one or the
other of these conditions.
The proposed amendments to Articles 8 and 11 of the Certificate of
Incorporation are not part of a plan by the Board of Directors to adopt a series
of anti-takeover measures. The Company's Board of Directors does not presently
intend to propose any additional measures designed to discourage any unfair or
unnegotiated takeovers apart from the four amendments proposed in this Proxy
Statement and those measures that previously have been adopted, but reserves the
right to propose and adopt additional measures if the Board of Directors
determines that such measures are in the best interests of the Company and its
stockholders.
VOTE REQUIRED FOR AMENDMENT OF ARTICLE 8
Adoption of the proposed amendment of Article 8 of the Certificate of
Incorporation requires the affirmative vote of the holders of at least 66-2/3%
of the outstanding shares of stock of the Company entitled to vote thereon at
the Annual Meeting. MET Holdings has advised the Company that it intends to vote
all shares of Common Stock beneficially owned by it in favor of this proposal.
Each of the holders of Series A Preferred Stock is required by the terms of the
Unit Purchase Agreement to vote in favor of this proposed amendment. MET
Holdings and the holders of the Series A Preferred Stock collectively
beneficially own 73.8% of the Company's Voting Securities. Consequently,
approval of the amendment of Article 8 of the Certificate of Incorporation is
assured.
VOTE REQUIRED FOR AMENDMENT OF ARTICLE 11
Adoption of the proposed amendment of Article 11 of the Certificate of
Incorporation requires the affirmative vote of the holders of at least 80% of
the outstanding shares of stock of the Company
21
<PAGE>
entitled to vote thereon at the Annual Meeting. MET Holdings has advised the
Company that it intends to vote all shares of Common Stock beneficially owned by
it in favor of this proposal. The holders of Series A Preferred Stock are not
required by the terms of the Unit Purchase Agreement to vote in favor of this
proposed amendment.
MET Holdings beneficially owns 48.75% of the Company's Voting Securities.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE
PROPOSED REVISIONS OF THESE TWO CURRENT ANTI-TAKEOVER PROVISIONS.
ADOPTION OF THE 1997 STOCK OPTION PLAN
(PROPOSAL FIVE)
The TeleBanc Financial Corporation 1997 Stock Option Plan (the "Plan")
was adopted by the Board of Directors of TeleBanc on February 25, 1997, subject
to stockholder approval at the Annual Meeting, to provide for the grant of
options to purchase shares of Common Stock to employees, nonemployee directors
and independent contractors of TeleBanc, its subsidiaries and affiliates. As of
March 20, 1997, there were approximately 51 employees, non-employee directors
and independent contractors of TeleBanc and its subsidiaries and affiliates who
were eligible to participate in the Plan.
The principal provisions of the Plan are summarized below. Such summary
does not, however, purport to be complete and is qualified in its entirety by
the terms of the Plan. A copy of the Plan is attached hereto as Exhibit D and is
incorporated herein by reference.
The Board of Directors of TeleBanc believes that stock options are
important to attract and to encourage the continued employment and service of
officers, other selected employees, non-employee directors and selected
independent contractors by facilitating their acquisition of a stock interest in
TeleBanc. The acquisition and holding of an equity interest in TeleBanc by such
individuals is in the best interest of TeleBanc because equity ownership will
even more closely align their interests with the interests of TeleBanc's
stockholders.
The adoption of the Plan is subject to stockholder approval at the
Annual Meeting. TeleBanc is submitting the Plan for stockholder approval at the
Annual Meeting to allow TeleBanc to obtain a tax deduction for the full amount
allowable with respect to the exercise of options granted under the Plan and to
provide flexibility to grant options qualifying as incentive stock options for
tax purposes ("incentive options"). See "--Federal Income Tax Consequences of
the Plan."
DESCRIPTION OF THE PLAN
The Plan provides for the grant of options to employees, non-employee
directors and independent contractors of TeleBanc and employees and independent
contractors of any subsidiary of TeleBanc. A total of 440,000 shares of Common
Stock will be reserved for issuance to employees, non-employee directors and
independent contractors under the Plan, representing approximately 19.9% of the
outstanding shares of Common Stock on March 20, 1997. Based on the $14.50 price
of a share of Common Stock on March 31, 1997, the aggregate value of the 440,000
shares reserved for issuance under the Plan is $6.4 million.
The Plan is administered by the Stock Option Committee, which consists
of not less than two outside directors appointed by the Board of Directors. The
Stock Option Committee selects the employees and independent contractors of
TeleBanc and its subsidiaries and affiliates to whom options will be granted.
Options covering not more than 200,000 shares of Common Stock may be granted to
any employee during any calendar year. Grants of stock options contingent upon
stockholder approval of the Plan have been made to certain executive officers as
set out in the table below.
22
<PAGE>
The option exercise price under the Plan may not be less than 100% of
the fair market value of the Common Stock on the date of grant of the option (or
110% in the case of an incentive stock option granted to an optionee
beneficially owning more than 10% of the outstanding Common Stock). The maximum
option term is 10 years (or five years in the case of an incentive stock option
granted to an optionee beneficially owning more than 10% of the outstanding
Common Stock). Options become vested and exercisable at the time and to the
extent provided in the option agreement related to such Option. Options become
exercisable in full upon the occurrence of a change in control of TeleBanc (as
defined in the Plan). Generally, for this purpose, a change in control is deemed
to occur if any person (i) acquires direct or indirect beneficial ownership of
at least 50% of the issued and outstanding shares of Common Stock or (ii) has
the power (whether as a result of ownership of capital stock, by contract or
otherwise) or ability to elect or cause the election of directors who, at the
time of such election, constitute a majority of the board of directors of
TeleBanc. The Stock Option Committee has the discretion to accelerate the
vesting and exercisability of options.
There is a $100,000 limit on the value of stock (determined at the time
of grant) covered by incentive stock options that first become exercisable by an
optionee in any calendar year. No option may be granted more than 10 years after
the effective date of the Plan. Generally, during an optionee's lifetime, only
the optionee (or a guardian or committee if the optionee is incapacitated) may
exercise an option except that, upon approval by the Stock Option Committee,
nonqualified options may be transferred to certain family members of the
optionee, charitable organizations or to trusts for the benefit of such persons.
Incentive stock options are non-transferable except at death.
Payment for shares purchased under options granted pursuant to the Plan
may be made either in cash or by exchanging shares of Common Stock of TeleBanc
with a fair market value of up to the total option exercise price and cash for
any difference. Options may be exercised by directing that certificates for the
shares purchased be delivered to a licensed broker as agent for the optionee,
provided that the broker tenders to TeleBanc cash or cash equivalents equal to
the option exercise price plus the amount of any taxes that TeleBanc may be
required to withhold in connection with the exercise of the option.
If an employee's employment with TeleBanc or a subsidiary, affiliate or
former subsidiary following a spin-off (a "Spin-Off Corporation") terminates by
reason of death or permanent and total disability, his or her options, whether
or not then exercisable, may be exercised within three years after such death or
disability, unless otherwise provided with respect to a particular option (but
not later than the date the option would otherwise expire). If the employee's
employment by TeleBanc or a subsidiary, affiliate or Spin-Off Corporation
terminates for any reason other than death or disability, options held by such
optionee terminate three months after such termination, unless otherwise
provided with respect to a particular option. In that event, each option would
be exercisable to the extent it had become vested before such termination of
employment (unless otherwise provided in the option agreement).
If the outstanding shares of Common Stock are increased or decreased or
changed into or exchanged for a different number or kind of shares or securities
of TeleBanc, by reason of merger, consolidation, reorganization,
recapitalization, reclassification, stock split-up, combination of shares,
exchange of shares, stock dividend or other distribution payable in capital
stock, or other increase or decrease in such shares without receipt of
consideration by TeleBanc, an appropriate and proportionate adjustment will be
made in the number and kinds of shares subject to the Plan, and in the number,
kinds and per share exercise price of shares subject to the unexercised portion
of options granted prior to any such change. Any such adjustment in an
outstanding option, however, will be made without a change in the total price
applicable to the unexercised portion of the option, but with a corresponding
adjustment in the per share option price.
Upon any dissolution or liquidation of TeleBanc, or upon a
reorganization, merger or consolidation in which TeleBanc is not the surviving
corporation, or upon the sale of substantially all of the assets of TeleBanc to
another corporation, or upon any transaction (including, without
23
<PAGE>
limitation, a merger or reorganization in which TeleBanc is the surviving
corporation) approved by the Board of Directors which results in any person or
entity owning 80% or more of the total combined voting power of all classes of
stock of TeleBanc, the Plan and the options issued thereunder will terminate,
unless provision is made in connection with such transaction for the
continuation of the Plan, the assumption of the options or both the continuation
of the Plan and the assumption of such options, or for the substitution for such
options of new options covering the stock of a successor corporation or a parent
or subsidiary thereof, with appropriate adjustments as to the number and kinds
of shares and the per share exercise price. In the event of such termination,
all outstanding options shall be exercisable in full during such period
immediately prior to the occurrence of such termination as the board of
directors in its discretion shall determine.
The Board of Directors may amend the Plan with respect to shares of the
Common Stock as to which options have not been granted. However, TeleBanc's
stockholders must approve any amendment that would (i) change the requirements
as to eligibility to receive incentive stock options; (ii) increase the maximum
number of shares in the aggregate for which incentive stock options may be
granted (except for adjustments upon changes in capitalization); or (iii)
otherwise cause the Plan to fail to satisfy the requirements of Section 162(m)
of the Internal Revenue Code relating to limitations on the deduction of amounts
not constituting qualified performance-related compensation.
The Board of Directors at any time may terminate or suspend the Plan.
Unless previously terminated, the Plan will terminate automatically on February
25, 2007, the tenth anniversary of the date of adoption of the Plan by the Board
of Directors. No termination, suspension or amendment of the Plan may, without
the consent of the person to whom an option has been granted, adversely affect
the rights of the holder of the option.
NEW PLAN BENEFITS
The table below provides certain information as of the date of this
proxy statement regarding stock options granted under the Plan to (i) the Named
Executive Officers (which includes all executive officers of TeleBanc as a
group, and (iii) all employees of TeleBanc as a group (including all officers
who are not executive officers). No other grants under the 1997 Stock Option
Plan have been made. All such grants are subject to stockholder approval of the
Plan.
NEW PLAN BENEFITS
<TABLE>
<CAPTION>
NUMBER OF
NAME AND POSITION(S) EXERCISE PRICE (A) OPTIONS GRANTED
-------------------- ------------------ ---------------
<S> <C> <C>
David A. Smilow, Chairman of the Board and $13.50 100,000
Chief Executive Officer of the Company and
Chairman of the Board and Chief Risk Management
Officer of TeleBank
Mitchell H. Caplan, Vice Chairman and $13.50 100,000
President of the Company and Vice Chairman,
President and Chief Executive Officer of TeleBank
Aileen Lopez Pugh, Executive Vice President -- --
- Chief Financial Officer/Treasurer of the
Company and TeleBank
All employees as a group (51 persons) $13.50 200,000
</TABLE>
- ----------
(a) All option grants were made at 100% of the fair market value of the Common
Stock on the date of grant. Grants covering 60,000 shares to each Messrs.
Caplan and D. Smilow are ten-year,
24
<PAGE>
nonqualified options vesting 20% on the date of grant and 20% per year
thereafter. Grants covering 40,000 shares to Messrs. Caplan and D. Smilow
are nonqualified options vesting to the extent of 1/3 of such shares on
each of the first three anniversaries of the date of grant that expire if
not exercised within 30 days of first becoming exercisable.
FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN
The grant of an option is not a taxable event for the optionee or
TeleBanc.
Upon exercising a non-qualifying option, an optionee will recognize
ordinary income in an amount equal to the difference between the exercise price
and the fair market value of the Common Stock on the date of exercise (except
that, if the optionee is subject to certain restrictions on transfer of shares
of Common Stock, the measurement date may be delayed, unless the optionee makes
a special tax election within 30 days after exercise to have income determined
without regard to the restrictions). If TeleBanc complies with applicable
reporting requirements, it will be entitled to a business expense deduction in
the same amount. Non-qualifying options under the Plan are intended to satisfy
the requirements applicable to "qualified performance-related compensation"
under the Code, so that TeleBanc should be entitled to deduct the full amount of
such compensation income without regard to the $1,000,000 limitation imposed on
the deduction of annual compensation paid to each of the chief executive officer
and the four other most highly compensated officers of a publicly held
corporation. Upon a taxable disposition of shares acquired pursuant to the
exercise of a non-incentive option, the optionee will have taxable gain or loss,
measured by the difference between the amount realized on the disposition and
the tax basis of the shares (generally, the amount paid for the shares plus the
amount treated as ordinary income at the time the option was exercised).
If the optionee surrenders shares of Common Stock in payment of part or
all of the exercise price for non-qualifying options, no gain or loss will be
recognized with respect to the shares surrendered and the optionee will be
treated as receiving an equivalent number of shares pursuant to the exercise of
the option in a non-taxable exchange. The basis of the shares surrendered will
be treated as the substituted tax basis for an equivalent number of option
shares received. However, the fair market value of any shares received in excess
of the number of shares surrendered will be taxed as ordinary income.
With respect to "incentive options," an optionee will not recognize
taxable income upon exercise of an incentive option, and any gain realized upon
a disposition of shares received pursuant to the exercise of an incentive option
will be taxed as long-term capital gain if the optionee holds the shares for at
least two years after the date of grant and for one year after the date of
exercise of the option. However, the excess of the fair market value of the
shares subject to an incentive option on the exercise date over the option
exercise price will be included in the optionee's alternative minimum taxable
income in the year of exercise (except that, if the optionee is subject to
certain restrictions on transfer, the determination of the amount included in
alternative minimum taxable income may be delayed, unless the optionee elects
within 30 days following exercise to have income determined without regard to
such restrictions) for purposes of the alternative minimum tax. An optionee may
be entitled to a credit against regular tax liability in future years for
minimum taxes paid with respect to the exercise of incentive options. TeleBanc
and its subsidiaries and affiliates will not be entitled to any business expense
deduction with respect to the grant or exercise of an incentive option, except
as discussed below.
For the exercise of an incentive option to qualify for the foregoing
tax treatment, the optionee generally must be an employee of TeleBanc or its
subsidiaries from the date the option is granted through a date within three
months before the date of exercise. In the case of an optionee who is disabled,
this three-month period is extended to one year. In the case of an employee who
dies, the three-month period and the holding period for shares received pursuant
to the exercise of the option are waived.
25
<PAGE>
If all of the foregoing requirements for incentive option treatment are
met except for the special holding period rules set forth above, the optionee
will recognize ordinary income upon the disposition of the shares in an amount
equal to the excess of the fair market value of the shares at the time the
option was exercised over the option exercise price. However, if the optionee
was subject to certain restrictions on transfer of Common Stock at the time the
option was exercised, the measurement date may be delayed, unless the optionee
has made a special tax election within 30 days after the date of exercise to
have taxable income determined without regard to such restrictions. The balance
of the realized gain, if any, will be long- or short-term capital gain,
depending upon whether or not the shares were sold more than one year after the
option was exercised. If the optionee sells the shares prior to the satisfaction
of the holding period rules but at a price below the fair market value of the
shares at the time the option was exercised (or other applicable measurement
date), the amount of ordinary income (and the amount included in alternative
minimum taxable income, if the sale occurs during the same year as the option
was exercised) will be limited to the excess of the amount realized on the sale
over the option exercise price. If TeleBanc complies with applicable (if any)
reporting requirements, it will be allowed a business expense deduction to the
extent the optionee recognizes ordinary income.
If an optionee exercises an incentive option by tendering shares of
Common Stock with a fair market value equal to part or all of the option
exercise price, the exchange of shares generally will be treated as a nontaxable
exchange (except that this treatment would not apply if the optionee had
acquired the shares being transferred pursuant to the exercise of an incentive
option and had not satisfied the special holding period requirements summarized
above). If the exercise is treated as a tax free exchange, the optionee would
have no taxable income from the exchange and exercise (other than minimum
taxable income as discussed above) and the tax basis of the shares exchanged
would be treated as the substituted basis for the shares received. If the
optionee used shares received pursuant to the exercise of an incentive option
(or another statutory option) as to which the optionee had not satisfied the
applicable holding period requirement, the exchange would be treated as a
taxable disqualifying disposition of the exchanged shares, with the result that
the excess of the fair market value of the shares tendered over the optionee's
basis in the shares would be taxable.
The foregoing is a brief summary of some of the principal federal
income tax consequences of stock option grants under the Plan and recipients of
grants under the Plan should consult with their personal tax advisors with
respect to such grants and transactions in stock acquired pursuant to the Plan.
REQUIRED VOTE
Assuming the presence of a quorum at the Annual Meeting, the
affirmative vote of the holders of a majority of the shares of voting stock
present in person or represented by proxy, and entitled to vote at the Annual
Meeting is required to approve the Plan.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR APPROVAL OF
THE PLAN.
RATIFICATION OF APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTANTS
(PROPOSAL SIX)
The Board of Directors has approved the appointment of Arthur Andersen
LLP to continue as TeleBanc's independent public accountants for the year ending
December 31, 1997, subject to ratification by stockholders at the Annual
Meeting. Arthur Andersen LLP has been acting as independent public accountants
for the Company since fiscal 1995. Representatives of Arthur Andersen LLP will
be present at the Annual Meeting. They will be given an opportunity to make a
statement if they desire to do so and will be available to respond to
appropriate questions.
26
<PAGE>
Unless otherwise indicated, properly executed proxies will be voted in
favor of ratifying the appointment of Arthur Andersen LLP to audit the books and
accounts of the Company for the year ending December 31, 1997. No determination
has been made as to what action the Board of Directors would take if the
stockholders do not ratify the appointment.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE
FOR THE RATIFICATION OF THE APPOINTMENT OF ARTHUR ANDERSEN LLP AS THE COMPANY'S
INDEPENDENT PUBLIC ACCOUNTANTS FOR THE YEAR ENDING DECEMBER 31, 1997.
STOCKHOLDER PROPOSALS
Any proposal that a stockholder wishes to have presented at the next
annual meeting and included in the proxy materials of the Company must be
received at the main office of the Company, 1111 North Highland Street,
Arlington, Virginia 22201, no later than December 8, 1997. If such proposal is
in compliance with all of the requirements of Rule 14a-8 of the Exchange Act of
1934, as amended, it will be included in the proxy statement and set forth on
the form of proxy issued for the next annual meeting of stockholders. Please
send any such proposal by certified mail, return receipt requested.
OTHER MATTERS
The Board of Directors is not aware of any matters that may come before
the Annual Meeting other than those specifically listed in the Notice of Annual
Meeting of Stockholders. If any other business is properly presented at the
Annual Meeting, it is the intention of the proxy holders to vote or act in
accordance with their best judgment with respect to such matters.
By order of the Board of Directors,
/s/ David A. Smilow
David A. Smilow
Chairman of the Board and
Chief Executive Officer
27
<PAGE>
EXHIBIT A
---------
TEXT OF PROPOSAL TWO
--------------------
Resolved, that Section 4.1 of the Company's Amended and Restated
Certificate of Incorporation shall be amended by deleting the text of Section
4.1 in its entirety and replacing it with the following:
The total number of shares of all classes of stock that the
Corporation shall have the authority to issue is 9,000,000
shares, of which 500,000 shares shall be serial preferred
stock, having a par value of $0.01 per share ("Preferred
Stock"), and 8,500,000 shall be classified as shares of common
stock, having a par value of $0.01 per share ("Common Stock").
The Board of Directors is expressly authorized to issue,
without stockholder approval, any unissued shares of the
Corporation's authorized Common Stock as nonvoting Common
Stock ("Nonvoting Common Stock").
Resolved, that the second sentence of Section 4.2(a) of the Company's
Amended and Restated Certificate of Incorporation shall be amended by deleting
the word "Each" at the beginning of that sentence and inserting in its place the
words "Except as provided in Section 4.2(e) hereof, each".
Resolved, that the first sentence of Section 4.2(b) of the Company's
Amended and Restated Certificate of Incorporation shall be amended by deleting
the word "Each" at the beginning of that sentence and inserting in its place the
words "Except as provided in Section 4.2(e) hereof, each".
Resolved, that Section 4.2 of the Company's Amended and Restated
Certificate of Incorporation shall be amended by inserting a new Section 4.2(e)
which shall provide as follows:
(e) NONVOTING COMMON STOCK.
The holders of Nonvoting Common Stock shall be
entitled to notice of meetings of the Corporation's
stockholders. Notwithstanding any other provision of this
Amended and Restated Certificate of Incorporation or the
Corporation's Bylaws, the Nonvoting Common Stock shall have no
voting rights upon any matter or thing (including, without
limitation, the election of directors) unless provided by
applicable law. Subject to and in compliance with the
following provisions of this Section 4.2(e), each share of
Nonvoting Common Stock held by any person or entity may be
converted into one fully-paid and non-assessable share of
voting Common Stock.
(i) In connection with the disposition of
shares upon the occurrence (or the expected
occurrence as described in Section 4.2(e)(iii)
below), of any Conversion Event (as defined below),
each holder of Nonvoting Common Stock shall be
entitled to convert such Nonvoting Common Stock into
an equal number of shares of voting Common Stock.
(ii) For purposes of this Section 4.2(e), a
"Conversion Event" shall mean, (A) any sale to the
public in a widely dispersed offering (including,
without limitation, a public offering registered
under the Securities Act of 1933, as amended), (B)
any disposition under Rule 144 or Rule 144A
promulgated by the Securities and Exchange Commission
under the Securities Act of 1933, as amended, or any
similar rule then in force of no more than two
percent (2%) of the outstanding voting securities of
the Corporation, (C) any transfer pursuant to a right
of first refusal set forth in the Transfer
Restriction Agreement, dated as of February 28, 1997,
by and among the Purchasers (as identified in the
$29,900,000 Unit Purchase
A-1
<PAGE>
Agreement, dated as of February 19, 1997, between the
Purchasers and the Corporation), David A. Smilow, MET
Holdings Corporation and the Corporation or the
Transfer Restriction Agreement, dated as of February
28, 1997, by and among the Purchasers, Mitchell H.
Caplan, MET Holdings Corporation and the Corporation
or (D) any transfer in a single transaction to an
independent third party who acquires at least a
majority of the voting stock of the Corporation
without regard to the transfer of such securities.
For purposes of this Section 4.2(e) "person" shall
include any natural person and any corporation,
partnership, joint venture, trust, unincorporated
organization and any other entity or organization.
(iii) Each holder of Nonvoting Common Stock
shall be entitled to convert shares of Nonvoting
Common Stock in connection with any Conversion Event
if such holder reasonably believes that such
Conversion Event shall be consummated, and a written
request for conversion from any holder of Nonvoting
Common Stock to the Corporation stating such holder's
reasonable belief that a Conversion Event shall occur
shall be conclusive and shall obligate the
Corporation to effect such conversion in a timely
manner so as to enable each such holder to
participate in such Conversion Event. The Corporation
shall not cancel the shares of Nonvoting Common Stock
so converted before the tenth day following such
Conversion Event and shall reserve such shares until
such tenth day for reissuance in compliance with the
next sentence. If any shares of Nonvoting Common
Stock are converted into shares of voting Common
Stock in connection with a Conversion Event and such
shares of voting Common Stock are not actually
distributed, disposed of or sold pursuant to such
Conversion Event, such shares of voting Common Stock
shall be promptly converted back into the same number
of shares of Nonvoting Common Stock, and during such
period prior to such distribution, disposal or sale,
the holder of such voting Common Stock shall not be
entitled to vote such shares notwithstanding
provisions of this Amended and Restated Certificate
of Incorporation.
(iv) To exercise its conversion privilege, a
holder of Nonvoting Common Stock shall surrender the
certificate or certificates representing the shares
being converted to the Corporation at its principal
office, and shall give written notice to the
Corporation at that office that such holder elects to
convert such shares. Such notice shall also state the
name or names (with address or addresses) in which
the certificate or certificates for shares of voting
Common Stock issuable upon such conversion shall be
issued. The certificate or certificates for shares of
Nonvoting Common Stock surrendered for conversion
shall be accompanied by proper assignment thereof to
the Corporation or in blank. The date when such
written notice is received by the Corporation,
together with the certificate or certificates
representing the shares of Nonvoting Common Stock
being converted, shall be the "Conversion Date". As
promptly as practicable after the Conversion Date,
the Corporation shall issue and shall deliver to the
holder of the shares of Nonvoting Common Stock being
converted, or on its written order, such certificate
or certificates as it may request for the number of
shares of voting Common Stock issuable upon the
conversion of such shares of Nonvoting Common Stock
in accordance with the provisions of this Section
4.2(e). Such conversion shall be deemed to have been
effected immediately prior to the closing of business
on the Conversion Date, and at such time the rights
of the holder as holder of the converted shares of
Nonvoting Common Stock shall cease and the person(s)
in whose name(s) any certificate(s) for shares of
voting Common Stock shall be issuable upon such
conversion shall be deemed to have become
A-2
<PAGE>
the holder or holders of record of the shares of
voting Common Stock represented thereby.
A-3
<PAGE>
EXHIBIT B
---------
TEXT OF PROPOSAL THREE
----------------------
Resolved, that the definition of "Control" in Section 8.3 of the
Company's Amended and Restated Certificate of Incorporation shall be amended by
deleting the word "10" and inserting in its place the word "25".
B-1
<PAGE>
EXHIBIT C
---------
TEXT OF PROPOSAL FOUR
---------------------
Resolved, that the first paragraph of Section 11.2 of the Company's
Amended and Restated Certificate of Incorporation shall be amended by deleting
the words "if the conditions specified in both paragraphs (a) and (b)" and
inserting in their place "if the condition or conditions specified in either
paragraph (a) or paragraph (b)."
C-1
<PAGE>
EXHIBIT D
---------
TELEBANC FINANCIAL CORPORATION
1997 STOCK OPTION PLAN
TELEBANC FINANCIAL CORPORATION ("TeleBanc") hereby adopts this
TeleBanc Financial Corporation 1997 Stock Option Plan (the "Plan") the terms of
which shall be as follows:
1. PURPOSE
The Plan is intended to advance the interests of TeleBanc by
providing eligible individuals (as designated pursuant to Section 4 below) with
an opportunity to acquire or increase a proprietary interest in TeleBanc, which
thereby will create a stronger incentive to expend maximum effort for the growth
and success of TeleBanc and its subsidiaries, and will encourage such eligible
individuals to remain in the employ of TeleBanc or one or more of its
subsidiaries. Each stock option granted under the Plan (an "Option") is intended
to be an "incentive stock option" ("Incentive Stock Option") within the meaning
of Section 422 of the Internal Revenue Code of 1986, or the corresponding
provision of any subsequently-enacted tax statute, as amended from time to time
(the "Code"), except to the extent that any such Option (i) would exceed the
limitations set forth in Section 7 below; (ii) is specifically designated at the
time of grant as not being an Incentive Stock Options; or (iii) is granted to
someone who is not an employee of TeleBanc or any subsidiary or affiliate of
TeleBanc.
2. ADMINISTRATION
(a) Board. The Plan shall be administered by the
Board of Directors of TeleBanc (the "Board"), which shall have the full power
and authority to take all actions, and to make all determinations required or
provided for under the Plan or any Option granted or Option Agreement (as
defined in Section 8 below) entered into under the Plan and all such other
actions and determinations not inconsistent with the specific terms and
provisions of the Plan deemed by the Board to be necessary or appropriate to the
administration of the Plan or any Option granted or Option Agreement entered
into hereunder. All such actions and determinations shall be by the affirmative
vote of a majority of the members of the Board present at a meeting at which any
issue relating to the Plan is properly raised for consideration or without a
meeting by written consent of the Board executed in accordance with TeleBanc's
Articles of Incorporation and By-Laws, and with applicable law. The
interpretation and construction by the Board of any provision of the Plan or of
any Option granted or Option Agreement entered into hereunder shall be final and
conclusive.
(b) Committee. The Board may from time to time
appoint a Stock Option Committee (the "Committee") consisting of not less than
two members of the Board, none of whom shall be an officer or other salaried
employee of TeleBanc or any of its subsidiaries, and each of whom shall qualify
in all respects as a "non-employee director" as defined in Rule 16b-3 of the
Securities and Exchange Commission under the Securities Exchange Act of 1934
(the "Exchange Act") and an "outside director" for purposes of Section 162(m) of
the Code. The Board, in its sole discretion, may provide that the role of the
Committee shall be limited to making recommendations to the Board concerning any
determinations to be made and actions to be taken by the Board pursuant to or
with respect to the Plan, or the Board may delegate to the Committee such powers
and authorities related to the administration of the Plan, as set forth in
Section 2(a) above, as the Board shall determine, consistent with the Articles
of Incorporation and By-Laws of TeleBanc and applicable law. The Board may
remove members, add members, and fill vacancies on the Committee from time to
time, all in accordance with TeleBanc's Articles of Incorporation and By-Laws,
and with applicable law. The majority vote of the Committee, or acts reduced to
or approved in writing by a majority of the members of the Committee, shall be
the valid acts of the Committee.
D-1
<PAGE>
(c) No Liability. No member of the Board or of the
Committee shall be liable for any action or determination made in good faith
with respect to the Plan or any Option granted or Option Agreement entered into
hereunder.
(d) Delegation to the Committee. In the event that
the Plan or any Option granted or Option Agreement entered into hereunder
provides for any action to be taken by or determination to be made by the Board,
such action may be taken by or such determination may be made by the Committee
if the power and authority to do so has been delegated to the Committee by the
Board as provided for in Section 2(b) above. Unless otherwise expressly
determined by the Board, any such action or determination by the Committee shall
be final and conclusive.
3. STOCK
The stock that may be issued pursuant to Options
granted under the Plan shall be shares of common stock, $.01 par value, of
TeleBanc (the "Stock"), which shares may be treasury shares or authorized but
unissued shares. The number of shares of Stock that may be issued pursuant to
Options granted under the Plan shall not exceed in the aggregate 440,000 shares,
subject to adjustment as provided in Section 17 below. If any Option expires,
terminates, or is terminated or canceled for any reason prior to exercise in
full, the shares of Stock that were subject to the unexercised portion of such
Option shall be available for future Options granted under the Plan.
4. ELIGIBILITY
(a) Employees. Options may be granted under the Plan
to any employee of TeleBanc or any "subsidiary corporation" (a "Subsidiary")
thereof within the meaning of Section 424(f) of the Code (including any such
employee who is an officer or director of TeleBanc or any Subsidiary) as the
Board shall determine and designate from time to time prior to expiration or
termination of the Plan. The maximum number of shares of Stock subject to
Options that may be granted under the Plan during any calendar year to any
executive officer or other employee of TeleBanc or any Subsidiary whose
compensation is or may be subject to Code ss. 162(m) is 200,000 shares (subject
to adjustment as provided in Section 17 hereof).
(b) Directors and Independent Contractors. Options
not intended to constitute Incentive Stock Options may be granted to members of
the Board who are not employees of TeleBanc or any Subsidiary and to independent
contractors performing services for TeleBanc or a Subsidiary as determined by
the Board from time to time on the basis of their importance to the business of
TeleBanc or such Subsidiary.
(c) Multiple Grants. An individual may hold more than
one Option, subject to such restrictions as are provided herein.
5. EFFECTIVE DATE AND TERM OF THE PLAN
(a) Effective Date. The Plan shall be effective as of
the date of adoption by the Board, which date is set forth below, subject to
approval of the Plan, within one year of such effective date, by the
shareholders of TeleBanc by a majority of the votes present and entitled to vote
at a duly held meeting of the shareholders at which a quorum representing a
majority of all outstanding voting stock is present, either in person or by
proxy or by written consent in accordance with TeleBanc's Articles of
Incorporation and By-Laws; provided, however, that upon approval of the Plan by
the shareholders of TeleBanc as set forth above, all Options granted under the
Plan on or after the effective date shall be fully effective as if the
shareholders of TeleBanc had approved the Plan on the effective date. If the
shareholders fail to approve the Plan within one year of such effective date,
any options granted hereunder shall be null and void and of no effect.
D-2
<PAGE>
(b) Term. The Plan shall terminate on the date 10
years from the effective date.
6. GRANT OF OPTIONS
Subject to the terms and conditions of the Plan, the Board
may, at any time and from time to time, prior to the date of termination of the
Plan, grant to such eligible individuals as the Board may determine
("Optionees"), Options to purchase such number of shares of the Stock on such
terms and conditions as the Board may determine, including any terms or
conditions which may be necessary to qualify such Options as Incentive Stock
Options. The date on which the Board approves the grant of an Option (or such
later date as is specified by the Board) shall be considered the date on which
such Option is granted.
7. LIMITATION ON INCENTIVE STOCK OPTIONS
An Option (other than an Option described in exception (ii) of
Section 1) shall constitute an Incentive Stock Option to the extent that the
aggregate fair market value (determined at the time the Option is granted) of
the stock with respect to which Incentive Stock Options are exercisable for the
first time by any Optionee during any calendar year (under the Plan and all
other plans of the Optionee's employer corporation and its parent and subsidiary
corporations within the meaning of Section 422(d) of the Code) does not exceed
$100,000. This limitation shall be applied by taking Options into account in the
order in which they were granted.
8. OPTION AGREEMENTS
All Options granted pursuant to the Plan shall be evidenced by
written agreements ("Option Agreements"), to be executed by TeleBanc and by the
Optionee, in such form or forms as the Board shall from time to time determine.
Option Agreements covering Options granted from time to time or at the same time
need not contain similar provisions; provided, however, that all such Option
Agreements shall comply with all terms of the Plan.
9. OPTION PRICE
The purchase price of each share of the Stock subject to an
Option (the "Option Price") shall be fixed by the Board and stated in each
Option Agreement, except that the Option Price of a share of Stock subject to an
Option that is intended to constitute an Incentive Stock Option shall be not
less than 100 percent of the fair market value of a share of the Stock on the
date the Option is granted (as determined in good faith by the Board); provided,
however, that in the event the Optionee would otherwise be ineligible to receive
an Incentive Stock Option by reason of the provisions of Sections 422(b)(6) and
424(d) of the Code (relating to stock ownership of more than 10 percent), the
Option Price of an Option that is intended to be an Incentive Stock Option shall
be not less than 110 percent of the fair market value of a share of Stock at the
time such Option is granted. In the event that the Stock is listed on an
established national or regional stock exchange, is admitted to quotation on the
National Association of Securities Dealers Automated Quotation System, or is
publicly traded on an established securities market, in determining the fair
market value of the Stock, the Board shall use the closing price of the Stock on
such exchange or System or in such market (the highest such closing price if
there is more that one such exchange or market) on the trading date immediately
before the Option is granted (or, if there is no such closing price, then the
Board shall use the mean between the high and low prices on such date), or, if
no sale of the Stock had been made on such day, on the next preceding day on
which any such sale shall have been made.
10. TERM AND EXERCISE OF OPTIONS
(a) Term. Each Option granted under the Plan shall
terminate and all rights to purchase shares thereunder shall cease upon the
expiration of ten years from the date such
D-3
<PAGE>
Option is granted, or on such date prior thereto as may be fixed by the Board
and stated in the Option Agreement relating to such Option; provided, however,
that in the event the Optionee would otherwise be ineligible to receive an
Incentive Stock Option by reason of the provisions of Sections 422(b)(6) and
424(d) of the Code (relating to stock ownership of more than 10 percent), an
Option granted to such Optionee that is intended to be an Incentive Stock Option
shall in no event be exercisable after the expiration of five years from the
date it is granted.
(b) Option Period and Limitations on Exercise. Each
Option shall be exercisable, in whole or in part, at any time and from time to
time, over a period commencing on or after the date of grant and ending upon the
expiration or termination of the Option, as the Board shall determine and set
forth in the Option Agreement relating to such Option. Without limiting the
foregoing, the Board, subject to the terms and conditions of the Plan, may in
its sole discretion provide that an Option may not be exercised in whole or in
part for any period or periods of time during which such Option is outstanding;
provided, however, that any such limitation on the exercise of an Option
contained in any Option Agreement may be rescinded, modified or waived by the
Board, in its sole discretion, at any time and from time to time after the date
of grant of such Option, so as to accelerate the time at which the Option may be
exercised. Each Option shall be exercisable, in whole or in part, at any time
and from time to time, over a period commencing on the date of grant and ending
upon the expiration of the Option. Notwithstanding any other provision of the
Plan, no Option granted to an Optionee under the Plan shall be exercisable in
whole or in part prior to the date the Plan is approved by the shareholders of
TeleBanc as provided in Section 5 above.
(c) Method of Exercise. An Option that is exercisable
hereunder may be exercised by delivery to TeleBanc on any business day, at its
principal office, addressed to the attention of the Committee, of written notice
of exercise, which notice shall specify the number of shares with respect to
which the Option is being exercised, and shall be accompanied by payment in full
of the Option Price of the shares for which the Option is being exercised,
except as provided below. The minimum number of shares of Stock with respect to
which an Option may be exercised, in whole or in part, at any time shall be the
lesser of 100 shares or the maximum number of shares available for purchase
under the Option at the time of exercise. Payment of the Option Price for the
shares of Stock purchased pursuant to the exercise of an Option shall be made
(i) in cash or in cash equivalents; (ii) through the tender to TeleBanc of
shares of Stock, which shares shall be valued, for purposes of determining the
extent to which the Option Price has been paid thereby, at their fair market
value (determined in the manner described in Section 9 above) on the date of
exercise; (iii) by delivering a written direction to TeleBanc that the Option be
exercised pursuant to a "cashless" exercise/sale procedure (pursuant to which
funds to pay for exercise of the Option are delivered to TeleBanc by a broker
upon receipt of stock certificates from TeleBanc) or a cashless exercise/loan
procedure (pursuant to which the optionees would obtain a margin loan from a
broker to fund the exercise) through a licensed broker acceptable to TeleBanc
whereby the stock certificate or certificates for the shares of Stock for which
the Option is exercised will be delivered to such broker as the agent for the
individual exercising the Option and the broker will deliver to TeleBanc cash
(or cash equivalents acceptable to TeleBanc) equal to the Option Price for the
shares of Stock purchased pursuant to the exercise of the Option plus the amount
(if any) of federal and other taxes that TeleBanc, may, in its judgment, be
required to withhold with respect to the exercise of the Option; (iv) to the
extent permitted by applicable law and under the terms of the Option Agreement
with respect to such Option, by the delivery of a promissory note of the
Optionee to TeleBanc on such terms as shall be set out in such Option Agreement;
(v) by a combination of the methods described in (i), (ii), (iii) and (iv).
Payment in full of the Option Price need not accompany the written notice of
exercise if the Option is exercised pursuant to the cashless exercise/sale
procedure described above. An attempt to exercise any Option granted hereunder
other than as set forth above shall be invalid and of no force and effect.
Promptly after the exercise of an Option, the individual exercising the Option
shall be entitled to the issuance of a Stock certificate or certificates
evidencing his ownership of such shares. A separate Stock certificate or
certificates shall be issued for any shares purchased pursuant to the exercise
of an Option that is intended to be an Incentive Stock Option, which certificate
or certificates shall not include any shares that were purchased pursuant to the
exercise of an Option that is not an Incentive Stock Option. An individual
holding or exercising an Option shall
D-4
<PAGE>
have none of the rights of a shareholder until the shares of Stock covered
thereby are fully paid and issued to him and, except as provided in Section 18
below, no adjustment shall be made for dividends or other rights for which the
record date is prior to the date of such issuance.
(d) Restrictions on Transfer of Stock. If an Option
is exercised before the date that is six months from the later of (i) the date
of grant of the Option or (ii) the date of shareholder approval of the Plan and
the sale of stock acquired pursuant to such exercise would subject the
individual exercising the Option to liability under Section 16 of the Exchange
Act, then such certificate or certificates shall bear a legend restricting the
transfer of the Stock covered thereby until the expiration of six months from
the later of the date specified in clause (i) above or the date specified in
clause (ii) above.
(e) Change in Control. In the event of a Change in
Control (as defined below), subject to the limitations set out in Section 17(f)
hereof and except as the Board shall otherwise provide in an Option Agreement
with respect to an Option granted under the Plan, all outstanding Options shall
become immediately exercisable in full, without regard to any limitation on
exercise imposed pursuant to Section 10(b) above. For purposes of the Plan, a
"Change in Control" shall be deemed to occur if any person shall (a) acquire
direct or indirect beneficial ownership of more than 50% of the total combined
voting power with respect to the election of directors of the issued and
outstanding stock of TeleBanc (except that no Change in Control shall be deemed
to have occurred if the persons who were stockholders of TeleBanc immediately
before such acquisition own all or substantially all of the voting stock or
other interests of such person immediately after such transaction), or (b) have
the power (whether as a result of stock ownership, revocable or irrevocable
proxies, contract or otherwise) or ability to elect or cause the election of
directors consisting at the time of such election of a majority of the Board. A
"person" for this purpose shall mean any person, corporation, partnership, joint
venture or other entity or any group (as such term is defined for purposes of
Section 13(d) of the Exchange Act), other than those persons who beneficially
own, or have outstanding options or warrants to acquire, more than five percent
of the voting stock of TeleBanc as of February 25, 1997. For purposes of this
Section 10(e), "fair market value" shall be determined in accordance with
Section 9 hereof and a person shall be deemed to be a beneficial owner as that
term is used in Rule 13d-3 under the Exchange Act.
11. TRANSFERABILITY OF OPTIONS
During the lifetime of an Optionee to whom an Incentive Stock
Option is granted, only such Optionee (or, in the event of legal incapacity or
incompetence, the Optionee's guardian or legal representative) may exercise the
Incentive Stock Option. No Option shall be assignable or transferable by the
Optionee to whom it is granted, other than by will or the laws of descent and
distribution, except that the Optionee may transfer an Option that is not
intended to constitute an Incentive Stock Option (a) pursuant to a qualified
domestic relations order as defined for purposes of the Employee Retirement
Income Security Act of 1974, as amended, or (b) by gift: to a member of the
"Family" (as defined below) of the Optionee, to or for the benefit of one or
more organizations qualifying under Code ss.ss. 501(c)(3) and 170(c)(2) (a
"Charitable Organization") or to a trust for the exclusive benefit of the
Optionee, one or more members of the Optionee's Family, one or more Charitable
Organizations, or any combination of the foregoing, provided that any such
transferee shall enter into a written agreement to be bound by the terms of this
Agreement. For this purpose, "Family" shall mean the spouse, siblings, and
lineal ancestors and descendants of the Optionee.
12. TERMINATION OF EMPLOYMENT OR SERVICE
Upon the termination of the employment or other
service of an Optionee with TeleBanc or a Subsidiary, other than by reason of
the death or "permanent and total disability" (within the meaning of Section
22(e)(3) of the Code) of such Optionee, any Option granted to an Optionee
pursuant to the Plan shall terminate three months after the date of such
termination of employment or service and thereafter such Optionee shall have no
further right to purchase shares of Stock pursuant to such Option; provided,
however, that the Board may provide, by inclusion of
D-5
<PAGE>
appropriate language in any Option Agreement, that the Optionee may (subject to
the general limitations on exercise set forth in Section 10(b) above), in the
event of termination of employment or service of the Optionee with TeleBanc or a
Subsidiary, exercise an Option, in whole or in part, at any time subsequent to
such termination of employment or service and prior to termination of the Option
pursuant to Section 10(a) above, either subject to or without regard to any
installment or other limitation on exercise imposed pursuant to Section 10(b)
above. Whether a leave of absence or leave on military or government service
shall constitute a termination of employment or service for purposes of the Plan
shall be determined by the Board, which determination shall be final and
conclusive. For purposes of the Plan, a termination of employment or service
with TeleBanc or a Subsidiary shall not be deemed to occur if the Optionee is
immediately thereafter employed by or otherwise providing services to TeleBanc
or any Subsidiary.
13. RIGHTS IN THE EVENT OF DEATH OR DISABILITY
(a) Death. If an Optionee dies while in the employ or
service of TeleBanc or a Subsidiary or within the period following the
termination of employment or service during which the Option is exercisable
under Section 12 above or Section 13(b) below, the executors or administrators
or legatees or distributees of such Optionee's estate shall have the right
(subject to the general limitations on exercise set forth in Section 10(b)
above), at any time within one year after the date of such Optionee's death and
prior to termination of the Option pursuant to Section 10(a) above, to exercise
any Option held by such Optionee at the date of such Optionee's death, whether
or not such Option was exercisable immediately prior to such Optionee's death;
provided, however, that the Board may provide by inclusion of appropriate
language in any Option Agreement that, in the event of the death of the
Optionee, the executors or administrators or legatees or distributees of such
Optionee's estate may exercise an Option (subject to the general limitations on
exercise set forth in Section 10(b) above), in whole or in part, at any time
subsequent to such Optionee's death and prior to termination of the Option
pursuant to Section 10(a) above, either subject to or without regard to any
installment or other limitation on exercise imposed pursuant to Section 10(b)
above.
(b) Disability. If an Optionee terminates employment
or service with TeleBanc or a Subsidiary by reason of the "permanent and total
disability" (within the meaning of Section 22(e)(3) of the Code) of such
Optionee, then such Optionee shall have the right (subject to the general
limitations on exercise set forth in Section 10(b) above), at any time within
one year after such termination of employment or service and prior to
termination of the Option pursuant to Section 10(a) above, to exercise, in whole
or in part, any Option held by such Optionee at the date of such termination of
employment or service, whether or not such Option was exercisable immediately
prior to such termination of employment or service; provided, however, that the
Board may provide, by inclusion of appropriate language in any Option Agreement,
that the Optionee may (subject to the general limitations on exercise set forth
in Section 10(b) above), in the event of the termination of employment or
service of the Optionee with TeleBanc or a Subsidiary by reason of the
"permanent and total disability" (within the meaning of Section 22(e)(3) of the
Code) of such Optionee, exercise an Option in whole or in part, at any time
subsequent to such termination of employment or service and prior to termination
of the Option pursuant to Section 10(a) above, either subject to or without
regard to any installment limitation on exercise imposed pursuant to Section
10(b) above. Whether a termination of employment or service is to be considered
by reason of "permanent and total disability" for purposes of this Plan shall be
determined by the Board, which determination shall be final and conclusive.
14. USE OF PROCEEDS
The proceeds received by TeleBanc from the sale of Stock
pursuant to Options granted under the Plan shall constitute general funds of
TeleBanc.
D-6
<PAGE>
15. REQUIREMENTS OF LAW
(a) Violations of Law. TeleBanc shall not be required
to sell or issue any shares of Stock under any Option if the sale or issuance of
such shares would constitute a violation by the individual exercising the Option
or TeleBanc of any provisions of any law or regulation of any governmental
authority, including without limitation any federal or state securities laws or
regulations. Any determination in this connection by the Board shall be final,
binding, and conclusive. TeleBanc shall not be obligated to take any affirmative
action in order to cause the exercise of an Option or the issuance of shares
pursuant thereto to comply with any law or regulation of any governmental
authority. As to any jurisdiction that expressly imposes the requirement that an
Option shall not be exercisable unless and until the shares of Stock covered by
such Option are registered or are subject to an available exemption from
registration, the exercise of such Option (under circumstances in which the laws
of such jurisdiction apply) shall be deemed conditioned upon the effectiveness
of such registration or the availability of such an exemption.
(b) Compliance with Rule 16b-3. The intent of this
Plan is to qualify for the exemption provided by Rule 16b-3 under the Exchange
Act. To the extent any provision of the Plan does not comply with the
requirements of Rule 16b-3, it shall be deemed inoperative to the extent
permitted by law and deemed advisable by the Board and shall not affect the
validity of the Plan. In the event Rule 16b-3 is revised or replaced, the Board,
or the Committee acting on behalf of the Board, may exercise discretion to
modify this Plan in any respect necessary to satisfy the requirements of the
revised exemption or its replacement.
16. AMENDMENT AND TERMINATION OF THE PLAN
The Board may, at any time and from time to time, amend,
suspend or terminate the Plan as to any shares of Stock as to which Options have
not been granted; provided, however, that no amendment by the Board shall,
without approval by a majority of the votes present and entitled to vote at a
duly held meeting of the shareholders of TeleBanc at which a quorum representing
a majority of all outstanding voting stock is, either in person or by proxy,
present and voting on the amendment, or by written consent in accordance with
applicable state law and the Articles of Incorporation and By-Laws of TeleBanc,
change the requirements as to eligibility to receive Incentive Stock Options,
increase the maximum number of shares of Stock in the aggregate that may be sold
pursuant to Incentive Stock Options granted under the Plan (except as permitted
under Section 17 hereof) or modify the Plan so that Options granted under the
Plan could not satisfy the applicable requirements of Code ss. 162(m). Except as
permitted under Section 17 hereof, no amendment, suspension or termination of
the Plan shall, without the consent of the holder of the Option, alter or impair
rights or obligations under any Option theretofore granted under the Plan.
17. EFFECT OF CHANGES IN CAPITALIZATION
(a) Changes in Stock. If the outstanding shares of
Stock are increased or decreased or changed into or exchanged for a different
number or kind of shares or other securities of TeleBanc by reason of any
recapitalization, reclassification, stock split, reverse split, combination of
shares, exchange of shares, stock dividend or other distribution payable in
capital stock, or other increase or decrease in such shares effected without
receipt of consideration by TeleBanc, occurring after the effective date of the
Plan, the number and kinds of shares for the purchase of which Options may be
granted under the Plan shall be adjusted proportionately and accordingly by
TeleBanc. In addition, the number and kind of shares for which Options are
outstanding shall be adjusted proportionately and accordingly so that the
proportionate interest of the holder of the Option immediately following such
event shall, to the extent practicable, be the same as immediately prior to such
event. Any such adjustment in outstanding Options shall not change the aggregate
Option Price payable with respect to shares subject to the unexercised portion
of the Option outstanding but shall include a corresponding proportionate
adjustment in the Option Price per share. If there is a distribution payable in
the capital stock of a subsidiary corporation of TeleBanc ("Spin-off Shares"),
to the extent consistent with Treasury Regulation Section 1.425-1(a)(6) or the
corresponding
D-7
<PAGE>
provision of any subsequent regulation, each outstanding Option shall thereafter
additionally pertain to the number of Spin-off Shares that would have been
received in such distribution by a shareholder of TeleBanc who owned a number of
shares of Common Stock equal to the number of shares that are subject to the
Option at the time of such distribution, and the aggregate Option Price of the
Option shall be allocated between the Spin-off Shares and the Common Stock in
proportion to the relative fair market values of a Spin-off Share and a share of
Common Stock immediately after the distribution of Spin-off Shares.
(b) Reorganization in Which TeleBanc Is the Surviving
Corporation. Subject to Subsection (c) hereof, if TeleBanc shall be the
surviving corporation in any reorganization, merger, or consolidation of
TeleBanc with one or more other corporation s, any Option theretofore granted
pursuant to the Plan shall pertain to and apply to the securities to which a
holder of the number of shares of Stock subject to such Option would have been
entitled immediately following such reorganization, merger, or consolidation,
with a corresponding proportionate adjustment of the Option Price per share so
that the aggregate Option Price thereafter shall be the same as the aggregate
Option Price of the shares remaining subject to the Option immediately prior to
such reorganization, merger, or consolidation.
(c) Reorganization in Which TeleBanc Is Not the
Surviving Corporation or Sale of Assets or Stock. Upon the dissolution or
liquidation of TeleBanc, or upon a merger, consolidation, reorganization or
other business combination of TeleBanc with one or more other entities in which
TeleBanc is not the surviving entity, or upon a sale of all or substantially all
of the assets of TeleBanc to another entity, or upon any transaction (including,
without limitation, a merger or reorganization in which TeleBanc is the
surviving corporation) approved by the Board which results in any person or
entity (or persons or entities acting as a group or otherwise in concert) owning
80 percent or more of the combined voting power of all classes of stock of
TeleBanc, the Plan and all Options outstanding hereunder shall terminate, except
to the extent provision is made in writing in connection with such transaction
for the continuation of the Plan and/or the assumption of the Options
theretofore granted, or for the substitution for such Options of new options
covering the stock of a successor entity, or a parent or subsidiary thereof,
with appropriate adjustments as to the number and kinds of shares and exercise
prices, in which event the Plan and Options theretofore granted shall continue
in the manner and under the terms so provided. In the event of any such
termination of the Plan, each individual holding an Option shall have the right
(subject to Section 17(f) below and to the general limitations on exercise set
forth in Section 10(b) above, and except as otherwise specifically provided in
the Option Agreement relating to such Option), immediately prior to the
occurrence of such termination and during such period occurring prior to such
termination as the Board in its sole discretion shall determine and designate,
to exercise such Option in whole or in part, whether or not such Option was
otherwise exercisable at the time such termination occurs and without regard to
any installment limitation on exercise imposed pursuant to Section 10(b) above.
The Board shall send written notice of an event that will result in such a
termination to all individuals who hold Options not later than the time at which
TeleBanc gives notice thereof to its shareholders.
(d) Adjustments. Adjustments under this Section 17
related to stock or securities of TeleBanc shall be made by the Board, whose
determination in that respect shall be final, binding, and conclusive. No
fractional shares of Stock or units of other securities shall be issued pursuant
to any such adjustment, and any fractions resulting from any such adjustment
shall be eliminated in each case by rounding downward to the nearest whole share
or unit.
(e) No Limitations on Corporation. The grant of an
Option pursuant to the Plan shall not affect or limit in any way the right or
power of TeleBanc to make adjustments, reclassifications, reorganizations or
changes of its capital or business structure or to merge, consolidate, dissolve
or liquidate, or to sell or transfer all or any part of its business or assets.
(f) Parachute Limitation. If the acceleration of the
exercisability or vesting of any Option or any other benefit to an Optionee
under this Plan would be considered a
D-8
<PAGE>
"parachute payment" within the meaning of Section 280G(b)(2) of the Code and if,
after reduction for any applicable federal excise tax imposed by Section 4999 of
the Code (the "Excise Tax") and federal income tax imposed by the Code, the
Optionee's net proceeds from the exercise of such Options and from other amounts
that would be so considered would be less than the amount of the Optionee's net
proceeds resulting from the payment of the Reduced Amount described below, after
reduction for federal income taxes, then the exercisability and vesting of
Options and other benefits provided under the Plan shall be limited to the
Reduced Amount. The "Reduced Amount" shall be the largest amount that could be
received by the Optionee under the Plan and each Option Agreement such that no
payment or other benefit received by the Optionee under the Plan and Option
Agreements and any other agreement, contract, or understanding heretofore or
hereafter entered into between the Optionee and TeleBanc or any Subsidiary (the
"Other Agreements") and any formal or informal plan or other arrangement (other
than the Plan) heretofore or hereafter adopted by TeleBanc or any Subsidiary for
the direct or indirect provision of compensation to the Optionee (including
groups or classes of participants or beneficiaries of which the Optionee is a
member), whether or not such compensation is deferred, is in cash, or is in the
form of a benefit to or for the Optionee (a "Benefit Plan") would be subject to
the Excise Tax. In the event that the Optionee shall be limited to the Reduced
Amount under the preceding sentence, then the Optionee shall have the right, in
the Optionee's sole discretion, to designate those payments or benefits under
the Plan and Option Agreements, any Other Agreements, and any Benefit Plans,
that should be reduced or eliminated so as to avoid having the benefits to the
Optionee under the Plan and Option Agreements be subject to the Excise Tax. In
the event that the Optionee would otherwise be deemed to have received an amount
that would constitute a parachute payment, the amount received by him that
exceeds the maximum amount permissible under this Section 17(f) shall be treated
as a loan to him and shall be repaid, with interest, to the extent necessary to
reduce the amount paid to the maximum permissible amount. The interest rate of
any such loan shall be at the minimum rate necessary to avoid characterization
of the loan as an excess parachute payment and the other terms of any such loan
shall conform to customary and reasonable terms that would be applicable to
loans of a similar unsecured type made by a bank or other financial institution
to an unrelated third party. Any such loan shall be repaid in full not later
than six months after the date on which TeleBanc notifies the Optionee that a
loan relationship exists, and may be repaid by the Optionee without prepayment
penalty at any time during such six month period.
18. DISCLAIMER OF RIGHTS
No provision in the Plan or in any Option granted or Option
Agreement entered into pursuant to the Plan shall be construed to confer upon
any individual the right to remain in the employ of TeleBanc or any Subsidiary,
or to interfere in any way with the right and authority of TeleBanc or any
Subsidiary either to increase or decrease the compensation of any individual at
any time, or to terminate any employment or other relationship between any
individual and TeleBanc or any Subsidiary.
19. NONEXCLUSIVITY OF THE PLAN
Neither the adoption of the Plan nor the submission of the
Plan to the shareholders of TeleBanc for approval shall be construed as creating
any limitations upon the right and authority of the Board to adopt such other
incentive compensation arrangements (which arrangements may be applicable either
generally to a class or classes of individuals or specifically to a particular
individual or individuals) as the Board in its discretion determines desirable,
including, without limitation, the granting of stock options or stock
appreciation rights otherwise than under the Plan.
* * *
D-9
<PAGE>
This Plan was duly adopted and approved by the Board of
Directors of TeleBanc by resolution at a meeting held on the 25th day of
February, 1997.
/s/ Sang-Hee Yi
--------------------------------
Assistant Secretary of TeleBanc
This Plan was duly approved by the shareholders of TeleBanc at
a meeting held the ______ day of ________________, 1997.
--------------------------------
Secretary of TeleBanc
D-10
<PAGE>
APPENDIX II
Quarterly Report of the Corporation on Form 10-K for the Quarter Ended September
30, 1997
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 1997
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
Commission File No. 33-76930
TELEBANC FINANCIAL CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3759196
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
1111 N. Highland Street, Arlington, Virginia 22201
--------------------------------------------------
(Address of principal executive office) (Zip code)
(703) 247-3700
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- ----
Indicate the number of shares outstanding for the issuer's classes of common
stock, as of November 6, 1997.
$.01 par value of common stock 2,224,161
------------------------------- ---------
(class) (outstanding)
<PAGE>
TELEBANC FINANCIAL CORPORATION
FORM 10-Q
INDEX
Part I - Financial Information Page
- ------------------------------ ----
Consolidated Statements of Financial Condition -September 30, 1997
and December 31, 1996 3
Consolidated Statements of Operations - Three and nine months ended
September 30, 1997 and 1996 4
Consolidated Statements of Changes in Stockholders' Equity - Nine
months ended September 30, 1997 and 1996 6
Consolidated Statements of Cash Flows - Nine months ended
September 30, 1997 and 1996 7
Notes to Consolidated Financial Statements 9
Management's Discussion and Analysis of Financial Condition and
Results of Operations 13
Part II - Other Information
- ---------------------------
Item 5, Other Information 21
Item 6, Exhibits and Reports on Form 8-K 21
Signatures 22
<PAGE>
TELEBANC FINANCIAL CORPORATION
Consolidated Statements of Financial Condition
(Dollars in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
September 30, December 31,
Assets: 1997 1996
---- -----
(unaudited)
<S> <C> <C>
Cash and cash equivalents $ 5,123 $ 3,259
Investment securities available for sale 65,750 78,826
Mortgage-backed securities available for sale and trading 240,091 184,743
Loans receivable, net 324,968 185,757
Loans receivable held for sale 170,343 166,064
Other assets 32,258 29,316
------ ------
Total assets $ 838,533 $ 647,965
======= =======
Liabilities and Stockholders' Equity:
Liabilities:
Deposits $ 445,241 $ 390,486
Advances from the Federal Home Loan Bank of Atlanta 170,000 144,800
Securities sold under agreements to repurchase 122,408 57,581
Subordinated debt 29,556 16,586
Other liabilities 16,466 13,854
------ ------
Total liabilities 783,671 623,307
------- -------
Corporation-Obligated Mandatorily Redeemable Capital Securities of
Subsidiary Trust Holding Solely Junior Subordinated
Debentures of the Corporation
9,602 --
Commitments and contingencies -- --
Stockholders' equity:
4% Cumulative Preferred Stock, $0.01 par value,
500,000 shares authorized
Series A, 18,850 issued and outstanding -- --
Series B, 4,050 issued and outstanding -- --
Series C, 7,000 issued and outstanding -- --
Common stock, $0.01 par value, 3,500,000 shares authorized;
2,211,961 and 2,049,500 issued and outstanding 22 20
Additional paid-in capital 31,392 14,637
Retained earnings, substantially restricted 10,496 7,905
Unrealized gain on securities available for sale, net of deferred tax 3,350 2,096
----- -----
Total stockholders' equity 45,260 24,658
------ ------
Total liabilities & stockholders' equity $ 838,533 $ 647,965
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
TELEBANC FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------ ------------
1997 1996 1997 1996
---- ---- ---- ----
Interest income:
<S> <C> <C> <C> <C>
Mortgage loans and other loans $ 8,855 $ 6,080 $ 24,727 $ 16,946
Mortgage-backed and related securities 4,248 4,483 13,179 14,117
Investment securities 1,348 1,289 4,330 3,261
Other 369 19 697 43
--- -- --- --
Total interest income 14,820 11,871 42,933 34,367
------ ------ ------ ------
Interest expense:
Deposits 6,649 5,635 18,686 15,419
Advances from the Federal Home Loan Bank of Atlanta 2,528 1,902 6,784 4,980
Reverse repurchase agreements 1,493 978 5,422 3,885
Subordinated debt 878 519 2,399 1,556
--- --- ----- -----
Total interest expense 11,548 9,034 33,291 25,840
------ ----- ------ ------
Net interest income 3,272 2,837 9,642 8,527
Provision for loan losses 120 125 671 744
--- --- --- ---
Net interest income after provision for loan losses 3,152 2,712 8,971 7,783
----- ----- ----- -----
Non-interest income:
Gain on sale of available for sale & trading securities 408 181 1,827 263
Gain on sale of loans 226 98 636 415
Fees, service charges and other 450 261 472 758
--- --- --- ---
Total non-interest income 1,084 540 2,935 1,436
----- --- ----- -----
(continued)
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
TELEBANC FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
(Dollars in Thousands, Except Per Share Data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Eneded Nine Months Ended
September 30, September 30,
------------ ------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Non-interest expenses:
General and administrative expenses:
Compensation and employee benefits 1,049 882 3,427 2,670
Federal insurance assessment -- 1,671 -- 1,671
Other 1,029 734 2,798 2,373
----- ----- ----- -----
Total general and administrative expenses 2,078 3,287 6,225 6,714
----- ----- ----- -----
Other non-interest expenses:
Net operating costs of real estate acquired
through foreclosure 55 126 185 173
Amortization of goodwill and other intangibles 204 121 486 457
--- --- --- ---
Total other non-interest expenses 259 247 671 630
--- --- --- ---
Total non-interest expenses 2,337 3,534 6,896 7,344
----- ----- ----- -----
Income (loss) before income tax expense and
minority interest 1,899 (282) 5,010 1,875
Income tax expense (benefit) 709 (220) 1,682 528
Minority interest in subsidiary (286) -- (353) --
----- -- ----- --
Net income (loss) $ 904 $ (62) $ 2,975 $ 1,347
=== ==== ===== =====
Preferred stock dividends 162 -- 384 --
--- -- --- --
Net income after preferred stock dividends $ 742 $ (62) $ 2,591 $ 1,347
=== ==== ===== =====
Net income per common share:
Primary $ 0.26 $(0.02) $ 0.94 $ 0.63
Fully diluted 0.26 (0.03) 0.93 0.63
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
TELEBANC FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(Dollars in Thousands)
(unaudited)
<TABLE>
<CAPTION>
Unrealized
Gain
Additional on Available
Preferred Common Paid-in Retained for Sale
Stock Stock Capital Earnings Securities Total
----- ----- ------- -------- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1995 $ -- $ 20 $ 14,637 $ 5,352 $ 1,556 $ 21,565
Net income for the nine months ended
September 30, 1996 -- -- -- 1,346 -- 1,346
Unrealized Gain on Available for Sale
Securities, net of tax effect -- -- -- -- 928 928
-- -- ------ ----- ----- ------
Balances at September 30, 1996 $ -- $ 20 $ 14,637 $ 6,698 $ 2,484 $ 23,839
== == ====== ===== ===== ======
Balances at December 31, 1996 $ -- $ 20 $ 14,637 $ 7,905 $ 2,096 $ 24,658
Net income for the nine months ended
September 30, 1997 -- -- -- 2,975 -- 2,975
Stock issued -- 2 1,474 -- -- 1,476
Issuance of 4% cumulative Preferred -- -- 9,634 -- -- 9,634
Stock, Series A
Issuance of 4% cumulative Preferred -- -- 2,070 -- -- 2,070
Stock, Series B
Issuance of 4% cumulative Preferred -- -- 3,577 -- -- 3,577
Stock, Series C
Dividends on 4% cumulative Preferred -- -- -- (384) -- (384)
Stock
Unrealized Gain on Available for Sale
Securities, net of tax effect -- -- -- -- 1,254 1,254
-- -- ------ ------ ----- ------
Balances at September 30, 1997 $ -- $ 22 $ 31,392 $ 10,496 $ 3,350 $ 45,260
== == ====== ====== ===== ======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
TELEBANC FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------
September 30,
-------------
1997 1996
---- ----
<S> <C> <C>
Net cash (used in) provided by operating activities $ (16,375) $ 15,692
-------- ------
Cash flows from investing activities:
Purchases of held-to-maturity loans (184,634) (105,761)
Equity investments in subsidiaries (1,608) (1,383)
Purchases of available-for-sale securities (250,956) (274,147)
Proceeds from sale of available-for-sale securities 125,520 206,639
Proceeds from maturities of and principal payments on
Available-for-sale securities and loans 162,030 109,354
Net sales (purchases) of premises and equipment 420 (623)
Proceeds from sale of foreclosed real estate 1,239 514
----- ---
Net cash used in investing activities (147,989) (65,407)
--------- ---------
</TABLE>
(continued)
See accompanying notes to consolidated financial statements.
<PAGE>
TELEBANC FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------
September 30,
-------------
1997 1996
---- ----
<S> <C> <C>
Cash flows from financing activities:
Net increase in non-interest bearing demand, savings, and
NOW deposit accounts and certificates of deposit accounts 37,256 75,924
Increase in advances from FHLB 244,000 237,000
Payments on advances from FHLB 218,800) (221,000)
Net decrease (increase) in securities sold under agreements
to repurchase 64,827 (46,218)
Net increase in other borrowed funds 12,970 68
Issuance of trust preferred stock 9,602 --
Issuance of common stock and 4% preferred stock 16,757 --
Dividends paid on common and preferred stock (384) --
Net cash provided by financing activities 166,228 45,774
------- -------
Net increase (decrease) in cash and cash equivalents 1,864 (3,941)
Cash and cash equivalents at beginning of period 3,259 8,965
----- -----
Cash and cash equivalents at end of period $ 5,123 $ 5,024
===== =====
Supplemental information:
Interest paid on deposits and borrowed funds $ 26,526 $ 11,770
Income taxes paid 853 822
Transfers from loans to real estate acquired through foreclosures 568 326
Gross unrealized gain on securities available for sale 1,888 1,292
Tax effect of gain on available for sale securities 634 364
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
TELEBANC FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
NOTE 1. BASIS OF PRESENTATION
TeleBanc Financial Corporation, (the "Company") was incorporated on
January 26, 1994 and in March, 1994 became the direct savings and loan holding
company parent of TeleBank (the "Bank"), formerly known as Metropolitan Bank for
Savings, F.S.B. The primary business of the Company is the business of the Bank,
the Bank's subsidiaries and TeleBanc Capital Markets, Inc. ("TCM"), a registered
investment advisor, funds manager and broker-dealer. The Bank is a federally
chartered savings bank in which deposit accounts are insured to applicable
limits by the Federal Deposit Insurance Corporation ("FDIC"). The consolidated
financial statements include financial information from TeleBanc Financial
Corporation and its wholly-owned subsidiaries.
The financial statements as of September 30, 1997 and for the three and
nine months ended September 30, 1997 and 1996 are unaudited, but in the opinion
of management, contain all adjustments, consisting solely of normal recurring
entries, necessary to present fairly the consolidated financial condition as of
September 30, 1997 and the results of consolidated operations for the three and
nine months ended September 30, 1997 and 1996. The results of consolidated
operations for the three and nine months ended September 30, 1997 are not
necessarily indicative of the results that may be expected for the entire year.
The Notes to Consolidated Financial Statements for the year ended December 31,
1996, included in the Company's Annual Report to Stockholders for 1996, should
be read in conjunction with these statements.
Certain prior year's amounts have been reclassified to conform to the
current year's presentation.
NOTE 2. NET INCOME PER COMMON SHARE
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 "Earnings per Share" ("SFAS
128"), effective December 15, 1997. This statement specifies the computation,
presentation, and disclosure requirements for earnings per share ("EPS") for
entities with publicly held common stock or potential common stock. The impact
on the Company has been calculated below:
<PAGE>
TELEBANC FINANCIAL CORPORATION
Pro Forma EPS Calculation
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------------------------------------------
Per share amounts 1997 1996 1997 1996
------------------------------------------------------------
<S> <C> <C> <C> <C>
Primary EPS as reported $ 0.26 $ (0.02) $ 0.94 $ 0.63
Effect of SFAS 128 0.07 (0.01) 0.25 0.03
---- ------ ---- ----
Pro forma basic EPS $ 0.33 $ (0.03) $ 1.19 $ 0.66
==== ====== ==== ====
Fully diluted EPS as reported $ 0.26 $ (0.03) $ 0.93 $ 0.63
Effect of SFAS 128 (0.02) 0.01 (0.11) (0.18)
------ ------ ------ ------
Pro Forma diluted EPS $ 0.24 $ (0.02) $ 0.82 $ 0.45
==== ====== ==== ====
</TABLE>
Basic earnings per common share, as required by SFAS 128, is computed
by dividing adjusted net income by the total of the weighted average number of
common shares outstanding during the respective periods. The year to date
weighted average number of common shares outstanding was 2,179,510 and 2,049,500
for the Company at September 30, 1997 and 1996, respectively. Weighted average
shares outstanding also include common stock equivalents which consist of
outstanding stock options and warrants, if such options or warrants are
dilutive.
Pro Forma EPS Calculation
<TABLE>
<CAPTION>
Income Shares Per Share Amount
------ ------ ----------------
For the Quarter Ended September 30, 1996
-----------------------------------------------------------------------
<S> <C> <C> <C>
Basic earnings per share
Net income $ (62,000) 2,049,500 $ (0.03)
=========================
Options issued to management -- 528,019
Warrants -- 127,373
------------------------------------------
Diluted earnings per share $ (62,000) 2,704,892 $ (0.02)
======================================================================
For the Quarter Ended September 30, 1997
-----------------------------------------------------------------------
Net income $ 904,000
less: Preferred Stock Dividends (162,000)
-----------------------
Basic earnings per share
Income available to common shareholders
$ 742,000 2,218,513 $ 0.33
=======================
Options issued to management -- 382,677
Warrants -- 254,261
Convertible preferred stock 162,000 910,180
----------------------------------------------
Diluted earnings per share $ 904,000 3,765,631 $ 0.24
======================================================================
</TABLE>
<PAGE>
TELEBANC FINANCIAL CORPORATION
NOTE 3. RECENT EVENTS
On February 28, 1997, the Company sold $29.9 million of units in the
form of 4% convertible preferred stock, 9.5% senior subordinated notes and
warrants, and purchased substantially all of the assets of Arbor Capital
Partners, Inc. ("Arbor"), a registered investment advisor, funds manager and
broker-dealer. MET Holdings, TeleBanc's majority shareholder, owned a majority
of Arbor. In connection with this sale, the Company incurred approximately $1.7
million of expenses, of which, approximately $725,000 is attributed to the
senior subordinated notes which will be amortized through March 31, 2004.
The $29.9 million of units were sold to investment partnerships managed
by Conning & Co., CIBC Wood Gundy Argosy Merchant Fund 2, LLC, The Progressive
Corporation and The Northwestern Mutual Life Insurance Company. Upon the sale of
the units, representatives from the Conning partnerships and the CIBC Merchant
Fund were appointed to the Company's Board. The units consist of $13.7 million
in 9.5% senior subordinated notes with 198,088 detachable warrants, $16.2
million in 4.0% convertible preferred stock, and rights to 205,563 contingent
warrants. The senior subordinated notes are due on March 31, 2004 and stipulate
increases over time in interest rates subsequent to March 31, 2002 from 9.5% up
to 15.25%. The warrants are exercisable at $9.50 with an expiration date of
February 28, 2005. Consisting of Series A Voting Convertible Preferred Stock,
Series B Nonvoting Convertible Preferred Stock and Series C Nonvoting
Convertible Preferred Stock, the preferred stock is convertible to 1,199,743
shares of common stock. Series A and Series B shares may be converted at any
time into fully-paid and non-assessable shares of Voting Common Stock. Series C
shares may be converted at any time to Series A or Series B shares or at any
time into fully-paid and non-assessable nonvoting common stock. The contingent
warrants may be exercised upon a change of control or at any time after February
29, 2002 ("Exercise Event"). If the Company's annual internal rate of return is
less than 25% at the time of an Exercise Event, unit holders may exercise the
contingent warrants for $0.01 until an internal rate of return of 25% is
obtained.
Also in connection with the sale of units, the Arbor asset acquisition
was structured as a tax free issuance of 162,461 shares of TeleBanc common stock
and a $500,000 cash payment for the Arbor assets. An independent appraisal
valued the assets to be acquired from Arbor at $3.1 million. Consistent with
TeleBanc's charter, the number of shares issued to Arbor as consideration was
limited to 5% of total market value of outstanding TeleBanc stock at the time of
acquisition.
In June 1997, the Company formed TeleBanc Capital Trust I, which in
turn sold, at par, 10,000 shares of trust preferred securities, Series A,
liquidation amount of $1,000, for a total of $10,000,000 in a private placement.
TeleBanc Capital Trust I is a business trust formed for the purpose of issuing
capital securities and investing the proceeds in junior subordinated debentures
issued by the company. The trust preferred securities mature in 2027 and have an
annual dividend rate of 11.0% payable semi-annually, beginning in December 1997.
The net proceeds will be used for general corporate purposes which include the
funding of Bank operations to create and expand its financial service and
product operations.
<PAGE>
NOTE 4. COMMITMENTS AND CONTINGENT LIABILITIES
In managing the Company's interest-rate risk, the Company utilizes
financial derivatives in the normal course of business. These products consist
primarily of interest rate cap and swap agreements. Financial derivatives are
employed to assist in the management and/or reduction of interest rate risk for
the Company and can effectively alter the interest sensitivity of segments of
the balance sheet for specified periods of time.
The Company accounts for interest rate swap agreements and cap
agreements as hedges of debt issuances, deposit balances and investment in loan
portfolio to which such agreements have been specifically designated. Cash
remittances due or received pursuant to these agreements are reported as
adjustments to interest expense on an accrual basis. Any premiums paid in
conjunction with these interest rate swap and cap agreements are amortized as
additional interest expense on a straight-line basis over the term of these
agreements. Any gain or loss upon early termination of these instruments would
be deferred and amortized as an adjustment to interest expense over the term of
the applicable interest rate agreement.
<PAGE>
TELEBANC FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, AS OF AND FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997
This discussion and analysis includes descriptions of material changes
which have affected the Company's consolidated financial condition and
consolidated results of operations during the periods included in the Company's
financial statements.
FINANCIAL CONDITION (SEPTEMBER 30, 1997 COMPARED TO DECEMBER 31, 1996)
The Company's total assets increased by $190.5 million or 29.4% from
$648.0 million at December 31, 1996 to $838.5 million at September 30, 1997. The
increase in total assets primarily reflects increases in loans receivable, net
and loans held for sale of $143.5 million, or 40.8% and mortgage-backed
securities available for sale and trading of $55.3 million, or 30.0%. The
increase in loans receivable includes purchases of primarily adjustable rate
loans. In February, 1997, the Company raised $28.2 million of net proceeds from
the sale of units consisting of debt and equity securities. In June 1997, the
Company raised $10.0 million from the sale of Trust Preferred securities (see
Note 1 to Consolidated Financial Statements for the three and nine months ended
September 30, 1997 and 1996). The Company continues to invest the net proceeds
as additional equity capital of the Bank. The increase in asset size reflects
management's initial efforts to leverage the proceeds raised from the sale of
units and capital securities. The Company intends to continue to leverage such
proceeds, as well as capital raised from earnings, for additional growth in the
foreseeable future.
The Company funded its asset growth with a mix of securities sold under
agreements to repurchase ("reverse repos"), Federal Home Loan Bank advances and
deposits. Total deposits increased by $54.8 million, or 14.0% from $390.5
million at December 31, 1996 to $445.2 million at September 30, 1997. The
average term for the new time deposits gathered in the three months ended
September 30, 1997 was approximately 30.7 months with an average percentage
yield of 5.95%. The Company has continued to focus on building core deposit
accounts. Money market checking and savings accounts increased 25.0% from $109.8
million at December 31, 1996 to $137.3 million at September 30, 1997. Federal
Home Loan Bank Advances remained relatively stable. As of September 30, 1997,
the weighted average interest rate (excluding hedges) and weighted average
maturity for Federal Home Loan Bank Advances was 5.70% and 554 days,
respectively. Securities sold under agreements to repurchase, increased by $64.8
million or 112.5% from $57.6 million at December 31, 1996 to $122.4 million at
September 30, 1997 largely as a result of management's intention to fund high
growth after the capital raising and to replace these borrowings with the core
deposits over the year. As of September 30, 1997, the weighted average interest
rate (excluding hedges) and weighted average maturity for securities sold under
agreements to repurchase was 5.80% and 128 days, respectively. As of September
30, 1997, subordinated debt, net of original issue discount was $29.6 million,
which includes the 9.5% senior subordinated debt raised in February, 1997 and
the 11.5% subordinated debt raised in the second quarter of 1994. In June 1997,
the Company formed TeleBanc Capital Trust I, which in turn sold shares of trust
preferred securities, Series A, for a total of $10,000,000
<PAGE>
TELEBANC FINANCIAL CORPORATION
in a private placement. The trust preferred securities have an annual dividend
rate of 11.0% payable semi-annually, beginning in December 1997.
Stockholders' equity increased $20.6 million, from $24.7 million at
December 31, 1996 to $45.3 million at September 30, 1997. The increase was due
to the $15.3 million issuance of 4% convertible preferred stock, $1.5 million
stock issuance in exchange for Arbor's assets, $3.0 million in net income for
the nine months ended September 30, 1997 and an unrealized gain on securities
available for sale, net of deferred taxes, of $1.3 million, which pursuant to
SFAS 115 affects the Company's stockholders' equity but does not impact the
statement of operations. This increase is partially offset by $384,000 of
preferred stock dividends.
<PAGE>
TELEBANC FINANCIAL CORPORATION
The consolidated average balance sheets, along with income and expense
and related interest yields and rates for the quarters ended September 30, 1997
and 1996 are shown below. The table also presents information for the periods
indicated with respect to the difference between the weighted average yield
earned on interest-earning assets and weighted average rate paid on
interest-bearing liabilities, or "interest rate spread," which saving
institutions have traditionally used as an indicator of profitability. Another
indicator of an institution's net interest income is its "net yield on
interest-earning assets," which is its net interest income divided by the
average balance of interest-earning assets and interest-bearing liabilities.
When interest-earning assets approximate or exceed interest-bearing liabilities,
any positive interest rate spread will generate interest income.
<TABLE>
<CAPTION>
Quarter ended September 30, 1997 Quarter ended September 30, 1996
----------------------------------- ------------------------------------
Interest Average Interest Average
(Dollars in thousands) Average Income/ Annualized Average Income/ Annualized
unaudited Balance Expense Yield/Cost Balance Expense Yield/Cost
------- -------- ---------- ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net $ 456,059 $ 8,864 7.77% $ 302,358 $ 6,089 8.06%
Investment securities 8,244 116 5.59 7,531 115 5.99
Mortgage-backed and related
securities available for sale 212,961 4,397 8.26 218,350 4,453 8.16
Investment securities available
for sale (a) 66,609 1,111 6.67 67,263 1,109 6.59
Federal funds sold 1,566 22 5.58 659 9 5.19
Investment in FHLB 8,346 152 7.25 7,059 129 7.25
Trading account 19,663 360 7.25 -- -- --
------- ------- ---- ------- ------ ----
Total interest-earning assets 773,448 15,022 7.74% 603,220 11,904 7.90%
Non-interest-earning assets 70,621 12,817
------ ------
Total assets $ 844,069 $ 616,037
======= =======
Interest-bearing liabilities:
Savings deposits $ 147,009 $ 1,953 5.27% $ 104,033 $ 1,247 4.77%
Time deposits 315,627 4,995 6.28 275,302 4,384 6.34
FHLB advances 161,871 2,528 6.11 136,332 2,040 5.85
Other borrowings 98,924 1,493 5.91 57,204 839 5.74
Subordinated debt, net 39,519 1,153 11.67 17,250 519 12.03
Total interest-bearing 762,950 12,122 6.28% 590,121 9,029 6.06%
liabilities
Non-interest-bearing liabilities 37,256 2,283
------ -----
Total liabilities 800,206 592,404
Stockholders' equity 43,863 23,633
------ ------
Total liabilities and
stockholders' equity $ 844,069 $ 616,037
======= =======
Excess of interest-earning assets
over interest-bearing
liabilities/net interest $ 10,498 $ 2,900 1.46% $ 13,099 $ 2,875 1.84%
====== ===== ==== ====== ===== ====
income/interest rate spread
Net yield on interest earning assets 1.50% 1.91%
==== ====
Ratio of interest-earning assets
to interest-bearing liabilities 101.38% 102.22%
====== ======
</TABLE>
(a) Interest income and average yields on municipal bonds are presented on a tax
equivalent basis.
<PAGE>
TELEBANC FINANCIAL CORPORATION
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND
1996
Net Income. Net income for the three and nine months ended September
30, 1997 was $904,000 and $3.0 million, compared to $(62,000) and $1.3 million
for the three and nine months ended September 30, 1996, respectively. Net income
for the three months ended September 30, 1997 consisted primarily of $3.3
million of net interest income reduced by $120,000 in provision for loan losses,
$1.1 million in non-interest income, $2.3 million in non-interest expenses and
$709,000 in income tax expense. Net income for the three months ended September
30, 1996 consisted primarily of $2.8 million in net interest income offset by
$125,000 in provision for loan losses, non-interest income of $540,000, $3.5
million in non-interest expenses and a tax benefit of $220,000. General and
administrative expenses for the quarter ended September 30, 1996 included a $1.7
million accrual for a one-time assessment mandated by the Federal Deposit
Insurance Corporation ("FDIC") to recapitalize the Savings Association Insurance
Fund ("SAIF"). Net income for the nine months ended September 30, 1997 consisted
of $9.6 million of net interest income offset by $671,000 in provision for loan
losses, $2.9 million of non-interest income, $6.9 million of non-interest
expenses and $1.7 million in income tax expense. Net income for the nine months
ended September 30, 1996 consisted of net interest income of $8.5 million
reduced by $744,000 of provision for loan losses, non-interest income of $1.4
million offset by $7.3 million of non-interest expense and $528,000 in income
tax expense.
Net Interest Income. Net interest income was $3.3 million and $2.8
million for the three months ended September 30, 1997 and 1996, respectively,
reflecting an annualized interest rate spread of 1.46% and 1.84% for the three
months ended September 30, 1997 and 1996, respectively. The decline in yield is
attributable to a decrease in loan yield due to a larger held for sale portfolio
than in the same quarter last year and an increase in hedging instruments used
to reduce interest rate risk matched against the deposit portfolio resulting in
higher costs. In the quarter ending September 30, 1997, total interest earning
assets, consisting primarily of loans receivable, net and mortgage-backed and
related securities, yielded 7.74% as compared to 7.90% for the same period in
1996. The decline is attributed to an increase in the held for sale category and
an increase in non-accrual loans. In 1996, the Bank made a one-time transfer of
approximately $106.6 million from loans receivable, net to loans held for sale.
According to generally accepted accounting principles, purchase discounts on
mortgage loans held for sale are not amortized as interest revenue. Discounts on
loans held for sale are recognized as non-interest income when principal
repayments are received or when loans are sold. Non-accrual loans increased from
$8.9 million at September 30, 1996 to $11.1 million at September 30, 1997
causing a decline in loan interest income. Average interest-earning assets were
$773.4 million and $603.2 million for the quarters ending September 30, 1997 and
1996, respectively. Average interest bearing liabilities were $763.0 million and
$590.1 million for the quarters ending September 30, 1997 and 1996,
respectively. Interest-bearing liabilities cost 6.28% in the third quarter of
1997 as compared 6.06% in the same period in 1996. Third quarter decreases in
interest-earning assets and interest-bearing liabilities primarily reflect an
overall decrease in interest rates.
<PAGE>
TELEBANC FINANCIAL CORPORATION
Provision for Loan Losses. Total provision for loan losses decreased
$5,000 from $125,000 for the three months ending September 30, 1996 to $120,000
for the three months ending September 30, 1997. The provision for loan losses
reflects management's intent to provide prudent reserves for loan losses. During
the quarters ended September 30, 1997 and 1996, the Company provided additional
reserves for single-family loans acquired during each quarter. Total provision
for loan losses decreased $73,000 from $744,000 for the nine months ended
September 30, 1996 to $671,000 for the nine months ended September 30, 1997. For
the first nine months of 1997 and 1996, the Company provided reserves for
several single-family loans and for loan acquisitions in accordance with the
Company's loan loss reserve policy. For the nine months ended September 30, 1997
and 1996, the Company purchased approximately $231.3 and $132.6 million in whole
loans. The total loan loss allowance at September 30, 1997 was $3.2 million
which was 0.7% of total loans outstanding. Total loss allowance as a percentage
of total non-performing assets was 17.1%. The total loan loss allowance at
September 30, 1996 was $2.6 million which was 0.8% of total loans outstanding.
Total loss allowance as a percentage of total non-performing assets was 16.7%.
Non-Interest Income. Total non-interest income increased by $544,000
from $540,000 for the three months ended September 30, 1996 to $1.1 million for
the three months ended September 30, 1997. During the third quarter of 1997, the
Company sold corporate bonds held for liquidity purposes for a gain of $259,000,
recognized $226,000 on prepayments in the loan held for sale portfolio, $213,000
in gains in the trading account and the remainder in loan fees and service
charges. For the three months ending September 30, 1996, non-interest income
primarily consists of $195,000 in loan fees and service charges on the Bank's
portfolio and on the purchase mortgage servicing rights, a net gain of $181,000
on the sale of several liquid bonds in the mortgage-backed security and
investment portfolio, $100,000 on the sale of real estate held for sale offset
by $108,000 loss on the Bank's equity investments in a mortgage service company
and a company that acquires and collects delinquent consumer debt obligations
for its own portfolio. Total non-interest income increased by $1.5 million from
$1.4 million for the nine months ended September 30, 1996 to $2.9 million for
the nine months ended September 30, 1997. During the first nine months of 1997,
the Company reported non-interest income of $1.8 million in trading income
attributed to the second quarter securitization of cooperative mortgage loans
held for sale, the sale of mortgage-backed securities and investments held for
liquidity purposes, $636,000 on the sale of loans, and $472,000, net, in loan
fees and TCM commission income offset by a loss on its equity investment in AGT
Mortgage Services ("AGT"). AGT serviced performing and non-performing loans for
a fee. Given lower than anticipated non-performing loan levels, AGT did not
achieve adequate economies of scale to generate sufficient revenue. Accordingly,
management decided to cease operations of AGT on July 31, 1997. Non-interest
income of $1.4 million for the nine months ended September 30, 1996 primarily
reflects $263,000 in income resulting from the sale of securities, $415,000 on
the sale of loans and $758,000, net, in loan fees, service charges, and equity
investment.
Non-Interest Expenses. Non-interest expenses for the three and nine
months ended September 30, 1997 were $2.3 million and $6.9 million,
respectively. Non-interest expenses for the three and nine months ended
September 30, 1996 were $3.5 million and $7.3 million, respectively. On
September 30, 1996, President Clinton signed legislation calling for a one-time
<PAGE>
TELEBANC FINANCIAL CORPORATION
assessment on the FDIC's SAIF-insured deposits held by depository institutions
as of March 31, 1995 to recapitalize SAIF. TeleBank recorded an accrual of $1.7
million, $1.1 million after-tax, for this assessment. The recapitalization of
SAIF has resulted in lower deposit insurance premiums in the future for most
SAIF-insured institutions, including TeleBank. Total non-interest expenses,
excluding the special assessment, increased by $474,000 from $1.9 million for
the three months ended September 30, 1996 to $2.3 million for the three months
ended September 30, 1997. Excluding the special assessment, this increase is
largely the result of a $462,000 increase in general and administrative expenses
associated with a higher volume of deposit accounts, an increase in marketing
expenses, and an overall increase in compensation levels. Total non-interest
expenses, excluding the special assessment, increased by $1.2 million from $5.7
million for the nine months ended September 30, 1996 to $6.9 million for the
nine months ended September 30, 1997. The increase in general and administrative
expense for the nine months ended September 30, 1997 is the result of increases
in compensation, increases in personnel, marketing expenditures and an accrual
for bonuses as well as the inclusion of TCM's expenses.
Income Tax Expense. The effective tax rate for the nine months ended
September 30, 1997 was 33.6% compared to 28.2% for the nine months ended
September 30, 1996. The effective tax rate increased due to the $1.7 million
federal insurance assessment which was incurred in 1996. The Company carried a
deferred tax payable of $474,000 on its Consolidated Statement of Financial
Condition as of September 30, 1997.
LIQUIDITY
Liquidity is the ability of the Company to generate cash flows
sufficient to fund operations and to meet present and future financial
obligations to borrowers and depositors in a timely manner. Cash flows provided
from operating activities, consisting primarily of interest received less
interest paid on borrowings and purchases less sales of loans held for sale,
were $(16.4) million and $15.7 million for the nine months ended September 30,
1997 and 1996, respectively. Net cash flow used in investing activities
(primarily purchases of mortgage-backed and related securities and mortgage
loans, offset by principal payments on loans and mortgage-backed and related
securities and proceeds from sale or maturity of investment securities) was
$148.0 million and $65.4 million for the nine months ended September 30, 1997
and 1996, respectively. The increase in cash flows related to investing
activities for the nine months ended September 30, 1997 reflects a significant
increase in the amount of mortgage-backed securities, mortgage loans and
investment securities purchased. Net cash provided by financing activities
(primarily net activity in deposits and borrowings) were $166.2 million and
$45.8 million for the nine months ended September 30, 1997 and 1996,
respectively. The increase in net cash provided by financing activities for the
nine months ended September 30, 1997 is primarily the result of increased growth
in 1997 as compared to the same period in 1996. The total net increase in cash
and cash equivalents was $1.9 and $(3.9) million for the nine months ended
September 30, 1997 and 1996, respectively.
<PAGE>
TELEBANC FINANCIAL CORPORATION
The Company's primary sources of funds are deposits, principal and
interest payments on loans and mortgage-backed securities, and proceeds from
sales and maturities of mortgage-backed and related securities and investment
securities. Investment maturities and scheduled amortization of loans and
mortgage-backed securities are generally a predictable source of funds. Deposit
flows and mortgage prepayments are greatly influenced by the general level of
interest rates, economic conditions, and competition. The Company also accesses
FHLB advances and has utilized securities sold under agreements to repurchase.
The Bank is required to maintain minimum levels of liquid assets as
defined by the OTS regulations. This requirement, which may vary at the
discretion of the OTS depending upon economic conditions and deposit flows, is
based upon a percentage of deposits and short-term borrowings. The minimum
required ratio is 5.0%. At September 30, 1997, the Company's liquidity ratio was
5.43%.
In the second quarter of 1994, the Company completed its initial public
offering, raising an aggregate of $21.9 million through the issuance of common
stock and subordinated notes with warrants. Upon completion of this offering,
the Company invested $15 million of the proceeds as capital of the Bank. In
February, 1997, the Company raised an additional $29.9 million in aggregate
through the issuance of 4.0% cumulative preferred stock and 9.5% senior
subordinated notes with warrants. Upon completion of this offering, the Company
invested $10 million of the proceeds as capital of the Bank. The subordinated
debt represents a stable, although relatively expensive, source of funds. In
addition, the Company formed TeleBanc Capital Trust I, which in turn sold shares
of trust preferred securities, Series A, for a total of $10,000,000 in a private
placement. The annual expense to service the total subordinated debt and the
trust preferred securities are $3.3 million and $1.1 million, respectively.
Annual dividends on the 4% preferred stock are $648,000.
Subject to regulatory approval, the Bank anticipates distributing
dividends of $3.9 million to the Company at year end to service the debt and
preferred stock. There are various regulatory limitations on the extent to which
federally chartered savings institutions may pay dividends. Also, savings
institution subsidiaries of holding companies generally are required to provide
their OTS Regional Director with no less than 30 days notice of any proposed
declaration on the institution's stock. Under terms of the indentures pursuant
to which the subordinated notes were issued, the Company presently is required
to maintain, on an unconsolidated basis, liquid assets in an amount equal to or
greater than $3.3 million, which represents 100% of the aggregate interest
expenses for one year on the subordinated debt.
The Company's most liquid assets are cash and cash equivalents, which
include investments in liquid short-term investments and federal funds sold with
maturities of nine months or less. The levels of these assets are dependent upon
the Company's operating, financing, and investing activities during any given
period. Cash equivalents totaled $5.1 million and $3.3 million as of September
30, 1997 and December 31, 1996, respectively. As of September 30, 1997, the
Company had commitments to purchase $10.2 million in loans.
<PAGE>
TELEBANC FINANCIAL CORPORATION
In the normal course of business, the Company makes various commitments
to extend credit and incurs contingent liabilities which are not reflected in
the consolidated statements of financial condition.
CAPITAL RESOURCES
Capital ratios at September 30, 1997 exceeded each of the three OTS
capital requirements on a fully phased-in basis. The following table sets forth
the actual and required minimum levels of regulatory capital for the Company
under applicable OTS regulations as of September 30, 1997 ($ in thousands):
<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISION
-------------------------------------------------------------------------------------
As of September 30, 1997 AMOUNT RATIO AMOUNT RATIO AMOUNT
------ ----- ------ ----- ------
<S> <C> <C> <C> <C> <C>
Total Capital (to risk
weighted assets) $51,228 13.37% $30,663 8.00% $20,565
Tier 1 Capital (to risk
weighted assets) $48,354 12.62% $15,331 4.00% $33,023
Tier 1 Capital (to average
assets) $48,354 5.99% $32,278 4.00% $16,076
Tangible $48,344 6.15% $11,788 1.50% $36,556
</TABLE>
<PAGE>
TELEBANC FINANCIAL CORPORATION
PART II -- OTHER INFORMATION
Item 5. Other Information
No information to report.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
No information to report.
<PAGE>
TELEBANC FINANCIAL CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TeleBanc Financial Corporation
------------------------------
(Registrant)
Date: November 14, 1997 By: /s/ Mitchell H. Caplan
----------------------------------- ---------------------------------
Mitchell H. Caplan
President
Date: November 14, 1997 By: /s/ Aileen Lopez Pugh
----------------------------------- ---------------------------------
Aileen Lopez Pugh
Executive Vice President
Chief Financial Officer/Treasurer
<PAGE>
================================================================================
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THIS EXCHANGE
OFFER AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE CORPORATION OR THE TRUST. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE
AFFAIRS OF THE CORPORATION OR THE TRUST SINCE THE DATE HEREOF. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING
SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
------------------------------------------------
TABLE OF CONTENTS
PAGE
----
Available Information............................... 7
Summary............................................. 8
Selected Consolidated Financial Data................ 16
Risk Factors........................................ 17
TeleBanc Financial Corporation...................... 24
TeleBanc Capital Trust I............................ 25
Use of Proceeds..................................... 25
Ratios of Earnings to Combined Fixed
Charges.......................................... 27
Accounting Treatment................................ 27
Capitalization...................................... 28
The Exchange Offer.................................. 28
Description of Exchange Securities.................. 38
Description of Original Securities.................. 63
Relationship Among the Exchange Capital
Securities, the Exchange Junior
Subordinated Debentures and the
Exchange Guarantee............................... 64
Certain Federal Income Tax Consequences............. 65
ERISA Considerations................................ 69
Plan of Distribution................................ 69
Validity of Exchange Securities..................... 70
Appendices ......................................... 70
================================================================================
<PAGE>
================================================================================
$10,000,000
TELEBANC CAPITAL TRUST I
OFFER TO EXCHANGE ITS
11.00% EXCHANGE CAPITAL SECURITIES
(LIQUIDATION AMOUNT $1,000 PER EXCHANGE CAPITAL SECURITY)
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
FOR ANY AND ALL OF ITS OUTSTANDING
11.00% ORIGINAL CAPITAL SECURITIES
(LIQUIDATION AMOUNT $1,000 PER ORIGINAL CAPITAL SECURITY)
UNCONDITIONALLY GUARANTEED,
AS DESCRIBED HEREIN, BY
TELEBANC FINANCIAL CORPORATION
---------------------------------------------------------------
PROSPECTUS
---------------------------------------------------------------
NOVEMBER ___, 1997
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
------------------------------------------
As authorized by Section 145 of the Delaware General Corporation Law,
the Corporation may indemnify its directors and officers against expenses
(including attorneys' fees, judgments, fines and amounts paid in settlement)
actually and reasonably incurred in connection with the defense or settlement of
any threatened, pending or completed legal proceedings in which the director or
officer is involved by reason of the fact that he is or was a director or
officer of the Corporation if he acted in good faith and in the manner that he
reasonably believed to be in, or not opposed to, the best interests of the
Corporation and, with respect to any criminal action or proceeding, if he had no
reasonable cause to believe that his conduct was unlawful. If the legal
proceeding, however, is by or in the right of the Corporation, the director or
officer may not be indemnified in respect of any claim, issue or matter as to
which he shall have been adjudged to be liable to the Corporation unless a court
determines otherwise.
Article 8 of the Corporation's Bylaws requires that the Corporation
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed legal proceeding (other than an action
by or in right of the Corporation) by reason of the fact that such person is or
was a director, officer, trustee, employee, or agent of the Corporation, or is
or was serving at the request of the Corporation as a director, officer,
trustee, employee, or agent of another corporation, association, partnership,
joint venture, trust, employee benefit plan or other enterprise, against
expenses (including attorney's fees, judgments, fines and amounts paid in
settlement) actually and reasonably incurred by such person in connection with
such legal proceeding, if such person acted in good faith and in a manner which
such person reasonably believed to be in, or not opposed to, the best interests
of the Corporation, and, with respect to any criminal legal proceeding, had no
reasonable cause to believe that such conduct was unlawful. The Corporation is
also required to indemnify any such person in connection with a legal proceeding
brought by or in the right of the Corporation to procure a judgment in the
Corporation's favor by reason of such person's connection to the Corporation,
against such expenses incurred by such person in connection with the defense or
settlement of such legal proceeding if such person acted in good faith and in a
manner which such person reasonably believed to be in, or not opposed to, the
best interests of the Corporation. No such indemnification shall be made against
expenses in respect of any claim, issue or matter as to which such person shall
have been adjudged to be liable to the Corporation or against amounts paid in
settlement unless and only to the extent that there is a determination that,
despite the adjudication of liability but in view of all the circumstances of
the case, such person is fairly and reasonably entitled to indemnity for such
expenses or amounts paid in settlement. The Corporation is permitted to advance
expenses incurred by such person in advance of the final disposition of such
legal proceeding upon the receipt of an undertaking by or on behalf of such
person to repay such amount if it shall ultimately be determined that such
person is not entitled to indemnification from the Corporation.
The Corporation also has the power to purchase and maintain insurance
on behalf of its directors, officers, trustees, employees and agents and persons
serving in such capacities with other entities at the Corporation's request. The
Corporation has a policy of liability insurance covering its directors and
officers, the effect of which is to reimburse the directors and officers of the
Corporation against certain damages and expenses resulting from certain claims
made against them caused by their negligent act, error or omission.
The foregoing indemnity and insurance provisions have the effect of
reducing directors' and officers' exposure to personal liability for actions
taken in connection with their respective positions.
II-1
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
-------------------------------------------
3.1 Amended and Restated Certificate of Incorporation of the Corporation.*
3.2 Certificate of Designation of the Corporation (incorporated by
reference herein from Exhibit 3 to the Corporation's Current Report on
Form 8-K filed with the Commission on March 17, 1997).
3.3 Bylaws, as amended, of the Corporation (incorporated by reference
herein from Exhibit 3.2 to the Corporation's Annual Report on Form 10-K
for the year ended December 31, 1996, attached to the Prospectus as
Appendix I).
3.4 Amended and Restated Declaration of Trust of TeleBanc Capital Trust I,
dated as of June 9, 1997. *
4.1 Indenture, dated as of June 9, 1997, between the Corporation and
Wilmington Trust Company, as debenture trustee. *
4.2 Form of Certificate of Exchange Junior Subordinated Debentures (filed
as Exhibit A to Exhibit 4.1 hereto). *
4.3 Certificate of Trust of TeleBanc Capital Trust I, dated as of June 3,
1997. *
4.4 Declaration of Trust of TeleBanc Capital Trust I, dated as of June 2,
1997. *
4.5 Amended and Restated Declaration of Trust of TeleBanc Capital Trust I,
dated as of June 9, 1997 (filed as Exhibit 3.4 hereto). *
4.6 Form of Exchange Capital Security Certificate (filed as EXHIBIT A-1 to
Exhibit 3.4 hereto). *
4.7 Exchange Guarantee Agreement by the Corporation for the benefit of the
holders of Exchange Capital Securities. *
4.8 Registration Rights Agreement, dated June 5, 1997, among the
Corporation, TeleBanc Capital Trust I, and the Initial Purchaser. *
4.9 Liquidated Damages Agreement, dated June 9, 1997, among the
Corporation, TeleBanc Capital Trust I, and the Initial Purchaser. *
5.1 Opinion of Hogan & Hartson L.L.P. as to the validity of the securities
registered hereunder (including the consent of that firm). *
5.2 Opinion of Morris, James, Hitchens & Williams as to the validity of the
Exchange Capital Securities (including the consent of that firm). *
8 Form of opinion of Hogan & Hartson L.L.P. as to certain federal income
tax matters (including the consent of that firm). *
10.1 1994 Stock Option Plan (incorporated by reference herein from the
Corporation's Registration Statement on Form S-1 (File No. 33-76930)
filed with the Commission on March 25, 1994).
10.2 Tax Allocation Agreement, dated April 7, 1994, between TeleBank and the
Corporation (incorporated by reference herein from the Corporation's
Pre-Effective Amendment No. 1 to the Registration Statement on Form S-1
(File No. 33-76930) filed with the Commission on May 3, 1994).
10.3 Unit Purchase Agreement, dated as of February 19, 1997, among the
Corporation and the Purchasers identified therein (incorporated by
reference herein from Exhibit 10.1 to the Corporation's Current Report
on Form 8-K filed with the Commission on March 17, 1997).
10.4 Amended and Restated Acquisition Agreement, dated as of February 19,
1997, among the Corporation, Arbor Capital Partners, Inc., MET Holdings
Corporation, and William M.
II-2
<PAGE>
Daugherty (incorporated by reference herein from Exhibit 10.2 to the
Corporation's Current Report on Form 8-K filed with the Commission on
March 17, 1997).
10.5 1997 Stock Option Plan (incorporated by reference herein from Exhibit D
to the Corporation's definitive proxy materials which were filed as
Exhibit 99.3 to the Corporation's Annual Report on Form 10-K for the
year ended December 31, 1996, attached to the Prospectus as Appendix
I).
12 Computation of ratio of earnings to combined fixed charges.
13 1996 Annual Report to Stockholders (portions of which are incorporated
by reference herein from Exhibit 13 to the Corporation's Annual Report
on Form 10-K for the year ended December 31, 1996, attached to the
Prospectus as Appendix I).
21.1 Subsidiaries of the Corporation (incorporated by reference herein from
Exhibit 21 to the Corporation's Annual Report on Form 10-K for the year
ended December 31, 1996, attached to the Prospectus as Appendix I).
21.2 Subsidiaries of TeleBanc Capital Trust I.
23.1 Consent of Hogan & Hartson L.L.P. (included as part of Exhibit 5.1 and
Exhibit 8). *
23.2 Consent of Morris, James, Hitchens & Williams (included as part of
Exhibit 5.2). *
23.3 Consent of Arthur Andersen LLP
25 Form T-1 Statement of Eligibility of Wilmington Trust Company to act as
trustee. *
99.1 Form of Letter of Transmittal.
99.2 Form of Notice of Guaranteed Delivery.
99.3 Form of Exchange Agent Agreement.
99.4 Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies
and Other Nominees.
99.5 Form of Client Letter.
----------------
* To be filed by amendment.
ITEM 22. UNDERTAKINGS.
-------------
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, each of the
registrants has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of such registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, each registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
Each of the undersigned registrants hereby undertakes to respond to
requests for information that is incorporated by reference into the prospectus
pursuant to Items 4, 10(b), 11, or 13 of this Form, within one business day of
receipt of such request, and to send the incorporated documents by first class
mail or other equally prompt means. This includes information contained in
documents filed subsequent to the effective date of the registration statement
through the date of responding to the request.
Each of the undersigned registrants hereby undertakes to supply by means
of a post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrants
have duly caused this registration statement to be signed on their behalf by the
undersigned, thereunto duly authorized, in the City of Arlington, Commonwealth
of Virginia, on November 17, 1997.
TELEBANC FINANCIAL CORPORATION
By: /s/ Mitchell H. Caplan
----------------------------------------
Mitchell H. Caplan
Vice Chairman of the Board and President
TELEBANC CAPITAL TRUST I
By: /s/ David A. Smilow
----------------------------------------
David A. Smilow,
as Administrative Trustee
By: /s/ Mitchell H. Caplan
----------------------------------------
Mitchell H. Caplan,
as Administrative Trustee
By: /s/ Aileen Lopez Pugh
----------------------------------------
Aileen Lopez Pugh,
as Administrative Trustee
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below appoints David A. Smilow or Aileen Lopez Pugh, jointly and
severally, each in his own capacity, his true and lawful attorneys-in-fact, with
full power of substitution for him and in his name, place and stead, in any and
all capacities to sign any amendments to this registration statement, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Commission, hereby ratifying and confirming all that said
attorney-in-fact, or their substitute or substitutes, may lawfully do or cause
to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this registration
statement has been signed by the following persons in the capacities indicated
on November 17, 1997.
Signature Title
- --------- -----
/s/ David A. Smilow Chairman of the Board and Chief Executive Officer
- --------------------------- (Principal Executive Officer)
David A. Smilow
/s/ Aileen Lopez Pugh Executive Vice President - Chief Financial
- --------------------------- Officer/ Treasurer, Director
Aileen Lopez Pugh (Principal Financial and Accounting Officer)
/s/ Mitchell H. Caplan Vice Chairman of the Board and President
- ---------------------------
Mitchell H. Caplan
II-4
<PAGE>
/s/ Arlen W. Gelbard Director
- ---------------------------
Arlen W. Gelbard
/s/ Dean C. Kehler Director
- ---------------------------
Dean C. Kehler
/s/ Steven F. Piaker Director
- ---------------------------
Steven F. Piaker
/s/ David R. DeCamp Director
- ---------------------------
David R. DeCamp
/s/ Mark Rollinson Director
- ---------------------------
Mark Rollinson
Director
- ---------------------------
Michael A. Smilow
II-5
<PAGE>
EXHIBIT INDEX
Exhibit No. Exhibit Page No.
- ----------- ------- --------
3.1 Amended and Restated Certificate of Incorporation of the
Corporation.*
3.2 Certificate of Designation of the Corporation (incorporated
by reference herein from Exhibit 3 to the Corporation's
Current Report on Form 8-K filed with the Commission on March
17, 1997).
3.3 Bylaws, as amended, of the Corporation (incorporated by
reference herein from Exhibit 3.2 to the Corporation's Annual
Report on Form 10-K for the year ended December 31, 1996,
attached to the Prospectus as Appendix I).
3.4 Amended and Restated Declaration of Trust of TeleBanc Capital
Trust I, dated as of June 9, 1997. *
4.1 Indenture, dated as of June 9, 1997, between the Corporation
and Wilmington Trust Company, as debenture trustee. *
4.2 Form of Certificate of Exchange Junior Subordinated
Debentures (filed as Exhibit A to Exhibit 4.1 hereto). *
4.3 Certificate of Trust of TeleBanc Capital Trust I, dated as of
June 3, 1997. *
4.4 Declaration of Trust of TeleBanc Capital Trust I, dated as of
June 2, 1997. *
4.5 Amended and Restated Declaration of Trust of TeleBanc Capital
Trust I, dated as of June 9, 1997 (filed as Exhibit 3.4
hereto). *
4.6 Form of Exchange Capital Security Certificate (filed as
EXHIBIT A-1 to Exhibit 3.4 hereto). *
4.7 Exchange Guarantee Agreement by the Corporation for the
benefit of the holders of Exchange Capital Securities. *
4.8 Registration Rights Agreement, dated June 5, 1997, among the
Corporation, TeleBanc Capital Trust I, and the Initial
Purchaser. *
4.9 Liquidated Damages Agreement, dated June 9, 1997, among the
Corporation, TeleBanc Capital Trust I, and the Initial
Purchaser. *
5.1 Opinion of Hogan & Hartson L.L.P. as to the validity of the
securities registered hereunder (including the consent of
that firm). *
5.2 Opinion of Morris, James, Hitchens & Williams as to the
validity of the Exchange Capital Securities (including the
consent of that firm). *
8 Form of opinion of Hogan & Hartson L.L.P. as to certain
federal income tax matters (including the consent of that
firm). *
10.1 1994 Stock Option Plan (incorporated by reference herein from
the Corporation's Registration Statement on Form S-1 (File
No. 33-76930) filed with the Commission on March 25, 1994).
10.2 Tax Allocation Agreement, dated April 7, 1994, between
TeleBank and the Corporation (incorporated by reference
herein from the Corporation's Pre-Effective Amendment No. 1
to the Registration Statement on Form S-1 (File No. 33-76930)
filed with the Commission on May 3, 1994).
<PAGE>
10.3 Unit Purchase Agreement, dated as of February 19, 1997, among
the Corporation and the Purchasers identified therein
(incorporated by reference herein from Exhibit 10.1 to the
Corporation's Current Report on Form 8-K filed with the
Commission on March 17, 1997).
10.4 Amended and Restated Acquisition Agreement, dated as of
February 19, 1997, among the Corporation, Arbor Capital
Partners, Inc., MET Holdings Corporation, and William M.
Daugherty (incorporated by reference herein from Exhibit 10.2
to the Corporation's Current Report on Form 8-K filed with
the Commission on March 17, 1997).
10.5 1997 Stock Option Plan (incorporated by reference herein from
Exhibit D to the Corporation's definitive proxy materials
which were filed as Exhibit 99.3 to the Corporation's Annual
Report on Form 10-K for the year ended December 31, 1996,
attached to the Prospectus as Appendix I).
12 Computation of ratio of earnings to combined fixed charges.
13 1996 Annual Report to Stockholders (portions of which are
incorporated by reference herein from Exhibit 13 to the
Corporation's Annual Report on Form 10-K for the year ended
December 31, 1996, attached to the Prospectus as Appendix I).
21.1 Subsidiaries of the Corporation (incorporated by reference
herein from Exhibit 21 to the Corporation's Annual Report on
Form 10-K for the year ended December 31, 1996, attached to
the Prospectus as Appendix I).
21.2 Subsidiaries of TeleBanc Capital Trust I.
23.1 Consent of Hogan & Hartson L.L.P. (included as part of
Exhibit 5.1 and Exhibit 8.1). *
23.2 Consent of Morris, James, Hitchens & Williams (included as
part of Exhibit 5.2). *
23.3 Consent of Arthur Andersen LLP
25 Form T-1 Statement of Eligibility of Wilmington Trust Company
to act as trustee. *
99.1 Form of Letter of Transmittal.
99.2 Form of Notice of Guaranteed Delivery.
99.3 Form of Exchange Agent Agreement.
99.4 Form of Letter to Brokers, Dealers, Commercial Banks, Trust
Companies and Other Nominees.
99.5 Form of Client Letter.
- --------------
* To be filed by amendment.
EXHIBIT 12
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
<TABLE>
<CAPTION>
9/30/97 9/30/96
------- -------
(in thousands, except ratio data)
<S> <C> <C>
Earnings
Net income before extraordinary items and
cumulative effect of changes in accounting principles 2,975 1,347
Add: Applicable income tax 1,682 528
Applicable fixed charges:
Interest expenses 33,291 25,840
Total earnings used in ratio calculation with
interest on deposits 37,948 27,715
Combined fixed charges:
Including interest on deposits 33,291 25,840
Ratio: 1.14 1.07
==== ====
Total earnings used in ratio calculation without
interest on deposits
Total earnings with deposits 37,948 27,715
Less: interest expense on deposits 18,686 15,419
Total earnings without interest deposits 19,262 12,296
Combined fixed charges:
Excluding interest on deposits 14,605 10,421
Ratio: 1.32 1.18
==== ====
</TABLE>
EXHIBIT 21.2
Subsidiaries of TeleBanc Capital Trust I
TeleBanc Capital Trust I does not have any subsidiaries.
EXHIBIT 23.3
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the incorporation by
reference in this registration statement of our report dated February 14, 1997
(except with respect to the matters discussed in Note 20, as to which the date
is February 28, 1997) included in the Corporation's Annual Report on Form 10-K,
as amended, for the year ended December 31, 1996 and to all references to our
Firm included in this registration statement.
/s/ Arthur Andersen LLP
-----------------------
November 17, 1997
EXHIBIT 99.1
LETTER OF TRANSMITTAL
TELEBANC CAPITAL TRUST I
OFFER TO EXCHANGE ITS
11.00% EXCHANGE CAPITAL SECURITIES
("EXCHANGE CAPITAL SECURITIES")
(LIQUIDATION AMOUNT $1,000 PER CAPITAL SECURITY)
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
FOR ANY AND ALL OF ITS OUTSTANDING
11.00% ORIGINAL CAPITAL SECURITIES
("ORIGINAL CAPITAL SECURITIES")
(LIQUIDATION AMOUNT $1,000 PER CAPITAL SECURITY)
UNCONDITIONALLY GUARANTEED, AS DESCRIBED HEREIN, BY
TELEBANC FINANCIAL CORPORATION
PURSUANT TO THE PROSPECTUS DATED NOVEMBER _____, 1997
(AS THE SAME MAY BE AMENDED OR SUPPLEMENTED, THE "PROSPECTUS")
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL
EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON _________________, 1997,
OR ON SUCH LATER DATE OR TIME TO WHICH
THE CORPORATION OR THE TRUST
MAY EXTEND THE EXCHANGE OFFER (THE "EXPIRATION DATE").
TENDERS MAY BE WITHDRAWN PRIOR TO 5:00 P.M.,
NEW YORK CITY TIME, ON THE EXPIRATION DATE.
The Exchange Agent For The Exchange Offer Is:
Wilmington Trust Company
By Hand, Overnight Delivery, Registered or Certified Mail:
Rodney Square North
1100 North Market Street
Wilmington, DE 19890-0001
Attention: Corporate Trust Department
Confirm by Telephone: (302) 651-1000
Facsimile Transmissions: (302) 651-8882
(ELIGIBLE INSTITUTIONS ONLY)
<PAGE>
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER
THAN AS SET FORTH ABOVE OR TRANSMISSION OF THIS LETTER OF TRANSMITTAL VIA
FACSIMILE TO A NUMBER OTHER THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE A VALID
DELIVERY.
Capitalized terms used but not defined herein shall have the
same meaning given them in the Prospectus. As used herein, the term "Holder"
means a holder of Original Capital Securities, including any participant ("DTC
Participant") in the book-entry transfer facility system of The Depository Trust
Company ("DTC") whose name appears on a security position listing as the owner
of the Original Capital Securities. As used herein, the term "Certificates"
means physical certificates representing Original Capital Securities.
To participate in the Exchange Offer (as defined below),
Holders must tender by (a) book-entry transfer pursuant to the procedures set
forth in the Prospectus under "The Exchange Offer--Procedures for Tendering
Original Capital Securities," or (b) forwarding Certificates herewith. Holders
who are DTC Participants tendering by book-entry transfer must execute such
tender through the Automated Tender Offer Program ("ATOP") of DTC. A Holder
using ATOP should transmit its acceptance to DTC on or prior to the Expiration
Date. DTC will verify such acceptance, execute a book-entry transfer of the
tendered Original Capital Securities into the Exchange Agent's account at DTC
and then send to the Exchange Agent confirmation of such book-entry transfer (a
"book-entry confirmation"), including an agent's message ("Agent's Message")
confirming that DTC has received an express acknowledgment from such Holder that
such Holder has received and agrees to be bound by this Letter of Transmittal
and that the Trust and the Corporation may enforce this Letter of Transmittal
against such Holder. The book-entry confirmation must be received by the
Exchange Agent in order for the tender relating thereto to be effective.
Book-entry transfer to DTC in accordance with DTC's procedures does not
constitute delivery of the book-entry confirmation to the Exchange Agent.
If the tender is not made through ATOP, Certificates, as well
as this Letter of Transmittal (or facsimile thereof), properly completed and
duly executed, with any required signature guarantees, and any other documents
required by this Letter of Transmittal, must be received by the Exchange Agent
at its address set forth herein on or prior to the Expiration Date in order for
such tender to be effective.
Holders of Original Capital Securities who cannot complete the
procedures for delivery by book-entry transfer of such Original Capital
Securities on a timely basis or who cannot deliver their Certificates for such
Original Capital Securities and all other required documents to the Exchange
Agent on or prior to the Expiration Date, must, in order to participate in the
Exchange Offer, tender their Original Capital Securities according to the
guaranteed delivery procedures set forth in the Prospectus under "The Exchange
Offer--Procedures for Tendering Original Capital Securities."
THE METHOD OF DELIVERY OF THE BOOK-ENTRY CONFIRMATION OR
CERTIFICATES, THIS LETTER OF TRANSMITTAL, AND ALL OTHER REQUIRED DOCUMENTS IS AT
THE OPTION AND SOLE RISK OF THE TENDERING HOLDER, AND THE DELIVERY WILL BE
DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE EXCHANGE AGENT. IF DELIVERY IS BY
MAIL, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED, OR
OVERNIGHT DELIVERY SERVICE IS RECOMMENDED. IN ALL CASES, SUFFICIENT TIME SHOULD
BE ALLOWED TO ENSURE TIMELY DELIVERY.
<PAGE>
NOTE: SIGNATURES MUST BE PROVIDED BELOW.
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY.
ALL TENDERING HOLDERS COMPLETE THIS BOX:
<TABLE>
<CAPTION>
=====================================================================================================================
DESCRIPTION OF ORIGINAL CAPITAL SECURITIES
- ----------------------------------------------------------------------------------------------------------------------
If blank, please print name and Original Capital Securities tendered
address of registered holder. (Attach additional list if necessary)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Principal Amount of
Aggregate Principal Original Capital
Certificate Amount of Original Securities Tendered
Number(s)* Capital Securities (if less than all)**
---------------------- ------------------------ -------------------------
---------------------- ------------------------ -------------------------
---------------------- ------------------------ -------------------------
---------------------- ------------------------ -------------------------
---------------------- ------------------------ -------------------------
TOTAL AMOUNT TENDERED
- ----------------------------------------------------------------------------------------------------------------------
* Need not be completed by book-entry holders.
** Original Capital Securities may be tendered in whole or in part in denominations of $100,000 and integral
multiples of $1,000 in excess thereof, provided that if any Original Capital Securities are tendered for
exchange in part, the untendered principal amount thereof must be $100,000 or any integral multiple of $1,000
in excess thereof. All Original Capital Securities held shall be deemed tendered unless a lesser number is
specified in this column. See Instruction 4.
======================================================================================================================
</TABLE>
<PAGE>
BOXES BELOW TO BE CHECKED BY ELIGIBLE INSTITUTIONS ONLY
[ ] CHECK HERE IF TENDERED ORIGINAL CAPITAL SECURITIES ARE BEING DELIVERED BY
BOOK-ENTRY TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT
WITH DTC, AND COMPLETE THE FOLLOWING:
Name of Tendering Institution:
--------------------------------------------------
DTC Account Number:
-------------------------------------------------------------
Transaction Code Number:
--------------------------------------------------------
[ ] CHECK HERE AND ENCLOSE A PHOTOCOPY OF THE NOTICE OF GUARANTEED DELIVERY IF
TENDERED ORIGINAL CAPITAL SECURITIES ARE BEING DELIVERED PURSUANT TO A
NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT, AND
COMPLETE THE FOLLOWING:
Name of Registered Holder(s):
-----------------------------------------------
Window Ticket Number (if any):
----------------------------------------------
Date of Execution of Notice of Guaranteed Delivery:
-------------------------
Name of Institution which Guaranteed Delivery:
------------------------------
If Guaranteed Delivery is to be made By Book-Entry Transfer:
----------------
Name of Tendering Institution:
----------------------------------------------
DTC Account Number:
---------------------------------------------------------
Transaction Code Number:
----------------------------------------------------
[ ] CHECK HERE IF YOU ARE A BROKER-DEALER WHO ACQUIRED THE ORIGINAL CAPITAL
SECURITIES FOR YOUR OWN ACCOUNT AS A RESULT OF MARKET MAKING OR OTHER
TRADING ACTIVITIES AND WISH TO RECEIVE TEN ADDITIONAL COPIES OF THE
PROSPECTUS AND TEN COPIES OF ANY AMENDMENTS OR SUPPLEMENTS THERETO.
Name:
---------------------------------------------------------------------------
Address:
------------------------------------------------------------------------
<PAGE>
Ladies and Gentlemen:
The undersigned hereby tenders to TeleBanc Capital Trust I, a
trust formed under the laws of the State of Delaware (the "Trust") and TeleBanc
Financial Corporation, a Delaware corporation (the "Corporation"), the above
described aggregate Liquidation Amount of the Trust's Original Capital
Securities in exchange for a like aggregate Liquidation Amount of the Trust's
Exchange Capital Securities which have been registered under the Securities Act
of 1933, as amended (the "Securities Act"), upon the terms and subject to the
conditions set forth in the Prospectus, receipt of which is hereby acknowledged,
and in this Letter of Transmittal (which, together with the Prospectus,
constitute the "Exchange Offer").
Subject to and effective upon the acceptance for exchange of
all or any portion of the Original Capital Securities tendered herewith in
accordance with the terms and conditions of the Exchange Offer (including, if
the Exchange Offer is extended or amended, the terms and conditions of any such
extension or amendment), the undersigned hereby sells, assigns and transfers to
or upon the order of the Trust all right, title and interest in and to such
Original Capital Securities as are being tendered herewith. The undersigned
hereby irrevocably constitutes and appoints the Exchange Agent as its agent and
attorney-in-fact (with full knowledge that the Exchange Agent is also acting as
agent of the Corporation and the Trust in connection with the Exchange Offer)
with respect to the tendered Original Capital Securities, with full power of
substitution (such power of attorney being deemed to be an irrevocable power
coupled with an interest) subject only to the right of withdrawal described in
the Prospectus, to (i) deliver Certificates for Original Capital Securities to
the Corporation or the Trust together with all accompanying evidences of
transfer and authenticity to, or upon the order of, the Trust, upon receipt by
the Exchange Agent, as the undersigned's agent, of the Exchange Capital
Securities to be issued in exchange for such Original Capital Securities, (ii)
present Certificates for such Original Capital Securities for transfer, and to
transfer the Original Capital Securities on the books of the Trust, and (iii)
receive for the account of the Trust all benefits and otherwise exercise all
rights of beneficial ownership of such Original Capital Securities, all in
accordance with the terms and conditions of the Exchange Offer.
THE UNDERSIGNED HEREBY REPRESENTS AND WARRANTS THAT THE
UNDERSIGNED HAS FULL POWER AND AUTHORITY TO TENDER, EXCHANGE, SELL, ASSIGN AND
TRANSFER THE ORIGINAL CAPITAL SECURITIES TENDERED HEREBY AND THAT, WHEN THE SAME
ARE ACCEPTED FOR EXCHANGE, THE TRUST WILL ACQUIRE GOOD, MARKETABLE AND
UNENCUMBERED TITLE THERETO, FREE AND CLEAR OF ALL LIENS, RESTRICTIONS, CHARGES
AND ENCUMBRANCES, AND THAT THE ORIGINAL CAPITAL SECURITIES TENDERED HEREBY ARE
NOT SUBJECT TO ANY ADVERSE CLAIMS OR PROXIES. THE UNDERSIGNED WILL, UPON
REQUEST, EXECUTE AND DELIVER ANY ADDITIONAL DOCUMENTS DEEMED BY THE TRUST OR THE
EXCHANGE AGENT TO BE NECESSARY OR DESIRABLE TO COMPLETE THE EXCHANGE, ASSIGNMENT
AND TRANSFER OF THE ORIGINAL CAPITAL SECURITIES TENDERED HEREBY, AND THE
UNDERSIGNED WILL COMPLY WITH ITS OBLIGATIONS UNDER THE REGISTRATION AGREEMENT.
THE UNDERSIGNED HAS READ AND AGREES TO ALL OF THE TERMS OF THE EXCHANGE OFFER.
The name(s) and address(es) of the registered Holder(s) of the
Original Capital Securities tendered hereby should be printed in the box
entitled "Description of Original Capital Securities" above, if they are not
already set forth in such box, as they appear on the Certificates representing
such Original Capital Securities or on the records of DTC, as the case may be.
The Certificate number(s) of any such Certificates and the principal amount of
such Original Capital Securities should be specified in such box as indicated
therein.
The undersigned understands that tenders of Original Capital
Securities pursuant to any one of the procedures described in "The Exchange
Offer--Procedures for Tendering Original Capital Securities" in the Prospectus
and in the instructions attached hereto will, upon the Corporation's and the
Trust's acceptance for exchange of such tendered Original Capital Securities,
constitute a binding agreement between the undersigned, the Corporation and the
Trust upon the terms and subject to the conditions of the Exchange Offer.
<PAGE>
The undersigned recognizes that, under certain circumstances
set forth in the Prospectus, the Corporation and the Trust may not be required
to accept for exchange any of the Original Capital Securities tendered hereby.
Unless otherwise indicated in the box entitled "Special
Issuance Instructions" below, the undersigned hereby directs that the Exchange
Capital Securities be issued in the name(s) of the undersigned or credited to
the account at DTC indicated above in the case of a book-entry transfer of
Original Capital Securities.
If any Original Capital Securities are submitted for more
Original Capital Securities than are tendered or accepted for exchange, then,
without expense to the tendering Holder, promptly following the expiration or
termination of the Exchange Offer, such non-exchanged or non-tendered Original
Capital Securities will, if evidenced by Certificates, be returned, or will, if
evidenced by book-entry, be credited to the account at DTC indicated above. If
applicable, substitute Certificates representing non-exchanged Original Capital
Securities will be issued to the undersigned or non-exchanges Original Capital
Securities will be credited to the account at DTC indicated above in the case of
a book-entry transfer of Original Capital Securities.
Unless otherwise indicated under "Special Delivery
Instructions," certificates for Original Capital Securities and for Exchange
Capital Securities will be delivered to the undersigned at the address shown
below the undersigned's signature.
BY TENDERING ORIGINAL CAPITAL SECURITIES AND EXECUTING THIS
LETTER OF TRANSMITTAL, THE UNDERSIGNED HEREBY REPRESENTS AND AGREES THAT (1) THE
UNDERSIGNED IS NOT AN "AFFILIATE" (AS DEFINED IN RULE 144 UNDER THE SECURITIES
ACT) OF THE CORPORATION OR THE TRUST, (2) ANY EXCHANGE CAPITAL SECURITIES TO BE
RECEIVED BY THE UNDERSIGNED ARE BEING ACQUIRED IN THE ORDINARY COURSE OF ITS
BUSINESS, (3) THE UNDERSIGNED HAS NO ARRANGEMENT OR UNDERSTANDING WITH ANY
PERSON TO PARTICIPATE IN A DISTRIBUTION (WITHIN THE MEANING OF THE SECURITIES
ACT) OF EXCHANGE CAPITAL SECURITIES TO BE RECEIVED IN THE EXCHANGE OFFER, AND
(4) IF THE UNDERSIGNED IS NOT A BROKER-DEALER, THE UNDERSIGNED IS NOT ENGAGED
IN, AND DOES NOT INTEND TO ENGAGE IN, A DISTRIBUTION (WITHIN THE MEANING OF THE
SECURITIES ACT) OF SUCH EXCHANGE CAPITAL SECURITIES. BY TENDERING ORIGINAL
CAPITAL SECURITIES PURSUANT TO THE EXCHANGE OFFER AND EXECUTING THIS LETTER OF
TRANSMITTAL, A HOLDER OF ORIGINAL CAPITAL SECURITIES THAT IS A BROKER-DEALER
REPRESENTS AND AGREES, CONSISTENT WITH CERTAIN INTERPRETIVE LETTERS ISSUED BY
THE STAFF OF THE DIVISION OF CORPORATION FINANCE OF THE SECURITIES AND EXCHANGE
COMMISSION TO THIRD PARTIES, THAT (1) SUCH ORIGINAL CAPITAL SECURITIES ARE HELD
BY SUCH BROKER-DEALER ONLY AS A NOMINEE, OR (2) SUCH ORIGINAL CAPITAL SECURITIES
WERE ACQUIRED BY IT FOR ITS OWN ACCOUNT AS A RESULT OF MARKET-MAKING ACTIVITIES
OR OTHER TRADING ACTIVITIES AND IT WILL DELIVER THE PROSPECTUS MEETING THE
REQUIREMENTS OF THE SECURITIES ACT IN CONNECTION WITH ANY RESALE OF SUCH
EXCHANGE CAPITAL SECURITIES (PROVIDED THAT, BY SO ACKNOWLEDGING AND BY
DELIVERING THE PROSPECTUS, IT WILL NOT BE DEEMED TO ADMIT THAT IT IS AN
"UNDERWRITER" WITHIN THE MEANING OF THE SECURITIES ACT).
THE CORPORATION AND THE TRUST HAVE AGREED THAT, SUBJECT TO THE
PROVISIONS OF THE REGISTRATION AGREEMENT, THE PROSPECTUS MAY BE USED IN
CONNECTION WITH RESALES OF EXCHANGE CAPITAL SECURITIES RECEIVED IN EXCHANGE FOR
ORIGINAL CAPITAL SECURITIES BY A BROKER-DEALER WHO ACQUIRED ORIGINAL CAPITAL
SECURITIES FOR ITS OWN ACCOUNT AS A RESULT OF MARKET-MAKING OR OTHER TRADING
ACTIVITIES (A "PARTICIPATING BROKER-DEALER") FOR A PERIOD ENDING 180 DAYS AFTER
THE EXPIRATION DATE (SUBJECT TO EXTENSION UNDER CERTAIN LIMITED CIRCUMSTANCES
DESCRIBED IN THE PROSPECTUS) OR, IF EARLIER, WHEN ALL SUCH EXCHANGE CAPITAL
SECURITIES HAVE BEEN DISPOSED OF
<PAGE>
BY SUCH PARTICIPATING BROKER-DEALER. IN THAT REGARD, EACH PARTICIPATING
BROKER-DEALER, BY TENDERING SUCH ORIGINAL CAPITAL SECURITIES AND EXECUTING THIS
LETTER OF TRANSMITTAL OR BY TENDERING THROUGH BOOK-ENTRY TRANSFER IN LIEU
THEREOF, AGREES THAT, UPON RECEIPT OF NOTICE FROM THE CORPORATION OR THE TRUST
OF THE OCCURRENCE OF ANY EVENT OR THE DISCOVERY OF ANY FACT WHICH MAKES ANY
STATEMENT CONTAINED OR INCORPORATED BY REFERENCE IN THE PROSPECTUS UNTRUE IN ANY
MATERIAL RESPECT OR WHICH CAUSES THE PROSPECTUS TO OMIT TO STATE A MATERIAL FACT
NECESSARY IN ORDER TO MAKE THE STATEMENTS CONTAINED OR INCORPORATED BY REFERENCE
THEREIN, IN LIGHT OF THE CIRCUMSTANCES UNDER WHICH THEY WERE MADE, NOT
MISLEADING OR OF THE OCCURRENCE OF CERTAIN OTHER EVENTS SPECIFIED IN THE
REGISTRATION AGREEMENT, SUCH PARTICIPATING BROKER-DEALER WILL SUSPEND THE SALE
OF EXCHANGE CAPITAL SECURITIES PURSUANT TO THE PROSPECTUS UNTIL (1) THE
CORPORATION AND THE TRUST HAVE AMENDED OR SUPPLEMENTED THE PROSPECTUS TO CORRECT
SUCH MISSTATEMENT OR OMISSION AND HAVE FURNISHED COPIES OF THE AMENDED OR
SUPPLEMENTED PROSPECTUS TO THE PARTICIPATING BROKER-DEALER OR (2) THE
CORPORATION OR THE TRUST HAS GIVEN NOTICE THAT THE SALE OF THE EXCHANGE CAPITAL
SECURITIES MAY BE RESUMED, AS THE CASE MAY BE. IF THE CORPORATION OR THE TRUST
GIVES SUCH NOTICE TO SUSPEND THE SALE OF THE EXCHANGE CAPITAL SECURITIES, THEY
SHALL EXTEND THE 180-DAY PERIOD REFERRED TO ABOVE DURING WHICH PARTICIPATING
BROKER-DEALERS ARE ENTITLED TO USE THE PROSPECTUS IN CONNECTION WITH THE RESALE
OF EXCHANGE CAPITAL SECURITIES BY THE NUMBER OF DAYS DURING THE PERIOD FROM AND
INCLUDING THE DATE OF THE GIVING OF SUCH NOTICE TO AND INCLUDING THE DATE ON
WHICH (1) PARTICIPATING BROKER-DEALERS SHALL HAVE RECEIVED COPIES OF THE
SUPPLEMENTED OR AMENDED PROSPECTUS NECESSARY TO PERMIT RESALES OF THE EXCHANGE
CAPITAL SECURITIES OR (2) THE CORPORATION OR THE TRUST HAS GIVEN NOTICE THAT THE
SALE OF EXCHANGE CAPITAL SECURITIES MAY BE RESUMED, AS THE CASE MAY BE.
AS A RESULT, A PARTICIPATING BROKER-DEALER WHO INTENDS TO USE
THE PROSPECTUS IN CONNECTION WITH RESALES OF EXCHANGE CAPITAL SECURITIES
RECEIVED IN EXCHANGE FOR ORIGINAL CAPITAL SECURITIES PURSUANT TO THE EXCHANGE
OFFER MUST NOTIFY THE CORPORATION AND THE TRUST, OR CAUSE THE CORPORATION AND
THE TRUST TO BE NOTIFIED, ON OR PRIOR TO THE EXPIRATION DATE, THAT IT IS A
PARTICIPATING BROKER-DEALER. SUCH NOTICE MAY BE GIVEN IN THE SPACE PROVIDED
ABOVE OR MAY BE DELIVERED TO THE EXCHANGE AGENT AT THE ADDRESS SET FORTH IN THE
PROSPECTUS UNDER "THE EXCHANGE OFFER--EXCHANGE AGENT."
Holders whose Original Capital Securities are accepted for
exchange will not receive Distributions on such Original Capital Securities and
the undersigned hereby waives the right to receive any Distributions on such
Original Capital Securities accumulated from and including June 9, 1997.
Accordingly, holders of Exchange Capital Securities (as of the record date) for
the payment of Distributions on December 1, 1997 will be entitled to
Distributions accumulated from and including June 9, 1997.
The undersigned will, upon request, execute and deliver any
additional documents deemed by the Corporation or the Trust to be necessary or
desirable to complete the sale, assignment and transfer of the Original Capital
Securities tendered hereby. All authority herein conferred or agreed to be
conferred in this Letter of Transmittal shall survive the death or incapacity of
the undersigned and any obligation of the undersigned hereunder shall be binding
upon the heirs, executors, administrators, personal representatives, trustees in
bankruptcy, legal representatives, successors and assigns of the undersigned.
Except as stated in the Prospectus, this tender is irrevocable.
THE UNDERSIGNED, BY COMPLETING THE BOX ENTITLED "DESCRIPTION
OF ORIGINAL CAPITAL SECURITIES" ABOVE AND SIGNING THIS LETTER, WILL BE
<PAGE>
DEEMED TO HAVE TENDERED THE ORIGINAL CAPITAL SECURITIES AS SET FORTH IN SUCH
BOX.
<PAGE>
HOLDER(S) SIGN HERE
(SEE ATTACHED INSTRUCTIONS 2, 5 AND 6)
(PLEASE COMPLETE SUBSTITUTE FORM W-9 ON THE LAST PAGE)
(NOTE: SIGNATURE(S) MUST BE GUARANTEED IF REQUIRED BY INSTRUCTION 2)
Must be signed by registered Holder(s) exactly as name(s)
appear(s) on Certificate(s) for the Original Capital Securities hereby tendered
or on the records of DTC, as the case may be, or by any person(s) authorized to
become the registered Holder(s) by endorsements and documents transmitted
herewith (including such opinions of counsel, certifications and other
information as may be required by the Trust to comply with the restrictions on
transfer applicable to the Original Capital Securities). If signature is by an
attorney-in-fact, executor, administrator, trustee, guardian, officer of a
corporation or another acting in a fiduciary capacity or representative
capacity, set forth the signatory's full title. See Instruction 5.
- --------------------------------------------------------------------------------
(SIGNATURE(S) OF HOLDER(S))
Date: , 1997
------------------------------------------
Name(s):
------------------------------------------------------------------------
(PLEASE PRINT)
Capacity (full title):
----------------------------------------------------------
Address:
------------------------------------------------------------------------
(INCLUDE ZIP CODE)
Area Code and Telephone Number:
-------------------------------------------------
Tax Identification or Social Security Number(s):
--------------------------------
<PAGE>
GUARANTEE OF SIGNATURE(S)
(SEE ATTACHED INSTRUCTIONS 2 AND 5)
- --------------------------------------------------------------------------------
(AUTHORIZED SIGNATURE)
Date: , 1997
------------------------------------------
Name of Firm:
-------------------------------------------------------------------
(PLEASE PRINT)
Capacity (full title):
----------------------------------------------------------
Address:
------------------------------------------------------------------------
(INCLUDE ZIP CODE)
Area Code and Telephone Number:
-------------------------------------------------
<PAGE>
SPECIAL ISSUANCE INSTRUCTIONS
(SEE ATTACHED INSTRUCTIONS 1, 5 AND 6)
To be completed ONLY if certificates for Exchange Capital
Securities or non-tendered or non-exchanged Original Capital Securities are to
be issued in the name of someone other than the registered Holder(s) of the
Original Capital Securities whose name(s) appear(s) above.
Issue:
[ ] Non-tendered or non-exchanged Original Capital Securities to:
[ ] Exchange Capital Securities to:
Name(s):
------------------------------------------------------------------------
Address:
------------------------------------------------------------------------
(INCLUDE ZIP CODE)
Area Code and
Telephone Number:
---------------------------------------------------------------
Tax Identification or Social Security Number(s):
--------------------------------
<PAGE>
SPECIAL DELIVERY INSTRUCTIONS
(SEE ATTACHED INSTRUCTIONS 1, 5 AND 6)
To be completed ONLY if certificates for Exchange Capital
Securities or non-tendered or non-exchanged Original Capital Securities are to
be sent to someone other than the registered Holder(s) of the Original Capital
Securities whose name(s) appear(s) above, or such registered Holder(s) at an
address other than that shown above.
Mail:
[ ] Non-tendered or non-exchanged Original Capital Securities to:
[ ] Exchange Capital Securities to:
Name(s):
------------------------------------------------------------------------
Address:
------------------------------------------------------------------------
(INCLUDE ZIP CODE)
Area Code and
Telephone Number:
---------------------------------------------------------------
Tax Identification or Social Security Number(s):
--------------------------------
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER
1. BOOK-ENTRY TRANSFER; DELIVERY OF LETTER OF TRANSMITTAL AND
CERTIFICATES; GUARANTEED DELIVERY PROCEDURES. To tender in the Exchange Offer,
Holders must tender by (a) forwarding Certificates herewith or (b) book-entry
transfer pursuant to the procedures set forth in "The Exchange Offer-Procedures
for Tendering Original Capital Securities" in the Prospectus. Holders who are
DTC Participants tendering by book-entry transfer must execute such tender
through DTC's ATOP system. A Holder using ATOP should transmit its acceptance to
DTC on or prior to the Expiration Date. DTC will verify such acceptance, execute
a book-entry transfer of the tendered Original Capital Securities into the
Exchange Agent's account at DTC and then send to the Exchange Agent a book-entry
confirmation, including an Agent's Message confirming that DTC has received an
express acknowledgment from such Holder that such Holder has received and agrees
to be bound by this Letter of Transmittal and that the Trust and the Corporation
may enforce this Letter of Transmittal against such Holder. The book-entry
confirmation must be received by the Exchange Agent in order for the tender
relating thereto to be effective. Book-entry transfer to DTC in accordance with
DTC's procedure does not constitute delivery of the book-entry confirmation to
the Exchange Agent.
IF THE TENDER IS NOT MADE THROUGH ATOP, CERTIFICATES, AS WELL
AS THIS LETTER OF TRANSMITTAL (OR FACSIMILE THEREOF), PROPERLY COMPLETED AND
DULY EXECUTED, WITH ANY REQUIRED SIGNATURE GUARANTEES, AND ANY OTHER DOCUMENTS
REQUIRED BY THIS LETTER OF TRANSMITTAL, MUST BE RECEIVED BY THE EXCHANGE AGENT
AT ITS ADDRESS SET FORTH HEREIN ON OR PRIOR TO THE EXPIRATION DATE IN ORDER FOR
SUCH TENDER TO BE EFFECTIVE.
Original Capital Securities may be tendered in whole or in
part in the principal amount of $100,000 (100 Capital Securities) and integral
multiples of $1,000 in excess thereof, provided that, if any Original Capital
Securities are tendered for exchange in part, the untendered principal amount
thereof must be $100,000 (100 Capital Securities) or any integral multiple of
$1,000 in excess thereof.
Holders who wish to tender their Original Capital Securities
and (i) whose Original Capital Securities are not immediately available or (ii)
who cannot deliver their Original Capital Securities, this Letter of Transmittal
and all other required documents to the Exchange Agent on or prior to the
Expiration Date or (iii) who cannot complete the procedures for delivery by
book-entry transfer on a timely basis, may tender their Original Capital
Securities by properly completing and duly executing a notice to the Exchange
Agent guaranteeing delivery to the Exchange Agent of either certificates
representing the Original Capital Securities or a book-entry confirmation in
compliance with the requirements set forth in the Prospectus (the "Notice of
Guaranteed Delivery"), pursuant to the guaranteed delivery procedures set forth
in the Prospectus under "The Exchange Offer--Procedures for Tendering Original
Capital Securities--Guaranteed Delivery." Pursuant to such procedures: (i) such
tender must be made by or through an Eligible Institution (as defined below);
(ii) a properly completed and duly executed Notice of Guaranteed Delivery,
substantially in the form accompanying this Letter of Transmittal, must be
received by the Exchange Agent on or prior to the Expiration Date; and (iii) (a)
a book-entry confirmation or (b) the certificates representing all tendered
Original Capital Securities, in proper form for transfer, together with a
properly completed and duly executed Letter of Transmittal (or facsimile
thereof), with any required signature guarantees and any other documents
required by this Letter of Transmittal, must be received by the Exchange Agent
within three New York Stock Exchange trading days after the date of execution of
such Notice of Guaranteed Delivery, all as provided in the Prospectus under "The
Exchange Offer--Procedures for Tendering Original Capital Securities--Guaranteed
Delivery".
A Notice of Guaranteed Delivery may be delivered by hand or
transmitted by facsimile or mail to the Exchange Agent, and must include a
guarantee by an Eligible Institution in the form set forth in such Notice. For
Original Capital Securities to be properly tendered pursuant to the guaranteed
delivery procedure, the Exchange Agent must receive a Notice of Guaranteed
Delivery on or prior to the Expiration Date. As used herein and in the
Prospectus, "Eligible
<PAGE>
Institution" means a firm or other entity identified in Rule 17Ad-15 under the
Exchange Act as "an eligible guarantor institution," including (as such terms
are defined therein) (i) a bank; (ii) a broker, dealer, municipal securities
broker or dealer or government securities broker or dealer; (iii) a credit
union; (iv) a national securities exchange, registered securities association or
clearing agency; or (v) a savings association that is a participant in a
Securities Transfer Association.
THE METHOD OF DELIVERY OF THE BOOK-ENTRY CONFIRMATION OR
CERTIFICATES, THIS LETTER OF TRANSMITTAL, AND ALL OTHER REQUIRED DOCUMENTS IS AT
THE OPTION AND SOLE RISK OF THE TENDERING HOLDER AND THE DELIVERY WILL BE DEEMED
MADE ONLY WHEN ACTUALLY RECEIVED BY THE EXCHANGE AGENT. IF DELIVERY IS BY MAIL,
REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED, OR OVERNIGHT
DELIVERY SERVICE IS RECOMMENDED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED
TO ENSURE TIMELY DELIVERY.
Neither the Corporation nor the Trust will accept any
alternative, conditional or contingent tenders. Each tendering Holder, by
book-entry transfer through ATOP or execution of a Letter of Transmittal (or
facsimile thereof), waives any right to receive any notice of the acceptance of
such tender.
2. GUARANTEE OF SIGNATURES. No signature guarantee on this
Letter of Transmittal is required if:
(i) this Letter of Transmittal is signed by the registered
Holder(s) of Original Capital Securities tendered herewith,
unless such Holder(s) has completed either the box entitled
"Special Issuance Instructions" or the box entitled "Special
Delivery Instructions" above, or
(ii) such Original Capital Securities are tendered for the account
of a firm that is an Eligible Institution.
In all other cases, an Eligible Institution must guarantee the
signature(s) on this Letter of Transmittal. See Instruction 5.
3. INADEQUATE SPACE. If the space provided in the box
captioned "Description of Original Capital Securities" is inadequate, the
Certificate number(s) and/or the principal amount of Original Capital Securities
and any other required information should be listed on a separate signed
schedule which is attached to this Letter of Transmittal.
4. PARTIAL TENDERS AND WITHDRAWAL RIGHTS. Tenders of Original
Capital Securities will be accepted only in the principal amount of $100,000
(100 Capital Securities) and integral multiples of $1,000 in excess thereof,
provided that if any Original Capital Securities are tendered for exchange in
part, the untendered principal amount thereof must be $100,000 (100 Capital
Securities) or any integral multiple of $1,000 in excess thereof. If less than
all the Original Capital Securities are to be tendered, fill in the principal
amount of Original Capital Securities that are to be tendered in the box
entitled "Principal Amount of Original Capital Securities Tendered." If
applicable, new Certificate(s) for the Original Capital Securities that were not
tendered will be sent to the address designated herein by such Holder promptly
after the Expiration Date. All Original Capital Securities represented by
Certificates delivered to the Exchange Agent will be deemed to have been
tendered unless otherwise indicated.
Except as otherwise provided herein, tenders of Original
Capital Securities may be withdrawn at any time on or prior to the Expiration
Date. In order for a withdrawal to be effective on or prior to such date, a
written or facsimile transmission of such notice of withdrawal must be timely
received by the Exchange Agent at one of its addresses set forth above or in the
Prospectus on or prior to such date. Any such notice of withdrawal must specify
the name of the person who tendered the Original Capital Securities to be
withdrawn, the aggregate principal amount of Original Capital Securities to be
withdrawn, and, if any Certificates for Original Capital Securities have been
<PAGE>
tendered, the name of the registered Holder of the Original Capital Securities
as set forth on any such Certificates, if different from that of the person who
tendered such Original Capital Securities. If Certificates for the Original
Capital Securities have been delivered or otherwise identified to the Exchange
Agent, then prior to the physical release of such Certificates, the tendering
Holder must submit the serial numbers shown on the particular Certificates to be
withdrawn and the signature on the notice of withdrawal must be guaranteed by an
Eligible Institution, except in the case of Original Capital Securities tendered
for the account of an Eligible Institution. If Original Capital Securities have
been tendered pursuant to the procedures for book-entry transfer set forth in
the Prospectus under "The Exchange Offer--Procedures for Tendering Original
Capital Securities," the notice of withdrawal must specify the name and number
of the account at DTC to be credited with the withdrawal of Original Capital
Securities. Withdrawals of tenders of Original Capital Securities may not be
rescinded. Original Capital Securities properly withdrawn will not be deemed
validly tendered for purposes of the Exchange Offer, but may be retendered at
any subsequent time on or prior to the Expiration Date by following any of the
procedures described herein.
All questions as to the validity, form and eligibility
(including time of receipt) of such withdrawal notices will be determined by the
Corporation and the Trust, in their sole discretion, whose determination shall
be final and binding on all parties. Neither the Corporation, the Trust, any
affiliates or assigns of the Corporation or the Trust, the Exchange Agent nor
any other person shall be under any duty to give any notification of any
irregularities in any notice of withdrawal or incur any liability for failure to
give any such notification. Any Original Capital Securities which have been
tendered but which are withdrawn will be returned or transferred by book-entry,
as the case may be, to the Holder thereof without cost to such Holder promptly
after withdrawal.
5. SIGNATURES ON LETTER OF TRANSMITTAL, ASSIGNMENTS AND
ENDORSEMENTS. If this Letter of Transmittal is signed by the registered
Holder(s) of the Original Capital Securities tendered hereby, the signature(s)
must correspond exactly with the name(s) as written on the face of the
Certificate(s) for such Original Capital Securities, without alteration,
enlargement or any change whatsoever, or as recorded in DTC's book-entry
transfer facility system, as the case may be.
If any Certificates tendered hereby are owned of record by two
or more joint owners, all such owners must sign this Letter of Transmittal.
If any tendered Original Capital Securities are registered in
different names on several Certificates, it will be necessary to complete, sign
and submit as many separate Letters of Transmittal as there are different
registrations of Certificates. If any tendered Original Capital Securities are
registered in different names in several book-entry accounts, proper procedures
for book-entry transfer must be followed for each account.
If this Letter of Transmittal or any Certificates or bond
powers are signed by trustees, executors, administrators, guardians,
attorneys-in-fact, officers of corporations or others acting in a fiduciary or
representative capacity, such persons should so indicate when signing and must
submit proper evidence satisfactory to the Corporation and the Trust, in their
sole discretion, of each such person's authority so to act.
When this Letter of Transmittal is signed by the registered
Holder(s) of the Original Capital Securities listed and transmitted hereby, or
book-entry transfer is effectuated by such Holder(s), no endorsement(s) of
Certificate(s) or separate bond power(s) are required except if Exchange Capital
Securities are to be issued in the name of a person other than the registered
Holder(s). If such exception applies, signature(s) on such Certificate(s) or
bond power(s) must be guaranteed by an Eligible Institution.
If this Letter of Transmittal is signed by a person other than
the registered Holder(s) of the Original Capital Securities listed, the
Certificate(s) must be endorsed or accompanied by appropriate bond powers,
signed exactly as the name(s) of the registered Holder(s) appear(s) on the
Certificates, and also must be accompanied by such opinions of counsel,
certifications and other information as the Corporation or the Trust may require
in accordance with the restrictions on
<PAGE>
transfer applicable to the Original Capital Securities. In such event,
signatures on such Certificates or bond powers must be guaranteed by an Eligible
Institution.
6. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS. If Exchange
Capital Securities are to be issued in the name of a person other than the
signer of this Letter of Transmittal, or if Exchange Capital Securities are to
be sent to someone other than the signer of this Letter of Transmittal or to an
address other than that shown above, the appropriate boxes on this Letter of
Transmittal should be completed. Original Capital Securities not exchanged will
be returned, if evidenced by Certificates, by mail or, if tendered by book-entry
transfer, by crediting the account at DTC indicated above in Instruction 4.
7. IRREGULARITIES. The Corporation and the Trust will
determine, in their sole discretion, all questions as to the form of documents,
validity, eligibility (including time of receipt) and acceptance for exchange of
any tender of Original Capital Securities, which determination shall be final
and binding on all parties. The Corporation and the Trust reserve the absolute
right to reject any and all tenders determined by either of them not to be in
proper form or the acceptance of which, or exchange for which, may in the view
of counsel to the Corporation and the Trust be unlawful. The Corporation and the
Trust also reserve the absolute right, subject to applicable law, to waive any
of the conditions of the Exchange Offer set forth in the Prospectus under "The
Exchange Offer--Conditions to the Exchange Offer" or any conditions or
irregularity in any tender of Original Capital Securities of any particular
Holder whether or not similar conditions or irregularities are waived in the
case of other Holders. The Corporation's and the Trust's interpretation of the
terms and conditions of the Exchange Offer (including this Letter of Transmittal
and the instructions hereto) will be final and binding. No tender of Original
Capital Securities will be deemed to have been validly made until all
irregularities with respect to such tender have been cured or waived. The
Corporation, the Trust, any affiliates or assigns of the Corporation, the Trust,
the Exchange Agent, or any other person shall not be under any duty to give
notification of any irregularities in tenders or incur any liability for failure
to give such notification.
8. QUESTIONS, REQUESTS FOR ASSISTANCE AND ADDITIONAL COPIES.
Questions and requests for assistance may be directed to the Exchange Agent at
its address and telephone number set forth on the front cover of this Letter of
Transmittal. Additional copies of the Prospectus, the Notice of Guaranteed
Delivery and this Letter of Transmittal may be obtained from the Exchange Agent
or from your broker, dealer, commercial bank, trust company or other nominee.
9. 31% BACKUP WITHHOLDING; SUBSTITUTE FORM W-9. Under U.S.
Federal income tax law, a Holder whose tendered Original Capital Securities are
accepted for exchange is required to provide the Exchange Agent with such
Holder's correct taxpayer identification number ("TIN") on Substitute Form W-9
below. If the Exchange Agent is not provided with the correct TIN, the Internal
Revenue Service (the "IRS") may subject the Holder or other payee to a $50
penalty. In addition, payments to such Holders or other payees with respect to
Original Capital Securities exchanged pursuant to the Exchange Offer may be
subject to 31% backup withholding.
The box in Part 2 of the Substitute Form W-9 may be checked if
the tendering Holder has not been issued a TIN and has applied for a TIN or
intends to apply for a TIN in the near future. If the box in Part 2 is checked,
the Holder or other payee must also complete the Certificate of Awaiting
Taxpayer Identification Number below in order to avoid backup withholding.
Notwithstanding that the box in Part 2 is checked and the Certificate of
Awaiting Taxpayer Identification Number is completed, the Exchange Agent will
withhold 31% of all payments made prior to the time a properly certified TIN is
provided to the Exchange Agent. The Exchange Agent will retain such amounts
withheld during the 60-day period following the date of the Substitute Form W-9.
If the Holder furnishes the Exchange Agent with its TIN within 60 days after the
date of the Substitute Form W-9, the amounts retained during the 60-day period
will be remitted to the Holder and no further amounts shall be retained or
withheld from payments made to the Holder thereafter. If, however, the Holder
has not provided the Exchange Agent with its TIN within such 60-day period,
amounts withheld will be remitted to the IRS as backup withholding. In addition,
<PAGE>
31% of all payments made thereafter will be withheld and remitted to the IRS
until a correct TIN is provided.
The Holder is required to give the Exchange Agent the TIN
(e.g., social security number or employer identification number) of the
registered owner of the Original Capital Securities or of the last transferee
appearing on the transfers attached to, or endorsed on, the Original Capital
Securities. If the Original Capital Securities are registered in more than one
name or are not in the name of the actual owner, consult the enclosed
"Guidelines for Certification of Taxpayer Identification Number on Substitute
Form W-9" for additional guidance on which number to report.
Certain Holders (including, among others, corporations,
financial institutions and certain foreign persons) may not be subject to these
backup withholding and reporting requirements. Such Holders should nevertheless
complete the attached Substitute Form W-9 below, and write "exempt" on the face
thereof, to avoid possible erroneous backup withholding. A foreign person may
qualify as an exempt recipient by submitting a properly completed IRS Form W-8,
signed under penalties of perjury, attesting to that holder's exempt status.
Please consult the enclosed "Guidelines for Certification of Taxpayer
Identification Number on Substitute Form W-9" for additional guidance on which
Holders are exempt from backup withholding.
Backup withholding is not an additional U.S. Federal income
tax. Rather, the U.S. Federal income tax liability of a person subject to backup
withholding will be reduced by the amount of tax withheld. If withholding
results in an overpayment of taxes, a refund may be obtained.
10. WAIVER OF CONDITIONS. The Corporation and the Trust
reserve the absolute right to waive satisfaction of any or all conditions
enumerated in the Prospectus.
11. NO CONDITIONAL TENDERS. No alternative, conditional or
contingent tenders will be accepted. All tendering Holders, by execution of this
Letter of Transmittal, shall waive any right to receive notice of the acceptance
of Original Capital Securities for exchange.
Neither the Corporation, the Trust, the Exchange Agent nor any
other person is obligated to give notice of any defect or irregularity with
respect to any tender of Original Capital Securities nor shall any of them incur
any liability for failure to give any such notice.
12. LOST, DESTROYED OR STOLEN CERTIFICATES. If any
Certificate(s) representing Original Capital Securities have been lost,
destroyed or stolen, the Holder should promptly notify the Exchange Agent. The
Holder will then be instructed as to the steps that must be taken in order to
replace the Certificate(s). This Letter of Transmittal and related documents
cannot be processed until the procedures for replacing lost, destroyed or stolen
Certificate(s) have been followed.
13. SECURITY TRANSFER TAXES. Holders who tender their Original
Capital Securities for exchange will not be obligated to pay any transfer taxes
in connection therewith. If, however, Exchange Capital Securities are to be
delivered to, or are to be issued in the name of, any person other than the
registered Holder of the Original Capital Securities tendered, or if a transfer
tax is imposed for any reason other than the exchange of Original Capital
Securities in connection with the Exchange Offer, then the amount of any such
transfer tax (whether imposed on the registered holder or any other persons)
will be payable by the tendering Holder. If satisfactory evidence of payment of
such taxes or exemption therefrom is not submitted with this Letter of
Transmittal, the amount of such transfer taxes will be billed directly to such
tendering Holder.
IMPORTANT: BOOK-ENTRY CONFIRMATION OR THIS LETTER OF
TRANSMITTAL (OR FACSIMILE THEREOF) AND ALL OTHER
REQUIRED DOCUMENTS MUST BE RECEIVED BY THE
EXCHANGE AGENT ON OR PRIOR TO THE EXPIRATION DATE.
<PAGE>
TO BE COMPLETED BY ALL TENDERING SECURITYHOLDERS
(SEE INSTRUCTION 9)
<TABLE>
<CAPTION>
PAYOR'S NAME: BANKERS TRUST COMPANY
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C>
SUBSTITUTE PART 1 - PLEASE PROVIDE YOUR TIN IN THE
FORM W-9 BOX AT RIGHT AND CERTIFY BY SIGNING AND
DEPARTMENT OF THE TREASURY DATING BELOW: Social Security Number or
INTERNAL REVENUE SERVICE Taxpayer Identification Number
PAYER'S REQUEST FOR TAXPAYER
IDENTIFICATION NUMBER ("TIN")
AND CERTIFICATION
--------------------------------------------------------------------------------------------
PART 2 - TIN Applied For [ ]
--------------------------------------------------------------------------------------------
CERTIFICATION-UNDER THE PENALTIES OF PERJURY, I CERTIFY THAT:
(1) The number shown on this form is my
correct taxpayer identification number
(or I am waiting for a number to be
issued to me).
(2) I am not subject to backup withholding
either because (i) I am exempt from
backup withholding, (ii) I have not
been notified by the Internal Revenue
Service ("IRS") that I am subject to
backup withholding as a result of a
failure to report all interest or
dividends, or (iii) the IRS has
notified me that I am no longer
subject to backup withholding, and
(3) any other information provided on this
form is true and correct.
Signature: Date:
----------------------------------- -------------------------
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
You must cross out item (iii) in Part (2) above if you have been notified by the IRS that you are subject to backup
withholding because of underreporting interest or dividends on your tax return
and you have not been notified by the IRS that you are no longer subject to
backup withholding.
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY IN CERTAIN CIRCUMSTANCES
RESULT IN BACKUP WITHHOLDING OF 31% OF ANY AMOUNTS PAID TO YOU
PURSUANT TO THE EXCHANGE OFFER. PLEASE REVIEW THE ENCLOSED GUIDELINES
FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM
W-9 FOR ADDITIONAL DETAILS.
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX
IN PART 2 OF THE SUBSTITUTE FORM W-9
- --------------------------------------------------------------------------------
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number has
not been issued to me, and either (1) I have mailed or delivered an application
to receive a taxpayer identification number to the appropriate Internal Revenue
Service Center or Social Security Administration Office or (2) I intend to mail
or deliver an application in the near future. I understand that if I do not
provide a taxpayer identification number by the time of payment, 31% of all
payments made to me on account of the Exchange Capital Securities shall be
retained until I provide a taxpayer identification number to the Exchange Agent
and that, if I do not provide my taxpayer identification number within 60 days,
such retained amounts shall be remitted to the Internal Revenue Service as
backup withholding and 31% of all reportable payments made to me thereafter will
be withheld and remitted to the Internal Revenue Service until I provide a
taxpayer identification number.
- ------------------------------- -----------------------------
Signature(s) Date
- --------------------------------------------------------------------------------
EXHIBIT 99.2
NOTICE OF GUARANTEED DELIVERY
FOR TENDER OF
11.00% ORIGINAL CAPITAL SECURITIES
(LIQUIDATION AMOUNT $1,000 PER CAPITAL SECURITY)
OF
TELEBANC CAPITAL TRUST I
UNCONDITIONALLY GUARANTEED BY
TELEBANC FINANCIAL CORPORATION
This Notice of Guaranteed Delivery, or one substantially
equivalent to this form, must be used to accept the Exchange Offer (as defined
below) if (i) certificates for the Trust's (as defined below) 11.00% Original
Capital Securities (the "Original Capital Securities") are not immediately
available, (ii) Original Capital Securities, the Letter of Transmittal and all
other required documents cannot be delivered to Wilmington Trust Company (the
"Exchange Agent") on or prior to the Expiration Date (as defined in the
Prospectus referred to below) or (iii) the procedures for delivery by book-entry
transfer cannot be completed on a timely basis. This Notice of Guaranteed
Delivery may be delivered by hand, overnight courier or mail, or transmitted by
facsimile transmission, to the Exchange Agent. See "The Exchange
Offer--Procedures for Tendering Original Capital Securities" in the Prospectus.
In addition, in order to utilize the guaranteed delivery procedure to tender
Original Capital Securities pursuant to the Exchange Offer, a completed, signed
and dated Letter of Transmittal relating to the Original Capital Securities (or
facsimile thereof) must also be received by the Exchange Agent on or prior to
the Expiration Date. Capitalized terms not defined herein have the meanings
assigned to them in the Prospectus.
The Exchange Agent For The Exchange Offer Is:
Wilmington Trust Company
By Hand, Overnight Delivery, Registered or Certified Mail:
Rodney Square North
1100 North Market Street
Wilmington, DE 19890-0001
Attention: Corporate Trust Department
Confirm by Telephone: (302) 651-1000
Facsimile Transmissions: (302) 651-8882
(ELIGIBLE INSTITUTIONS ONLY)
Delivery of this Notice of Guaranteed Delivery to an address other than
as set forth above or transmission of this Notice of Guaranteed Delivery via
facsimile to a number other than as set forth above will not constitute a valid
delivery.
THIS NOTICE OF GUARANTEED DELIVERY IS NOT TO BE USED TO
GUARANTEE SIGNATURES. IF A SIGNATURE ON A LETTER OF TRANSMITTAL IS REQUIRED TO
BE GUARANTEED BY AN "ELIGIBLE INSTITUTION" UNDER THE INSTRUCTIONS THERETO, SUCH
SIGNATURE GUARANTEE MUST APPEAR IN THE APPLICABLE SPACE PROVIDED IN THE
SIGNATURE BOX ON THE LETTER OF TRANSMITTAL.
<PAGE>
Ladies and Gentlemen:
The undersigned hereby tenders to TeleBanc Capital Trust I, a
Delaware business trust (the "Trust") and to TeleBanc Financial Corporation, a
Delaware Corporation (the "Corporation"), upon the terms and subject to the
conditions set forth in the Prospectus dated November _________, 1997 (as the
same may be amended or supplemented from time to time, the "Prospectus"), and
the related Letter of Transmittal (which together constitute the "Exchange
Offer"), receipt of which is hereby acknowledged, the aggregate principal amount
of Original Capital Securities set forth below pursuant to the guaranteed
delivery procedures set forth in the Prospectus under the caption "The Exchange
Offer--Procedures for Tendering Original Capital Securities."
Aggregate Liquidation Amount:
---------------------------------------------------
Name(s) of Registered Holder(s):
------------------------------------------------
Amount Tendered: $ *
-----------------------------------------------------
Certificate No(s)
(if available):
-----------------------------------------------------------------
Total Liquidation Amount Represented by Original Capital Securities
Certificate(s): $___________
If Original Capital Securities will be tendered by book-entry transfer, provide
the following information:
DTC Account Number:
-------------------------------------------
Date:
---------------------------------------------------------
- --------------------------------
* Must be in denominations of a Liquidation Amount of $1,000 and any integral
multiple thereof, and not less than $100,000 aggregate Liquidation Amount.
<PAGE>
- --------------------------------------------------------------------------------
All authority herein conferred or agreed to be conferred shall
survive the death or incapacity of the undersigned and every obligation of the
undersigned hereunder shall be binding upon the heirs, personal representatives,
successors and assigns of the undersigned.
- --------------------------------------------------------------------------------
PLEASE SIGN HERE:
X
------------------------------------- -----------------------------------
X
------------------------------------- -----------------------------------
Signature(s) of Owner(s) Date
or Authorized Signatory
Area Code and Telephone Number:
-------------------------------------------------
This Notice of Guaranteed Delivery must be signed by the
holder(s) of the Original Capital Securities as their name(s) appear(s) on
certificates for Original Capital Securities or on a security position listing,
or by person(s) authorized to become registered holder(s) by endorsement and
documents transmitted with this Notice of Guaranteed Delivery. If signature is
by a trustee, executor, administrator, guardian, attorney-in-fact, officer or
other person acting in a fiduciary or representative capacity, such person must
set forth his or her full title below.
Please print name(s) and address(es):
Name(s):
--------------------------------------------------------------------
--------------------------------------------------------------------
--------------------------------------------------------------------
Capacity:
--------------------------------------------------------------------
Address(es):
--------------------------------------------------------------------
--------------------------------------------------------------------
--------------------------------------------------------------------
<PAGE>
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a firm or other entity identified in Rule
17Ad-15 under the Securities Exchange Act of 1934, as amended, as an "eligible
guarantor institution," including (as such terms are defined therein): (i) a
bank; (ii) a broker, dealer, municipal securities broker, municipal securities
dealer, government securities broker or government securities dealer; (iii) a
credit union; (iv) a national securities exchange, registered securities
association or clearing agency; or (v) a savings association that is a
participant in a Securities Transfer Association recognized program (each of the
foregoing being referred to as an "Eligible Institution"), hereby guarantees to
deliver to the Exchange Agent, at one of its addresses set forth above, either
the Original Capital Securities tendered hereby in proper form for transfer, or
confirmation of the book-entry transfer of such Original Capital Securities to
the Exchange Agent's account at The Depository Trust Company, pursuant to the
procedures for book-entry transfer set forth in the Prospectus, in either case
together with one or more properly completed and duly executed Letter(s) of
Transmittal (or facsimile thereof) and any other required documents within three
business days after the date of execution of this Notice of Guaranteed Delivery.
The undersigned acknowledges that it must deliver the
Letter(s) of Transmittal and the Original Capital Securities tendered hereby to
the Exchange Agent within the time period set forth above and that failure to do
so could result in a financial loss to the undersigned.
- --------------------------------------- ------------------------------------
Name of Firm Authorized Signature
- --------------------------------------- ------------------------------------
Address Please Type or Print Name
- --------------------------------------- ------------------------------------
Zip Code Title
Area Code and Telephone No. Dated:
-------------------------- -------------------
NOTE: DO NOT SEND CERTIFICATES FOR ORIGINAL CAPITAL SECURITIES WITH THIS FORM.
CERTIFICATES FOR ORIGINAL CAPITAL SECURITIES SHOULD ONLY BE SENT WITH YOUR
LETTER OF TRANSMITTAL.
EXHIBIT 99.3
November __, 1997
Wilmington Trust Company
Corporate Trust Department
Rodney Square North
1100 North Market Street
Wilmington, DE 19890-0001
Ladies and Gentlemen:
TeleBanc Capital Trust I, a trust formed under the laws of the
State of Delaware (the "Trust") proposes to make an offer (the "Exchange Offer")
to exchange any and all of its outstanding 11.00% Capital Securities
(Liquidation Amount $1,000 per Capital Security) (the "Original Capital
Securities") for its 11.00% Exchange Capital Securities (Liquidation Amount
$1,000 per Capital Security) (the "Exchange Capital Securities"). All of the
beneficial interests represented by common securities of the Trust are owned by
TeleBanc Financial Corporation, a Delaware corporation (the "Corporation"). The
terms and conditions of the Exchange Offer as currently contemplated are set
forth in a prospectus, dated November _____, 1997 (as the same may be amended or
supplemented from time to time, the "Prospectus"), to be distributed to all
record holders of the Original Capital Securities. A copy of the Prospectus is
attached hereto as Exhibit A. The Original Capital Securities and the Exchange
Capital Securities are collectively referred to herein as the "Securities."
Capitalized terms used but not defined herein shall have the same meaning given
them in the Prospectus.
A copy of each of the form of the Letter of Transmittal, the
form of the Notice of Guaranteed Delivery, the form of letter to brokers and the
form of letter to clients are attached hereto as Exhibit B.
The Trust hereby appoints Wilmington Trust Company to act as
exchange agent (the "Exchange Agent") in connection with the Exchange Offer.
References hereinafter to "you" shall refer to Wilmington Trust Company.
The Exchange Offer is expected to be commenced by the Trust on
or about November ________, 1997. The Letter of Transmittal accompanying the
Prospectus (or in the case of book entry securities, the ATOP system) is to be
used by the holders of the Original Capital Securities to accept the Exchange
Offer and contains instructions with respect to (a) the delivery of certificates
for Original Capital Securities tendered in connection therewith and (b) the
book-entry transfer of Securities to the Exchange Agent's account.
<PAGE>
The Exchange Offer shall expire at 5:00 p.m., New York City
time, on ____________, 1997 or on such later date or time to which the
Corporation or the Trust may extend the Exchange Offer (the "Expiration Date").
Subject to the terms and conditions set forth in the Prospectus, the Trust
expressly reserves the right to extend the Exchange Offer from time to time by
giving oral (to be confirmed in writing) or written notice to you before 9:00
a.m., New York City time, on the Business Day following the previously scheduled
Expiration Date.
The Trust expressly reserves the right to amend or terminate
the Exchange Offer, and not to accept for exchange any Original Capital
Securities not theretofore accepted for exchange, upon the occurrence of any of
the conditions of the Exchange Offer specified in the Prospectus under the
caption "The Exchange Offer--Conditions to the Exchange Offer." The Trust will
give you prompt oral (confirmed in writing) or written notice of any amendment,
termination or nonacceptance of Original Capital Securities.
In carrying out your duties as Exchange Agent, you are to act
in accordance with the following instructions:
14. You will perform such duties and only such duties as are
specifically set forth in the section of the Prospectus captioned "The Exchange
Offer" or as specifically set forth herein; provided, however, that in no way
will your general duty to act in good faith be discharged by the foregoing.
15. You will establish an account with respect to the Original
Capital Securities at The Depository Trust Company (the "Book-Entry Transfer
Facility") for purposes of the Exchange Offer within two Business Days after the
date of the Prospectus, and any financial institution that is a participant in
the Book-Entry Transfer Facility's system may make book-entry delivery of the
Original Capital Securities by causing the Book-Entry Transfer Facility to
transfer such Original Capital Securities into your account in accordance with
the Book-Entry Transfer Facility's procedure for such transfer.
16. You are to examine each of the Letters of Transmittal and
certificates for Original Capital Securities (or confirmation of book-entry
transfer into your account at the Book-Entry Transfer Facility) and any other
documents delivered or mailed to you by or for holders of the Original Capital
Securities to ascertain whether: (a) the Letters of Transmittal and any such
other documents are duly executed and properly completed in accordance with
instructions set forth therein and (b) the Original Capital Securities have
otherwise been properly tendered. In each case where the Letter of Transmittal
or any other document has been improperly completed or executed or any of the
certificates for Original Capital Securities are not in proper form for transfer
or some other irregularity in connection with the acceptance of the Exchange
Offer exists, you will endeavor to inform such holders of the need for
fulfillment of all requirements and to take any other action as may be necessary
or advisable to cause such irregularity to be corrected.
<PAGE>
17. With the approval of any Administrative Trustee of the
Trust or any person designated in writing by the Corporation (a "Designated
Officer") (such approval, if given orally, to be confirmed in writing) or any
other party designated by any such Administrative Trustee or Designated Officer
in writing, you are authorized to waive any irregularities in connection with
any tender of Original Capital Securities pursuant to the Exchange Offer.
18. Tenders of Original Capital Securities may be made only as
set forth in the Letter of Transmittal and in the section of the Prospectus
captioned "The Exchange Offer--Procedures for Tendering Original Capital
Securities," and Original Capital Securities shall be considered properly
tendered to you only when tendered in accordance with the procedures set forth
therein.
Notwithstanding the provisions of this paragraph 5, Original
Capital Securities that any Administrative Trustee of the Trust or Designated
Officer of the Corporation shall approve as having been properly tendered shall
be considered to be properly tendered. Such approval, if given orally, shall be
confirmed in writing.
19. You shall advise the Trust and the Corporation with
respect to any Original Capital Securities received subsequent to the Expiration
Date and accept their instructions with respect to disposition of such Original
Capital Securities.
20. You shall accept tenders:
(a) in cases where the Original Capital Securities are registered in
two or more names only if signed by all named holders;
(b) in cases where the signing person (as indicated on the Letter of
Transmittal) is acting in a fiduciary or a representative capacity only
when proper evidence of such person's authority so to act is submitted;
and
(c) from persons other than the registered holder of Original Capital
Securities provided that customary transfer requirements, including
satisfaction of any applicable transfer taxes, are fulfilled.
You shall accept partial tenders of Original Capital
Securities where so indicated and as permitted in the Letter of Transmittal and
deliver certificates for Original Capital Securities to the transfer agent for
division and return any untendered Original Capital Securities to the holder (or
such other person as may be designated in the Letter of Transmittal) as promptly
as practicable after expiration or termination of the Exchange Offer.
21. Upon satisfaction or waiver of all of the conditions to
the Exchange Offer, the Trust will notify you (such notice, if given orally, to
be confirmed in writing) of its acceptance, promptly after the Expiration Date,
of all Original Capital Securities properly tendered and you, on behalf of the
Trust, will exchange such Original Capital Securities for Exchange Capital
Securities and
<PAGE>
cause such Original Capital Securities to be canceled. Delivery of Exchange
Capital Securities will be made on behalf of the Trust by you at the rate of
$1,000 principal amount of Exchange Capital Securities for each $1,000 principal
amount of the corresponding series of Original Capital Securities tendered
promptly after notice (such notice, if given orally, to be confirmed in writing)
of acceptance of said Original Capital Securities by the Trust; provided,
however, that in all cases, Original Capital Securities tendered pursuant to the
Exchange Offer will be exchanged only after timely receipt by you of
certificates for such Original Capital Securities (or confirmation of book-entry
transfer into your account at the Book-Entry Transfer Facility), a properly
completed and duly executed Letter of Transmittal (or facsimile thereof) with
any required signature guarantees and any other required documents. You shall
issue Exchange Capital Securities only in denominations of $1,000 or any
integral multiple thereof. Original Capital Securities may be tendered in whole
or in part in denominations of $100,000 and integral multiples of $1,000 in
excess thereof, provided that if any Original Capital Securities are tendered
for exchange in part, the untendered principal amount thereof must be $100,000
or any integral multiple of $1,000 in excess thereof.
22. Tenders pursuant to the Exchange Offer are irrevocable,
except that, subject to the terms and upon the conditions set forth in the
Prospectus and the Letter of Transmittal, Original Capital Securities tendered
pursuant to the Exchange Offer may be withdrawn at any time on or prior to the
Expiration Date.
23. The Trust shall not be required to exchange any Original
Capital Securities tendered if any of the conditions set forth in the Exchange
Offer are not met. Notice of any decision by the Trust not to exchange any
Original Capital Securities tendered shall be given orally (and confirmed in
writing) by the Trust to you.
24. If, pursuant to the Exchange Offer, the Trust does not
accept for exchange all or part of the Original Capital Securities tendered
because of an invalid tender, the occurrence of certain other events set forth
in the Prospectus under the caption "The Exchange Offer--Conditions to the
Exchange Offer" or otherwise, you shall promptly after the expiration or
termination of the Exchange Offer return those certificates for unaccepted
Original Capital Securities (or effect appropriate book-entry transfer),
together with any related required documents and the Letters of Transmittal
relating thereto that are in your possession, to the persons who deposited them.
25. All certificates for reissued Original Capital Securities,
unaccepted Original Capital Securities or for Exchange Capital Securities shall
be forwarded (a) by first-class certified mail, return receipt requested, under
a blanket surety bond protecting you and the Trust from loss or liability
arising out of the non-receipt or non-delivery of such certificates; (b) by
registered mail insured separately for the replacement value of each of such
certificates or (c) by effectuating appropriate book-entry transfer.
<PAGE>
26. You are not authorized to pay or offer to pay any
concessions, commissions or solicitation fees to any broker, dealer, bank or
other persons or to engage or utilize any person to solicit tenders.
27. As Exchange Agent hereunder you:
(a) shall have no duties or obligations other than those specifically
set forth in the section of the Prospectus captioned "The Exchange
Offer," the Letter of Transmittal or herein or as may be subsequently
agreed to in writing by you and the Trust;
(b) will be regarded as making no representations and having no
responsibilities as to the validity, sufficiency, value or genuineness
of any of the certificates or the Original Capital Securities
represented thereby deposited with you pursuant to the Exchange Offer,
and will not be required to and will make no representation as to the
validity, value or genuineness of the Exchange Offer or the Letter of
Transmittal or any other disclosure materials delivered in connection
therewith;
(c) shall not be obligated to take any legal action hereunder which
might in your reasonable judgment involve any expense or liability,
unless you shall have been furnished with indemnity reasonably
satisfactory to you;
(d) may reasonably rely on and shall be protected in acting in reliance
upon any certificate, instrument, opinion, notice, letter, telegram or
other document or security delivered to you and reasonably believed by
you to be genuine and to have been signed by the proper party or
parties;
(e) may reasonably act upon any tender, statement, request, agreement
or other instrument whatsoever not only as to its due execution and
validity and effectiveness of its provisions, but also as to the truth
and accuracy of any information contained therein, which you shall in
good faith believe to be genuine or to have been signed or represented
by a proper person or persons;
(f) may rely on and shall be protected in acting upon written or oral
instructions from any Administrative Trustee of the Trust or from any
Designated Officer of the Corporation;
(g) may consult with counsel satisfactory to you, including counsel for
the Trust, with respect to any questions relating to your duties and
responsibilities and the advice or opinion of such counsel shall be
full and complete authorization and protection in respect of any action
taken, suffered or omitted to be taken by you hereunder in good faith
and in accordance with the advice or opinion of such counsel, provided
that you shall promptly notify the Corporation of any action taken or
omitted by you in reliance upon such advice or opinion; and
<PAGE>
(h) shall not advise any person tendering Original Capital Securities
pursuant to the Exchange Offer as to the wisdom of making such tender
or as to the market value or decline or appreciation in market value of
any Original Capital Securities.
28. You shall take such action as may from time to time be
requested by the Trust or its counsel or any Designated Officer of the
Corporation (and such other action as you may reasonably deem appropriate) to
furnish copies of the Prospectus, Letter of Transmittal and the Notice of
Guaranteed Delivery or such other forms as may be approved from time to time by
the Trust or the Corporation, to all persons requesting such documents and to
accept and comply with telephone requests for information relating to the
Exchange Offer, provided that such information shall relate only to the
procedures for accepting (or withdrawing from) the Exchange Offer. The Trust
will furnish you with copies of such documents at your request. All other
requests for information relating to the Exchange Offer shall be directed to the
Trust, Attention: Aileen Lopez Pugh.
29. You shall advise by facsimile transmission or telephone,
and promptly thereafter confirm in writing to Aileen Lopez Pugh of the Trust,
and such other person or persons as the Trust or the Corporation may request,
daily (and more frequently during the week immediately preceding the Expiration
Date and if otherwise requested) up to and including the Expiration Date, as to
the number of Original Capital Securities which have been tendered pursuant to
the Exchange Offer and the items received by you pursuant to this Agreement,
separately reporting and giving cumulative totals as to items properly received
and items improperly received. In addition, you will also inform, and cooperate
in making available to, the Trust or the Corporation or any such other person or
persons, upon oral request made from time to time on or prior to the Expiration
Date, such other information as it or such person reasonably requests. Such
cooperation shall include, without limitation, the granting by you to the Trust
or the Corporation, and such person as the Trust or the Corporation may request,
of access to those persons on your staff who are responsible for receiving
tenders, in order to ensure that immediately prior to the Expiration Date the
Trust or the Corporation shall have received information in sufficient detail to
enable it to decide whether to extend the Exchange Offer. You shall prepare a
final list of all persons whose tenders were accepted, the aggregate principal
amount of Original Capital Securities tendered, the aggregate principal amount
of Original Capital Securities accepted and deliver said list to the Trust
promptly after the Expiration Date.
30. Letters of Transmittal and Notices of Guaranteed Delivery
shall be stamped by you as to the date and the time of receipt thereof and shall
be preserved by you for a period of time at least equal to the period of time
you preserve other records pertaining to the transfer of securities.
31. You hereby expressly waive any lien, encumbrance or right
of set-off whatsoever that you may have with respect to funds deposited with you
for the payment of transfer taxes by reasons of amounts, if any, borrowed by the
Trust,
<PAGE>
or any of its subsidiaries or affiliates pursuant to any loan or credit
agreement with you or for compensation owed to you hereunder.
32. For services rendered as Exchange Agent hereunder, you
shall be entitled to the compensation set forth on Schedule I attached hereto,
plus reasonable out-of-pocket expenses and reasonable attorneys' fees, incurred
in connection with your services hereunder, within 30 days following receipt by
the Corporation of an itemized statement of such expenses and fees in reasonable
detail.
33. (a) The Trust covenants and agrees to indemnify and hold
you (which for purposes of this paragraph shall include your directors, officers
and employees) harmless in your capacity as Exchange Agent hereunder from and
against any and all loss, liability, cost, damage, expense and claim, including
but not limited to reasonable attorneys' fees and expenses, incurred by you as a
result of, arising out of or in connection with the performance by you of your
duties under this Agreement or the compliance by you with the instructions set
forth herein or delivered hereunder; provided, however, that the Trust shall not
be liable for indemnification or otherwise for any loss, liability, cost,
damage, expense or claim arising out of your gross negligence or willful
misconduct. In no case shall the Trust be liable under this indemnity with
respect to any claim against you unless the Trust shall be notified by you, by
letter or by facsimile confirmed by letter, of the written assertion of a claim
against you or of any other action commenced against you, promptly after you
shall have received any such written assertion or notice of commencement of
action. The Trust shall be entitled to participate at its own expense in the
defense of any such claim or other action, and, if the Trust so elects, the
Trust may assume the defense of any suit brought to enforce any such claim;
provided that the Trust shall not be entitled to assume the defense of any such
action if the named parties to such action include both the Trust and you and
representation of both parties by the same legal counsel would, in the written
opinion of counsel to you, be inappropriate due to actual or potential
conflicting interests between them. In the event that the Trust shall assume the
defense of any such suit or threatened action in respect of which
indemnification may be sought hereunder, the Trust shall not be liable for the
fees and expenses of any counsel thereafter retained by you. The Trust shall not
be liable under this paragraph for the fees and expenses of more than one legal
counsel for you.
(b) You agree that, without the prior written consent of the
Trust (which consent shall not be unreasonably withheld), you will not settle,
compromise or consent to the entry of any pending or threatened claim, action,
or proceeding in respect of which indemnification could be sought in accordance
with the indemnification provisions of this Agreement (whether or not you or the
Trust or any of its trustees or controlling persons is an actual or potential
party to such claim, action or proceeding), unless such settlement, compromise
or consent includes an unconditional release of the Trust and its trustees and
controlling persons from all liability arising out of such claim, action or
proceeding.
<PAGE>
34. You shall arrange to comply with all requirements under
the tax laws of the United States, including those relating to missing Tax
Identification Numbers, and shall file any appropriate reports with the Internal
Revenue Service. The Trust understands that you are required in certain
instances to deduct 31% of the amounts to be paid with respect to interest paid
on the Exchange Capital Securities and proceeds from the sale, exchange,
redemption or retirement of the Exchange Capital Securities from holders who
have not supplied their correct Taxpayer Identification Number or required
certification. Such funds will be turned over to the Internal Revenue Service in
accordance with applicable regulations.
35. You shall notify the Trust of the amount of any transfer
taxes payable in respect of the exchange of Original Capital Securities and,
upon receipt of written approval from the Trust, you shall deliver or cause to
be delivered, in a timely manner to each governmental authority to which any
transfer taxes are payable in respect of the exchange of Original Capital
Securities, your check in the amount of all transfer taxes so payable, and the
Trust shall reimburse you for the amount of any and all transfer taxes payable
in respect of the exchange of Original Capital Securities; provided, however,
that you shall reimburse the Trust for amounts refunded to you in respect of
your payment of any such transfer taxes, at such time as such refund is received
by you.
36 This Agreement and your appointment as Exchange Agent
hereunder shall be construed and enforced in accordance with the laws of the
State of New York applicable to agreements made and to be performed entirely
within such state, and without regard to conflicts of law principles, and shall
inure to the benefit of, and the obligations created hereby shall be binding
upon, the successors and assigns of each of the parties hereto, and no other
person shall have any rights hereunder.
37. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original and all of which
taken together shall constitute one and the same agreement.
38. In case any provision of this Agreement shall be invalid,
illegal or unenforceable, the validity, legality and enforceability of the
remaining provisions shall not in any way be affected or impaired thereby.
39. This Agreement shall not be deemed or construed to be
modified, amended, rescinded, canceled or waived, in whole or in part, except by
a written instrument signed by a duly authorized representative of the party to
be charged. This Agreement may not be modified orally.
40. Unless otherwise provided herein, all notices, requests
and other communications to any party hereunder shall be in writing (including
facsimile or similar writing) and shall be given to such party, addressed to it,
at its address or facsimile number set forth below:
<PAGE>
If to the Trust:
TeleBanc Capital Trust I
c/o TeleBanc Financial Corporation
1111 North Highland Street
Arlington, VA 22201
Facsimile: (703) 247-5456
Attention: Aileen Lopez Pugh
If to the Exchange Agent:
Wilmington Trust Company
Corporate Trust Department
Rodney Square North
1100 North Market Street
Wilmington, DE 19890-0001
Facsimile: (302) 651-8882
Attention: Corporate Trust Department
41. Unless terminated earlier by the parties hereto, this
Agreement shall terminate 180 days following the Expiration Date.
Notwithstanding the foregoing, Paragraphs 19, 20 and 22 shall survive the
termination of this Agreement. Upon any termination of this Agreement, you shall
promptly deliver to the Trust any certificates for Securities, funds or property
then held by you as Exchange Agent under this Agreement.
42. This Agreement shall be binding and effective as of the
date hereof.
<PAGE>
Please acknowledge receipt of this Agreement and confirm the
arrangements herein provided by signing and returning the enclosed copy.
TELEBANC CAPITAL TRUST I
By: _____________________________
Name: ________________
Title: Administrative Trustee
Accepted as the date first above written:
WILMINGTON TRUST COMPANY, as Exchange Agent
By:_________________________________
Name:
Title:
<PAGE>
SCHEDULE I
FEES
WILMINGTON TRUST COMPANY
CORPORATE TRUST DEPARTMENT
SCHEDULE OF FEES
FOR
TELEBANC CAPITAL TRUST I
11.00% EXCHANGE CAPITAL SECURITIES
I. EXCHANGE AGENT $_______
--------------
Covers review of the Letter of Transmittal, the Exchange Agent
Agreement and other related documentation; establishment of accounts
and systems link with depositories; operational and administrative
charges and time spent in connection with the review, receipt and
processing of Letters of Transmittal, Agent's Messages and Notices of
Guaranteed Delivery.
Note: The fees set forth in this schedule are subject to review of documentation
and our internal credit and conflict review. The fees are also subject to change
should circumstances warrant. Out-of-pocket expenses and disbursements,
including counsel fees, incurred in the performance of our duties will be added
to the billed fees. We may place orders to buy/sell financial instruments with
outside broker-dealers that we select, as well as __________________ or its
affiliates. These transactions (for which normal and customary spreads will be
earned in addition to the charges quoted above) will be executed on a riskless
principal basis solely for your account(s) and without recourse to us or our
affiliates. If you choose to invest in any mutual fund, _________________ and/or
our affiliates may earn service fees/expenses associated with these funds as
disclosed in the mutual fund prospectus provided to you, in addition to the
charges quoted above. We will provide periodic account statements describing
transactions executed for your account(s). Trade confirms will be available upon
your request at no additional charge. If a deal should fail to close for reasons
beyond our control, we reserve the right to charge our acceptance plus
reimbursement for legal fees incurred.
Fees for any services not specifically covered in this or other applicable
schedules will be based on an appraisal of services rendered.
EXHIBIT 99.4
TELEBANC CAPITAL TRUST I
OFFER FOR ALL OUTSTANDING
11.00% ORIGINAL CAPITAL SECURITIES
IN EXCHANGE FOR
11.00% EXCHANGE CAPITAL SECURITIES
To: Brokers, Dealers, Commercial Banks,
Trust Companies and Other Nominees:
TeleBanc Capital Trust I (the "Trust") is offering, upon and
subject to the terms and conditions set forth in a prospectus dated November
____, 1997 (as the same may be amended or supplemented from time to time, the
"Prospectus"), and the enclosed letter of transmittal (the "Letter of
Transmittal"), to exchange (the "Exchange Offer") its 11.00% Exchange Capital
Securities for any and all of its outstanding 11.00% Original Capital Securities
(the "Original Capital Securities"). The Exchange Offer is being made in order
to satisfy certain obligations of the Trust and TeleBanc Financial Corporation
(the "Corporation") contained in the Registration Rights Agreement, dated June
5, 1997, among the Trust, the Corporation, and Sandler O'Neill & Partners, L.P.
We are requesting that you contact your clients for whom you
hold Original Capital Securities regarding the Exchange Offer. For your
information and for forwarding to your clients for whom you hold Original
Capital Securities registered in your name or in the name of your nominee, or
who hold Original Capital Securities registered in their own names, we are
enclosing the following documents:
43. The Prospectus dated November ______, 1997;
44. The Letter of Transmittal for your use and for the
information (or the use, where relevant) of your clients;
45. A Notice of Guaranteed Delivery to be used to accept the
Exchange Offer if certificates for Original Capital Securities
are not immediately available or time will not permit all
required documents to reach the Exchange Agent prior to the
Expiration Date (as defined below) or if the procedure for
book-entry transfer cannot be completed on a timely basis;
46. A form of letter which may be sent to your clients for
whose account you hold Original Capital Securities registered
in your name or the name of your nominee, with space provided
for obtaining such clients' instructions with regard to the
Exchange Offer; and
47. Guidelines for Certification of Taxpayer Identification
Number on Substitute Form W-9.
YOUR PROMPT ACTION IS REQUESTED. THE EXCHANGE OFFER WILL
EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON ____________, 1997, OR ON SUCH LATER
DATE OR TIME TO WHICH THE CORPORATION OR THE TRUST MAY EXTEND THE EXCHANGE OFFER
(THE "EXPIRATION DATE"). THE ORIGINAL CAPITAL SECURITIES TENDERED PURSUANT TO
THE EXCHANGE OFFER MAY BE WITHDRAWN AT ANY TIME BEFORE THE EXPIRATION DATE.
To participate in the Exchange Offer, a duly executed and
properly completed Letter of Transmittal (or facsimile thereof), with any
required signature guarantees and any other required documents, should be sent
to the Exchange Agent and certificates representing the Original Capital
<PAGE>
Securities should be delivered to the Exchange Agent, all in accordance with the
instructions set forth in the Letter of Transmittal and the Prospectus.
If holders of Original Capital Securities wish to tender, but
it is impracticable for them to forward their certificates for Original Capital
Securities prior to the expiration of the Exchange Offer or to comply with the
book-entry transfer procedures on a timely basis, a tender may be effected by
following the guaranteed delivery procedures described in the Prospectus under
"The Exchange Offer --Procedures for Tendering Original Capital Securities --
Guaranteed Delivery."
The Trust will, upon request, reimburse brokers, dealers,
commercial banks and trust companies for reasonable and necessary costs and
expenses incurred by them in forwarding the Prospectus and the related documents
to the beneficial owners of Original Capital Securities held by them as nominee
or in a fiduciary capacity. The Trust will pay or cause to be paid all stock
transfer taxes applicable to the exchange of Original Capital Securities
pursuant to the Exchange Offer, except as set forth in Instruction 6 of the
Letter of Transmittal.
Any inquiries you may have with respect to the Exchange Offer,
or requests for additional copies of the enclosed materials, should be directed
to Wilmington Trust Company, the Exchange Agent for the Original Capital
Securities, at its address and telephone number set forth on the front of the
Letter of Transmittal.
Very truly yours,
TELEBANC CAPITAL TRUST I
NOTHING HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE
YOU OR ANY PERSON AS AN AGENT OF THE TRUST OR THE EXCHANGE AGENT, OR AUTHORIZE
YOU OR ANY OTHER PERSON TO USE ANY DOCUMENT OR MAKE ANY STATEMENTS ON BEHALF OF
EITHER OF THEM WITH RESPECT TO THE EXCHANGE OFFER, EXCEPT FOR STATEMENTS
EXPRESSLY MADE IN THE PROSPECTUS OR THE LETTER OF TRANSMITTAL.
Enclosures
EXHIBIT 99.5
TELEBANC CAPITAL TRUST I
OFFER FOR ALL OUTSTANDING
11.00% ORIGINAL CAPITAL SECURITIES
IN EXCHANGE FOR
11.00% EXCHANGE CAPITAL SECURITIES
To Our Clients:
Enclosed for you consideration is a prospectus dated November
______, 1997 (as the same may be amended or supplemented from time to time, the
"Prospectus"), and the related letter of transmittal (the "Letter of
Transmittal"), relating to the offer (the "Exchange Offer") of TeleBanc Capital
Trust I (the "Trust") and TeleBanc Financial Corporation (the "Corporation") to
exchange the Trust's 11.00% Exchange Capital Securities for any and all of the
Trust's outstanding 11.00% Original Capital Securities (the "Original Capital
Securities"), upon the terms and subject to the conditions described in the
Prospectus. The Exchange Offer is being made in order to satisfy certain
obligations of the Trust and the Corporation contained in the Registration
Rights Agreement dated, June 5, 1997, among the Trust, the Corporation, and
Sandler O'Neill & Partners, L.P.
This material is being forwarded to you as the beneficial
owner of the Original Capital Securities carried by us in your account but not
registered in your name. A TENDER OF SUCH ORIGINAL CAPITAL SECURITIES MAY ONLY
BE MADE BY US AS THE HOLDER OF RECORD AND PURSUANT TO YOUR INSTRUCTIONS.
Accordingly, we request instructions as to whether you wish us
to tender on your behalf the Original Capital Securities held by us for your
account, pursuant to the terms and conditions set forth in the enclosed
Prospectus and Letter of Transmittal.
Your instructions should be forwarded to us as promptly as
possible in order to permit us to tender the Original Capital Securities on your
behalf in accordance with the provisions of the Exchange Offer. The Exchange
Offer shall expire at 5:00 p.m., New York City time, on __________, 1997, or on
such later date or time to which the Corporation or the Trust may extend the
Exchange Offer. Any Original Capital Securities tendered pursuant to the
Exchange Offer may be withdrawn at any time before the Expiration Date.
Your attention is directed to the following:
48. The Exchange Offer is for any and all Original Capital Securities.
49. The Exchange Offer is subject to certain conditions set forth
in the Prospectus in the section captioned "The Exchange
Offer--Conditions to the Exchange Offer."
50. Any transfer taxes incident to the transfer of Original
Capital Securities from the holder to the Corporation will be
paid by the Corporation, except as otherwise provided in the
Instructions in the Letter of Transmittal.
51. The Exchange Offer expires at 5:00 p.m., New York City time,
on ____________, 1997, or on such later date or time to which
the Corporation or the Trust may extend the Exchange Offer.
If you wish to have us tender your Original Capital
Securities, please so instruct us by completing, executing and returning to us
the instruction form on the back of this letter. THE LETTER OF TRANSMITTAL IS
FURNISHED TO YOU FOR INFORMATION ONLY AND MAY NOT BE USED DIRECTLY BY YOU TO
TENDER ORIGINAL CAPITAL SECURITIES.
<PAGE>
INSTRUCTIONS WITH RESPECT TO THE EXCHANGE OFFER
The undersigned acknowledge(s) receipt of your letter and the
enclosed material referred to therein relating to the Exchange Offer made by
TeleBanc Capital Trust I with respect to its Original Capital Securities.
This will instruct you to tender the Original Capital
Securities held by you for the account of the undersigned, upon and subject to
the terms and conditions set forth in the Prospectus and the related Letter of
Transmittal.
Please tender the Original Capital Securities held by you for
my account as indicated below:
<TABLE>
<CAPTION>
AGGREGATE PRINCIPAL AMOUNT AT MATURITY
OF ORIGINAL CAPITAL SECURITIES TENDERED
11.00% Original Capital Securities
---------------------------------------------------
[ ] Please do not tender any Original Capital Securities held by
you for my account.
<S> <C>
Dated: __________________________, 1997
---------------------------------------------------
Signature(s)
---------------------------------------------------
---------------------------------------------------
Please print name(s) here
---------------------------------------------------
---------------------------------------------------
---------------------------------------------------
Addresses
---------------------------------------------------
Area code and telephone number
---------------------------------------------------
Taxpayer Identification or Social Security Number(s)
</TABLE>
None of the Original Capital Securities held by us for your
account will be tendered unless we receive written instructions from you to do
so. Unless a specific contrary instruction is given in the space provided, your
signature(s) hereon shall constitute an instruction to us to tender all the
Original Capital Securities held by us for your account.
